Case Name: Newell vs. Gregg
Court: New York Supreme Court
Jurisdiction: New York
Decision Date: 1868-05-04
Citations: 51 Barb. 263
Docket Number: 
Parties: Newell vs. Gregg.
Judges: 
Reporter: Barbour's Supreme Court Reports
Volume: 51
Pages: 263–267

Head Matter:
Newell vs. Gregg.
No one can become a Iona fide holder of a promissory note, so as to shut out I a valid defense by the maker, when such holder takes it after, by its terms, ' money is past due upon it.
Where a note is for the payment of money at a specified time, with interest / payable annually, the payment of interest annually is as much a part of the^ agreement as the promise to pay the principal. It is a portion of the debt,i and if, when the note is sold to a third person, by the payee, a year’s interest^ is past due, the note is then dishonored.
When the instrument furnishes evidence that the written promise to pay has | been broken, a party taking the same takes it with a warning that the maker I may have some defense.
Where the holder of a promissory note which is invalid in his hands, by reason of its having been already paid, wrongfully transfers it, before maturity, to a bona fide holder, who enforces payment thereof, an action will lie against such original holder, by the maker, to recover back the amount.
APPEAL from a judgment entered upon the decision of a referee.
The complaint, in substance, is that the plaintiff gave his note for $200 to one John B. Gregg, payable to him or bearer, two years after date, with annual interest; date of note April 6, 1864; that he paid the note in full to Gregg, prior to January, 1865, before it became due; that Gregg died, and the note came into the hands of the defendant, as executor; and that he, with notice and knowledge of the payment of the note,- did unlawfully and fraudulently, and with intent to compel payment of the note by the plaintiff, a second time, sell and transfer it before it became due, to one Lewis B. Grant, a bona fide owner, &c.; and that the plaintiff, when the note became / due, was compelled to pay, and did pay it.to Grant, &c.l The answer was a denial.
The referee found as facts: 1st. That the plaintiff paid to Gregg, in October, 1864, $200 to apply on the note. 2d. That the note came into the hands of the defendant, .as executor of Gregg, before the principal of the note, by its terms, became due, and that he sold and transferred it to Grant for a valuable consideration. 3d. That the defendant, before selling the note, had notice of the payment to Gregg of the $200. 4th. That Grant had no notice. That he paid cash $166.23, in merchandise $1.75, a previous indebtedness of $36.72. 5th. That the plaintiff was compelled.to pay, and did pay the note to Grant. Conclusion, that the plaintiff was entitled to recover $168.28, with interest from July 15, 1865, in all amounting to $190.66.
O. W. Johnson, for the plaintiff.
Warren & Morris, for the defendant.

Opinion:
By the Court, Marvin, J.
The point is made that Grant was not a bona fide holder of the note, and that the de-IT fendant should have resisted the claim made upon him by IGrant. A^year's interest was past due upon the note ¡when, in July, 1865, Grant bought the note,_and. his atten|tion was called to the fact. Was not dishonor attached fto_ this. note ? The counsel for the plaintiff claims that A " though Grant may not have been a bona fide holder of the note, as to the interest past due, he was as to the principal hot yet due; and that the referee has allowed only the amount of the principal. Grant then paid for the note, cash $166.53, merchandise $1.75, a previous idebtedness of $36.72. Is the position of the counsel sound ? The agreement was, two years after date, to pay $200, with "interest payable annually. .The payment of interest annually was as much a part of the agreement as the promise to pay the principal. It was a portion of the debt. The i entire debt was evidenced by one written promise to pay, I and this promise was broken when Grant purchased the note. Was not such note dishonored ? It so seems to me. Suppose the note had been payable in installments, and one or more of the installments had been past due, could Grant have purchased the note and maintained his rights as a bona fide holder, as to the installments not due, against a defense which the maker could have made against the payee ? I think not. It seems to me that i when the instrument furnishes evidence that the written j promise to pay has been broken, the party taking the note If takes it with a warning that the maker may have some! j defense. It is settled that when a note is payable by in- j stallments, or if the interest is payable periodically, an action may be brought for any installment, or any interest, as it becomes due. (2 Pars, on Notes and Bills, 463. 2 Mass. R. 283. Id. 568. 3 id. 221.)
For the purpose of charging an indorser of a note pay- \ able in installments, there should be a demand of each J installment as it becomes due, and a notice of non-pay- j ment. (See 1 Pars, on Notes and Bills, 374.) These autho-ij rities show that the note is dishonored, and the indorser,; if demand is not made and notice given, will be discharged, as to such installments, but not as to future installments. The maker's liability will not be affected by the neglect to demand payment, &c. of the installment, but his neglect to pay is a dishonoring of his promise, and is a warning to all subsequent takers of the note. He may have neg- \ lected to pay because he had a defense, or he may have \ paid the whole note. In short, it seems to me that no one 1 can become a bona fide holder of a note, so as to shut out ! a valid' defense by the maker, when such holder takes it 1 after by its terms, money is past due upon it. '
As to the remaining question, understood to be the question mostly considered upon- the trial, I have but lit- tie difficulty. The question is whether an action can he maintained by the.maker of a.note transferred to a bona fide holder, the note void or not enforceable in the hands of the payee, the maker having been compelled to pay it ? No case precisely in point is cited-, and I have found none. The counsel refers to Cowen's Treaties, vol. l,p. 376. The author says: "If I hold a note or bill of exchange against you, which is void in my hands for want of consideration, illegal consideration or other cause, but I indorse or otherwise transfer it, before due, so that it is collected against you, I am accountable in this action for the damages. But such transfer must have been before the note or bill was due; for otherwise your remedy is by a defense against the first suit upon it." Though the . learned author has cited no authority in support of the text, I do not hesitate to adopt it as sound law, upon principles that are constantly recognized and applied. In the ¿hands of the payee or holder, the note or paper is valueless, and so long as it remains in his hands it cannot harm (the maker. The latter, knowing these facts and for the purpose of rendering the maker liable, transfers the paper to one who, by the law merchant, can enforce it, and '¡payment is enforced. This is a fraud upon the maker, and a fraudulent use of the law which makes commercial paper collectable by a' bona fide holder. In principle I think the case of Decker v. Mathews, (2 Kern. 313,) is in point. In that case it was decided by the Court of Appeals that the maker of a negotiable note can maintain an action for its conversion, against a person who, before it has any legal inception, wrongfully negotiates it to a bona fide holder for value. It was said, in one of the opinions, in substance, that the note in the hands of any one not a bona fide holder, was without value; that no action could have been maintained upon it; that the defendant took [the note, and by his wrongful act caused it to become valuable in the hands of a bona fide holder, and he received as the fruits of his wrongful act the full amount of such value, and made the plaintiff liable therefor; and that therein was the gravamen of the action.
/In the present case the note was invalid in the hands of the defendant, in case it had been paid; and the defendant, by wrongfully transferring it to a bona fide holder, enabled the latter to enforce payment. If this were the only question in the case, I should not hesitate to advise an affirmance of the judgment; but, for the reason before, stated, I think the judgment should be reversed, and therej should be a new trial.
[Erie General Term,
May 4, 1868.
Daniels, Marvin and Davis, Justices.]
The other members of the court expressed no opinion as to the finding being against evidence, but concurred upon the other two questions.
Hew trial granted.