Court Opinion

ID: 5257745
Source: CourtListenerOpinion
Date Created: 2022-01-06 18:33:12.280509+00
Date Added: 2024-06-11T08:28:02.222661
License: Public Domain

Laughlin, J. (dissenting):
This is an action on two promissory notes made by the defendant to the order of the Thompson-Starrett Company, on November 1, 1912, one being for $96,733.52, and the other for $3,094.63, payable in one year, with six per cent interest. The plaintiff discounted the notes for the payee on the 7th of December, 1912, which was before maturity. By the pleadings, which are an amended complaint and an amended answer, it stood admitted that the notes, which recite that they were given for value received, were duly made, executed and delivered to the payee on the date thereof and that they were duly indorsed and delivered to the plaintiff on the 7th day of December, 1912, in consideration of the face value thereof. Defendant pleaded, but failed to prove, payment; and evidently on the- theory of payment put in issue the allegations that the plaintiff was the holder and owner of the notes and denied the allegations with respect to non-payment. For a second and partial defense the defense pleaded facts arising in the course of and with respect to the execution and performance of an agreement between him and the payee for certain construction work by it for him at Uva, in the State of Wyoming, by which it was to be reimbursed by him for the cost of the work and to receive for its compensation five per cent on the cost, and he was to give in payment his promissory notes on monthly statements to be rendered by the payee with respect to the cost, to which was to be added the five per cent. The material facts so pleaded are that the payee entered on the performance of the work and rendered to defendant, from time to time, statements with respect to the cost,- and represented that they were correct; that the defendant relying thereon executed and delivered notes and paid on account of the notes, $24,646.92; that on November 1, 1912, the amount of his outstanding notes aggregated the face of the larger note in suit; that the payee was unskillful, *326negligent and wasteful in the performance of the contract, and unreasonably and improperly delayed the work, thereby largely and improperly increasing the cost, and that the statements rendered were false and fraudulent in that they contained charges for unnecessary and useless supplies and materials, and for work and labor done and supplies and materials purchased at excessive rates, and for some expenditures not belonging to the work, and others caused by the unskillfulness and negligence of the payee and by unreasonable delay on its part, and that such charges were knowingly made by the agents and servants of the payee with intent to deceive and to defraud the defendant; that these facts were unknown to the defendant when he received the statements and gave the notes called for by the contract, but that upon discovering them he notified the payee; that thereafter and on the maturity of the outstanding notes, and, in renewal thereof, he made and delivered the larger note in suit, and gave the other note in suit on a statement rendered by the payee with respect to disbursements made under the contract for the month of July, 1912, and that he expressly reserved to himself “ all rights and claims against said notes alleged in the amended complaint in connection with the performance of said agreement on the part of said company.” The defendant further alleged that the plaintiff, before receiving the notes, had knowledge of the claims of the defendant against the payee “ in respect of said notes and the transactions hereinbefore alleged and of the reservation by the defendant of his rights and claims against said notes.” The case was tried and decided on these pleadings without amendment.
The court found that the notes were given and were indorsed and delivered to the plaintiff as alleged, and were discounted by it, and the proceeds placed to the credit of the account of the payee, and, in effect, that the amount of such credit was withdrawn by the payee on or before December 16, 1912, for it was found that on that day the plaintiff became the holder of the notes for value. The court found, however, that the plaintiff did not receive the notes in due course and that prior to receiving them and paying therefor, and, before paying the full amount, it had notice of the reservation by the defendant of his rights and claims against the notes “ as *327• set forth in the amended answer,” and that before paying the full amount, plaintiff had notice of sufficient facts to put it on inquiry with respect to the defense pleaded, and if it had inquired, it would have ascertained the facts to be as pleaded in the amended answer; that the plaintiff did not take the notes in good faith; that the notes were made and delivered by the defendant under an agreement between him and the payee that they were made and delivered subject to all his rights, claims and defenses, and without prejudice or waiver of any claims he might have against the notes on any account in connection with the agreement, and that such rights were expressly reserved by him; that the payee was unskillful, negligent and wasteful in performing the work and unreasonably and improperly delayed it, whereby the cost was largely and improperly increased; that the statements of cost rendered by the payee were false and fraudulent in that they contained charges for expenditures not belonging to the work, and for moneys dishonestly appropriated by the agents, servants and employees of the payee, and contained charges for expenditures in consequence of unskillfulness, gross negligence and waste in the performance of the contract; that the plaintiff had notice that the title of the payee was defective and failed to sustain the burden of showing that it was a holder in due course; that the amount owing by the defendant under the notes has not been liquidated, and that the reasonable cost of the work and materials, with ten per cent plant and overhead charges, and the five per cent compensation added thereto, was $72,644.95, and that the balance owing by the defendant on account of the work was $53,150.64. As conclusions of law the court found that the plaintiff did not take the notes in good faith; that there was a partial failure of consideration for the notes which is a defense pro tanto and that plaintiff was only entitled to recover on the notes for the reasonable cost of the work, plus five per cent, less the amount paid to apply on the cost of the work, and was not entitled to interest on account of the fact that the amount owing had not been liquidated, and judgment was directed in favor of the plaintiff for $53,150.64 with costs. The case was submitted on the proposed findings and briefs, and the court wrote an opinion. (155 N. Y. Supp. 333.) Thereafter addi*328tional findings, to conform the decision to the views of the court expressed in the opinion, were made at the request of the defendant, but are not embodied in the decision. The court thereby found that a note for $50,000, of which the larger note in suit was in part a renewal, was given by the defendant May 1, 1912, in renewal of former notes, and that it was given subject to claims and defenses against the same and on the representation that the statements of cost which had been rendered by the payee were correct, and on an agreement that an investigation with respect thereto would be made and that, if anything was found wrong, it would be corrected and an adjustment made, and that for the work remaining to be done notes would be given maturing November 1, 1912; that pursuant thereto, three notes were thereafter given, aggregating $49,828.11, maturing on November 1, 1912; that the notes in suit were given, not as evidence of defendant’s indebtedness in a fixed amount, but with the distinct understanding that the amount was to be fixed after an investigation into the bona fieles of the bills or statements rendered by the payee, and were subject to all of the defendant’s defenses and claims against the notes; that the notes in suit were negotiated by the payee in breach of faith and in fraud of the rights of the defendant; and, as conclusions of law, that the title of the payee was defective, and that the plaintiff was not a holder in due course and was only entitled to recover the amount actually due to the payee.
