Cheever v. Pittsburgh, Shenango & Lake Erie Railroad

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. *63 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., Petty 2ith, 1888. “ Four months after date the Pittsburgh, Shenango and Lake Erie Eailroad 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 PITTSBUEGH, SHENANGO “Attest, & LAKE EEIE EA1LEOAD “ E. S. Templeton, COMPANY. “ Secretary. By M. S. Frost, “ Presidents Indorsed: “ Pay to the order of M. S. Frost & Son, “John T. Bruen, “M. S. Frost & Son.” “ $5,000.00 Greenville, Pa., Petty 2ith, 1888. “ Three months after date the Pittsburgh, Shenango and Lake Erie Eailroad 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 PITTSBUEGH, SHENANGO “Attest, & LAKE EEIE EAILEOAD “E. S. Templeton, COMPANY. “ Secretary. . By M. S. Frost, “ Presidents 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 *64 Francis A. Brooks for the benefit of jVI. 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. Hor 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 *65 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, that 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 defendants’ 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 *66 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 had faith. The rights of the holder are to he determined hy 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 ; Am. Ex. Nat. Bk. v. N. Y. Belting, etc., Co., 148 N. Y. 705; Knox v. Eden Musee Am. Co., 148 N. Y. 454; Canajoharie Nat. Bk. v. Diefendorf, 123 N. Y. 202; Vosburgh v. Diefendorf. 119 N. Y. 357: Jarvis v. Manhattan Beach Co., 148 N. Y. 652.) 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 *67 tlie 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 paper showed that it had been issued to a stranger in the regular course of business, and, through his indorsement, had come to the hands of a mercantile firm of which the president of the corporation was a member. If this were the fact, there is no doubt as to his right to use it in the business of the firm. The holder of a note who has no actual knowledge or notice of a defect in the title, or other equities between the parties, when circumstances come to his knowledge sufficient to put him upon inquiry, is chargeable with knowledge of all the facts that such inquiry would have revealed. The difficulty in this case is to find the circumstance which can be said to be sufficient to put Brooks upon the inquiry. There was absolutely nothing on the face of the paper except the signature, as president, of the party who was dealing with it, and that, we think, was not sufficient in view of the fact that the appearances were that he was a purchaser from a third party. The principle that applies in a case where an officer of a corporation makes the corporate obligation payable to himself, and then attempts to deal with it for his own benefit, does not aid in solving the question in this case. When paper of that character is presented by the officer or agent of the corporation, it bears upon its face sufficient notice of the incapacity of the officer or agent to issue it. (Hanover Bank v. Am. Dock & T. Co., 148 N. Y. 612; Bank of N. Y.,etc., v. Am. Dock & T. Co., 143 N. Y. 559; Wilson v. M. E. R. Co., 120 N. Y. *68 145 ; Gerona v. McCormick, 130 N. Y. 261.) There are numerous cases that belong to that class cited by the learned, counsel for the defendant on his brief. There is a manifest distinction between them and the case at bar. Here the officer was not dealing with the corporate notes payable to himself but with notes that had been regularly issued, so far as appeared from their face, to a stranger and by him transferred to a firm of which the officer was a member and for which he acted as agent in procuring the loan from Brooks and pledging them as security. The presence of Frost’s name upon the paper, as one of the agents who issued it, was not naturally or reasonably calculated, under the circumstances, to arouse suspicion in the mind of Brooks, or to lead him to believe that the president was attempting to defraud the corporation in disposing of the notes. Hone of the cases cited by the learned counsel for the defendant sustain the proposition that such a circumstance is sufficient to put the purchaser of negotiable paper upon inquiry or charge him with knowledge of the fact in case he fails to make it, and there are many cases that tend to support the contrary view. (Am. Ex. Nat. Bank v. N. Y. B. & P. Co., 148 N. Y. 698; Miller v. Consolidation Bank, 48 Penn. St. 514; Walker v. Kee, 14 S. C. 142.) It is said that if the plaintiff’s right to recover in this case is sanctioned by this court an easy way will be opened for the perpetration of frauds upon corporations by officers intrusted with its negotiable obligations, and that the device of making the paper payable to the order of a nominal payee, interested or aiding in the fraud, will be a favorite one to accomplish the end. We must leave all such cases to be dealt with upon the jieculiar facts and circumstances as they arise. It is more reasonable and just to assume that corporations will be able to protect themselves by proper vigilance from the dishonesty of their own officers, than to inrpute to joarties who have taken the paper for value, ignorant of its origin, constructive knowledge of the facts upon such circumstances as exist in this case. We think that there was nothing on the face of the paper *69 or in the facts shown to warrant the court in holding as matter of law, as it did, that the obligations were received by Brooks and the advances made on them mala fide. That is the effect of the ruling at the trial, and the conclusion was not supported by the facts. It follows that the judgment must be reversed and a new trial granted, costs to abide the event.