Court Opinion

ID: 3586583
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:36:23.501387+00
Date Added: 2024-06-11T13:47:50.255377
License: Public Domain

The plaintiff purchased two promissory notes, aggregating $8,800, which were made by Bischoft, Incorporated, and were payable to the defendant Jack T. Cosman. The notes bore the indorsement of Cosman, the defendants Tom Evans, Mark M. Dintenfass and National Evans Motion Ficture Film Laboratories. The last named defendant transferred the notes to the plaintiff and received therefor the sum of $8,000. Default in payment of the notes at maturity was made, and this action was brought against the indorsers to recover the balance due and payable thereon. The defendants resisted payment on the ground that the plaintiff, having been organized as a business corporation and not as a bank, was not authorized to purchase or discount the notes, and that the notes in its hands, under section 140 of the Banking Law, were void and uncollectible.
On the trial it was stipulated that the plaintiff was incorporated pursuant to the provisions of the Business Corporations Law, now the Stock Corporation Law; that the purposes of its organization, as expressed in its *Page 148 
certificate of incorporation, were these: "To loan money secured by mortgage on personal property or real estate, to purchase, hold, own, sell, assign, deal in, pledge and otherwise dispose of shares of capital stock, bonds, mortgages, debentures, notes and other securities, obligations, contracts, and evidences of indebtedness of corporations of the State of New York or any other State of the Union." It was further stipulated "that the plaintiff at the present time is engaged in and that prior and subsequent to and coincident with the transaction at bar the plaintiff engaged, among other of its transactions, in numerous transactions of the same nature and of the same legal effect as the transaction at bar." It thus appears, not only that the plaintiff was organized for the purpose, among others, of buying notes, but that it has, in pursuit of that corporate purpose, on various occasions made such purchases, paying to the selling indorsers sums of money less than the face value of the notes. The conclusion follows that the plaintiff was engaged in the business of buying notes at less than face value, and that, in the conduct of such a business, it bought the notes in suit.
It is provided in section 18 (formerly section 22) of the General Corporation Law that no corporation, "other than a corporation formed under or subject to the banking laws of this State or of the United States," shall "by any implication or construction be deemed to possess the power of carrying on the business of discounting bills, notes or other evidences of debt, of receiving deposits, of buying and selling bills of exchange, or of issuing bills, notes or other evidences of debt for circulation as money, or of engaging in any other form of banking." It is said that, under this provision, there is denied to a business corporation the possession of the four enumerated powers in combination, but not the possession singly of any one of the powers. Under this interpretation, if the certificate of incorporation of a *Page 149 
business corporation were drawn to sanction its exercise of the powers of discounting bills and notes, receiving deposits, and buying and selling bills of exchange, without specifying the power of issuing bills to pass current as money, the corporation might carry on a business quite characteristic of banking and be wholly free from supervision or control by the State Banking Department. It is unthinkable that the Legislature intended to permit a business corporation to exercise such powers. That it did not so intend is shown by its use of the disjunctive "or" rather than the conjunctive "and" as a connective for the several clauses of the quoted provision. The implication is clear that a corporation, other than a banking corporation, may not exercise any one of the powers enumerated in the provision. It may not carry on the business of "discounting bills, notes or other evidences of debt;" it is prohibited from "engaging in any other form of banking." Consequently, if the plaintiff, in carrying on the business of buying and selling notes, has engaged itself in "discounting" or any other form of banking, its actions have been unauthorized, notwithstanding the terms of its certificate, and its purchase of the notes in suit was an illegal act.
Obviously a corporation, "other than a corporation formed under or subject to the banking laws of this state," illegally engages in a "form of banking" when it habitually exerts a power confided to a bank organized under the banking laws. Such a bank is defined, in section 2 of the Banking Law, as follows: "The term, `bank,' when used in this chapter, unless a different meaning appears from the context, means any domestic moneyed corporation, other than a trust company, authorized to discount and negotiate promissory notes, drafts, bills of exchange and other evidences of debt; to receive deposits of money and commercial paper; to lend money on real or personal security; and to buy and sell gold and silver bullion, foreign coins or bills of *Page 150 
exchange." By section 106 a bank is empowered to exercise "all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange and other evidences of debt; by receiving deposits; by buying and selling exchange, coin and bullion, and by lending money on real or personal security."