One Louis J. Horowitz was the president of the payee, which in 1911 was engaged in various building enterprises throughout the country, and was constructing a $4,000,000 office building to be known as the “ Insurance Exchange Building ” for the defendant and one Graham in Chicago. Defendant had invested upwards of $100,000 in acquiring all the stock and bonds of the North Laramie Land Company, which owned 4.000 acres of reclaimed land in Platte county, Wyo., and had acquired the right to furnish water for irrigating purposes for 4.000 more acres of reclaimed land, and was engaged in constructing a system of irrigation consisting of three storage reservoirs connected with the North Laramie river and with one another by about twenty miles of ditches. The work was then being done under the supervision of John A. Whiting, the *329land company’s engineer, and one Shelburne, its resident engineer. The work, however, was not being done satisfactorily and the defendant was desirous of completing it to enable him to realize on his investment in the enterprise. Defendant requested Horowitz, representing the payee, to finish the work and showed Horowitz plans that had been prepared by Whiting for concrete facings for two dams. Horowitz stated that it was too small an enterprise ordinarily to interest the payee, but, in appreciation of defendant’s having given it the contract for the Chicago building, it would undertake the work. Defendant, who was an experienced lawyer and the general counsel for many corporations, thereupon prepared and submitted to Horowitz a proposed contract, as follows:
“ Chicago; III., August 17, 1911.
“ Thompson-Starrett Company,
“ 51 Wall Street, New York:
“ Gentlemen.— I am sending you herewith drawings and general specifications for reinforced concrete facings to be constructed on the North Laramie Land Co.’s project near Uva, Wyoming.
“ I desire you to put yourselves into communication with Mr. J. A. Whiting, Engineer, Cheyenne, Wyoming, who will give you any additional necessary information and instructions you may require for the purpose of executing this work.
“ I herewith employ you to execute such work as Mr. Whiting may direct you in writing to execute, upon the understanding that I will pay you for this work on the basis of cost to you plus five (5%) per cent, of the cost for your profit.
“ I agree that your cost is to include expenses of every nature incurred by you, including railroad transportation, board bills, and wages of people employed entirely or in part in connection with this work.
“ You are to render to me monthly statements showing the cost to you of the work at the end of each month. To this cost you will add the 5% commission above referred to. Against such bills I will give you my promissory notes with interest at the rate of six (6%) per annum, maturing May 1st, 1912.
“As soon as practicable for you to do so, I will be glad to *330have from you an approximate estimate as to the total prob7 able cost of the work ordered up to any one time, such estimate of course to be in no way binding upon you.
“ Yours very truly,
“ MAX PAM.”
The defendant at the same time prepared a letter to Whiting, a copy of which he inclosed to Horowitz with the proposed contract. In that letter he incorporated a provision for the approval of the vouchers of the contractor in advance by Whiting. Horowitz, on receiving the proposed contract and the copy of the letter to Whiting on August 17, 1911, as president of the payee wrote the defendant suggesting that, inasmuch as the approval of the vouchers was not provided for in their agreement, defendant write Whiting that such approval was unnecessary. Horowitz testified that he stated to the defendant that such a checking up of vouchers in advance was not customary and, on most jobs, the payee received its money before it submitted vouchers, and that it did not wish to be delayed in receiving its money by the checking up of the vouchers in advance by an engineer of whom it knew nothing, and that the vouchers would be submitted to the defendant and that, after he reimbursed the payee for the money expended, “ he could then do such checking as he had a mind to.” It is evident that this work was not of the kind usually performed by the payee, and it was to be done at a very remote and inconvenient point with respect to obtaining labor and material. The work to be done and the material to be used were to be determined by Whiting, and the work was to be done under his general supervision and under the direct and immediate supervision of the defendant’s resident engineer, Shelburne. Horowitz’s letter suggesting the elimination of the provision for the approval of the vouchers in advance was received by the defendant before he forwarded the letter which he had written to Whiting, and, without protest, he thereupon eliminated that provision. The payee had an office in Salt Lake City in charge of one Morton, and Horowitz forwarded to him the plans for part of the work which had been delivered to him by the defendant, and directed him to make arrange*331ments to meet the defendant’s representatives on the ground and plan for the execution of the work. Pursuant to these instructions, Morton went to Uva on the 24th of August, 1911, and with Whiting and one O’Neill, of the land company, inspected the work as then contemplated and estimated that it could be completed in about three months at a cost of about $30,000. At that interview, Whiting gave Morton a formal order for that part of the work which could then be proceeded with, and Morton thereupon proceeded to employ a staff to take charge of the work, which he contemplated visiting at short intervals from his office in Salt Lake City, which was about 500 miles from Uva. After inquiries into satisfactory references, he employed one Jennings of Salt Lake City as superintendent at a salary of $175 per month and expenses, and also employed at $100 a month and expenses one Meridith, whom he had known since 1905, and who had worked for the payee for two years commencing in 1907 as cashier at Salt Lake City, and during that time had handled satisfactorily for the payee about $1,500,000, while receiving a salary of $125 per month. Morton also employed one Snelgrove, a young engineer, as timekeeper. The payee’s representatives established a camp and commenced the work in September, 1911, and continued the work with the exception of concreting, which it was obliged to suspend earlier on account of the cold weather, until January 6, 1912, when weather conditions required complete suspension of the work. Work was resumed again on January 27, 1912, on the ditches and in hauling material and continued until April thirteenth, when the weather permitted the resumption of the work of concreting, and from that time it was continued until it was wholly completed on the 3d of July, 1912.
