Case Name: The Phenix Insurance Company, plaintiff and respondent, agt. Simeon E. Church, defendant and appellant
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1880-05-31
Citations: 59 How. Pr. 293
Docket Number: 
Parties: The Phenix Insurance Company, plaintiff and respondent, agt. Simeon E. Church, defendant and appellant.
Judges: 
Reporter: Howard's Practice Reports
Volume: 59
Pages: 293–302

Head Matter:
HEW YORK COURT OF APPEALS.
The Phenix Insurance Company, plaintiff and respondent, agt. Simeon E. Church, defendant and appellant.
Promissory note—Bona fide holder—What constitutes an indorsee ofi negotiable paper a hold&r for mine so as to exclude the equities ofi antecedent pa/rties.
To constitute an indorsee of negotiable paper a holder for value so as to exclude the equities of antecedent parties he must have relinquished some right, incurred some responsibility or parted with value upon the credit of the paper at the time of the transfer.
If the indorsee, at the time of receiving a diverted note, surrenders a past-due check held by him and made by the person delivering such diverted note he becomes a bona fide holder for value and is entitled to recover, and this whether the surrendered note be not due or overdue.
The rule, however, is technical and is not to be extended to a bank check surrendered under similar circumstances.
The distinction consists in this, that the note is given as the representative of the debt while the check is not. Nor is it even a security for it; it is taken in place of money. Its delivery amounts to a representation by the drawer that there are funds in the bank upon which it is drawn sufficient to meet it, and if the representation proves untrue the check is a false token and does not, in any sense, pay or discharge the debt. The courts of this state will not take judicial notice that the law of another state differs from our own.
The various cases reviewed (See same ease, reported ml, 56, pp. 29, 493).
Decided May 31, 1880.
Brown, Pape & Co., who were insurance brokers in Boston, collected premiums of insurance for the plaintiffs, and being pressed for payment by one Founce, their general agent at Boston, gave him their check for the amount due. Payment of the check was upon presentation at the bank refused. Being urged by Founce for payment of the check Brown, Pape & Co., the drawers thereof, gave the note in suit to him for the plaintiffs, representing at the time that it was a good
note; Founce, as the plaintiff’s agent, thereupon surrendered to them their dishonored bank check.
It subsequently transpired that the note in suit had been given to one Worcester for a particular purpose, and that Worcester had diverted it by loaning it to Brown, Pape & Co.
The right of the plaintiffs to recover depended, therefore, upon the question whether under the circumstances they became bona fide holders of the note in suit so as- to shut out, as against the maker, the equitable defense that the note had been diverted. The New York marine court, at trial term, held that the plaintiffs were bona fide holders of the note and awarded them judgment for $593 and costs. The general term of that court, upon appeal, reversed the -judgment. Upon a further appeal the New York common pleas affirmed the general term-of the marine court (see 56 How. Pr., 29), and upon a reargument subsequently ordered, decided the other way (Id., jp. 493).
The defendant thereupon appealed to the court of appeals.
S. E. Ghv/reb, for appellant.
G. Tillotson, for" respondent.

Opinion:
Andrews, J.—
The fact thqt Founce took the note in question in nominal payment of the debt of Brown, Pape & Co. did not constitute him a holder for value, so as to shut out the defense that the note had been wrongfully diverted by the payee from the purpose for which it was made. It is the settled law of this state that prior equities of antecedent parties to negotiable paper transferred in fraud of their rights, will prevail against an endorsee who has received it merely in nominal payment of a precedent debt, there being no evidence of an intention to receive the paper in absolute discharge and satisfaction beyond what may be inferred from the ordinary transaction of accepting or receipting it in payment or crediting it on account. The law regards the payment under such circumstances as conditional only, and the right of the creditor to proceed upon the original indebtedness, after the maturity of the paper, is unimpaired (Rosa agt. Brotherton, 10 Wend., 85; Payne agt. Cutler, 13 id., 605; Stalker agt. McDonald, 6 Hill, 93; Lawrence agt. Clark, 36 N. Y., 128; Weaver agt. Barden, 49 id., 286;. Moore agt. Ryder, 65 N. Y., 438; Potts agt. Myers, 74 id. 594). If, therefore, the claim that bounce, or the insurance company, his assignee, which has succeeded to his rights merely, can recover upon the note, in this action, notwithstanding the defense which it is conceded existed to the note in the hands of the prior holders and indorsees, rests solely upon the fact that it was received by bounce in payment of the debt of Brown, Pape & Oo. it is clear from the authorities cited that it cannot be sustained. But the plaintiff relies upon another circumstance to sustain the position that it is a holder for value. The original indebtedness of Brown,. Pape & Co. to bounce was for premiums on insurance collected by the firm and for which the firm was,accountable to. him.
