PHILBRICK against DALLETT

PHILBRICK against DALLETT. New York Superior Court; General Term, April, 1872. Defenses to Bill of Exchange.—Antecedent Debt, when no Consideration. Where a draft is taken on account of an antecedent debt, without surrendering anything, the subsequent acceptors are not precluded from showing that their acceptance was procured by the fraud of the drawers, and was wholly without consideration. Exceptions heard in the first instance at general term. John Jay Philbrick sued Henry C. Dallett and others, in the New York superior court, upon a draft of ten thousand dollars, drawn by Requelme & Co., of Havana, upon and accepted by the defendants, composing the firm of Dallett & Son, at Philadelphia, to the order of the plaintiff, and dated February 26,1869. The answer contained a general denial of each and every allegation of the complaint, except such as thereinafter specifically admitted; and it then set forth : 1. That the drawers obtained the acceptance by fraudulent misrepresentations, upon which defendants relied and of which the plaintiff was cognizant before such acceptance was made ; 2. That there was a failure of consideration between the drawers and defendants, of which also the plaintiff knew before acceptance ; and, 3. That the plaintiff never owned the bill or acceptance at all; that he never parted with any value or consideration for it, and that it had always remained the property of Requelme & Co., so far as any property in it could be said to exist. Upon the trial, plaintiff, as a witness on his own behalf, produced the draft, which was read in evidence, and proved its acceptance by defendants, March 18, 1869, and the interest due thereon. The question was then put to him, “Are you the owner of that note?” The court excluded it as unnecessary, as possession of the draft was sufficient. The court also declared it unnecessary for the plaintiff to prove the consideration of the draft in question. Plaintiff thereupon rested. Defendants called plaintiff as a witness on their side, and from his testimony it appeared that some time in February, 1869, Mr. Requelme came to Key West, and, while there, purchased from plaintiff a sunken steamer, called “The Ruby,” for which he promised to send plaintiff either a draft or the cash within ninety days ; that no bill of sale was made of the vessel, nor any record concerning her in the custom house, or any other office of the United States government; that Mr. Requelme thereupon left for Havana, and thence remitted the draft in question, which had not yet been accepted; that the draft came accompanied by a letter which read as follows: “Havana, February 26, 1869. “ John Jay Philbrick, Esq., Key West: “Dear Sir—Herewith $10,000 in cy., sixty days, on Dallett & Son, Phila., which you will please collect and hold at the disposal of our Señor Don Manl. Requelme. We are, dr. sir, yours very truly, “ M. Requelme & Co.” That plaintiff kept the draft on hand for about two weeks, and then sent it to a Hew York house for acceptance and collection; that the steamer so sold was never moved, that she remained sunk, and at the time of the commencement of this action was in the same state that she was sold in, and that no storm had occurred to hurt or injure her. Plaintiff insisted, however, that he had delivered her over to M. Requelme at the time of the sale. Defendants next called Henry C. Dallett, and offered to prove by him the real nature of the transaction between the firm of M. Requelme & Co. and defendants, with a view of showing that the draft was a fraud upon the defendants. The court excluded the proposed evidence, and defendants excepted. Defendants then offered to prove that there was no consideration between the drawers and acceptors, claiming to have laid the foundation for such proof by showing that the alleged consideration between plaintiff and the drawers of the draft was prior to the acceptance of the draft by the defendants, and was not on the faith thereof. The court excluded the evidence, holding that it would assume that the proof offered would establish the facts sought to be proven, but that they were not sufficient, as the case stood, to defeat a recovery on the draft. Defendants excepted. Defendants finally asked permission to go to the jury on the question whether Philbrick, the plaintiff, ever parted with any value for the draft. The court denied such request, and defendants excepied. The court directed a verdict for plaintiff for the amount of the draft, with interest, eleven thousand seven hundred and eighty-five dollars; to which direction defendants excepted. The court ordered defendants’ exceptions to be heard, in the first instance, at general term, and the entry of judgment to be suspended in the mean time. William W. Goodrich, for plaintiff. Joseph J. Marrin, for defendants. [MAJORITY — By the Court.—Freedman, J.] By the Court.