The vouchers for the work to the end of December, 1911, aggregated $52,396.79, but it appears that more work had been ordered by Whiting than Morton made his estimate on, and the cost of the work was largely increased owing to the fact that the cold weather set in unusually early in the fall of 1911, the temperature having fallen to zero in the month of October. It appears that down to the end of December, 1911, as great progress as could have been expected was believed to have been made by Whiting and Shelburne, *332defendant's representatives, and by the payee's representatives. No complaint had been made and the suspension of work had been made at the suggestion of Whiting. There was no direct supervision of the work either by Whiting or Morton between January twenty-seventh arid April thirteenth. During that period it was left to the other representatives of the payee acting under the direction of Shelburne with respect to the work. The first complaint from the defendant with respect to the work was a telegram to Morton on April 9, 1912, in whiph he stated that he had relied upon the assurances of Horowitz that the work would be done as economically and expeditiously as possible, and that the cost down to that time had been many times the estimate made and was appalling, and that the work was not complete and that the water was rising and the reservoirs and ditches were not ready. He also stated that he had had a favorable offer for the sale of the whole project which, owing to the fact that the work was not completed, he could not accept, and that he wished to know definitely when the work would be completed. Morton thereupon wrote Horowitz explaining the reasons for the increase in the cost, which were as already stated, and this was communicated to the defendant. On the 12th of April, 1912, defendant wrote Whiting stating that the vouchers received down to March first aggregated $67,178.72, and that apparently considerable work remained to be done. To this Whiting replied that the present progress of the work was very satisfactory and that the project would be in shape to conserve water at an early date, and that the length of time required to complete the work would depend upon the weather and the number of teams obtainable, and that he believed it would be completed within sixty days. He also stated that favorable weather was some thirty days later that year than usual. From that time on and until its completion there was no serious or well-grounded complaint with respect to the progress of the work.
Notes aggregating, with interest, $72,225.10 were to fall due May 1, 1912, and there was an interview between Horowitz and the defendant on April twenty-ninth concerning them. With respect to .this and other interviews and matters, there was a serious conflict between the testimony of Horowitz *333and that of the defendant. The learned trial court accepted the testimony of the defendant, and as it was a question of veracity with but little or no evidence corroborating either, and both were interested, an appellate court would not be warranted in holding that the trial court erred in so doing. We, therefore, accept the testimony of the defendant, but not in all respects the construction placed thereon by the trial court. With respect to that interview the defendant testified, in substance, that Horowitz called at his office and he stated to Horowitz that the cost of the work down to that time had very materially exceeded $60,000, which was a revised estimate made by a representative of the payee in December, 1911, and that he objected to paying the notes falling due May first in view of the excessive cost and owing to the delay in completing the work, and that he was unwilling to pay them without some investigation on his own account “ with reference to the correctness of the situation; ” that Horowitz expressed confidence that Morton had given the work every possible attention, that the cost was no more than it should be, and that the increased cost was due largely to weather conditions and to the additional work ordered by the engineers; that he thereupon stated that he had no information from his own representative with respect thereto, and that he “ wanted to write Mr. Whiting and get some information; ” that Horowitz then suggested that he pay the notes down to $50,000 and “ renew the $50,000 until November 1st,” and that in the meantime he could make whatever investigation and inquiry he cared to make to satisfy himself that what Horowitz had continually said to him was correct; that he then asked Horowitz “ what about the balance; is there any assurance, is there any indication what I am to meet there? ” and that Horowitz said, “ Let whatever balance there is, let that—make your notes payable November 1st, so that in the meantime the work will be completed, and then if there is anything wrong, it will be corrected; ” that Horowitz assured him that the work would cost him infinitely less by the payee’s doing it than if any one else had done it, whereupon he said: “ Well, I am willing to do that; I am willing to pay you down to $50,000, and then in the meantime I will give you these notes, but there must be some *334adjustment between now and November 1st and find out exactly what is right; ” that Horowitz replied: “ That is perfectly satisfactory to me. I will find out what the amount is so that we can figure it out.” The figures representing the amount necessary to reduce the indebtedness to $50,000 were furnished, and on April 30, 1912, defendant inclosed a check to Horowitz for $22,225.10 and a note for $50,000 payable on or before six months from May 1, 1912, “ account my notes and obligations held by you in re North Laramie Land Company,” and requested that Horowitz return the other notes. The other notes were returned to the defendant shortly thereafter, and he testified that he had previously received notice from the plaintiff with respect to them and that, on receiving them, he noticed that they had been discounted by the plaintiff. This is the only testimony in support of the supplemental findings, to which reference has been made, with respect to any agreement or understanding between the defendant and the payee at the time the note for $50,000 was given on May 1, 1912. There is no other testimony or evidence bearing on the question as to whether the note then given, or the notes thereafter given on vouchers subsequently submitted by the payee, were to be held by or to be negotiated by the payee. Defendant continued to give notes on vouchers submitted for the completion of the work. The aggregate of the vouchers, plus the five per cent which the payee was to receive as compensation, was $121,504.56. Defendant retained the vouchers as received and never forwarded any of them to Whiting or to Shelburne to check up or for information until the 25 th of June, 1912, when they aggregated $100,143.27. The first complaint by Whiting with respect to extravagance or negligence in the performance of the work was a telegram on May 17, 1912, in answer to a telegram from the defendant referring to the fact that the work had then cost over $83,000 and that the payee claimed that the increase in the cost was due to extra work constantly ordered by Whiting. In that telegram Whiting stated that the contractor was constantly exceeding its own estimate by fifty per cent and that there was lack of economy and proper handling of men, and he suggested that the contract be terminated and stated that he could take charge of the plant *335and equipment and proceed with work, employing the payee’s concrete foreman as superintendent, and save the defendant time and money, and that it was impossible for him to regulate the cost under the present management. The defendant sent a copy of Whiting’s telegram to Horowitz, who replied on May 21, 1912, that in his opinion Whiting’s statements were not justified and that he thought Whiting had made too low an estimate and was attempting to place the blame on the payee, and said that the work was taken