150 N.Y. 59, Cheever v. Pittsburgh, Shenango and Lake Erie Railroad Co.

Citation150 N.Y. 59
Party NameJOHN D. CHEEVER, Appellant, v. THE PITTSBURGH, SHENANGO AND LAKE ERIE RAILROAD COMPANY, Respondent.
Case DateOctober 06, 1896
CourtNew York Court of Appeals

Page 59

150 N.Y. 59

JOHN D. CHEEVER, Appellant,

v.

THE PITTSBURGH, SHENANGO AND LAKE ERIE RAILROAD COMPANY, Respondent.

New York Court of Appeal

October 6, 1896

Argued April 22, 1896.

Page 60

COUNSEL

Austen G. Fox for appellant. The presumption is that the rights and relations of parties to negotiable paper are precisely such as they appear upon its face to be. (Hoge v. Lansing, 35 N.Y. 136; Colson v. Arnot, 57 N.Y. 259.) When these notes were offered as collateral security for a loan to the firm of M. S. Frost & Son, each note, upon its face, appeared to be, not a corporate obligation created by the president in his own favor, but, rather, a corporate obligation issued regularly,

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for value, to a stranger, John T. Bruen, and indorsed by him, for value, to M. S. Frost & Son, who were then the ostensible owners. (Hoge v. Lansing, 35 N.Y. 136; M. B. Assn. v. N.Y. & S.W. L. Co., 35 N.Y. 505; Belmont Branch Bank v. Hoge, 35 N.Y. 65; Magee v. Badger, 34 N.Y. 247; Colson v. Arnot, 57 N.Y. 259; Central Bank of B. v. Hammett, 50 N.Y. 158; Jarvis v. M. B. Co., 148 N.Y. 652; Goodman v. Simonds, 20 How. [U. S.] 365, 366.) The fact that Mr. Frost, who presented the notes on behalf of M. S. Frost & Son, was president of the defendant corporation did not show, as matter of law, that the firm of M. S. Frost & Son were not the owners of the notes. (Ex parte Bushnell, 3 M., D. & DeG. 615; Exchange Bank v. Monteath, 26 N.Y. 505; 17 Barb. 171; Bank of N.Y. N. B. Assn. v. A.D. & T. Co., 143 N.Y. 559; Jarvis v. M. B. Co., 148 N.Y. 652; Bank of Genesee v. Patchin Bank, 13 N.Y. 309; F. & M. Bank v. B. & D. Bank, 16 N.Y. 125; Smith v. Lusher, 5 Cow. 688, 711; Gale v. Miller, 44 Barb. 420; Ridley v. Taylor, 13 East, 175; Swan v. Steele, 7 East, 210.) The president having been authorized to give the corporate notes to the amount of $10, 000, it is no defense as against a purchaser for value, without notice, for the corporation to show that the president abused his authority, and did not apply the notes to the purpose which was indicated in the resolution of authority. (Jarvis v. M. B. Co., 148 N.Y. 652; Bank of Bengal v. Macleod, 7 Moore P. C. 35; Ridway v. Farmers' Bank, 12 S. & R. 255; City of Lexington v. Butler, 14 Wall. 282; Exchange Bank v. Monteath, 17 Barb. 171.)

Frank Sullivan Smith for respondent. The plaintiff is not a bona fide holder of the notes, for value, without notice of facts affecting their validity before maturity, and in the usual course of business, and, therefore, cannot recover upon said notes. (Wilson v. M. E. R. Co., 120 N.Y. 145; A. E. Nat. Bank v. N.Y. B. & P. Co., 148 N.Y. 698; M. L. Ins. Co. v. F. S. St., etc., R. R. Co., 139 N.Y. 146, 151; Gerard v. McCormick, 130 N.Y. 261; Pendleton v. Fay, 2 Paige, 202; Shaw