—Freedman, J. In excluding defendants’ proposed evidence as to fraud, by the drawers, upon them, by means of which they were induced to accept the draft, and as to a failure of consideration between them and the drawers, the learned judge who presided at the trial clearly erred. He probably assumed that plaintiff had sufficiently shown himself to be a dona fide holder of commercial paper for value paid on the faith thereof. But such was not the fact. The sale of the steamer Ruby being a transaction between the plaintiff and M. Requelme individually, the plaintiff (under the direction of the firm of M. Requelme & Co., contained in the letter accompanying the draft, to collect the same and hold the proceeds subject to the order of M. Requelme, and in the absence of proof showing an appropriation by M. Requelme of the said- proceeds to plaintiff’s use), appeared, so far as the evidence went, in the character of a mere naked holder possessing authority to collect for the benefit of the true owner; especially as the court had, at an early stage of the trial, excluded as unnecessary the proof offered by plaintiff to establish actual ownership, and had ruled proof of possession to be sufficient. Even upon plaintiff’s theory, however, that he took the draft before acceptance, for the debt of M. Requelme, the evidence was admissible. In such case, and as the evidence then stood, plaintiff took the unaccepted draft on account of an antecedent debt, without parting with any value upon the faith of either the draft or its acceptance, and defendants were not precluded from showing that their subsequent acceptance was procured wholly by the fraud of the drawers, and was, in point of fact, wholly without consideration. That was one of the very issues raised by the answer, and, if established, as we must assume it would have been but for such erroneous exclusion, would have cast the burden of proof upon the plaintiff to establish that he was an innocent actual owner and holder of the draft for value paid on the faith of its acceptance. As against the holder of a draft, the acceptor, as a general rule, stands in the same position as the maker of a promissory note, and the drawer in the same as the indorser. By his acceptance the acceptor admits that he has funds of the drawer in his hands to pay it. He is, in such case, regarded as the principal, and the drawer as his surety, and the accepted draft imports a debt due from the acceptor to the drawer, which is assigned to the payee. The instrument being one of those which, on account of their negotiable quality and universal convenience in mercantile affairs, are specially favored by the law, if A., in the course of trade, parts with value on the faith of B.’s acceptance, the law, to protect A., as an innocent holder for a valuable consideration, against B.’s contradicting the words, “Value received,” written above his promise, presumes a consideration to exist, and B. will not be permitted to overthrow such presumption by actual proof to the contrary. But this rule applies only to a tona 'fide holder for a valuable consideration ; and the doctrine as to what constitutes a person such tona fide holder for value, again varies in cases presenting a wide and marked distinction. Thus, in Cole v. Saulpaugh (48 Bart., 104), and Schepp v. Carpenter (49 Id., 542), the holder of an accommodation note, which had been given by the maker without restriction as to the manner in which it should be used by the payee, was held to be a tona fide holder for value as against the maker, notwithstanding it appeared that he took it for an antecedent debt and with notice of its character as accommodation paper. These decisions are based upon the fact that the payee, not being limited or restricted as to the manner of its use, had a right to apply it to the payment or security of an antecedent debt, or to sustain Ms credit with it in any other way. So, in the absence of fraud, an acceptance has been held to involve a consideration, inasmuch as it delays the holder’s resort to the drawer, which he might have immediately, in case of non-acceptance; and for the same reason a subsequent acceptance before maturity, and for the accommodation of the drawer, has been held to inure to the benefit of the holder who discounted the draft before acceptance, in the expectation, justified by a previous course of dealing, that it would be so accepted (Mechanics’ Bank v. Livingston, 33 Barb., 458). But where the acceptance is not only without consideration in fact, but, in addition, has been procured by means of a fraud practiced upon the acceptor, an entirely different rule prevails. Here, the mere taking of the draft on account of an antecedent debt, without giving up or surrendering something of value on the faith of its acceptance, is not enough to constitute the holder a bona fide holder for value as against the acceptor. The doctrine of Swift v. Tyson (16 Pet., 1), has not been followed in this State. On the contrary, our courts held, at quite an early day, that the receipt of commercial paper, fraudulently put in