over by the payee as an accommodation to the defendant and that the payee was quite willing to relinquish it, and expressed the hope that the defendant would act on Whiting’s recommendation. The work evidently was nearly completed at that time, and the payee was continued in charge and completed it to the entire satisfaction of the defendant with respect to the work itself. On the 13th of June, 1912, Whiting wrote O’Neill of the land company, criticising the work that was being done by the payee and complaining of negligence and incompetericy on the part of the superintendent of the payee, and stating that he had complained to Morton and to the superintendent with respect to the cost of the work; but as a witness he . admitted that he had made no such complaint to them. On the 23d of July, 1912, Horowitz wrote the defendant asking for a check or note for vouchers aggregating $35,150.04 that had been rendered, and thereafter there was an interview between the defendant and Horowitz with respect thereto. The defendant testified that he then informed Horowitz that he was not disposed to give any more notes; that he had been informed through Whiting that Morton was not on the job between December and the end of May, although he had been assured by Horowitz that Morton would give it his attention, and he took the position that the matter should remain for adjustment and that a proper investigation should be made as he suggested when the note of May first was given; that Horowitz replied that his finance committee was criticising him for not getting the notes for expenditures that had been made a month or two months before, and said: “It is not necessary to withhold the notes. My understanding with you is that the matter shall be investigated and adjusted, and it will save me adverse criticism if you will give me the *336notes;” and that he replied, “ Very well, I will do so.” Horowitz denied that conversation.
The notes were inclosed to Horowitz by the defendant with a letter, dated August 2, 1912, containing no reference to the reservation with respect to adjustment, but merely stating that they covered the last two statements which were being sent to Whiting for review. According to the testimony of the defendant, there was an interview between him and Horowitz in Chicago early in September, 1912. With respect to that interview he testified that he was desirous of taking up the matter of the adjustment of their account because he expected to be very much occupied with personal matters between then and the first of November; that he informed Horowitz that the opportunity for making the necessary investigation had not been sufficient, and Horowitz agreed to that on the ground that the men who worked on the job had become scattered; that he told Horowitz that he was unwilling to make any payment on the notes until after the subject had been fully and entirely investigated and every effort made to make an adjustment based upon the results of the investigation; that Horowitz asked what he suggested, and that he said that sufficient time should be given to get the information and that the charges were serious, and that Horowitz should be as much interested as he in having an investigation complete and satisfactory; and that to this Horowitz assented and said that he wanted the defendant to be satisfied that he had not been imposed upon, and that the complaint made to him by Whiting had been grossly exaggerated, and he asked what the defendant would suggest doing; that the defendant replied that the notes ought to be renewed for a sufficient length of time to permit the investigation and adjustment; whereupon, Horowitz said that the matter of the defendant’s contract, claims and complaints had been the subject of discussion in the finance committee of the payee, and that the committee had charged him with showing favoritism to the defendant through friendship, but that he insisted that the renewal of the notes which he had agreed to should be made so that the investigation could be conducted; that he told Horowitz that he thought the renewal ought to be for a year, to afford ample opportunity for the investigation and for the adjustment after the result of the *337investigation; that Horowitz replied that it would be difficult for him to persuade the committee to allow such a renewal but that he felt the. defendant ought to have every opportunity to satisfy himself with respect to the facts, and that he would renew the notes for one year; that he then said, “ Of course, Mr. Horowitz, you must understand that these various complaints and claims I have made and whatever defenses I have to these notes are reserved so that they can be the subject of adjustment when the renewal period is up.” He did not testify that Horowitz made any reply, but he says they both agreed to expedite the investigation so that abundant time would be left for adjustment. Horowitz admitted an interview with the defendant at about that time, but denied that there was any discussion with respect to the notes, and said that at the interview the defendant claimed to have discovered evidence of irregularity and extravagance, and that he asked for the facts and assured the defendant, if there was anything wrong with respect to the expenditures made by the payee, the payee would suffer the consequences and not require the defendant to sustain the loss. Horowitz contemplated going to Europe in the fall of 1912 and did not expect to return until after November first, when the notes were to fall due. He sailed on the 3d of October, 1912, and did not return until between the fifteenth and twentieth of November of that year. The day before he sailed there was an interview between him and the defendant. At that time there was a balance of over $200,000 due from the defendant and Graham to the payee on account of the Chicago contract, and the defendant executed for himself and Graham four notes for $50,000 each therefor. The defendant testified with respect to that interview that, while receipts for the payments evidenced by the notes were being written out, he asked Horowitz if he had disposed of the renewal of the Uva notes during his absence, and that Horowitz replied, in substance, that he had, but that he had had great difficulty in getting it through the finance committee, and that they insisted that he was altogether too friendly in giving the defendant the renewals, but that he insisted that the defendant should have whatever time was necessary to make a complete investigation and reach an adjustment, and that they *338finally agreed to it; that Horowitz asked about the interest, and that he replied by asking what Horowitz would do with reference to the notes if he were going to be away, and that Horowitz answered that he would give instructions to Mr. Pond, the treasurer of the payee, to exchange the existing notes for the renewal notes on the first of November; that Horowitz again asked with respect to the interest, to which he replied that it would be practically impossible to pay the interest because “ the amount that is to be payable on these notes is not ascertained ” and that the amounts could not be fixed until the “ adjustment is reached,” and that, therefore, there could be no interest paid “ at this time,” and that he offered to give a note for the interest payable on demand which could be adjusted at the same time the principal was taken up for final adjustment. The defendant also testified that the defenses which he referred to in his testimony consisted of the investigation and adjustment of the amount to be paid by him. Horowitz testified that the first reference to the renewal of the notes falling due on November 1, 1912, was at this interview and that, when the defendant requested a renewal for a year, he objected, saying that the investigation would not require a year and did not involve the whole amount, and that the defendant agreed that he would take up the notes sooner if the investigation was finished, but that he wanted the invest tigation completed.