In Atlantic State Bank v. Savery (82 N.Y. 291) the question was whether the plaintiff, organized as a bank under chapter 260 of the Laws of 1838, was empowered to buy the promissory notes in suit. Under section 18 of the act it was empowered "to carry on the business of banking, by discounting bills, notes and other evidences of debt; by receiving deposits; by buying and selling gold and silver bullion, foreign coins and bills of exchange, in the manner specified in their articles of associations for the purposes authorized by this act; by loaning money on real and personal security; and by exercising such incidental powers as shall be necessary to carry on such business." It was held that the plaintiff, in buying the notes in suit, lawfully exercised the statutory power of "discounting bills, notes and other evidences of debt." The court quoted with approval the statement that "to buy or purchase a debt is always in commerce termed to discount it," made in MacLeod on Banking (at p. 43); and the statement made in Tracy v. Talmage (18 Barb. 456), as follows: "Now, `to discount' includes `to buy;' for discounting, in most cases, is but another term for `buying at a discount.'" It is noticeable that the statute under consideration did not expressly confer upon banks, as does our statute, the power "to negotiate" as well as "to discount" promissory notes. There is authority to the effect that "to negotiate" means not only "to transfer or assign (as a bill, etc.) to another" but "to obtain or give value for (bills, cheques, etc.) in money." (Oxford Dictionary.) In construing a statute similar to ours, the Supreme Court of Illinois, in the *Page 151 
case of First National Bank of Greenville v. Sherburne
(14 Ill. App. 566) has suggested that to "negotiate" means not only to sell but to buy. However that may be, the decision inAtlantic State Bank v. Savery (supra) is clear authority to the effect that a bank authorized "to discount" promissory notes is necessarily empowered "to buy" them. Under this authority, therefore, it is clear that the plaintiff, in buying the notes in suit, according to its practice, was engaged in a form of banking which it was prohibited from exercising by section 18 of the General Corporation Law. The purchase was, therefore, illegal. Whether the notes were void and uncollectible is another question.
It is provided in section 140 of the Banking Law that no corporation, other than a banking corporation, "shall employ any part of its property, or be in any way interested in any fund which shall be employed for the purpose of receiving deposits, making discounts, or issuing notes or other evidences of debt to be loaned or put into circulation as money." Again, the disjunctive "or" is used to connect the prohibitory clauses. The enumerated powers, thus forbidden to business corporations, are the precise powers conferred upon banks by sections 2 and106 of the Banking Law. A bank is permitted to employ its funds in "discounting" commercial paper; other corporations are forbidden to use their funds in making "discounts." Obviously the discounting forbidden and the discounting sanctioned are identical. A bank in the exercise of the "discounting" power may purchase promissory notes. It would seem that a corporation to which making "discounts" is forbidden might never legally buy them. The provision quoted from section 140 is followed by this: "All notes and other securities for the payment of any money or the delivery of any property, made or given to any such association, institution or company, or made or given to secure the payment of any money loaned or discounted by any corporation *Page 152 
or its officers, contrary to the provisions of this section, shall be void." Notes "made or given" to secure "money loaned or discounted," in violation of the section, shall be void. Moneys "discounted," then, are something not comprehended in the expression "moneys loaned;" nor are notes "given" included in the phrase "notes made." The inference is that notes "given" to secure moneys "discounted" are notes which have been purchased, without the creation of an attendant loan. The conclusion is thereby strengthened that a business corporation which makes a business of purchasing notes at a discount violates the section under consideration. If it conducts such business, the notes purchased in the course thereof are void.
In section 114 of the Banking Law a "loan" is distinguished from a "discount." The same distinction appeared in the act of 1870 (Ch. 163), from which the provisions of section 114 were derived. It was there provided that every bank might make a charge of seven per cent "on every loan or discount made;" that if a greater sum were charged and paid, the person paying might recover from the bank twice the amount of the excess payment. The provisions of the act of 1870 were considered in Nash v.White's Bank of Buffalo (68 N.Y. 396). It had been found that the plaintiff had presented commercial paper to the defendant bank for discount; that he had indorsed and transferred the paper to the defendant; that the defendant had credited the plaintiff on its books with the amounts for which the paper was made or drawn, less an amount charged for discount; that the amount charged in each case was greater than the sum of seven per cent per annum. RAPALLO, J., writing for the court, said: "There was no loan, but an absolute transfer of the paper to the bank." It was held that, since there was no loan, the transaction was not usurious under the general statutes against usury; that nevertheless there had been a discount and the *Page 153 
plaintiff was entitled to a recovery of double the amount thereof. In Johnson v. National Bank of Gloversville (74 N.Y. 329) a provision of the United States Banking Act, identical with the provisions of the act discussed in Nash v. White's Bank ofBuffalo (supra), was considered. Under it a recovery of double the excess discount charged by the defendant in buying commercial paper from the plaintiff was approved. RAPALLO, J., again writing for the court, said of the act of Congress: "It limits the rate of interest to be taken on loans and discounts. If the rate were limited only on loans there might be some plausibility in the argument that the purchase of business paper at a discount did not fall within the limitation. But it distinctly specifies discounts as well as loans, and it is well known that the principal office of banks of discount, is to discount the business paper of their customers." If the association of "discounts" with "loans" was of determinative importance in the case last cited, the association of moneys "discounted" with "moneys loaned" in section 140 of the Banking Law is of equal importance. In any event the two decisions are definite authority to establish the proposition that to purchase a promissory note, at a discount from its face, is "to discount" the note, a thing prohibited to business corporations, the doing of which renders the note void.
