#### The Bank of the State of New York, plaintiffs and respondents, *vs.*Jacob W. Vanderhorst, defendant and appellant.

One who discounts a note, receiving at the same time as collateral security for its payment, a note made hy a third person for the mere accommodation of the borrower, becomes thereby a *bona fide*holder of such accommodation note, for value, and may recover thereon against the maker,

(Before Moncrief, Robertson and Monell, JJ.)

Heard October 9,1863;

decided November 14, 1863.

This was an appeal from a judgment against the defendant. The defendant was sued as the maker of a promissory note made payable to the order of Kolff *&*Persuhn, for whose *212accommodation it was made. The payees, before maturity, indorsed the note in blank, and through one Stange, their attorney in fact, delivered the same to the bank (the plaintiff) as collateral security to their own note discounted by the bank for them.

Kolff *&*Persuhn, through their attorney Stange, applied to the bank'in writing to discount their note for $5000, offering the note in suit and other bills receivable as collateral. The discount was made, the bank receiving the note in suit and holding it as sedurity,. until maturity, when this suit was brought.

The cause was tried before Samuel E. Lyon, Esq. as referee.

The conclusion of law of the referee was that the plaintiff was a *bona fide*holder of the note for value, and although such note was made without consideration, and had no validity in the hands of Kolff & Persuhn, yet that the plaintiff was entitled to recover:

*James Maurice,*for the defendant, appellant,

I. The plaintiffs have not shown themselves *bona fide*holders for value of the note in suit, within the principle of the adjudged eases.

II. The referee having held that the note was made without consideration, and had no validity while in the possession of Kolff & Persuhn, it was incumbent on the plaintiffs to show that they had given value for it. This they did not do.

1. They did not discount it; no representations were made to them in relation to it, and they parted with nothing on the credit and security of this note.

2. The transaction, as shown by the proof, was simply this: Stange, without any authority, sent the note in suit to the bank, and offered it, with two others, as collateral to a discount of Kolff *&*Persuhn’s own note. The credit of Kolff *&*Persuhn at the bank being very good, the discount was made solely upon their credit, without inquiry as to the collaterals.

3. The utmost that can be made out of this transaction is, that the collateral notes were left with the bank for collection, *213and the avails, when received, were to be applied on Kolff *&*Persuhn’s account, and could not be withdrawn from the bank without its consent. There was no transfer of title or change of ownership, but the bank was constituted the agent of Kolff & Persuhn to collect the collaterals and hold the avails for a specified purpose, and to this effect is the indorsement in pencil on the note in suit, to wit: *“Collection—Kolff & Persuhn ■—special account.”*

4. All notes and negotiable paper held by a bank consist of notes discounted and paper deposited for collection. Collaterals are embraced in the latter class. In that description of paper the bank has only a qualified interest to collect the amount and credit the proceeds to the proper account.

*5.*The deposit of the note in suit as collateral was a breach of trust. Kolff *&*Persuhn never had any property in the note, and their attorney could do no valid act in respect to such note. His power extended only to those matters in which the firm had an interest.

III. *Bona fide*holders of negotiable paper are only those who show affirmatively that they have paid value for it, or relinquished some available security or valuable right on the credit of the note. Those only who can bring themselves within that description, can maintain an action upon the note, because the right of property passes absolutely, by delivery, to such holders. *(Stalker*v. McDonald, 6 *Hill,*93, *and, cases cited.)*

IV. A note valid in the hands of the payee may be negotiated as collateral, and the pledgee thereby acquire the exclusive right to collect *it;*but the pledgee of .a note invalid in the hands of the pledgor^ is not entitled to collect it. *(Clark*v. *Dearborn,*6 *Duer,*309.) Kolff *&*Persuhn had no right of action upon the note, and could pledge none with the bank ; which, taking it simply as collateral, succeeded only to the possessory right of Kolff, and equally with him was bound to return the note before maturity, on demand.

V. The individual note of Kolff given to the defendant, was but a mere memorandum to take the place of an agreement. *214Neither note had any validity, and it was not intended that either should get into circulation. The referee’s ruling as to the validity of the noté in the hands of Kolff & Persuhn is conclusive upon this point.