There was evidence of negligence on the part of the payee’s superintendent with respect to the work, and of his incompetency, which, however, was not known to the payee at the time; and the evidence shows dishonesty on the part of the payee’s cashier on the job, through which several items, relatively small, however, were included in the vouchers which were not properly chargeable to the work, but this was not known to the payee until long after the work was completed. The learned trial court held that the evidence tending to impeach the vouchers upon which the original notes were given was sufficient to require the plaintiff to bear the burden of showing to what extent the vouchers were correct. The plaintiff failed to bear that burden, and the court determined the amount to be deducted from the notes in suit by determining what the work should have cost if it had been skillfully and *339honestly performed. The learned counsel for the appellant contends that the nature and extent of the evidence tending to impeach the vouchers was not sufficient to constitute a prima facie impeachment of all the vouchers, and that it did not warrant the ruling to that effect made by the trial court; but in the view I take of the case, it is unnecessary to consider or to decide whether that ruling was right, or whether the theory on which that issue was decided was correct, for I deem it an immaterial issue herein.
The plaintiff was the principal but not the sole banker of the payee of the notes, and since March 9, 1903, it has been represented on the board of directors of the payee by Mr. Kelsey, its president, and Mr, Stanley, its second vice-president, treasurer and the manager of its banking department, and by three others, forming a majority of the board. Kelsey was also chairman of the payee’s finance committee, which had general charge of the contracts to be taken by the payee and of its finances. Stanley was also a member of the finance committee and was one of the two members of the auditing committee of the payee. It is unnecessary at this point further to consider the relations between the plaintiff and the payee of the notes, for the trial court properly found that they remained separate and distinct corporations and that the payee was not a subsidiary of the plaintiff.
The latter part of October, 1912, Pond, the treasurer of the payee, informed Kelsey, the chairman of its finance committee, that he had notes of the defendant about to fall due and that Horowitz had agreed to take renewal notes for a year therefor. Kelsey informed him that, since Horowitz was absent, the only thing to do was to take the renewal notes. Thereupon the renewal notes, which had been made by the defendant and left with his secretary for delivery, were procured and delivered to the treasurer of the payee. A few days thereafter a demand note of the defendant for the interest on the notes due November first was likewise received from him by the payee. That note was paid by him on May 2, 1913, by check inclosed with a letter stating that it was without prejudice or waiver of any rights or claims the maker had against the notes then held by the payee, and that any such rights or claims “ on any account in connection with the contract ” for the con*340struction work were expressly reserved. The defendant’s notes due November 1,1912, in so far as they had been discounted by the plaintiff, were taken up by the payee’s check given that day to the plaintiff for $63,406.38. They were retained by the payee for a few days and returned to. the defendant on receiving from him, as already stated, the notes in suit. The payee was not in need of funds at the time it received from the defendant the notes in suit, but early in December thereafter it became necessary for it to discount some paper. The treasurer of the payee spoke to Mr. Stanley of having these notes and of the necessity for discounting some paper within a few days, and said he intended to speak to Horowitz about it, and Mr. Stanley approved. The treasurer then spoke to Horowitz, who directed that he have the notes discounted. A few days later and on December 7, 1912, the treasurer of the payee took the notes to the plaintiff and there informed Stanley, its treasurer, that they were the notes he had spoken to him a few days before about having discounted, and Stanley answered “ all right ” and directed him to the discount clerk, and he informed the discount clerk that Stanley authorized their discount, and they were thereupon accepted and discounted. The testimony of the treasurer of the payee tends to show that he informed Stanley on the first occasion either of the amount of the notes or about the amount that was needed, but that nothing was said as to whose notes they were, and that Stanley on neither occasion examined them. When they became due, no adjustment had been made between the defendant and the payee. The defendant refused to pay them, and the payee likewise refused to pay them and suggested to the plaintiff that it bring an action thereon, which it did.
