Klots Throwing Co. v. Manufacturers' Commercial Co.

• Decision Date: 14 June 1910
• Docket Number: 289.
• Citation: 179 F. 813
• Court: U.S. Court of Appeals — Second Circuit
• Parties: KLOTS THROWING CO. v. MANUFACTURERS' COMMERCIAL CO.

179 F. 813

KLOTS THROWING CO. v. MANUFACTURERS' COMMERCIAL CO.

No. 289.

United States Court of Appeals, Second Circuit.

June 14, 1910

[Copyrighted Material Omitted]

In Error to the Circuit Court of the United States for the Southern District of New York.

Action by the Manufacturers' Commercial Company against the Klots Throwing Company. Judgment for plaintiff, and defendant brings error. Reversed.

See also, 170 F. 311.

Writ of error to review a judgment entered upon a verdict directed by the court in favor of the defendant in error who was the plaintiff below. In the following statement and opinion the parties are designated as in the Circuit Court.

The action was brought to recover upon a note ^[1] of which the following is a copy:

'Six months after date we promise to pay to the order of Regenerated Cold Air Co., thirty-one hundred and sixty-six 00/100 dollars at 487 Broadway, N.Y. City, with interest at 6% per annum.

'Value received, subject to terms of contract between maker and payee of Oct. 25th, 1905.

'No. . . . Due July 15th, '06.

Klots Throwing Co.,

'H. D. Klots, Prest.'

The complaint alleged that the note had been indorsed and assigned by said Regenerated Cold Air Company to the plaintiff which was the lawful owner and holder thereof. The answer alleged, among other things, that said Regenerated Cold Air Company had failed to perform its part of the agreement referred to in the note, and set up by way of counterclaim a demand for damages for such nonperformance. Upon the trial the court ruled that the note was a negotiable instrument, basing its decision upon the opinion of this court reported in 170 F. 311, 95 C.C.A. 203, reversing a judgment in the case sustaining a demurrer to the complaint. Consequently the court further ruled that the defendant was not entitled to establish defenses available as against the payee of the note, and directed a verdict for the full amount thereof.

Gould & Wilkie (John L. Wilkie and Chester A. Jayne, of counsel), for plaintiff in error.

Ivins, Mason, Wolff & Hoguet (Robert Louis Hoguet and William L. Ransom, of counsel), for defendant in error.

Before LACOMBE, COXE, and NOYES, Circuit Judges.

NOYES Circuit Judge (after stating the facts as above).

The trial judge misapprehended our former opinion in this case. We did not hold that the note in question was a negotiable note. We merely held that whether it was negotiable or not its indorsement and assignment gave the plaintiff the right to recover thereon. If the note were negotiable the plaintiff would recover as indorsee; if nonnegotiable, as assignee. It was unnecessary to determine the question of negotiability. The case as now presented turns upon this question of negotiability. If the note were negotiable the trial court properly directed a verdict for the indorsee, for the defendant was not entitled to establish against it the defenses offered. If, on the other hand, the note were nonnegotiable, the action of the court was manifestly erroneous.

In examining the question of negotiability, it is important to recognize at the outset the distinction between it and any question of pleading. The plaintiff throughout its brief insists that because a note contains no conditions precedent, performance of which must be alleged in suing upon it, it is a negotiable instrument. But this conclusion does not follow. The conclusion which does follow is that the plaintiff, upon proving the note, is entitled to recover the full amount thereof in the absence of defenses established by the defendant. Thus, in our former opinion, we said that performance of the contract referred to in the note was not made a condition precedent to the payment thereof; that, as a consequence, it was unnecessary to plead such performance, and that nonperformance could be set up, if at all, only by way of defense. But, as already pointed out, we did not hold that, on account of the absence of conditions precedent, the note was a negotiable instrument.

It is elementary that a promise to pay must be absolute and unconditional to make the instrument containing it a negotiable note. If payment be dependent upon a condition or contingency, the instrument is not negotiable. In many cases the contingency is expressed in the form of a condition precedent. But we do not think it necessary that it should be so expressed. In our opinion when a note contains special stipulations and its payment is subject to contingencies, it fails to possess the character of a negotiable instrument and is subject in the hands of an assignee to any defense which would be available if it were still held by the original payee. See McClelland v. Norfolk Southern R.R. Co., 110 N.Y. 469, 18 N.E. 237, 1 L.R.A. 299, 6 Am.St.Rep. 397. And, as bearing especially upon the facts in this case, we think that whenever the payment of a note is expressly made subject to the equities growing out of, and defenses based upon, an existing or contemporaneous agreement, a person taking such note holds it subject to such equities and defenses.

The distinction between conditions precedent, performance of which must be alleged in bringing the action, and contingencies and equities which must be set up by way of defense and which yet serve to qualify the obligation to pay the note and deprive it of negotiability, may be shown by illustration. Thus, let us suppose that the note in suit contained the following stipulation:

'This note in the hands of all holders is subject to all defenses which would be available to the maker based upon the contract between the maker and the payee of October, 1905, in the same manner and to the same extent as if it were held by the payee.'

Such a provision would not constitute a condition precedent. It would not be necessary to plead performance of the contract in a suit upon the note. And yet it could hardly be claimed that an assignment of the note would shut out the defenses which the parties had stipulated should exist in the case of an assignment. Any...