Hamilton National Bank, Respondent, v. Eli M. Upton and Thomas R. Levis, Appellants

Hamilton National Bank, Respondent, v. Eli M. Upton and Thomas R. Levis, Appellants. Negotiable paper— the holder’s rights are determined not on the basis of carelessness but of good faith—pledge by a note broker of his customer’s note, placed in his hands for sale, as collateral to his own. Carelessness or oversight is not the criterion by which the rights of a holder of negotiable paper are to be tested. The holder’s right cannot be defeated without proof of actual notice of the defect in title or of bad faith on his part evidenced by circumstances. Though he may have been negligent in taking the paper and omitting precautions Which a prudent man would have tallen, his title will nevertheless prevail unless he has acted mala fide. In an action brought to recover upon a promissory note made by the defendants, á firm of coal dealers in the city of Rochester, it appeared that the plaintiff was a national bank in Chicago and had acquired the note before maturity from one Kemper, a note broker; that the note which had been sent to Kemper to be • sold for the defendants’ account had been pledged by Kemper to the bank as collateral security for his own existing indebtedness to the bank. The officers of the bank had no information that Kemper was not the absolute owner of the note. They knew that he was a dealer in commercial paper and that he was reputed to be worth §35,000. They had previously discounted over thirty notes at his request and supposed him to be the owner of each of them. It further appeared that one of the defendants called on the plaintiff bank with Kemper before the. note in suit had been accepted by the bank; that at this time the bank held one note of §5,000 made by the defendants, which Kemper had used as collateral, and another' which the hank had discounted; that Kemper,, in the presence of the said defendant, stated to the hank officers that if the hank at any time desired the money on either of these notes before maturity it should advise the defendants and the note would be taken up. Held, that the court properly directed a verdict in favor of the plaintiff; That the plaintiff was a holder for value, and that the circumstances surrounding the negotiation of the note were not so suspicious and unusual as to make the ■ question of the plaintiff’s good faith one of fact for the jury.to pass on. i Appeal-by the defendants, Eli M. Upton and another, from a judgment of the Supreme' Court in favor of the plaintiff, entered in the office of the clerk of the county of Monroe, on the- 3d day of May, 1904, upon the verdict of a jury.rendered by direction of the court, and also from an order entered in said clerk’s' office on the 6th day-of May, 1904,.denying the defendants7 motion for a new trial made upon the minutes. John A. Barhite, for the appellants. Elbridge L. Adams, for surety on appellants’ appeal bond. Nathaniel Foote, for the respondent. [MAJORITY — Spring, J.:] Spring, J.: The plaintiff, a national bank in Chicago, acquired the note in suit before maturity of one A. L. Kemper, who was doing business in that city as a note broker under the firm riame of A. L. Kemper & Co. The note was taken as collateral security to an existing indebtedness held by the bank against Kémper. This note of $2,500 and a similar note made by,the defendants.for a like sum were negotiated at the same time and the bank surrendered another note of the defendants which it had received from Kemper as collateral security for his indebtedness and the face value of which was $5,000. The defendants were copartners engaged in the coal business in the city of Rochester and Kemper had "before "negotiated notes for them. 'On August- 7, 1903, they sent to Kemper & Co. six undated promissory notes aggregating $20,000, due at different'dates in the month of January following, and which included the note in. suit. These notes were sent pursuant to an oral arrangement1 mádé with Kemper and the letter contains the following instructions relative to their discount or use: “ One-is to take care of the one due on the 25tli, one you aré to send us proceeds' for, and the others are for anybody who may want to purchase them.” Kemper had no authority to pledge this note as collateral security for his own indebtedness to the bank and the defendant contends that the circumstances surrounding the negotiation of the note were suspicions and unusual so that the good faith of the plaintiff was for the jury to pass upon. The officers of the bank had no information that Kemper was other than the absolute owner of ■ the note. They knew he was a dealer in commercial paper. They had ascertained upon investigation that he was reputed to be worth $25,000. They had during the summer of 1903 discounted over thirty notes at his request but supposed that he was the owner of each of them and there is nothing tending to discredit this position. The note was acquired by the plaintiff in October and the bank officers did not discover the lack of authority in Kemper until January. Even then the defendants in their telegrams and letters did not claim that the note had been diverted, only insisting that Kemper had money in his hands to pay it. The plaintiff is a holder for value. (American Exchange Nat. Bank v. N. Y. Belting & Packing Co., 148 N. Y. 698.) In that case the defendant had delivered the note to a firm doing a brokerage business in commercial paper to be discounted for the benefit of the defendant. The brokers pledged the note with the plaintiff as collateral security for their own indebtedness and it was substituted for another note of the defendant, which was surrendered to the brokers. The court directed a verdict for the plaintiff, which _ was sustained by the Court of Appeals. That case is closely similar to the present one in its facts, and is decisive of every question involved in this appeal. In the present case there is nothing disclosed in the record to. excite any suspicion of the conduct of Kemper at the time of the taking of the note by the plaintiff. Mr. Levis, one of the defendants, called on the plaintiff with Kemper in the summer or fall of 1903 and before this note was accepted by the bank. It then had one note of $5,000 made by the defendants and used as collateral for the benefit of Kemper, and one which it had discounted. The subject of these notes was talked over with the president and cashier of the hank, and Kemper' voluntarily made the statement in the presence of Levis that if the 'bank at any time desired the money on either of these notes before. maturity to advise the makers at Rochester and it would be taken up. ' The defendants were vouching. for the authority of Kemper, and the bank officers might well give credence to him after that manifest indorsement. Carelessness or oversight is not the criterion by which the rights of a holder of commercial paper are to be tested. As was said in Cheever v. Pittsburgh, etc., R. R. Co. (150 N. Y. 59, 66): “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.” This case was approved in Second National Bank v. Weston (172 N. Y. 250, 254, 255). We doubt there being sufficient evidence to establish the negligence or inattention of' the bank officials, but in any event they did not act in bad1 faith or with any sort of notice that Kemper was using the note unlawfully. The judgment and order should be affirmed, with costs. All concurred. Judgment and order affirmed, with costs.