Title Guarantee & Trust Co. v. Pam

• Decision Date: 31 January 1922
• Citation: 232 N.Y. 441,134 N.E. 525
• Court: New York Court of Appeals Court of Appeals
• Parties: TITLE GUARANTEE & TRUST CO. v. PAM.

232 N.Y. 441

134 N.E. 525

TITLE GUARANTEE & TRUST CO.

v.PAM.

Court of Appeals of New York.

Jan. 31, 1922.

Action by the Title Guarantee & Trust Company against Max Pam. A Judgment for plaintiff for a part only of the amount claimed (155 N. Y. Supp. 333) was affirmed by the Appellate Division (192 App. Div. 268,182 N. Y. Supp. 824) and plaintiff appeals.

Affirmed.

Hiscock, C. J., and McLaughlin, J., dissenting.Appeal from Supreme Court, Appellate Division, First Department.

Frederick Collin and Harold Swain, both of New York City, for appellant.

William D. Guthrie, Edmund L. Mooney, and William S. Siemon, all of New York City, for respondent.

CARDOZO, J.

The action is upon two promissory notes, drawn by the defendant to the order of the Thompson-Starrett Company, and indorsed by the payee to the plaintiff, for value and before maturity. Both notes are dated November 1, 1912, and are payable a year thereafter. One of them is for $96,733.52, with interest at the rate of 6 per cent. per annum; the other is for $3,094.63, with interest at the same rate. The court, sustaining a partial defense, gave judgment in favor of the plaintiff for $53,150.64 and no more. The plaintiff appealed.

In August, 1911, the Thompson-Starrett Company agreed to construct for the defendant certain works, dams, ditches, and dikes, in furtherance of an irrigation project at Uva, Wyo. Payment was to be made on the basis of ‘cost plus percentage.’ The builder was to render monthly bills, showing the cost to it of the work at the end of each month, to which cost it was to add a commission of 5 per cent., and against such bills the defendant was to give his promissory notes, with interest at the rate of 6 per cent. per annum, maturing May 1, [232 N.Y. 446]1912. The expectation then was that about three months would be the time required for completion. An estimate of the costs, by which, however, the builder was to be in no wise bound, informed the defendant that about $30,000 was the probable outlay. The estimate was changed afterwards by the addition of $8,500 because of extra work. Events did not verify the prophecy either as to cost or as to time. The defendant gave his first notes in November, 1911. One was for $8,613.29; the other for $14,448.09; a total of $23,061.38. In January, 1912, there was a request for a third note of $29,956.18, which brought the expense far above the estimate, with the end not yet in sight. The defendant held back. The builder became urgent. A letter of January 17, 1912, brings the situation vividly before us:

‘May I suggest that you give us your note for the amount of our statements, with the understanding that if before we render a further statement you find any errors in checking up the accounts, such errors shall be corrected in connection with the following payment? What I suggest is that you give us your note for $29,000. We will get the money, and you can take your time to do the checking without inconveniencing us by depriving us of the use of the money we have already laid out.’

Here was clear notice to the defendant, an experienced and sagacious lawyer, that the note, if given, would be used. He did not misunderstand the notice, but none the less he gave the note. He followed it with a note, dated March 15, 1912, for $14,781.93. The total with interest added was then $72,225.10.

On April 29, 1912, there was a conference between the defendant and Mr. Horowitz, the builder's president. The notes were about to fall due, and the work was still unfinished. The defendant insisted that he must investigate the items of the builder's outlay, and ascertain if they were proper. Without such investigation he was unwilling either to pay the notes or to give others in renewal. Mr. Horowitz suggested that he pay $22,225.10 in cash, which would reduce the notes to $50,000, and give a new note for the latter amount, payable November 1, 1912. In the meantime the investigation might be pursued. This suggestion was accepted. The defendant gave his check and note accordingly, and received back the earlier notes, which had been discounted by the plaintiff. They were stamped by the plaintiff ‘Paid’ with the addition of the plaintiff's name, and the defendant saw the stamp, and understood its meaning. About this time reports came to him from an engineer whom he had sent to Wyoming to inspect the works. The reports gave warning that there had been inefficiency and waste. The superintendent on the job had been negligent and even corrupt. But the end had not been reached. New statements of expenditures came in, and new notes were demanded. On June 4, 1912, the defendant, in response to these demands, made his note for $11,583.48 payable November 1. This note and the one for $50,000, which preceded it, were discounted by the plaintiff. One August 2 the defendant made still another note, this time for $35,150.04, payable like the others on November 1. Before giving this note, which brought the total up to $96,733.52, he had another conference with the builder. He expressed reluctance to give a note in view of the reports of waste. There followed what was substantially a repetition of the promise of adjustment and reparation which had been given in connection with the notes of May.