In the case of Pratt v. Short (79 N.Y. 437) the plaintiffs, as assignees of a corporation not organized to do a banking business, sought a recovery from the defendants, who were the indorsers of a promissory note. The note was made payable to the defendants, and represented a debt owed by the maker to them. The note was indorsed by the defendants and transferred to the corporation, which paid the defendants the proceeds of the discount. The plaintiffs declared upon three counts, seeking a recovery upon the note, a recovery for money loaned, and a recovery for money had and received. The *Page 154 
Restraining Act then in force (1 R.S. 712) provided that "no incorporated company, without being authorized by law, shall employ any part of its effects, or be in any way interested in any fund that shall be employed, for the purpose of receiving deposits, making discounts or issuing notes or other evidences of debt, to be loaned or put in circulation as money." The words of the prohibition are identical with the prohibitory words of section 140 of the Banking Law under discussion. The act further provided that all notes or other securities for the payment of money "made or given to secure the payment of any money loaned or discounted by any incorporated company, contrary to the provisions of the third section of this title, shall be void." Identical words are used in section 140. The court held that "the discount by the corporation of the note in question, was unlawful" and that, under the quoted provision of the Restraining Act, the note was void.
While the court denied a recovery upon the note, it permitted the recovery of an amount equal to the sums advanced upon the discount. It is not at all clear that the permitted recovery was for money loaned. Thus, the court said that while "the law will not enforce the prohibited contract, it will take notice of the circumstances, and if justice and equity require a restoration of money or property, received by either party thereunder, it will, and in many cases has given relief." Again it said: "If the defendants avoid their indorsement it is the plainest equity that they shall restore the money which they received on the faith of it." In support of its conclusions the court cited the Utica Insurance Company cases (Utica Insurance Co. v. Kip, 8 Cow. 20; Utica Insurance Co. v. Cadwell, 3 Wend. 296; and UticaInsurance Co. v. Bloodgood, 4 Wend. 652). In each of these cases the notes, with indorsements made for accommodation, were presented by the maker to the plaintiff, and the moneys paid by it were received by the maker. *Page 155 
Manifestly, the notes had no inception, as binding obligations, until presented to the plaintiff, so that the transactions were clearly loans to the makers. It would be quite a different thing to say that on a transfer of a note, embodying a binding obligation of the maker, by the indorser to a person paying money therefor, a loan is made to the indorser. It is noteworthy, also, that in the first case, the court, in support of a recovery of the moneys advanced, quoted 2 Comyn on Contracts, 109, to the effect that the holder of an illegal instrument, received in exchange for moneys advanced, may disregard it, and, "to prevent the defendant from retaining the benefit which he derived from an unlawful act," may have a recovery. The court also cited Munt
v. Stokes (4 Durnford  East Rep. 561, 4 T.R. 561). In that case Lord KENYON expressed the opinion that a person paying out money on the security of an illegal instrument could maintain "an action for money had and received." The Utica Insurance Company cases were severely criticized in Tracy v. Talmage (14 N.Y. 162), where the court said: "Recoveries are not had in such cases upon the basis of the express contract, which is tainted with illegality; but upon an implied contract, founded upon the moral obligation resting upon the defendant to account for the money or property received." This, it seems to the writer, is the true principle underlying the recovery permitted in Pratt v. Short
(supra). The obligation to restore was in quasi contract to prevent unjust enrichment; not in assumpsit to repay money loaned.