VI. The pledge of the note in suit as collateral, (assuming that it was so pledged by Kolff’s direction,) did not change the title to the note. The general ownership remained in the pledgor, and the plaintiffs are mere trustees, succeeding only to the rights the pledgor possessed, and can not set up a claim as owners for value. *(Jenness*v. *Bean,*10 *N. Hamp.*266. *Williams*v. *Little,*11 *id.*66.) When promissory notes or commercial paper are pledged as collateral security to a loan, the pledgee must hold the paper until maturity, and collect and apply the money to the payment of the loan or debt. This is the extent of his authority. (*Wheeler*v. *Newbould,*5 *Duer,*29-38, *citing*12 *John.*146, *and*15 *Mass. R.*534. *Brown*v. *Ward,*3 *Duer,*660.)

In *Wheeler*v. *Newbould,*(16 *N. Y. Rep.*392,) the court ruled that the pledge of commercial paper as security for a loan did not change the ownership so as to authorize the pledgee to sell it. If the plaintiffs hold the note in pledge as collateral security, they can not set up a claim as *bona fide*owners. They succeed to the rights of the pledgors, (their *cestuis que trust,)*and a defense available against the pledgors is equally available against such pledgees.

VII. The policy of the law does not favor the hypothecation or pledge of commercial paper, but only the sale, and then protects the *bona fide*owner, although it may have come through an invalid or tainted channel, but only provided he show that he took it in good faith before maturity, and gave value for it.

The distinction between commercial paper pledged as collateral, and the same paper transferred or taken in the usual course of business, is this: In the latter case, the right of disposition following the ownership is perfect. The paper may be again, at any time, put in circulation, at the pleasure of the holder. It performs an important function in a commer*215cial community in payment of debts. It passes from hand to hand, the title following delivery. Hence the reason for the rule of protection of the *bona fide*owner. In the case of paper pledged as collateral, all this is changed. It can no longer be circulated, or lawfully sold, but must remain with the person to whom it is pledged, until maturity. Its assignability is gone, and it ceases to perform any useful function in the payment of debts. Its holder is a mere trustee, not its owner, and therefore not within the reason for the rule which protects *bona fide*owners. The rule itself, therefore, has no application to the case. ■

VIII. The plaintiff’s counsel contended before the referee, that the bank must be presumed to make the discount on the strength of the collaterals. If this be so, it is an affirmative fact which must be proved, and can not be presumed. (6 *Duer,*309.) In this case, the proof is clear and explicit the other way. .Besides, if the theory before advanced is correct, the bank took the collaterals at its own risk. They only were valid in their hands, if valid in the hands of the pledgor. If they had no validity in the hands of the pledgor, they acquired none by the transfer in pledge to the bank.

IX. The power of attorney, under which cheeks drawn on the 19th April, for the sum of $1294.05' on deposit, belonging to Kolff & Persuhn, was revoked by the death of Kolff. • By which, also, the firm was dissolved. Ho person, consequently, could rightfully use the firm name in drawing out this money. If the bank chose to pay it, they did so in their own wrong, and can not charge it over to the defendant. Such power of attorney was improperly admitted in evidence, to which an exception was taken in due season.

Other points, made by the' counsel upon questions of fact, are omitted.

*A. W. Clason,*for the plaintiff, respondent.

I. The question of fact in this case is settled by the testimony.

II. The question of law turns upon the meaning of the *216word *“ value.”*The counsel for the defendant insists, that it does not imply merely *some*consideration, or inducement, but that it means discount only.

When *bona fides*are proved, the amount of consideration is unimportant. (5 *Duer,*260.)

Monell, J.

The result of a careful examination of the cases is, that in this state the law seems to be now settled, that a promissory note, taken in payment of an antecedent debt, and the prior indebtedness extinguished, is deemed to be taken for value, so as to constitute it a valid security in the hands of the holder. *(Rutland Bank*v. *Buck, 5 Wend.*66. *Grandin*v. *Le Roy,*2 Paige, 509. *Lathrop*v. *Morris,*5 *Sandf.*7. *Mohawk Bank*v. *Corey,*1 *Hill,*513. *Youngs*v. *Lee,*12 *N. Y. Rep.*551. *Boyd*v. *Cummings,*17 *id.*101. *Stettheimer*v. *Meyer,*33 *Barb. 215. .Spencer*v. *Ballou, 18 N. Y. Rep.*327.)

