Webster v. Howe Mach. Co.

• Decision Date: 17 December 1886
• Citation: 8 A. 482,54 Conn. 394
• Court: Connecticut Supreme Court
• Parties: WEBSTER and others v. HOWE MACHINE CO.

8 A. 482

54 Conn. 394

WEBSTER and others

v. HOWE MACHINE CO.

Supreme Court of Errors of Connecticut.

December 17, 1886.

Case reserved for opinion of supreme court, from the superior court of Fairfield county.

This case involves the same general facts as the preceding one, Credit Co., Limited, v. Howe Machine Co.

This action was brought upon one of two drafts for $10,000 each, drawn by A. B. Stockwell, March 28, 1877, in favor of plaintiff upon the defendant, payable in 60 days, which were presented for acceptance April 11, and, although at first refused acceptance, were afterwards accepted by the treasurer in behalf of the company as of April 11th. The defendants, Hume Webster & Co., indorsed the drafts, and sold them for A. B. Stockwell, and placed the proceeds to his credit in his account with them. Stockwell was then indebted to them in a sum exceeding the amount of the drafts. One of the drafts was paid at maturity, and the other not. The latter Hume "Webster & Co. took up, and now sue upon.

R. S. Bansom and E. W. Seymour, for plaintiffs

W. D. Shipman and M. H. Cardozo, (S. & Wheeler, Jr., and G. Stoddard, of counsel,) for defendant.

PARDEE, J. For the facts which are common to this and the cognate case of Credit Co., Limited, v. Howe Machine Co., ante, 472, reference is made to the latter. The additional facts solely applicable to this are that the plaintiffs were, in March, 1877, doing business as bankers in London, England; that on March 28, 1877, A. B. Stockwell drew a draft upon the defendant company, at its office in the city of New York, in favor of the plaintiffs, at 60 days' sight, for the sum of $10,000 in gold. Soon after the date of the draft it was delivered by A. B. Stockwell to the plaintiffs, who indorsed and sold it for him, and placed the proceeds thereof to his credit in his account with them, he being then indebted to them in a much larger sum. The draft was subsequently accepted by Levi Stockwell as treasurer of the defendant corporation, but was dishonored at maturity. The plaintiffs, as payees and indorsers, took it up, and now hold it unpaid, and this suit is based thereon.

The defendant is a private manufacturing corporation. At the time of acceptance by its treasurer the drawer was largely indebted to it. The acceptance was solely a loan of its credit to him for his accommodation. This loan of credit—this act of accommodation—was an abuse of the power conferred upon the treasurer, and a fraud upon the corporation for which he accepted. Of this the plaintiffs were without notice or knowledge. But there is neither claim nor proof, nor ground for the assumption, that they agreed to or did discharge or release A. B. Stockwell from any portion of his liability to them upon their book-account against him by the mere reception of the draft, and the credit upon that account of the proceeds resulting from the indorsement and sale thereof. There is no proof of any express, and there can be no assumption of any implied, agreement, that it was received in absolute payment and satisfaction, or in discharge of any portion of the drawer's liability to them; no proof nor presumption that upon dishonor of the bill they could not have enforced to the fullest extent their original account against him; no proof that upon the reception of the draft they parted with any right or property; no proof that they are not now in every respect in as good condition as if they had not received it.

The defendant had its office and place of business in New York; there the acceptance was made; there the bill was made payable. In an action at law for the enforcement of a contract, the law of the jurisdiction in which it is made and to be executed determines the extent of the obligation of the contractor, and the character of the defenses which he may interpose for his protection. We think the law of the state of New York is that when the acceptance of a bill by the treasurer of a private manufacturing corporation is an act of fraud upon the corporation, or when the same has been unduly obtained, or the procurement and negotiation thereof is a wrong and a loss inflicted upon the corporation by the drawer and the treasurer jointly, the burden is upon the person suing upon it to prove that he is a bona fide holder; and that he cannot be such if he received it upon a pre-existing debt, without parting with any right or property of value, and can lose nothing if he does not recover; for this reason: he has neither paid anything for nor lost anything in consequence of being the holder of the bill,—there was possibility of gain, no possibility of loss. It is the pleasure of the law, if possible, to make every fraud harmless to innocent parties. Therefore, in such cases, it will not permit the holder to be the instrumentality by which a needless injury should be inflicted upon the acceptor. Under this rule there remains to the defendant the right to interpose in this action all defenses of which it could avail itself if A. B. Stockwell were plaintiff.

In Coddlngton v. Bay, 20 Johns. 637, (1822,) the marginal note is: "Where R., as agent, had received notes to be remitted to his principal, and passed them to the defendant as security against responsibilities assumed by him as indorser of the notes of R., and the maker of notes lent R. for his accommodation, but not then payable, and the defendant had no notice or knowledge that the notes belonged to the plaintiff, but believed that they belonged to R., who had become insolvent at the time he received them, held that, the notes not being received in the usual course of trade, nor for a present consideration, the defendant was not entitled to hold them against the true owner." The court says: "The general rule laid down seems to be this: that when negotiable paper is transferred for a valuable consideration, and without notice of any fraud, the right of the holder shall prevail against the true owner. All the cases substantially agree in this. In the application of the rule this question arises: What is that valuable consideration intended which shall protect the holder as against the drawer of the note? Is the rule satisfied if enough is shown to make out a consideration as between the holder and the agent who assigned or transferred the paper? If nothing more is required, the appellants must prevail; for the notes were passed for the indemnity of the appellants, and, so far as Randolph and Savage are concerned, that formed a valid consideration. The right to hold against the owner in any case is an exception to the general rule of law; it is founded on principles of commercial policy. The reason for such rule would seem to be that the innocent holder having incurred loss by giving credit to the paper, and having paid a fair equivalent, is entitled to protection. But what superior equity has the holder who made no advances, nor incurred any responsibility on the credit of the paper he received, whose situation will be improved if he is allowed to retain, but, if not, is in the condition he was before the paper was passed? To allow such a state of facts as sufficient to resist the title of the real owner would be productive of manifest injustice, and is not required by any rule of policy. It is enough if the holder be secure when he advances his funds, or makps himself liable on the credit of the paper he receives. In coincidence with this principle it appears to me all the cases have been decided; for, although the rule is laid down generally that the hclder will be protected where the bill or note is taken in the usual course of trade, and for a fair and valuable consideration, without notice, in every case I have met with where the owner failed to recover it appeared that the holder gave credit to the paper, received it in the way of business, and gave money or property in exchange."

In Philbrick v. Dallett, 34 N. Y. Super. Ct. 370, the marginal note is: "The doctrine that when a note has been taken for a pre-existing debt it is held bona fide, etc., as held in Swift v. Tyson, 16 Pet. 1, has not been followed in this state. A contrary rule has been firmly maintained, both at law and equity, by a long and uninterrupted series of adjudications, and is beyond question the law of the state." The court says: "But when 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 a 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 for 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 being 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. It is only when a creditor receives 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 the parting with securities, or to the paying of money. The...