It is now the rule in this State that where business paper is transferred and indorsed by the payee, or a subsequent indorser thereof, to a third person who makes payment therefor, no new relationship of debtor and creditor is created, and the transaction is not usurious, although the payment made involves a deduction of a greater sum than accrued interest. (Eastman v.Shaw, 65 N.Y. 522; Joy v. Diefendorf, 130 N.Y. 6; Nash v. *Page 156 White's Bank of Buffalo, supra; Johnson v. National Bank ofGloversville, supra.) "The rule which renders void a note in the hands of a third party, who has purchased at a discount greater than the legal interest applies to instruments that have no inception between the parties or which are not intended to be available until discounted." (Joy v. Diefendorf, supra.) If the note transferred evidences a binding obligation on the part of the maker, the transferor merely sells that obligation, accompanying the sale by a guaranty, implied in his indorsement, that the maker will pay, or in default thereof that the indorser will. No loan to the indorser is involved; no present indebtedness on his part is created. (1 Daniels Neg. Inst. § 768; 2 Parsons Notes  Bills 429, 430; Nichols v. Fearson, 7 Pet. [U.S.] 103.) In Nichols v. Fearson (supra) the court said that the cases holding that a transfer by indorsement involved the making of a loan rested upon the theory that an indorsement involved a promise to pay which ordinarily has that significance; that the reasoning was erroneous "for the contract between indorser and indorsee is at best but a conditional or provisional contract; the indorsement of a business note produces a real transfer of interest, and the indorsement may well be regarded in the light of a guarantee against the insolvency of the promisor." In view of the rule, now well established in this State, that a transfer by indorsement for a discount greater than legal interest is not usurious, it necessarily follows that a transferor through his indorsement never becomes a debtor to the transferee. If it be true, therefore, as urged by the respondent, that there is a "discount" only where there is a loan, promissory notes are discounted only in cases where the primary obligors present them to the money lenders, and themselves receive the advances made thereupon. Of course the payee of a note may engage himself generally to make payment of money borrowed, and to secure his promise may indorse and transfer the *Page 157 
note to the lender. Obviously in such an instance, the note is not "discounted;" it is merely deposited. "A banker discounts a bill, as opposed to taking it for collection or as security for advances, when he takes it definitely and at once as transferee for value." (Halsbury, Laws of England, vol. 1, p. 629.) The distinction between a discount and a deposit of bills depends upon the intention to make an absolute transfer, or to enable the transferee to receive the moneys for the transferor; "Indorsementprima facie evidence of the former; unless the object of mere deposit is clearly shown." (Headnote: Twogood, Ex Parte, 19 Vesey Ch. 228.) If the respondent's argument were to prevail, therefore, business corporations would be subject to the sole restriction that they might not discount notes for the benefit of the primary obligors. They might exercise at will what Judge RAPALLO has termed "the principal office of banks of discount," viz., "to discount the business paper of their customers." The argument ought not to prevail.
The respondent argues that the opinion in Pratt v. Short
(supra) indicates that the court deemed that a loan was involved in the transfer of the note sued upon, and, therefore, a true "discount" had been made. The proof showed that the maker, Alice Van Cleek, gave the note in suit to the payee, H.W. Short 
Co., to apply on her account for lumber purchased. It was stipulated "that the note in question was made by Mrs. Van Cleek payable to the order of Henry W. Short  Co., which company consisted of Henry W. Short and George B. Leonard, the defendants in this action, and upon the application of the payees and indorsers Henry W. Short  Co., said note was discounted by the said Peoples' Savings Bank and Safe Deposit Company at the banking office of said company in Syracuse, and the money proceeds of said note less the discount was paid by said bank at its counter to the said defendant in the ordinary way that a bank of discount and deposit discounts short paper." (See *Page 158 
record of case on appeal.) It will be seen that the stipulated facts indicated a transaction which involved no more than the ordinary transfer of business paper for moneys paid. If the court thought that a loan was involved, it must have so considered upon the theory, once obtaining in our courts, that a transferor of a note by indorsing it assumes with the transferee the relationship of debtor and creditor. (Cobb v. Titus, 10 N.Y. 198, and cases cited.) If this were the basis of the court's opinion, then, upon the same theory, the notes in suit involved equally well the initiation of a loan, and, therefore, a "discount." Certainly no fact distinguishes our case from Pratt v. Short
(supra) to indicate in the latter a loan and in the former a mere sale. If there was a loan in either there was a loan in both. We think that in each instance there was a purchase of commercial paper without more, and that such a purchase, though not involving a loan, is nevertheless a "discount" within the prohibition of section 140 of the Banking Law. Accordingly, the notes in suit, like the note in Pratt v. Short (supra), were void and uncollectible.
The order of the Appellate Division should be reversed and the judgment of the Trial Term affirmed, with costs in this court and in the Appellate Division.
POUND, O'BRIEN and HUBBS, JJ., concur with LEHMAN, J.; KELLOGG, J., dissents in opinion in which CRANE, J., concurs; CARDOZO, Ch. J., not voting.
Order affirmed, etc. *Page 159