The principle is, that if the" holder parts with any thing at the timé he receives the note, it affords a sufficient consideration, to make his holding *bona fide.*If, therefore, he extinguishes the prior debt, or surrenders á prior security, or advances money upon the credit of the new, it will, within the cases cited, constitute him a holder for value.. .1 do not find that our courts have yet reached the point, that merely receiving a promissory note or bill of exchange of a third person, as security for a precedent debt, without extinguishing the' prior debt, or parting with-any money or security at the time, is sufficient to constitute a holding for value. In a recent case, *(Cardwell*v. *Hicks,*37 *Barb.*458,) a majority of. the court, against, I think," a clear weight of authority, has faEen back upon the old doctrine, that even the extinguishment of the old debt will not afford a consideration to the new transfer. But this case stands by itself, and is in direct antagonism to a large number of uniform decisions the other way. *(Purchase*v. *Mattison,*3 *Bosw.*310.) .•

. I can not find that the precise point involved in this case has been decided in any adjudication in this state. In some of' the neighboring states it seems" to have been. *(Griswold**217v. *Davis,*31 *Vt.*2*Shaw,*450.) Also, substantially, by the Supreme Court of the United States. *(Gerdman*v. *Simonds,*20 *How. U. S. Rep.*343.)

No question arising under commercial law has been more extensively discussed, or produced a greater variety—perhaps I might say a greater confusion—of decision, than as to what shall constitute a holding of commercial paper for value, so as to shut out the equities existing among the original parties.

And in a community where all collateral securities are daily resorted to, to bolster credit and procure moneyed facilities in the uses of trade, it is very desirable that the courts of this state should settle the rights of parties, in respect to such securities.

I think a careful reading of the numerous cases in this state, where the question of the *bona fides*of commercial paper is examined, will show that the current of decision has been, and continues to set strongly in favor of the sufficiency of the consideration, whether the new security is taken in payment of an antecedent debt, or as collateral to a first loan. If any thing is parted with at the time—either money or an old security'—it is sufficient to uphold the transaction as against the defenses of the first parties.

A reference to a few of the more recent cases will, I think, show the correctness of the above deduction.

In *Stettheimer*v *Meyer, (supra,)*the defendant was the accommodation maker of a note, which the payees transferred to the plaintiff in payment of a prior debt; the plaintiff delivering up a prior note *not yet due.*It was held that the plaintiff was a holder for a valuable consideration.

In *Spencer*v. *Ballou, (supra,)*the plaintiff had been charged as the indorser of Hollister’s note, and received.the note in suit, indorsed by the defendant as an accommodation indorser. '

The note was made for the purpose of taking up the protested notes, and was left at the bank for that object, but was not discounted by the bank. The court, in answer to the objection that the note could not be made available to the *218plaintiff otherwise than by applying it to the purpose of taking up the notes in the bank,, say, if the plaintiff had borrowed the money on the credit of this note, and had paid the notes in the bank, the security would be valid. “ So, if the plaintiff had *advanced*the money to pay and take up the notes in the bank, *retaining this note for the*advance, it is not prescribed that the maker, or the defendant, would have .any legal defense to the note.”

The pre-existing debt does not strengthen or invigorate the consideration. The *advance*constitutes the consideration, not the prior indebtedness.

The case of *Goodman*v. *Simonds, supra,*fully sustains this view. The learned court there say that if there is a *present*consideration *at the time of the transfer,*it is sufficient to constitute a *bona fide*holding.

And a late elementary writer, of profound learning, and great research, (1 *Parsons on Notes and Bills,*219,) declares it a sufficient consideration when the note is received as *collateral security*for a debt or contract,- which is *simultaneous*with the transfer of the paper.

In the case before us, the plaintiff, at the time of the transfer of the note in suit, gave to the holders of the note.five thousand dollars in money. Upon what security did the bank part with this amount of money ? Surely not upon the note of Kolff *&*Persuhn alone, else why did they receive collaterals ? The advance was made at the time of the transfer, and, although it was nominally a discount of Kolff & Persuhn’s note, yet the money was loaned upon the strength and credit of the collaterals, which, upon the principle of all the cases, constituted the bank the holders for -value of the note in suit, and deprives the defendants of the right to interpose as a defense any equities existing between the previous parties.

I.t would not" be difficult, I think, to point to a difference between a consideration growing out of the extinguishment of a pre-existing debt, or the surrender of prior securities and a present loan. In the latter case, the. lender parts usually with more value and directly upon the credit of the collateral secu*219rity. In the former, the creditor, presumptively at least, loses less, and the borrower gains but little,

If there is any reason, -therefore, for upholding the consideration in the one case, there is a stronger one in the other, where money is advanced at the time the transfer is made, and where the lender looks to his securities for payment.