In September, 1912, discussion was renewed. Mr. Horowitz was about to ieave for Europe, and the impending maturity of the notes made it desirable that there should be some understanding about renewal. The defendant again expressed reluctance to make payments on the notes without probing the accounts. He suggested renewal for a year, coupling the suggestion with the statement that the accounts must be adjusted when the renewal period had expired, and that defenses were reserved. Mr. Horowitz in effect assented, though expressing fear of criticism at the hands of his finance committee. On October 2, 1912, the day before he left for Europe, he met the defendant, and brought the matter up again. He reported that he had succeeded with much difficulty in obtaining the approval of the committee. The old notes were surrendered, and two others, the notes in suit, were given, one for $96,733.52, and the other for $3,094.63, both payable with interest on November 1, 1913. Of the three notes surrendered, two had been discounted by the plaintiff, though there was no stamp upon them to indicate the plaintiff's ownership. The new notes, i. e., those in suit, were discounted by the plaintiff in December, 1912. The defendant says that he knew nothing of the discount then. He learned of it, however, in May, 1913. On May 2, 1913, he sent the builder a check for $2,421.82, in payment of a note which he had given for interest. The check was accompanied by a letter which stated that the payment was without prejudice to any claims or rights with reference to the notes unpaid. The builder, answering this letter, said:

‘You speak of having rights or claims against the notes held by us. While these notes have been discounted by us, so that no claim can be said to exist against them, I want to assure you that if it develops that your suspicions were well founded, this company will give you its check, and reimburse you for any damage you may have suffered, without regard to the fact that the notes are no longer in our possession.’

The defendant though replying promptly to other statements in this letter, made no protest that the negotiation of the notes was a breach of any condition attached to the delivery. The date of maturity arrived. The defendant then proposed renewal for another year upon the same terms as before, still without suggestion on his part that those terms had been disregarded by the discount of the paper. Renewal was refused; the notes were dishonored; and dishonor was followed by suit.

The trial judge held that the negotiation of the notes was in fraud of the defendant's rights; that the effect of the agreement already stated between the defendant and the payee was to make delivery conditional; that the notes were not to come into being as effective obligations until the bills had been adjusted; that the builder's monthly statements included wasteful and negligent expenditures; that the burden was on the plaintiff, in view of the fraudulent negotiations, to prove itself a holder in good faith; and that not only had it failed to sustain this burden, but the defendant had proved the contrary. The reasonable cost of the work was fixed at $72,644.95. The defendant was credited with part payments and cast in judgment for the balance.

[1] We are unable to accept the ruling that delivery was conditional, and negotiation a breach of faith. No condition was expressed. We think that none is to be implied. The defendant argues that the promise to adjust was of little use if the note could be transfered. It is perhaps a sufficient answer that the note itself was of little use if transfer was forbidden. These arguments would balance each other, to say the least, if the purpose of the transaction were not otherwise revealed. In truth, however, it is revealed in many ways. The evidence is unmistakable that the defendant permitted and expected the discount of his notes. He was willing to take the chance of a transfer to a holder without notice, relying on the builder's responsibility, and its promise of indemnity, if mistake was afterwards established. When the note of $29,956.18 was demanded in January, 1912, he was already on the watch for waste. On the promise of later adjustment, he made the note, though distinctly informed that discount was intended. We find no evidence that the delivery of later notes, upon a like promise of adjustment, was otherwise conditioned. In May, 1912, when suspicions of waste had grown, the old notes were taken back with notice that the payee had passed them over to the plaintiff. Even then, the defendant was satisfied with a repetition by the payee of the promise of adjustment. He said nothing in prohibition of a transfer,...