Court Opinion

ID: 3615757
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:58:56.527241+00
Date Added: 2024-06-11T14:24:25.674309
License: Public Domain

On the 2d day of October, 1911, John K. Kerr made his promissory note for $2,500 to William B. Kerr, which was thereafter indorsed by the payee to enable the maker to obtain credit thereon. William B. Kerr was an accommodation indorser. The note was discounted for the maker and became due on October 23d 1911, to the Third National Bank at its offices in Buffalo, N Y Not being paid, the note was protested and notice of dishonor mailed to the indorser on the day of payment. On October 24th, 1911, the note was paid by the maker, John K. Kerr, and delivered *Page 149 
over to him by the bank on the following day — the 25th — and thereupon destroyed. At this time William B. Kerr was very sick and died on October 27th, 1911. His affairs were looked after by his wife and others. It was she who indorsed this note for him, signing the name of "William B. Kerr per Mrs. W.B. Kerr." About the time of payment John K. told Mrs. Kerr, the wife of William, that he had paid the note and had taken care of it. The trial justice also found as a fact that one Eliza M. Kerr who was looking after the personal business of William B. Kerr, which was quite extensive, learned on October 24th, 1911, of the payment of this promissory note, and relied on the payment and continued to rely upon the payment of the note, both as an individual, looking after his business and as the executrix of his will down to the time of her death March 6, 1912. Eliza M. Kerr was the executrix of William B. Kerr's will which was admitted to probate November 18, 1911. In fact, it was not until April 1, 1912, that the estate of William B. first learned of the claim made that the note had not been paid. The money with which John K. paid his note on October 24th, 1911, did not belong to him but to the plaintiff, the Pittsburgh-Westmoreland Coal Company; — he had wrongfully converted it to his own use.
In April of 1912 the plaintiff commenced this action to recover the amount of the note from the estate of the accommodation indorser upon the theory that, the note having been paid with its money, it could and should be subrogated to such rights as the bank had against the indorser at the time of protest for non-payment and notice thereof.
Thus far the plaintiff has succeeded but in my opinion upon a wrong theory.
When the note was paid on October 24th, the day after it became due, and the fact of payment was communicated to the indorser, his liability was discharged. His *Page 150 
obligations ended when his rights ceased. The courts below have proceeded upon the theory that the liability of the indorser upon receiving notice of protest was absolute, apparently overlooking the fact that such liability was conditioned upon the existence and continuance of his rights and remedies against the maker unimpaired. These rights have been thus stated: "It is a rule, long recognized, that an accommodation indorser, or surety, is entitled to have the engagement of the principal debtor preserved, without variation in its terms, and that his assent to any change therein is essential to the continuance of his obligation. The reason of the rule is that his right must not be affected, upon the maturity of the indebtedness, to make paymentand by subrogation to the creditor's place, to, at once, proceedagainst the principal debtor to enforce repayment. Therefore, it is that any agreement of the creditor, which operates to extend the time of payment of the original debt and suspends the rightto immediate action, is held to discharge the non-assenting indorser, or surety; as the law will presume injury to him thereby." (GRAY, J., in National Park Bank of N.Y. v.Koehler, 204 N.Y. 174, 179. See, also, Shutts v. Fingar,100 N.Y. 539, p. 544.)
In German American Bank of Buffalo v. Niagara Cycle F. Co. (13 App. Div. 450) it was said to be the indorser's duty upon notice of dishonor to take up the note and to take such proceedings against the maker for its collection as should be deemed expedient. (First National Bank of Buffalo v. Wood,71 N.Y. 405; Smith v. Erwin, 77 N.Y. 466; Madison Square Bank
v. Pierce, 137 N.Y. 444; Schwartzman v. Post, 94 App. Div. 474. )
Did William B. Kerr have any such right left to him after the payment to the bank on October 24th? The bank had received the amount of the note with interest, had returned the note to the maker and had marked it paid upon its books. After that date the indorser could *Page 151 
not have taken up the note from the bank nor have proceeded against the maker. Leaving out of consideration the fact that the indorser had been informed that the note had been paid, his actual position — known to him or unknown — was this: the bank would not have received his money; it had no note to surrender; the debt had been paid, the records so marked, and the note destroyed.
The theory of the plaintiff that John K. was its agent and as such purchased the note from the bank in its behalf is a fiction; the fact is the note as to the bank was paid.
Neither the bank nor the indorser knew until months later that payment had been made by the maker with another's money. In the meantime John K. Kerr, the maker, had gone into bankruptcy. The bank had never repaid the money and could not itself proceed against the indorser. By the judgment in this case the liability of the indorser has been reinstated five months after payment of the note. In that time no action could have been taken by him against the maker and his remedies became valueless.
Recovery by the plaintiff will establish this principle: When a maker pays his note at a bank after maturity and notice of protest, and it is considered by the bank and by the indorsers as paid, the liability of the indorsers may yet be revived any time within the period of limitations if it appear that the payment had in fact been made with stolen money. This in my opinion is reading into the Negotiable Instruments Law something which is not there and placing indorsers in a position where they can never be sure of discharge from liability. John K. Kerr was the principal debtor; he paid the note in due course and the indorser became discharged. (Lancey v. Clark, 64 N.Y. 209; Eastman
v. Plumar, 32 N.H. 238, and Carson v. Heath, 86 Ga. 438.)
The doctrine of subrogation would apply to any rights *Page 152 
the bank might have against the maker of the note but does not apply in this case against the indorser.
The judgment should be reversed and the complaint dismissed.
COLLIN, HOGAN, CARDOZO and POUND, JJ., concur with CHASE, J.; CUDDEBACK, J., dissents, and CRANE, J., reads dissenting memorandum.
Judgment affirmed.