#### Fenby & Johnson *v.*Pritchard.

On a sale on a credit, to be secured by notes as collateral, not yet due, the receipt of the collaterals five days after the delivery of the goods, makes the seller a *bona fide*holder of the notes for a valuable consideration, so as to protect him against any defence which the maker of the notes had against the buyer of the goods.

This was *held,*although at the time of the sale, the notes in question were not specified or described, and were not in fact then in the possession of the buyer.

Sept. 21 ;

Oct. 28, 1848.

*152Case subject to the opinion of the court. The action was assumpsit on two promissory notes made by the defendant, payable six months after date, to E. W. Pemberton, and indorsed by him; one for $471 18, dated December 6, 1845, the other ■ for $396 48, dated January 20, 1846.

The following facts appeared on the trial. Soon after the date of the second note, an agreement was made between the defendant and Pemberton, by which these and other notes of the defendant, were to be delivered up to him, on his paying Pemberton $1000, and returning to P. merchandise of. the value of $3000, which he had theretofore bought of P. This arrangement was consummated by the defendant, January 31, 1846; and he was then entitled to the notes. For some unexplained cause, the notes were not delivered up to him by Pemberton.

On the same 31st of January, Pemberton bought of Oliver P. Mills, his bills of exchange on a house in London for about £1000, on a credit of forty-five days. P. was to give his own notes at that date, and secure the same by collateral notes. He gave his own notes, and he delivered the collateral notes to Mills prior to the 15th of February; it was probably on the 8th, and was not before. Among these collaterals, were the two notes in suit. The bills drawn by Mills were protested, and' were never paid.

On the 4th of February, 1846, Mills through a broker, bought of the plaintiffs, 500 barrels of flour, for which he was to give them his note at thirty days, with collateral security by notes. No particular notes were specified. The flour was delivered on the 5th of February, Mills’s own note was given four or five days after, and the collateral notes were furnished to the plaintiffs by Mills, part on the 9th or 10th, and the residue on the 14th to the 16th of February. The two notes in suit were transferred to the plaintiffs as a .part of such collaterals, in the first parcel delivered.

Proof was given, that it was customary in New York, on a sale for cash or collaterals, to deliver the property, and then send for the payment a few days thereafter, where the buyer stands fair, and is in good credit. The seller in such cases, *153trusting to the honor of the buyer, and the delivery is absolute. Mills was in good credit and standing, at the time of the sale to him.

*G. M. Ogden,*and *D. B. Ogden,*for the plaintiffs.

I. By leaving the notes in the possession of Pemberton after they were paid, a possession entirely inconsistent with the fact of payment; the defendant voluntarily gave Pemberton the power to transfer them, and gave strangers good reason to believe that they still remained valid in Pemberton’s hands; and the defendant ought therefore to suffer, rather than the plaintiffs, who are entirely innocent.

II. The plaintiffs received the notes in the usual course of trade, for a valuable consideration, and without notice or knowledge of any defence to them. *(Lickbarrow*v. *Mason, 2*T. R. 63.)

III. When the plaintiffs received these notes, they had a valid and effectual claim against Mills to have his agreement for the delivery of collateral notes specifically performed. He was then solvent and able to respond ; and by accepting these notes, they relinquished that claim, which was thereby satisfied. They therefore parted with a valuable consideration at the time at which they received the notes. *(2*T. R. 63, before cited.)

*H. F. Clark,*for the defendant.

I. The notes sued upon were paid and discharged by force of the agreement between the defendant and Pemberton, and the liability of the defendant upon the notes had ceased. Therefore the plaintiffs cannot recover upon them, unless they are to be regarded as *bona fide*purchasers for a valuable consideration.

II. The plaintiffs are not *bona fide*holders for a valuable consideration, within the rule which protects purchasers against the prior equities of third parties. They did not part with any money or property at the time of receiving the notes, or upon the faith and credit of them, but took them as security for an existing debt.

*154■ The notes were not in Mills’s possession or mentioned, and Mills did not know of any such notes. Therefore, these particular notes could not have been in the view of either party; and no faith or credit was given to them.

III. The agreement of Mills to give collateral security for the payment of his note for the flour, was not a condition of the delivery. The delivery of the flour was complete and unconditional, and was made upon the credit of Mills alone, and not upon the credit of the notes in suit. It was on his promise to deliver collaterals, not upon any specified securities pledged. It must be a valuable consideration, parted with at the time, in money or property, as established by the case of *Stalker*v. McDonald, 6 Hill, 93.