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v. Spencer, 100 Mass. 388; Garrard v. P. & C. R. R. Co., 29 Penn. St. 154; Farrington v. S. B. R. R. Co., 150 Mass. 406; Petre v. Clark, 11 S. & R. 377; Culver v. R. R. E. Co., 91 Penn. St. 367.) The pledge of the notes in suit by the president of the railroad company was unauthorized and cannot bind the defendant. (Shaw v. S. H. N. Co., 144 N.Y. 220; Cumming v. Williamson, 1 Sandf. Ch. 17; Waldron v. McComb, 1 Hill, 111; Bloomer v. Waldron, 3 Hill, 361; A. F. Ins. Co. v. Bay, 4 N.Y. 9; Merchants' Bank of C. v. Livingston, 74 N.Y. 223; Wright on Agency, 79; Mechem on Agency, § 356; Story on Agency, 78; Randolph on Comcl. Paper, § 794; Bank of Bengal v. Macleod, 7 Moore P. C. 35; Francia v. Joseph, 3 Edw. Ch. 182; Perry v. C. B. C. W. W. Co., 67 Hun, 456; 143 N.Y. 637.) The trial court properly declined to submit to the jury any of the questions proposed by the plaintiff, and properly directed a verdict in favor of the plaintiff. (Wilson v. M. E. R. Co., 120 N.Y. 145; Pendleton v. Fay, 2 Paige, 202; Garrard v. P. & C. R. R. Co., 29 Penn. St. 154; Shaw v. Spencer, 100 Mass. 388; Thompson on Trials, § 1931; Williams v. Hartshorn, 30 Ala. 211; Hardy v. Simpson, 13 Ired. L. 132, 139; Sturtevant v. Ballard, 9 Johns. 337; Narsley v. De Mattos, 1 Burr. 467; Bigelow on Fraud (1st ed.), 468; Gage v. Parker, 25 Barb. 141, 145; Erwin v. Voorhees, 26 Barb. 127.)

OPINION

O'BRIEN, J.

The complaint in this action contained four separate causes of action, each upon a promissory note of the defendant. The last two causes of action were not defended, and upon these the plaintiff recovered, but was defeated upon the two notes embraced in the first and second causes of action. The defense to these two notes was that they were made by the defendant's president, one M. S. Frost, and by him wrongfully diverted from the uses and purposes for which they were intended to his own personal or private benefit, or the benefit of a firm of which he was a member, and that the plaintiff is not a bona fide holder, but chargeable with notice of these facts.

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The following are copies of the two notes in controversy, with the indorsements thereon when put in circulation by the defendant's president:

'$5, 000. GREENVILLE, PA., Feb'y 24th, 1888.

'Four months after date the Pittsburgh, Shenango and Lake Erie Railroad Company promises to pay to the order of John T. Bruen five thousand dollars, at the American Exchange National Bank, New York City.

'Value received. THE PITTSBURGH, SHENANGO

'Attest, & LAKE ERIE RAILROAD

'E. S. TEMPLETON, COMPANY.

'Secretary. By M. S. FROST,

'President.'

Indorsed:

'Pay to the order of M. S. FROST & SON,

'JOHN T. BRUEN,

'M. S. FROST & SON.'

'$5, 000.00 GREENVILLE, PA., Feb'y 24th, 1888.

'Three months after date the Pittsburgh, Shenango and Lake Erie Railroad Company promises to pay to the order of John T. Bruen five thousand dollars, at the American Exchange National Bank, New York City.

'Value received. THE PITTSBURGH, SHENANGO

'Attest, & LAKE ERIE RAILROAD

'E. S. TEMPLETON, COMPANY.

'Secretary. By M. S. FROST,

'President.'

Indorsed--'JOHN T. BRUEN,

'M. S. FROST & SON.'

The body of these notes and every part of them except the signature of the president was in the handwriting of Templeton, the secretary. The president was authorized by the board of directors to issue the corporate notes to the extent of $10, 000 for the purpose of purchasing flat cars. In March, 1888, before the notes became due, Frost went to Boston and there negotiated a cash loan of $30, 000 from

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Francis A. Brooks for the benefit of M. S. Frost & Son, giving the firm note therefor and delivering to him the two notes in question, indorsed as they now appear, with other obligations, as collateral security for the payment of this loan. Subsequent to the maturity of the notes Brooks became the absolute owner by consent of the pledgor and the proceeds applied upon the debt, and still later he transferred them to a third party, and they have come to the hands of the plaintiff for value. It is not claimed that the plaintiff occupies any other or different position than Brooks would if he had brought the action upon the notes at maturity. Bruen, the payee of the notes, was the private secretary of Frost, the president, and the notes were made payable to him by Templeton, the secretary of defendant, who drew them in that form at the suggestion of the president. There is not and cannot be any dispute with respect to the authority of Frost to make the notes. They were made with sufficient authority, the fraud upon the defendant consisting in the wrongful use of them when made for a legitimate purpose by the president for his own private business.

Nor is there any dispute with respect to the fact appearing on the plaintiff's case, that Brooks paid value for the notes and made present advances in cash to Frost in the sum already stated. It is equally clear upon the record that Brooks had no actual knowledge of the facts surrounding the origin of the paper or of the diversion of it by the president. He received the notes and made the advances in Boston, whereas they were made and the transactions stated with respect to them took place in a distant state, where the office of the company was, and is indicated on the paper as the place where made.

The learned trial judge held as matter of law that the plaintiff could not recover...

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