There was sufficient evidence, we think, that the application for discount was made by direction of Mr. Kolff, to sustain the finding of the referee that it was made by his direction and upon his authority. At least, such finding is not against the clear weight of the evidence. Besides, the authority contained in the written power,, of attorney to Stange, was ample to clothe him with all the power necessary to transfer the note.

The plaintiffs were not bound indeed, they had not the right, to retain Kolff & Persuhn’s deposit. Their note was .not due when the deposit was drawn out, and the bank could not have set off the note in a suit to recover the deposit.

' Upon the whole, we do not see that the referee has committed any error, and we think the judgment should be affirmed.

Barbour, J. concurred.

Robertson, J.

The findings of the referee upon conflicting evidence, set at rest all contested questions of fact: The single question remains, whether- accommodation notes delivered as collateral security for the repayment of a loan of money, at the time it was lent, upon the faith of their delivery as such security, can be sued upon and the amount recovered by the lender. I speak simply of accommodation notes, without reference to any diversion of them by such deposit from any special purpose for an application to which they, were created, because it will be found that the argument against the liability of such makers wholly disregards such purpose and diversion from it, and is irrespective of the sufficiency of the. consideration upon the transfer. There could be "no doubt, that money lent on the faith of the double security of the *220borrower’s responsibility and the simultaneous delivery of property as security, or even on the faith of the latter alone, would form a sufficient consideration, for the transfer of such property; otherwise no mortgage or pledge of personal chattels could be given.

But the whole argument in this case may be reduced to the single proposition, that because a pledge of promissory notes, including those given for the accommodation of the holder, or of any choses in action, differs from the pledge of all other personal property, in this, that the pledgee must wait to the maturity of such notes and make them available by collecting them, but can not sell them on notice. He therefore can not be said to be *the owner*of them, either in good or bad faith, because the entire power of disposition has not been vested in him. Consequently where the. promissory notes were so made that such an action could not have been maintained upon them by the pledgor, they can not be sued upon by the pledgee.' That in fact the pledgee in so collecting, acts simply as the agent of the pledgor, with merely the right to apply the money when collected to the payment of this debt to himself.

The doctrine in regard to the want of power oil the part of a mere pledgee of choses in action to do any thing but collect the amount due on them, was first decided in *Garlick*v. *James,*(12 *John.*146,) where it was held they could not *compromise*them. This limitation was extended by the case of *Wheeler*v. *Newbould,*(16 *N. Y. Rep.*392,) and *Atlantic Fire Ins. Co.*v. *Boies,*(6 *Duer,*583,) to *sales*of them. But in both these cases it was recognized that the pledgee had a *special property*in such choses in action, an. interest in the moneys to be collected coupled with the power of collecting, and the rule was established as being for the benefit of the pledgor alone, and not of other parties liable on the choses in action. The right of the pledgee was even so far recognized, and protected, that it was held that upon a collection of the moneys due on a chose in action by a pledgor, to whom the same had been redelivered for the purpose, he collected them in a *fiduciary capacity*for the pledgee, *(White*v. *Platt,*5 *221*Denio,*269;) and upon the same principle it was held that the pledgee of a bond could even recover its value in an action of trover against a pledgor, to whom he had delivered it in order to obtain and substitute stock for it as security, but such pledgor applied it to his own use. *(Hays*v. *Riddle,*1 *Sandf.*248.) All these cases concede that the pledgee acquires an interest in or lien on the moneys agreed to be paid by the instrument pledged, to the extent of his loan. His special property is therefore a species of ownership of the choses in action however limited or qualified, and he is only prevented from being considered as entire owner in order to protect any rights of the pledgor from being sacrificed by a sale, compromise, or other disposition of the note for less than its face. He does not therefore the less continue to be owner as to the maker of a note, to the extent of whatever loan he has made on the faith of such note being valid and binding.

In this case, too, the defendant, by becoming the maker of a promissory note payable to the order of *Kolff*& *Persuhn,*and leaving it in their hands; furnished them with the means of inducing the plaintiffs to believe that it was a business note capable,of being pledged by them to secure loans made to them. Except in cases tainted with usury, or other positive prohibitions of the contract made, they would be estopped by such signing from denying the business character of the note.

It- will be observed that any diversion of the note from its original purpose does not affect the question of ownership by the plaintiff, but only the bona fides of this transfer; that doctrine has been clearly settled not. to apply to advances of mopey in ignorance of the original purpose. On all other points my views coincide with those of my associate,- and I concur in affirming the judgment, (a)

*(a)*The judgment in this case has since been affirmed on appeal by the Court of Appeals. (32 *N. Y. Rep.*553.)