Case Name: First Bank of Notasulga, Respondent, v. Richard W. Jones, Jr., and Others, Appellants, Impleaded with Thomas J. Lewis
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1913-04-25
Citations: 156 A.D. 277
Docket Number: 
Parties: First Bank of Notasulga, Respondent, v. Richard W. Jones, Jr., and Others, Appellants, Impleaded with Thomas J. Lewis.
Judges: 
Reporter: Appellate Division Reports
Volume: 156
Pages: 277–279

Head Matter:
First Bank of Notasulga, Respondent, v. Richard W. Jones, Jr., and Others, Appellants, Impleaded with Thomas J. Lewis.
First Department,
April 25, 1913.
Bailment—pledge of stock to secure payment of promissory note—. refusal of pledgee to accept substituted securities —• accommodation note of business corporation ■— defense of ultra vires not available to indorsers.
Where the pledgee of corporate bonds which are colla teral to a promissory note refuses on the demand of the pledgor to accept substituted securities under a plan for the reorganization of the corporation whereby a loss is caused, he is not liable in the absence of bad faith, being entitled to an honest exercise of judgment. Hence, it is no answer to an action by the pledgee on the promissory note merely to allege that by reason of his failure to accept substituted securities a loss was incurred.
Where the defendants in an action upon such note are indorsers, not makers, it is no defense to allege that the note, being made by a business corporation for the debt of a third party, was ultra vires- the corporation, there being no allegation of fraud in procuring the indorsement.
As between a holder and indorsers the former may be a holder in due course notwithstanding knowledge that the note was not an enforcible obligation of the maker.
Appeal by the defendants, Richard W. Jones, Jr., and others, from an interlocutory judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 16th day of January, 1913, upon the decision of the court, rendered after a- trial at the New York Special Term, sustaining the plaintiff’s demurrers to certain defenses and counterclaims contained in the answers of the respondent.
Rockwood & Haldane, for the appellants Jones and Stallo.
William C. White, for the appellant Henry J. Mayham.
John M. Ryan, for the respondent.
Judgment affirmed, with costs, on opinion of Bischoff, J,
Present —Ingraham, P. J., McLaughlin, Laughlin and Dowling, JJ.

Opinion:
The following is the opinion of Bischoff, J.:
Bischoff, J.:
The defense and counterclaim founded upon the plaintiff's neglect and refusal to exchange the corporate bonds held as collateral for the note in suit and to accept substituted securities under a proposed plan of reorganization of the corporation do not proceed upon facts sufficient to ¡support the finding of any breach of duty upon the part of the¡ plaintiff. A creditor-holding property pledged as collateral security is bound to use reasonable care in the matter of the physical preservation of the property (Willets v. Hatch, 132 N. Y. 41), and this duty extends also to the preservation of the value of commercial paper in the hands of the pledgee as security, by taking the ordinary steps to charge an indorser upon default. (Easton v. German-Am. Bank, 24 Fed. Rep. 523.) Where there has been a loss of value through the pledgee's refusal to change the form of the security, however, the' question is simply whether the refusal proceeded upon an honest exercise of judgment, and the mere fact'that a loss followed the pledgee's neglect to make or accept the change upon the pledgor's request would not suffice for a case. (Field v. Leavitt, 37 N. Y. Super. Ct. 215.) It is apparent from the facts alleged that the election to participate in the plan of reorganization was to be exercised or withheld as a matter of business judgment, and in the absence of anything to suggest bad faith upon the plaintiff's part when exercising its judgment for the protection of its own rights in the collateral security, the matter alleged in these answers is insufficient in substance. The further defense that the note in suit was made by ¡a business corporation, not for its own debt, but to secure the debt of another party to the knowledge of the plaintiff is also demurrable when sought to be interposed by the defendants sued as indorsers. Granting that the note itself was ultra vires the corporation (10 Cyc. 1115), the new contract evidenced by the indorsement was not dependent upon the validity of the note (Daniel Heg. Inst. [5th ed.] § 673, 678a) in the absence of fraud upon the part of the holder whereby the indorsement had been procured. (Turner v. Keller, 66 N. Y. 66; Mosher v. Carpenter, 13 Hun, 604.) For the purposes of the indorser's contract the party taking the note with the indorsement is a holder in due course, notwithstanding his knowledge that the note was not an enforcible obligation of the maker. (Erwin v. Downs, 15 N. Y. 575.) Demurrers severally sustained, with costs, with leave to defendants to amend upon payment of costs within twenty days.