Case Name: John D. Cheever, Appellant, v. The Pittsburgh, Shenango and Lake Erie Railroad Company, Respondent
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1896-10-06
Citations: 150 N.Y. 59
Docket Number: 
Parties: John D. Cheever, Appellant, v. The Pittsburgh, Shenango and Lake Erie Railroad Company, Respondent.
Judges: 
Reporter: New York Reports
Volume: 150
Pages: 59–76

Head Matter:
John D. Cheever, Appellant, v. The Pittsburgh, Shenango and Lake Erie Railroad Company, Respondent.
1. Diverted Negotiable Paper—Rights op Holder for Value. The rights of a holder of wrongfully diverted negotiable paper, acquired by him for value before due, cannot be defeated without proof of actual notice of the defect in title, or bad faith on his part evidenced by circumstances.
2. Presumption as to Relations of Parties to Negotiable Paper. One who takes negotiable paper for value before due, without actual notice of any defect therein, has the right to assume that the relations to the paper of every party whose name appears on it are precisely what they appear to be.
3. Wrongful Dealings by Officer of Corporation with Negotiable Corporate Paper, Originally Payable to a Third Party. The principle, that where an officer or agent of a corporation makes a corporate obligation payable to himself, it bears upon its face sufficient notice of his incapacity to issue it, when he attempts to deal with it for his own benefit, does not apply where an officer or agent deals with a corporate note, executed by himself as such officer or agent, but originally payable to a third party, and which, so far as appears upon its face, had been regularly issued to the original payee and by him transferred to a firm of which the officer isa member and for which he acted in dealing with the note.
(Argued April 22, 1896;
decided October 6, 1896.)
4. Rights of Holder, for Value, of Corporate Promissory Note Originally Payable to a Third Party, Wrongfully Negotiated by the Officer by whom Executed. If the president of a corporation, who is authorized to make corporate notes for a corporate purpose, makes a corporate note regular in form and attested by the secretary, payable to the order of a third party, who in fact has no interest therein, and the note is indorsed by the nominal payee, to a mercantile firm of which the president is a member, or in blank, and then indorsed by the firm, and the president thereafter wrongfully delivers the note, before maturity, to a stranger having no actual knowledge or notice of a defect in the title, as collateral security for a cash advance of more than its amount upon a note of the firm and for its benefit, the fact that the corporate note bears upon its face the signature, as president, of the party dealing with it, is not sufficient to put the transferee upon inquiry, so as to render him chargeable with knowledge of all the facts that such inquiry would have revealed, and hence does not deprive him, as matter of law, of the character of a iona fide purchaser, so as to prevent him, on becoming absolute owner of the note after its maturity, by consent of the pledgor and application of its proceeds upon the debt, or a subsequent holder, for value, from enforcing the note against the corporation.
0keener v. P., 8. & L. B. B. B. Oo., 72 Hun, 380, reversed.
Appeal from judgment of the General Term of the Supreme Court in the first judicial department, entered upon an order made October 13, 1893, which overruled plaintiff’s exceptions taken on the trial at Circuit and ordered to be heard in the first instance at General Term, and directed judgment for the defendant dismissing the plaintiff’s complaint as to the first and second causes of action therein contained.
The nature of the action and the facts, so far as material, are stated in the opinions.
Austen G. Fox for appellant.