circulation or diverted from the purpose of which it was originally issued, merely as payment or security for a precedent debt, no new credit or other thing of legal value being given on the faith thereof, and no security being relinquished or discharged, nor any new responsibility incurred on the credit thereof, is not parting with value, such as to enable the holder to enforce such commercial paper against an accommodation party, or to hold it against the true owner, or to hold it free of equities existing upon it against the transferrer at the time of the transfer. This rule has been firmly maintained, both at law and in equity, by a long and uninterrupted series of adjudications, and is, beyond question, the settled law of this State (Coddington v. Bay, 20 Johns., 637; affirming S. C., 5 Johns. Ch., 54; Stalker v. McDonald, 6 Hill, 93; Wardell v. Howell, 9 Wend., 170; Rosa v. Brotherson, 10 Id., 86; Hart v. Palmer, 12 Id., 523; Ontario Bank v. Worthington, Id., 593; Payne v. Cutler, 13 Id., 605; Morton v. Rogers, 14 Id, 576; Commercial Bank v. Horton, 1 Hill, 501; Manhattan Co. v. Reynolds, 2 Id, 140; Scott v. Betts, Hill & D. Supp., 363; Elliott v. Dudley, 19 Barb., 326; Francia v. Joseph, 3 Edw. Ch., 182; Clark v. Ely, 2 Sandf. Ch., 166; Furniss v. Gilchrist, 1 Sandf., 53; Stewart v. Small, 2 Barb., 559; Mickles v. Colvin, 4 Id, 304; Spear v. Myers, 6 Id, 445; Clark v. Gallagher, 20 How. Pr., 308; Farrington v. Frankfort Bank, 31 Barb., 183; Prentiss v. Graves, 33 Id, 621; Cardwell v. Hicks, 37 Id, 458; West v. American Exchange Bank, 44 Id, 175; Crandall v. Vickery, 45 Id, 156; McBride v. Farmers’ Bank, 26 N. Y., 450; Lawrence v. Clark, 36 Id. 138). It is only where a creditor receives a negotiable paper fraudulently put in circulation or diverted from its purpose in good faith and in actual satisfaction and discharge of a prior indebtedness, so that unless such paper is available in his hands, he loses the demand, that this is considered as parting with value. In such case, the actual discharge of the personal responsibility of the debtor is equivalent to parting with securities or to paying money. The extinction of a legal demand in its original form is, however, to be proved affirmatively ; and the question whether a party is a holder for value, so as to displace in his favor any right or equity of prior parties, depends upon the fact being established of an intended and actual extinguishment (New York Exchange Co. v. De Wolf, 3 Bosw., 86, and authorities there cited). Time and space do not permit me to make a more extended reference to the authorities cited than I have done, and I will conclude, therefore, by calling attention yet to the following decisions of a comparatively recent date, which deserve to be carefully noted. In McBride n. Farmers’ Bank (26 N. Y., 450), and Commercial Bank of Clyde v. Marine Bank (6 Abb. Pr. N. S. 33; S. C., 3 Keyes, 337), it was held that a bank does not become a purchaser for value of demands remitted to it for collection, by reason of its having a balance against the remitting bank, for which it has refrained from drawing, and of its having discounted notes for the latter upon its indorsement, in reliance upon a course of dealings between the banks to collect notes for each other, each keeping an open account of said collections, treating all the paper sent for collection as the property of the other, and drawing for balances at pleasure. In Bright v. Judson (47 Barb., 29), it was expressly decided that fraudulent representations, by which one is induced to accept a bill, are a bar to a recovery thereon by a holder who took the bill in payment of an antecedent debt, without surrendering something of value upon the faith of such acceptance. And in Farmers’ & Mechanics’ Bank v. Empire Stone Dressing Co. (5 Bosw., 289), the decision was,that to entitle one to enforce an acceptance, which is otherwise invalid (whether for want of power in the agent who wrote the acceptance to bind his principal, as in that case, or for fraud practiced by the drawer upon the acceptor, as in case at bar, makes no difference), on the ground that he is a bona fide holder for value, it must appear that he parted with value upon the faith of such acceptance. He may be a bona fide holder of the bill for value paid therefor, and be entitled to enforce it against every other party thereto, and yet have no right to recover on such acceptance. In view of the authorities referred to, it is entirely clear that defendants had an unquestionable right to prove the facts embraced in the two offers made, and that the exclusion of their proposed evidence constituted error. Defendants’ exceptions to such exclusion of their evidence and to the direction of a verdict against them must, therefore, be sustained, and the verdict must be set aside, and a new trial ordered, with costs to defendants to abide the event. Barbour, Ch. J., and Sedgwick, J., concurred. Present, Babbotjb, Ch. J., Pbbedmah and Sedgwick, JJ.