Cheever v. Pittsburgh

• Decision Date: 06 October 1896
• Parties: CHEEVER v. PITTSBURGH, S. & L. E. R. CO.
• Court: New York Court of Appeals Court of Appeals

150 N.Y. 59

44 N.E. 701

CHEEVER

v.PITTSBURGH, S. & L. E. R. CO.

Court of Appeals of New York.

Oct. 6, 1896.

Appeal from supreme court, general term, First department.

Action by John D. Cheever against the Pittsburgh, Shenango & Lake Erie Railroad Company to recover on certain notes. See 25 N. Y. Supp. 449. From a judgment for defendant on two of the four separate causes of action, plaintiff appeals. Reversed.

Bartlett, Haight, and Vann, JJ., dissenting.

Austen G. Fox, for appellant.

Frank Sullivan Smith, for respondent.

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. 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 & Lake Erie Railroad Company, by M. S Frost, President. Attest: E. S. Templeton, Secretary.’

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 & Lake Erie Railroad Company, by M. S. Frost, President. Attest: E. S. Templeton, Secretary.’

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 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 upon the notes, for the reason that he was chargeable with knowledge of the facts and circumstances that rendered them invalid in the hands of Frost. The plaintiff is doubtless chargeable with such knowledge or notice as to the antecedent equities of the defendant as Brooks, his assignor, had, but with no others. If the notes were valid obligations in the hands of Brooks, the plaintiff may assert every right that he could have asserted. It needs no argument to show that if Brooks had knowledge or notice, or is in law chargeable with knowledge or notice, of the fraud by means of which the notes were diverted from the purpose for which they were authorized to be made, the plaintiff cannot recover. But it is not claimed that he knew anything about the origin or diversion of the paper, in fact. All that is claimed is that when it was presented to him in Boston by Frost, whom he knew to be the president of the railroad, there was enough upon the face of the paper to put him upon inquiry, and therefore to charge him with knowledge of all the facts that such inquiry would have disclosed. He knew nothing, so far as appears, outside of the paper itself, except the fact that the party presenting it was defendant's president, and that he was proposing to pledge the notes for his own debt, or rather for the debt of his firm, which, for all the purposes of the question, may be assumed to be the same thing. The question in the case is therefore reduced to a very narrow inquiry, and that is whether Brooks, standing in all other respects in the position, and sustaining the character, of a bona fide purchaser of negotiable paper, is deprived of that character and the benefits of that position by reason of anything appearing upon the face of the notes themselves.

The mind, at the threshold of the inquiry, encounters two principles that point in opposite directions, and lead to different conclusions, as the one or the other is allowed to preponderate in the mental process of determining the legal rights of the parties. On the one hand is the principle which protects a bona fide holder of commercial paper from existing, antecedent equities between the parties, and on the other the principle which protects a corporation from the unauthorized and fraudulent acts of its own officers. There is not much difficulty in stating the rule of law defining the duties and obligations of a party to whom negotiable paper is presented for discount or sale before due. He is not bound, at his peril, to be on the alert for circumstances which might possibly excite the suspicion of wary vigilance. He does not owe to the party who puts the paper afloat the duty of active inquiry, in order to avert the imputation of bad faith. The rights of the holder are to be determined by the simple test of honesty and good faith, and not by a speculative issue as to his diligence or negligence. 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. Magee v. Badger, 34 N. Y. 249;American Exch. Nat. Bank v. New York Belting & Packing Co., 148 N. Y. 705, 43 N. E. 168;Knox v. American Co., 148 N. Y. 454, 42 N. E. 988;Bank v. Diefendorf, 123 N. Y. 202, 25 N. E. 402;Vosburgh v. Diefendorf, 119 N. Y. 357, 23 N. E. 801;Jarvis v. Manhattan Beach Co., 148 N. Y. 652, 43 N. E. 68.

Applying these rules to the conceded facts of the case, it seems to me to be impossible to impute bad faith to Brooks in the transaction. He advanced a large sum of money on the faith of the paper, without any actual knowledge that the relations of the party with whom he dealt to the paper were different from what they appeared to be on the face of it. The question now is, not what the facts were, but what they appeared to be, and what he had the right, from the notes themselves, to assume. He had the right to assume that the relations to the paper of every party whose name appeared on it were precisely what they appeared to be. Hoge v. Lansing, 35 N. Y. 136. He had the right to believe that the notes had been issued by the defendant to Bruen for value, in the regular course of business, and were by him transferred to Frost & Son in like manner. There was nothing to suggest to him that Frost was dealing with paper that belonged to the railroad, for his own benefit. The appearances were that the defendant had put the notes in circulation by delivery to Bruen, and that they came to Frost's firm in the regular course of business, for value, and were then the property of the firm. It is quite true that all these appearances were deceptive, and that the actual facts were otherwise. But how was a banker or business man in Boston to know or suspect that Bruen was only the nominal payee, and a mere instrument in the transaction to enable the president to divert the paper to his own use? The name of the party who presented it and had it in his possession appeared on the face of the paper to have signed it as president. The name of another officer of the corporation was upon it also, attesting its regularity, and everything was in his handwriting, except the signature of the president and the indorsement of the payee. So far as Brooks was concerned, the...