Accepting the testimony of the defendant, as did the trial court, I am of opinion that the fair inference to be drawn therefrom, and the effect thereof, is only that the amount payable on the notes was subject to deduction according to any adjustment arrived at between the parties with respect to the defendant’s claim that the charges for the.cost of the work, and for which he gave the notes originally, were excessive. It is perfectly clear, I think, that the notes were unconditionally delivered, and the evidence of the defendant with respect thereto only shows a condition subsequent, which, being *341inconsistent with and contradictory of the terms of the notes, could not be proved by parol evidence and did not constitute a defense thereto. (Jamestown Business College Assn. v. Allen, 172 N. Y. 291; Smith v. Dotterweich, 200 id. 299; Grannis v. Stevens, 157 App. Div. 561; affd., 216 N. Y. 583; Nash v. Weidenfeld, 41 App. Div. 511; affd., 166 N. Y. 612; Copans v. Dougan, 217 id. 695, reversing 158 App. Div. 896, on the dissenting opinion of Burr, J.; Pratt & Whitney Co. v. Pneumatic Tool Co., 50 App. Div. 369; affd., on opinion below, 166 N. Y. 588; Smith v. Hedges, 89 Misc. Rep. 183; affd., 170 App. Div. 349; affd., 222 N. Y. 701; Rice v. Grange, 131 id. 149; Tradesmen’s Nat. Bank v. Curtis, 167 id. 194.)
In Copans v. Dougan (supra) the action was on a note against the indorser, and the answer admitted the making and the indorsement of the note and alleged that it was made to secure the defendant Cronk for $200, on account of the purchase price of a house and lot which he had sold to the maker, who had purchased goods for him and guaranteed the account, and it was verbally agreed by all parties to the instrument that Cronk should hold the note and that when it fell due, if he was still liable on his guaranty, the amount of such liability should be deducted from the note. The plaintiff was present when the agreement was made and was fully informed with respect thereto and, therefore, was not a bona fide holder in due course. When the note became due, Cronk owed on account of the purchases guaranteed by the maker more than the amount of the note. Mr. Justice Burr, on whose dissenting opinion the decision of the Appellate Division was reversed, wrote, and Mr. Justice Thomas concurred with him, holding that by the pleadings, which were in precisely the same condition, so far as this point is concerned, as those in the case at bar, the absolute making and delivery of the note were admitted and that, if that were doubtful, the defendant pleaded and attempted to prove that, if at the maturity of the note the payee was indebted to the maker, such indebtedness should be offset against the note, which could not be done even between the original parties.
In Pratt & Whitney Co. v. Pneumatic Tool Co. (supra) it was pointedly held that only conditions attaching to the delivery of a note which go to its existence as a contract may *342be shown by parol, and that no conditions which concede the existence of the contract and tend to vary its terms may be shown in defense unless properly pleaded as a counterclaim where a counterclaim is available. There, as here, the making and the delivery of the note were admitted, and the defendant pleaded, as a defense only, that it was given for work and material, and that it was agreed that the giving of the note should be without prejudice to the right of the defendant to have the proper deductions made in the amount of the bills theretofore rendered, and that the defendant should not be compelled to pay until such adjustment was made, and then only so much of the note as represented the actual amount of the cost to the plaintiff for work and material. Evidence of these facts was given in the defense of the action, but it was held that neither the defense pleaded nor the evidence given thereunder showed that the note was delivered conditionally and was not to become a contract, or a failure of consideration, but at most showed an offset which could only be availed of by counterclaim.
In Smith v. Hedges (supra), on the facts as stated in the Court of Appeals memorandum of affirmance, it was held that in an action on a note brought by an assignee after maturity, an answer to the action on the note given in part payment for construction work pleading a failure of consideration, in that the work for which the note was given was not performed, was properly stricken out as pleading no defense, as was also a defense that the maker stated when he gave the note that it was for the accommodation of the payee only and that he did not admit that any amount was due or owing to the payee, and that if the work was not completed at the maturity of the note he would not pay it, as was also a defense that he made the note relying on the false and fraudulent representations of the payee that it could and would complete the work within ten days.
In the case at bar there was ample consideration for the giving of the original notes, in that the giving thereof was required by the contract, and the renewal notes rested on the same consideration, for they were given in payment of the former notes which were surrendered, and on the further consideration of the extension of the time of the payment of the *343indebtedness, or, in view of the evidence most favorable to defendant, for such amount thereof as might be found on the adjustment tó be due and owing from him, and on Horowitz’s agreement to make such an adjustment.
There can be no doubt but that, as between the original parties, the payee of those notes became a holder for value, for they were given in payment of former notes which were then surrendered to the maker. (Kelso & Co. v. Ellis, 224 N. Y. 528; Neg. Inst. Law, § 51; McKinney’s notes and citations to the section in his Ann. Consol. Laws of N.Y.; Editors’ notes and citations in Birdseye, Cumming & Gilbert’s Consol. Laws of N. Y. vol. 5 [2d ed.], p. 5448 et seq.) If the action were by the payee on the original notes, I think the defendant could not defend on the theoiy of partial failure of consideration, which is the only possible defense pleaded here, predicated on the fact that the payee had breached its contract to furnish true and honest vouchers or had overcharged for the work, for the defendant agreed to give the notes on the presentation of the vouchers, and its agreement to perform and its performance of the work constituted the consideration for his agreement to give the notes; but, of course, in that case the defendant could have interposed a counterclaim based on the excessive or unauthorized charges. (Gillespie v. Torrance, 25 N. Y. 306; Pratt & Whitney Co. v. Pneumatic Tool Co., 50 App. Div. 369; affd., 166 N. Y. 588; Manufacturers’ Nat. Bank v. Russell, 6 Hun, 375; Rice v. Grange, 131 N. Y. 149.) Surely the renewal notes were not open to defenses which could not have been interposed to the original notes, for the agreement between the defendant and Horowitz with respect to the renewal notes did not enlarge the rights of the defendant; and, moreover, here there were additional considerations for the renewal notes, consisting of Horowitz’s agreement to make a proper adjustment with the defendant, which he has not breached, for so far as appears there was an honest effort to reach an agreement but without success, and there was also the extension of the time of payment. (O’Brien v. Fleckenstein, 180 N. Y. 350; Emerson v. Sheffer, 113 App. Div. 19; Milius v. Kauffmann, 104 id. 442; McCormick Harvesting Machine Co. v. Yoeman, 26 Ind. App. 415; Rice v. Grange, supra.) Ordinarily, a renewal note, where *344the note of which it is a renewal is retained, is merely a continuation of the original note, but where, as here, the original notes are given up on the execution and delivery of the renewal notes, the renewal notes are taken for value, for they are taken in payment of the old notes. (Twelfth Ward Bank v. Samuels, 71 App. Div. 168; affd., sub nom. Twelfth Ward Bank v. Schauffler, 176 N. Y. 593; Hayward v. Empire State Sugar Co., 105 App. Div. 21; affd., 191 N. Y. 536; Jagger Iron Co. v. Walker, 76 id. 521; First Nat. Bank v. Weston, 25 App. Div. 414.)