In January, 1875, Brown, Pape & Co. gave to bounce their check on a bank, in ordinary form, in settlement of the balance then due to him. The check, on presentation, was dishonored for want of funds of the drawer to meet it, and it was presented to the bank for payment on several subsequent occasions but was not paid, and it is found that the firm neither at the time the check was drawn or at any subsequent time had funds in bank out of which the check could have been paid, and the court, upon this evidence, further found that the check was worthless, bounce held the check until March, when Brown, Pape & Co., who in the meantime had received the note in question from the payee, indorsed it over to bounce .in part payment of the debt of the firm and he, at the time of the transfer, delivered to Brown, Pape & Co. their unpaid check.
It is claimed that the delivering up of the check upon receiving the note constituted bounce a holder for value of the note, discharged of the equities of the maker. Since the case of Coddington agt. Bay (20 J. R., 637) it has been the established rule of the law in this state that to constitute an indorsee of negotiable paper a holder for value so as to exclude the equities of antecedent parties it is not sufficient that the transfer should be valid as between the indorser and indorsee, but, in addition, the latter must have relinquished some right, incurred some responsibility or parted with value upon the credit of the paper at the time of the transfer. In exact accordance with this principle and upon grounds which are entirely obvious and satisfactory, it has been frequently held that when a creditor takes from his debtor the note of a third person, before maturity, in good faith in payment of, or as collateral security for, the debt, and in consideration thereof gives up collateral securities held therefor, he thereby, to the extent of the collaterals surrendered, becomes a holder for value of the paper and takes it free from the defenses of antecedent parties (Bank of Salina agt. Babcock, 21 Wend., 499 ; Essex Co. Bank agt. Russell, 29 N. Y., 673; Park Bank agt. Watson, 42 id., 490; Chrysler agt. Revois, 43 id., 209). The question whether the surrender, by a creditor to a debtor of the debtor's own noté on taking the negotiable note of a third person is a parting with value within the rule in Coddington agt. Bay, and the subsequent cases first arose in this court in Youngs & ano. agt. Lee (12 N. Y., 551) where the plaintiffs surrendered to their debtors, on receiving their note indorsed by the defendant, a prior note of the debtors given for merchandise sold by the plaintiffs. It was held that the surrender of the prior note constituted the plaintiffs holders for value of the note in suit to the amount of the note surrendered, and entitled them to recover against the indorser notwithstanding the delivery of the note to them was a diversion of it by the maker from the purpose for which it had been indorsed, the plaintiffs having received it, without notice of the diversion • the note surrendered was not due, and this fact is adverted to in the opinion of the court, but that circumstance was not the ground upon which the decision proceeded, as we shall hereafter show. In Day agt. Saunders (1 Abbott's Court of Appeals Decs., 495) the plaintiff, on receiving the debtor's note indorsed by the defendant, which was a diversion from the purpose for which it was indorsed, surrendered four notes of the debtors, two of which were due and two not due, and the court held that the plaintiff was a holder for value and said that there was no distinction in principle between the case of a surrender of notes not due and of notes due, and they reversed the judgment of the court below founded upon this distinction, holding that the plaintiff was a holder for value of the note in suit, to the full amount of the notes surrendered. The question again arose in Brown agt. Leavitt (31 N. Y., 113), which was an action against the maker of a promissory note, payable to the order of Zebley & Co., and indorsed by them to th§ plaintiff's testator in part payment of their note held by him which he surrendered on receiving the note upon which the suit was brought, and other notes and a balance in money. The defense alleged was fraud on the part of Zebley & Co. in obtaining the note, but it was not claimed that the indorsee had notice of the fraud when he received it. The evidence to show the alleged fraud was excluded on the trial and the plaintiff recovered. This court affirmed the judgment, Davis, J., saying: " In this state it is settled by abundant authority that this transaction