The presumption-is that the rights and relations of parties to negotiable paper are precisely such as they appear upon its face to be. (Hoge v. Lansing, 35 N. Y..136; Colson v. Arnot, 57 N. Y. 259.) When these notes were offered as collateral security for a loan to the firm of M. S. Frost & Son, each note, upon its face, appeared to be, not a corporate obligation created by the president in his own favor, but, rather, a corporate obligation issued regu larly, for value, to a stranger, John T. Bruen, and indorsed by him, for value, to M. S. Frost & Son, who were then the ostensible owners. (Hoge v. Lansing, 35 N. Y. 136; M. B. Assn. v. N. Y. & S. W. L. Co., 35 N. Y. 505; Belmont Branch Bank v. Hoge, 35 N. Y. 65 ; Magee v. Badger, 34 N. Y. 247; Colson v. Arnot, 57 N. Y. 259 ; Central Bank of B. v. Hammett, 50 N. Y. 158; Jarvis v. M. B. Co., 148 N. Y. 652; Goodman v. Simonds, 20 How. [U. S.] 365, 366.) The fact that Mr. Frost, who presented the notes on behalf of M. S. Frost & Son, was president of the defendant corporation did not show, as matter of law, that the firm of M. S. Frost & Son were not the owners of the notes. (Ex parte Bushnell, 3 M., D. & DeG. 615 ; Exchange Bank v. Monteath, 26 N. Y. 505 ; 17 Barb. 171; Bank of N. Y. N. B. Assn. v. A. D. & T. Co., 143 N. Y. 559; Jarvis v. M. B. Co., 148 N. Y. 652; Bank of Genesee v. Patchin Bank, 13 N. Y. 309; F. & M. Bank v. B. & D. Bank, 16 N. Y. 125; Smith v. Lusher, 5 Cow. 688, 711; Gale v. Miller, 44 Barb. 420; Ridley v. Taylor, 13 East, 175 ; Swan v. Steele, 7 East, 210.) The president having been authorized to give the corporate notes to the amount of $10,000, it is no defense as against a purchaser for value, without notice, for the corporation to show that the president abused his authority, and did not apply the notes to the purpose which was indicated in the resolution of authority. (Jarvis v. M. B. Co., 148 N. Y. 652; Bank of Bengal v. Macleod, 7 Moore P. C. 35; Ridway v. Farmers' Bank, 12 S. & R. 255; City of Lexington v. Butler, 14 Wall. 282; Exchange Bank v. Monteath, 17 Barb. 171.)
Frank Sullivan Smith for respondent.
The plaintiff is not a bona fide holder of the notes, for value, without notice of facts affecting their validity before maturity, and in the usual course of business, and, therefore, cannot recover upon said notes. (Wilson v. M. E. R. Co., 120 N. Y. 145; A. E. Nat. Bank v. N. Y. B. & P. Co., 148 N. Y. 698; M. L. Lns. Co. v. F. S. St., etc., R. R. Co., 139 N. Y. 146,151; Gerard v. McCormick, 130 N. Y. 261; Pendleton v. Fay, 2 Paige, 202; Shaw v. Spencer, 100 Mass. 388; Garrard, v. P. & C. R. R. Co., 29 Penn. St. 154; Farrington v. S. B. R. R. Co., 150 Mass. 406; Petre v. Clark, 11 S. & R. 377; Culver v. R. R. E. Co., 91 Penn. St. 367.) The pledge of the notes in suit by the president of the railroad company was unauthorized and cannot bind the defendant. (Shaw v. S. H. N. Co., 144 N. Y. 220; Cumming v. Williamson, 1 Sandf. Ch. 17; Waldron v. McComb, 1 Hill, 111; Bloomer v. Waldron, 3 Hill, 361; A. F. Ins. Co. v. Bay, 4 N. Y. 9 ; Merchants’ Bank of C. v. Livingston, 74 N. Y. 223; Wright on Agency, 79; Mechem on Agency, § 356 ; Story on Agency, 78; Randolph on Gomel. Paper, § 794; Bank of Bengal v. Macleod, 7 Moore P. C. 35 ; Francia v. Joseph, 3 Edw. Ch. 182; Perry v. C. B. C. W W. Co., 67 Hun, 456; 143 N. Y. 637.) The trial court properly declined to submit to the jury any of the questions proposed by the plaintiff, and properly directed a verdict in favor of the plaintiff. (Wilson v. M. E. R. Co., 120 N. Y. 145; Pendleton v. Fay, 2 Paige, 202; Garrard v. P. & C. R. R. Co., 29 Penn. St. 154; Shaw v. Spencer, 100 Mass. 388; Thompson on Trials, § 1931; Williams v. Hartshorn, 30 Ala. 211; Hardy v. Simpson, 13 Ired. L. 132, 139; Sturtevant v. Ballard, 9 Johns. 337; Narsley v. De Mattos, 1 Burr. 467; Bigelow on Fraud (1st ed.), 468; Gage v. Parker, 25 Barb. 141, 145; Erwin v. Voorhees, 26 Barb. 127.)