But if the defense pleaded, in so far as it has been proved, would have constituted a good defense as between the original parties, without being pleaded as a counterclaim, on the theory that it shows a partial failure of consideration, it is not available as a defense in this action brought by the bank which discounted the notes for full value before maturity, and, I think, became a holder in due course without notice of any infirmity in the notes or of the facts upon which the defense is predicated. (See Neg. Inst. Law, §§ 91-98.)
There is no evidence of express notice to the plaintiff that the defendant claimed to have any defense to the original notes or to the renewal notes, including those on which the action is brought. The only theory on which it is claimed that the plaintiff is chargeable with notice of any such defense is on account of the relationship between the plaintiff and the payee. All of the testimony and evidence in the case that was competent as against the plaintiff is to the effect that its representatives, who were taking part in the management of the affairs of the payee, had no notice or knowledge of any of the material facts on which the defendant predicates his defense. The only claim is that the plaintiff’s representatives were in a position to acquire knowledge of these facts and that it was their duty to inquire, or that it may be inferred that Horowitz communicated to the finance committee of the payee his interview and understanding with the defendant. But such an inference would be unwarranted in view of the fact that the testimony of Horowitz and of all the plaintiff’s representatives who were connected with the payee is to the contrary, and it is the only evidence in the case on the subject. The notice or knowledge acquired by an agent which is imputable to his *345principal is limited to notice to or knowledge acquired by him while acting for his principal, or which, if acquired while representing another principal, is in his mind when so acting and when the agent has no private purpose of his own to influence him in refraining from making disclosure to his principal or from acting for the protection of his principal with respect thereto. (Constant v. University of Rochester, 111 N. Y. 604; McCutcheon v. Dittman, 164 id. 355; Comey v. Harris, No. 1, 133 App. Div. 686; affd., 200 N. Y. 534; Cragie v. Hadley, 99 id. 131; Holden v. New York & Erie Bank, 72 id. 286; Crooks v. People’s Nat. Bank, 72 App. Div. 331; New York Assets Realization Co. v. Pforzheimer, 158 id. 700; Republic Life Ins. Co. v. Hudson Trust Co., 130 id. 618; affd., 198 N. Y. 590; Casco Nat. Bank v. Clark, 139 id. 307; Logan v. Fidelity-Phenix Fire Ins. Co., 161 App. Div. 404; affd., 220 N. Y. 688.) It does not appear that the plaintiff was under any obligation to discount any or all the notes the payee might desire to have discounted, or to discount the notes of the defendant. It was, through representatives, exercising a financial supervision over the business of the payee to protect it with respect to credit it had extended or might extend to the payee. In other words, it was exercising this supervision for its own protection only, and not for the benefit of the defendant or others dealing with the payee, and it appears that discounts were obtained by the payee from other banking institutions from time to time. The payee, in making and performing contracts, was acting for itself, and not as agent of the plaintiff, which through its representatives exercised such restraint and control over the business' of the payee as was deemed necessary for its own protection. Therefore, I think the plaintiff was not even chargeable with all notice and knowledge of the payee’s business as the same was from time to time transacted, but only such as bore upon any credit which the payee might apply to it for. I agree with the learned trial court that the representatives of the plaintiff had notice and knowledge that this contract had been made by the payee and that the work was being performed by it and that notes were being given by the defendant to the payee under the contract long prior to the time when, according to the testimony of some of them given on the trial, they first acquired knowledge thereof; but that has no material *346bearing on the points upon which the decision of the issues depends. The plaintiff is not chargeable with knowledge of the interview between the president of the payee and Horowitz. Knowledge of any agreement made by Horowitz in procuring the renewal notes would of course be chargeable to the payee, which was his principal, but there is no evidence that he communicated the facts to the finance committee of the payee, on which the plaintiff had representation, or to any of its representatives. There is merely his statement to defendant that he did; but he did not represent the plaintiff, and his admissions or declarations are not binding upon it, and all the testimony in the case shows that he did not so communicate it to the finance committee, and there is no evidence,competent as against the plaintiff, that he did. If the plaintiff, in the circumstances, were chargeable with knowledge of all the records of the payee, notice of this verbal agreement between Horowitz and its president could not be imputed to it, for that agreement was in no manner made a matter of record. The plaintiff’s representatives on the finance committee and on the auditing committee of the payee had knowledge of this contract; and doubtless, through them, notice that the notes were given with respect to the contract work was imputable to the plaintiff; but upon no theory of the evidence was notice or knowledge that the defendant claimed or had or reserved any defense to these notes, in whole or in part, brought home to any of the plaintiff’s representatives in the management of the affairs of the payee; and, therefore, there is no basis for imputing such notice or knowledge to Stanley, who, as treasurer of the plaintiff, authorized the discount of these notes by it, or for charging the plaintiff with notice or knowledge of the conversations between the defendant and Horowitz with respect to the giving of the renewal notes, or any of the notes of which they were renewals. There is no evidence of notice or knowledge to the plaintiff’s representatives, in the management of the affairs of the payee, of any of the correspondence or interviews showing or tending to show that the defendant claimed to have a defense in whole or in part to any of the notes given to the payee, or a claim for a deduction of any amount from the vouchers purporting to represent the cost of the work plus the payee’s