constituted the plaintiff's testator a holder for value of the note in question. A further discussion of the question might lead to a suspicion that the law was in doubt on this point." In Pratt agt. Coman (37 N. Y., 440) the court again held that the surrender to a party of his own negotiable note past due, and taking in lieu thereof the negotiable note of a third person, indorsed by the debtor, was a sufficient parting with value to constitute the indorsee a holder, for value of the latter note. The counsel for the defendant, as appears from his printed points, sought to distinguish the case from Brown agt. Leamitt, on the ground that in that case it did not appear that the plain- tiff on surrendering the note had any remedy on the original indebtedness for which it was given, while in Pratt agt. Goman the note surrendered was given for money loaned by the plaintiff to Agnew, and that although 'the plaintiff had surrendered .the notes he could still recover on the original consideration. The proposition that Pratt's right of action to recover the money loaned was not taken away by the surrender of the notes is supported by authority (Hill agt. Beebe, 13 N. Y., 556), but the court in deciding the case disregarded the circumstance relied upon by counsel to distinguish it from Brown agt. Lemiit. In Paddon agt. Taylor (44 N. Y., 371) it was held that the defendant, who had received a warehouse receipt for property fraudulently obtained from, the plaintiff in consideration of the-.surrender to the fraudulent vendee, who was insolvent, of his note past due, given for money loaned him by the defendant, was a purchaser for value. In Clotlier agt. Adriance (51 N. Y., 322) one Bennett had purchased mowing machines of the defendants on credit, and on settling his account gave his notes to the defendants for the purchase-money, and also assigned to them, as collateral security, a mortgage, a life insurance policy of the value of forty-six dollars and fifty-eight cents, and notes purporting to be made by a third party. The mortgage and the notes assigned as collateral turned out to be fictitious and fraudulent. Afterwards Bennett, by fraud, procured the plaintiff to indorse his notes and turned them out to the defendants in payment of his notes given on the purchase of the machines, and they, in consideration thereof, surrendered to Bennett his original notes and the collaterals. The court held that the defendants were holders for value of the notes indorsed by the plaintiff by reason of the surrender of the original notes of Bennett. Hwt, Comr., said: "As the surrender of the notes of Bennett forms a sufficient consideration under our authorities, it is not necessary to discuss the effect of the surrender of the other instruments," citing Brown agt. Leavitt, Pratt agt. Coman, Bay agt. Saunders and Paddon agt. Taylor. In Mechanics' and Traders' Bank agt. Crow (60 N. Y., 85) the cases of Brown agt. Leavitt and Pratt agt. Goma/n were cited with approval; but the note surrendered in that case was indorsed by a third person.
In view of this long line of authorities, it must be regarded as the settled doctrine in this State that the surrender by a creditor of the past due notes of a debtor upon receiving from him in good faith, before maturity, the note of a third person in place of the note surrendered, constitutes the creditor a holder for value of the note thus taken and protects him against the defenses and equities of the antecedent parties, and that it is immaterial whether the note surrendered was given to the creditor for goods sold or money loaned under circumstances which would leave the original debt represented by the note in existence enforcible against the debtor, or whether by surrendering the note the creditor parted with his entire right of action.
The principle upon which Youngs agt. Lee and the subsequent cases rest is, that the surrender of the debtor's note is an extinguishment of security surrendered, and that such extinguishment is a parting with value within the principle of Coddington agt. Bay. In Youngs agt. Lee the court say: " In the case before us the note was received in extinguishment of a demand upon a note not yet due and the note was delivered up. The surrender, upon a consideration, of a security not due extinguishes the security." And in Pratt agt. Goman, Mason, J., says : " If, however, it (the giving up of the note) did not discharge the pre-existing debt, it certainly operated to cancel the negotiable paper of the plaintiff; and this, as I understand the law, is a sufficient parting with value to constitute the plaintiff a bona fide holder of this note."