By the Court. Vanderpoel, J.

The question is whether the plaintiffs received these notes under such circumstances as to protect them from the alleged payment by the defendant to Pemberton the payee ; and this presents, in a form somewhat new, the ever recurring question, when the indorsees of a note are to be déemed *bona fide*holders in a commercial sense, so as to preclude a defence existing at the time of the transfer. From the evidence, it seems that the notes in suit were delivered to the witness Pemberton, in payment for merchandise sold by him ; that before he transferred the notes to Mills, an agreement was made between him and the defendant, by which the defendant was to return to Pemberton an invoice of goods, valued at about $3000, and to pay in cash $1000; in consideration of which Pemberton was to assume certain liabilities of the defendant; and the return of the goods was to be considered a payment of the notes upon which this suit is brought; that this agreement was consummated on the 31st of January; but Pemberton did not return the notes, and says he cannot tell why he did not return them; that afterwards, he purchased exchange from Oliver P. Mills on a credit of forty-five days, to he secured by the notes of the witness, and by collateral notes; that on the 8th of February he passed to Mills, as such col-laterals, the notes in suit.

On the 3d of February, Mills applied to the plaintiffs for the *155purchase of 500 barrels of flour. It was finally sold to him, on the following terms. Mills was to give in payment his own note at thirty days, and collateral security, which was to be *notes.*The flour was delivered to Mills on the 5th of February, 1846, and the collaterals were in pursuance of the contract, delivered about the 14th, 15th, or 16th of February. The note .of Mills has not been paid. At the time of the agreement for the sale of the flour, the particular collaterals to be turned out were not specified; but a witness testified, that *collaterals*meant notes, when not otherwise expressed. Now, are the plaintiffs such *bona fide*holders for value, as to enable them to recover the notes, notwithstanding the alleged payment of the defendant to Pemberton *1*

The principle is well established, that receiving the transfer of a note as collateral security for the payment of a pre-existing debt, is not taking it in the ordinary course of trade and for a valuable consideration, as against the equities of the maker. *(Wardell*v. Howell, 9 Wend. 170; *Coddington*v. Bay, 20 Johns. 637.) To protect the holder of a negotiable security, which has been improperly transferred to him in fraud of' the prior legal or equitable rights of others, he must not only have taken it without notice, but must also have parted with something of *actual*value, upon the credit or faith thereof. Merely receiving it in payment or security of an antecedent debt, is not sufficient. *(Stalker*v. McDonald, 6 Hill, 93.) After the very able and elaborate opinion in that case, there can no longer be doubt as to what the law is on this subject. But in the application of the principle, the question whether a case comes within the well established rule, still leaves abundant room for controversy. This is not the case of receiving the notes as security for a pre-existing debt, without parting with any thing of value. The giving collaterals, was one and an indispensable condition or consideration, on which the plaintiffs parted with their flour. They would not, when the contract was made, receive the personal responsibility of Mills alone for payment. Had they received the collaterals simultaneously with the delivery of the flour, and as part of the consideration therefor, their title to pro, teetion as against the equities of the defendant, would have *156been unquestionable. Here the note of Mills, the vendee, was not given when the flour was delivered, but, according to the usage as proved, the vendor generally calls for the stipulated security on a sale to be secured by collaterals, a number of days after the goods are delivered, according to his leisure. Whether the notes were delivered at the time of the delivery of the flour, is not the true test in this case. The true and controlling question is, whether the plaintiffs parted with their flour on the condition and with the understanding that collateral security ■ was to be given. Of this, there can surely be no doubt. The collateral security was one of the inducements to parting with their property. If so, no good reason can be assigned why they should not have the same benefit of the collateral notes, that they would have had, had they received them simultaneously with the delivery of the flour. We therefore hold, that the plaintiffs received the notes in suit under such circumstances as to entitle them to protection against the alleged payment of the defendant to the payee, before they were transferred to the plaintiffs.

It *is urged*in behalf of the defendant, that these particular notes were not specified as among the collaterals that were to be transferred. We cannot perceive how this can weaken the position of the plaintiffs.. Collateral security was with them an indispensable consideration for parting with their property. These notes were offered and accepted, in satisfaction of such consideration. What was general when the contract was made, was rendered specific and certain when the notes were delivered and accepted. It is not pretended that the plaintiffs knew, or are chargeable with notice, that Mills had no authority to pledge or part with the notes; and having been passed before they matured, the plaintiffs are entitled to judgment.