commissions. *347The record evidence with respect thereto was kept by Horowitz, personally, and was not seen by or known to or available to the plaintiff’s representatives; but if they would have been entitled to see it, had they insisted on seeing it, I think that it is quite clear that the plaintiff is only chargeable with such notice and knowledge as its representatives actually had. The plaintiff’s representatives may have been negligent with respect to the performance of their duty toward it in supervising the affairs of the payee; but the plaintiff owed no duty to the defendant; and its representatives in the management of the payee were under no obligation to the defendant to investigate or inquire with respect to his interviews or negotiations or correspondence with Horowitz. The defendant acquired no right under the agreement between the plaintiff and the payee with respect to supervision or financial control. That agreement the plaintiff made solely for its own protection. It had the same right as any one else to discount these notes, and owed the defendant no duty of inquiry with respect thereto. The uncontroverted evidence shows that it had no notice or knowledge that these renewal notes were not what they purported to be, or that they were subject to any adjustment or deduction between the defendant and the payee, or that there was any implied agreement between them that they were not to be negotiated. The plaintiff, through its representatives, is chargeable with knowledge or notice that the notes were renewal notes in connection with the contract work, but not with any verbal arrangement between the defendant and Horowitz with respect thereto. A bank need not be suspicious of its customers, and may assume, when they present papers for discount that they are acting in good faith and within their lawful rights. (American Ex. Nat. Bank v. N. Y. Belting, etc., Co., 148 N. Y. 698.) Therefore, the title of the plaintiff is to be tested, not by its diligence or negligence in making inquiries, but by its honesty and good faith, and if it had no actual notice of any infirmity in the notes or defect in the title of the payee, and acted in good faith, even though it acted negligently and omitted to make inquiries which a prudent man would have made, its title is unimpeachable. (Cheever v. Pittsburgh, etc., R. R. Co., 150 N. Y. 59; Carlisle v. Norris, 215 id. 400, 415.) If the defense pleaded be a partial failure *348of consideration, the burden was on the defendant, not only of showing the partial failure of consideration, but that plaintiff was not a holder in due course (Broderick & Bascom Rope Co. v. McGrath, 81 Misc. Rep. 199; Abrahamson v. Steele, 176 App. Div. 865; Greenhall v. Davis, 190 id. 632; Neg. Inst. Law, §§ 54, 91, 94-97); and that he failed to do. The defendant, being a capable, experienced lawyer, and knowing that the payee had negotiated his former notes, must have known that it would likely or, at least, that it might, negotiate the notes in question. He could have protected himself by not giving negotiable notes, or by exacting an agreement that the notes were not to become obligations until the matters in difference were adjusted, and then only to the extent of the balance found to be due and owing by him. The payee was financially responsible, and it is perfectly evident that he gave all the notes intending that they should be negotiable instruments, and if negotiated that he would look to the payee to take them up if the matters of difference between them were not adjusted in the interim. The fair and reasonable construction of his testimony is, I think, that in giving the notes he reserved his claims against the payee. If he had not so reserved them, it might have been claimed that he had waived them. That, in my opinion, is all that he intended to guard against. He could have taken up the notes at maturity when he found that they had been negotiated, and could then have brought action against the payee for the difference between what he had paid for the work and the amount with which he should have been charged therefor. He knew that the payee insisted upon having the notes to reimburse it for its disbursements under the contract, and he knew that the only manner in which it could obtain reimbursement by the notes was by discounting them pending the adjustment of his claims for reductions in the charges for the work. This construction of the defendant’s testimony brings the case within the authority of Pratt & Whitney Co. v. Pneumatic Tool Co. (supra), and also within the authority of Tradesmen’s Nat. Bank v. Curtis (167 N. Y. 194), where a time draft for coal to be delivered was accepted on the agreement of the drawer to deliver the coal before the draft became payable, and to take up the draft if the coal should not be so delivered. The plaintiff, with full *349knowledge of the agreement, discounted the draft without knowledge that the drawer had failed to deliver the coal. It was held that the plaintiff could recover, and that the drawer’s promise to deliver the coal was a sufficient consideration for the draft, even though he failed to perform the agreement, and that the prior discount by the drawer of like drafts which was known to the acceptor was sufficient to show that he knew that it might be negotiated. To the same effect is Davis v. McCready (17 N. Y. 230), where an accepted time draft for work to be performed, discounted by plaintiff before maturity with knowledge that it was given under an executory contract for work to be performed, but without knowledge of a breach of the contract, was held enforcible; and it was also held that the plaintiff was under no obligation to inquire with respect to the performance of the work, even though such inquiry would have disclosed that the contract had been breached before the draft was discounted, and that the acceptor must be deemed to have relied on the agreement for performance for his indemnity.
I deem it very doubtful whether the judgment could be sustained on the findings as made; but I think several findings are based on an erroneous construction of the testimony of the defendant. I am of opinion, therefore, that the judgment should be reversed, with costs to the appellant, and the findings of fact and conclusions of law inconsistent with these views should be reversed, and that the findings with respect to the cost of the performance of the contract work should be reversed as immaterial, and findings and conclusions in accordance herewith made, and judgment awarded in favor of the plaintiff for the entire amount of the notes, together with interest thereon, and costs.
Judgment affirmed, with costs.