The surrender of a prior note to the maker under the circumstances of the cases cited, is unequivocal evidence of an intention on the part of the parties to the transaction to extinguish the note surrendered, and is equivalent to an express agreement to that effect. That the actual extinguishment and discharge of a prior debt upon the transfer of a note of a third person by the debtor to the creditor is a parting with value by the former was held in Bank of St. Albans agt. Gilliland, (23 Wend., 311), and Bank of Sandusky agt. Scoville (24 id., 115). If these cases are in any respect inconsistent with prior or subsequent decisions of the court, the inconsistency is to be found in .the conclusion that the prior debts were extinguished by the transactions in these cases, which it may be thought was reached upon evidence which, if the dealings had been between individuals, would not, according to some of the other cases, have been sufficient to establish an extinguishment. But it may well be that, by common understanding and usage, when a note is discounted by a bank to take a prior note held by the bank against the party procuring the discount, and the avails are credited to him, the transaction is to be regarded as an extinguishment of the prior note, although it may not be actually surrendered (Slaymaker agt. Gundackers, Exr., 10 S. & R., 75; Bank of U. S. agt. Daniel, 12 Peters' R., 34; Note to Cumber agt. Wave, 1 Smith's Leading Cases, 458). While, therefore, we do not feel at liberty to disturb the rule established by You/ngs agt. Lee, and the subsequent cases, it is quite manifest that the reason upon which they proceed is rather technical than substantial. There seems to be but little ground for holding that the surrender by a creditor of a past due note of a debtor, especially when his remedy upon the original debt remains, is a parting with value within the principle of Coddington agt. Bay, and we are not disposed to carry the rule established upon this subject further than has already been done. If we adhere to the reason of the rule in Coddmgton agt. Bay, which, as stated by Woonwobth, J,, is, "that the innocent holder having incurred loss by giving credit to the paper, and having paid a fair equivalent, is entitled to protection," Youngs agt. Lee, and kindred cases, should not be extended. In this case it is claimed that the surrender of the check of Brown, Pape & Go. was the same as the surrender of the debtor's note of the cases cited. We are of opinion that the cases are distinguishable. The check was not given to represent the debt. It was not taken or intended as a security for the debt. It was a false token taken by Founce in place of money. Brown, Pape & Co., by drawing and delivering the check, represented to Founce that-they had funds in the bank upon which it was drawn, out of which, on presentation, it would be paid. They had no funds. The representation was false, and the bank refused to pay the check on presentation. It was not a payment of the debt to Founce any more than the turning out to him of worthless bank bills on a broken bank would be payment, and returning the check to the drawers was a surrender of nothing of value. It is true that an action on the- check against the drawers might have been maintained by Founce; but they were at all times liable to him for the debt. It is' said that the check operated as an acknowledgment of the debt, and that Founce having given it up would he compelled, if now obliged to seek his remedy against Brown, Pape & Co., to bring his action on the account, in maintaining which he would, or might, meet with difficulties which he would not encounter if he had retained the check. "We are of opinion that this is quite too slight a circumstance upon which to found a judgment that Founce was a holder for value of the note in suit. There is no legal presumption that it would be more difficult to prove a claim upon an account than upon a check; certainly no such presumption can arise upon the circumstances of this case.
Our conclusion is, that this action cannot be maintained.
It is conceded that Brown, Pape & Co. were not holders for value of the note, according to the laws of this state. Founce did not become such holder on the transfer of the note to him.
The plaintiff stands in no better position, having simply succeeded to his rights.
The point is suggested, on the brief of counsel, that the note having been transferred to the plaintiff in Massachusetts, the transaction is governed by the law of that state, which it it is said is different from the law of Hew York upon the point we have considered. It is sufficient to say that the point was not raised on the trial, and no proof was given as to the law of Massachusetts upon the question before us.
Note.— The court holds that if a note instead of a check had been surrendered, the plaintiffs, under the adjudged cases, would have become Iona fide holders of the note in suit, and as such entitled to recover. It maybe difficult to recognize the practical distinction between a demand note and a sight draft or check drawn by and delivered to the same persons upon the same identical consideration.
The holder of either may sue upon the original cause of action, upon surrendering the demand note or sight draft upon the trial. The court, however, draws a marked distinction between the two cases. It holds that while a note is given as a representative of the debt, a bank check is given in lieu of money ; that the giving of a check amounts in law to a representation that there are funds on deposit to meet it, and that if this representation is untrue, the check is a false token and in no sense payment.
This maybe true; but is the innocent holder bound so to regard it ? May he not elect to treat it as a payment of the debt in the same manner as he might have treated the debtor's demand note under like circumstances ? Could he not sue upon it, and use it like a note as evidence of the debt ?
The court says that' the rule laid down in previous cases depends upon a technical rather than a substantial basis, and that it should not be extended; but is not the distinction adopted fully as technical as the rule itself ? If the rule is unsound or unjust it ought to be overthrown, and one more consonant with justice declared.
Instead of overruling the technicality it is by this case divided and refined. [Ed.
We cannot take judicial notice that the law of another state differs from our own (McBride agt. The Farmers' Bank, 26 N. Y., 450; Levanworth agt. Brockway, 2 Hill, 201.)
The order of the general term of the court of common pleas, reversing the order of the general term of the marine court, should be reversed and the order of that- court affirmed.
All concur.