Opinion:
O'Brien, J.
The complaint in this action contained four separate causes of action, each upon a promissory note of the defendant. The last two causes of action were not defended, and upon these the plaintiff recovered, but was defeated upon the two notes embraced in the first and second causes of action. The defense to these two notes was that they were made by the defendant's president, one M. S. Frost, and by him wrongfully diverted from the uses and purposes for which they were intended to his own personal or private benefit, or the benefit of a firm of which he was a member, and that the plaintiff is not a bona fide holder, but chargeable with notice of these facts.
The following are copies of the two notes in controversy, with the indorsements thereon when put in circulation by the defendant's president:
" §5,000. Greenville, Pa., Petty 2ith, 1888.
" Four months after date the Pittsburgh, Shenango and Lake Erie Eailroad Company promises to pay to the order of John T. Bruen five thousand dollars, at the American Exchange National Bank, New York City.
" Value received. THE PITTSBUEGH, SHENANGO "Attest, & LAKE EEIE EA1LEOAD
" E. S. Templeton, COMPANY.
" Secretary. By M. S. Frost,
" Presidents
Indorsed:
" Pay to the order of M. S. Frost & Son,
"John T. Bruen,
"M. S. Frost & Son."
" $5,000.00 Greenville, Pa., Petty 2ith, 1888.
" Three months after date the Pittsburgh, Shenango and Lake Erie Eailroad Company promises to pay to the order of John T. Bruen five thousand dollars, at the American Exchange National Bank, New York City.
"Value received. THE PITTSBUEGH, SHENANGO "Attest, & LAKE EEIE EAILEOAD
"E. S. Templeton, COMPANY.
" Secretary. . By M. S. Frost,
" Presidents
Indorsed — "John T. Bruen,
" M. S. Frost & Son."
The body of these notes and every part of them except the signature of the president was in the handwriting of Templeton, the secretary.. The president was authorized by the board of directors to issue the corporate notes to the extent of $10,000 for the purpose of purchasing flat cars. In March, 1888, before the notes became due, Frost went to Boston and there negotiated a cash loan of $30,000 from Francis A. Brooks for the benefit of jVI. S. Frost & Son, giving the firm note therefor and delivering to him the two notes in question, indorsed as they now appear, with other obligations, as collateral security for the payment of this loan. Subsequent to the maturity of the notes Brooks became the absolute owner by consent of the pledgor and the proceeds applied upon the debt, and still later he transferred them to a third party, and they have come to the hands of the plaintiff for value. It is not claimed that the plaintiff occupies any other or different position than Brooks would if he had brought the action upon the notes at maturity. Bruen, the payee of the notes, was the private secretary of Frost, the president, and the notes were made payable to him by Templeton, the secretary of defendant, who drew them in that form at the suggestion of the president. There is not and cannot be any dispute with respect to the' authority of Frost to make the notes. They were made with sufficient authority, the fraud upon the defendant consisting in the wrongful use of them when made for a legitimate purpose by the president for his own private business.
Hor is there any dispute with respect to the fact appearing on the plaintiff's case, that Brooks paid value for the notes and made present advances in cash to Frost in the sum already stated. It is equally clear upon the record that Brooks had no actual knowledge of the facts surrounding the origin of the paper or of the diversion of it by the president. He received the notes and made the advances in Boston, whereas they were made and the transactions stated' with respect to them took place in a distant state, where the office of the company was, and is indicated on the paper as the place where made.
The learned trial judge held as matter of law that the plaintiff could not recover upon the notes for the reason that he was chargeable "with knowledge of the facts and circumstances that rendered them invalid in the hands of Frost. The plaintiff is, doubtless, chargeable with such knowledge or notice as to the antecedent equities of the defendant as Brooks, his assignor, had, but with no others. If the notes were valid obligations in the hands of Brooks the plaintiff may assert every right that he could have asserted. It needs no argument to show that if Brooks had knowledge or notice or is in law chargeable- with knowledge or notice of the fraud by means of which the notes were diverted from the purpose for which they were authorized to be made, that the plaintiff cannot recover. But it is not claimed that he knew anything about the origin or diversion of the paper in fact. All that is claimed is that when it was presented to him in Boston by Frost, whom he knew to be the president of the railroad, there was enough upon the face of the paper to put him upon inquiry and, therefore, to charge him with knowledge of all the facts that such inquiry would have disclosed. He knew nothing, so far as appears, outside of the paper itself, except the fact that the party presenting it was defendants' president and that he was proposing to pledge the notes for his own debt, or rather for the debt of his firm, which for all the purposes of the question may be assumed to be the same thing. The question in the case is, therefore, reduced to a very narrow inquiry, and that is whether Brooks, standing in all other respects in the position and sustaining the character of a bona fide purchaser of negotiable paper, is deprived of that character and the benefits of that position by reason of anything appearing upon the face of the notes themselves.
The mind, at the threshold of the inquiry, encounters two principles that point in opposite directions and lead to different conclusions, as the one or the other is allowed to preponderate in the mental process of determining the legal rights of the parties. On the one hand is the principle which protects a bona fide holder of commercial paper from existing antecedent equities between the parties, and on the other the principle which protects a corporation from the unauthorized and fraudulent acts of its own officers. There is not much difficulty in stating the rule of law defining the duties and obligations of a party to whom negotiable paper is presented for discount or sale before due. He is not bound at his peril to be on the alert for circumstances which might possibly excite the suspicion of wary vigilance; he does not owe to the party who puts the paper afloat the duty of active inquiry in order to avert the imputation of had faith. The rights of the holder are to he determined hy the simple test of honesty and good faith, and not by a speculative issue as to his diligence or negligence. The holder's rights cannot be defeated without proof of actual notice of the defect in title or bad faith on his part evidenced by circumstances. Though he may have been negligent in taking the paper, and omitted precautions which a prudent man would have taken, nevertheless, unless he acted mala fide, his title, according to settled doctrine, will prevail. (Magee v. Badger, 34 N. Y. 249 ; Am. Ex. Nat. Bk. v. N. Y. Belting, etc., Co., 148 N. Y. 705; Knox v. Eden Musee Am. Co., 148 N. Y. 454; Canajoharie Nat. Bk. v. Diefendorf, 123 N. Y. 202; Vosburgh v. Diefendorf. 119 N. Y. 357: Jarvis v. Manhattan Beach Co., 148 N. Y. 652.)
Applying these rules to the conceded facts of the case, it seems to me to be impossible to impute bad faith to Brooks in the transaction. He advanced a large sum of money on the faith of the paper, without any actual knowledge that the relations of the party with whom he dealt to the paper were different from what they appeared to be on the face of it. The question now is, not what the facts were, but what they appeared to be, and what he had the right, from the notes themselves, to assume. He had the right to assume that the relations to the paper of every party whose name appeared on it were precisely what they appeared to be. (Hoge v. Lansing, 35 N. Y. 136.) He had the right to believe that the notes had been issued by the defendant to Bruen for value in the regular course of business, and were by him transferred to Frost & Son in like manner. • There was nothing to suggest to him that Frost was dealing with paper that belonged to the railroad for his own benefit. The appearances were that the defendant had put the notes in circulation by delivery to Bruen, and that they came to Frost's firm in the regular course of business for value and were then the property of tlie firm. It is quite true that all these appearances were deceptive and that the actual facts were otherwise. But how was a banker or business man in Boston to know or suspect that Bruen was only the nominal payee and a mere instrument in the transaction to enable the president to divert the paper to his own use. The name of the party who presented it and had it in his possession appeared on the face of the paper to have signed it as president. The name of another officer of the corporation was upon it also, attesting its regularity, and everything was in his handwriting except the signature of the president and the indorsement of the payee. So far as Brooks was concerned, the paper showed that it had been issued to a stranger in the regular course of business, and, through his indorsement, had come to the hands of a mercantile firm of which the president of the corporation was a member. If this were the fact, there is no doubt as to his right to use it in the business of the firm. The holder of a note who has no actual knowledge or notice of a defect in the title, or other equities between the parties, when circumstances come to his knowledge sufficient to put him upon inquiry, is chargeable with knowledge of all the facts that such inquiry would have revealed. The difficulty in this case is to find the circumstance which can be said to be sufficient to put Brooks upon the inquiry. There was absolutely nothing on the face of the paper except the signature, as president, of the party who was dealing with it, and that, we think, was not sufficient in view of the fact that the appearances were that he was a purchaser from a third party.
The principle that applies in a case where an officer of a corporation makes the corporate obligation payable to himself, and then attempts to deal with it for his own benefit, does not aid in solving the question in this case. When paper of that character is presented by the officer or agent of the corporation, it bears upon its face sufficient notice of the incapacity of the officer or agent to issue it. (Hanover Bank v. Am. Dock & T. Co., 148 N. Y. 612; Bank of N. Y.,etc., v. Am. Dock & T. Co., 143 N. Y. 559; Wilson v. M. E. R. Co., 120 N. Y. 145 ; Gerona v. McCormick, 130 N. Y. 261.) There are numerous cases that belong to that class cited by the learned, counsel for the defendant on his brief. There is a manifest distinction between them and the case at bar. Here the officer was not dealing with the corporate notes payable to himself but with notes that had been regularly issued, so far as appeared from their face, to a stranger and by him transferred to a firm of which the officer was a member and for which he acted as agent in procuring the loan from Brooks and pledging them as security. The presence of Frost's name upon the paper, as one of the agents who issued it, was not naturally or reasonably calculated, under the circumstances, to arouse suspicion in the mind of Brooks, or to lead him to believe that the president was attempting to defraud the corporation in disposing of the notes. Hone of the cases cited by the learned counsel for the defendant sustain the proposition that such a circumstance is sufficient to put the purchaser of negotiable paper upon inquiry or charge him with knowledge of the fact in case he fails to make it, and there are many cases that tend to support the contrary view. (Am. Ex. Nat. Bank v. N. Y. B. & P. Co., 148 N. Y. 698; Miller v. Consolidation Bank, 48 Penn. St. 514; Walker v. Kee, 14 S. C. 142.)
It is said that if the plaintiff's right to recover in this case is sanctioned by this court an easy way will be opened for the perpetration of frauds upon corporations by officers intrusted with its negotiable obligations, and that the device of making the paper payable to the order of a nominal payee, interested or aiding in the fraud, will be a favorite one to accomplish the end. We must leave all such cases to be dealt with upon the jieculiar facts and circumstances as they arise. It is more reasonable and just to assume that corporations will be able to protect themselves by proper vigilance from the dishonesty of their own officers, than to inrpute to joarties who have taken the paper for value, ignorant of its origin, constructive knowledge of the facts upon such circumstances as exist in this case.
We think that there was nothing on the face of the paper or in the facts shown to warrant the court in holding as matter of law, as it did, that the obligations were received by Brooks and the advances made on them mala fide. That is the effect of the ruling at the trial, and the conclusion was not supported by the facts.
It follows that the judgment must be reversed and a new trial granted, costs to abide the event.