Warnock Uniform Co. v. Garifalos

McLaughlin, J.: Action in equity to perpetually enjoin the defendants from negotiating certain promissory notes of the plaintiff, or prosecuting actions to recover thereon and to cancel such notes on the ground of fraud. In March, 1914, one Garifalos obtained from the plaintiff fifteen promissory notes, aggregating $6,000, on the representation that he had a line of credit at the Public Bank and the Second National Bank in the city of New York, where he could have the same discounted. It was agreed between plaintiff and Garifalos that when the notes were discounted he would pay over to the plaintiff one-half of the proceeds of each note, retaining the other half for his compensation in the transaction. It was further agreed that Garifalos should return to the plaintiff, within ten days, all notes which he did not use, and should pay one-half of the amount of all notes which were discounted when they became due. Garifalos’ statement as to his credit at the hanks referred to was false and the notes were never discounted by him as agreed, but instead were transferred to third parties, from whom the plaintiff received no consideration whatever. The plaintiff succeeded in getting hack some of the notes and then brought this action to have the remaining ones which are in the possession of the defendants adjudged void and canceled. The defendants Silver, Krakower and Kobre (the appellants) appeared and interposed an answer, alleging as a defense to the action that they were bona fide holders for value. At the trial, plaintiff introduced evidence of Garifalos’ fraud, his negotiation of the notes, and rested. The appellants then endeavored to prove that they acquired their respective titles for a valuable consideration, in due course (Neg. Inst. Law [Consol. Laws, chap. 38; Laws of 1909, chap. 43], § 98), and in this they completely failed. At the close of the trial the court found, and we all agree there is sufficient evidence to sustain the finding, that the appellants acquired their respective notes with notice of their fraudulent inception, or under such circumstances as would put them on notice of such fact, and directed that they be surrendered for cancellation. It is from a judgment to this effect that the appeal is taken. [676] The appellants contend that thé action cannot he maintained in equity for the reason that under the allegations of the complaint, and proof, the plaintiff has an adequate remedy at law to any action which might be brought to enforce collection of the notes. As a general rule, where one has an adequate remedy at law, he cannot resort to a court of equity, and if he does so, it will refuse to exercise its equitable powers. This rule, however, is not of universal application. It has its exceptions, and I think the facts here bring this case within them. The existence of a defense, the risk of losing evidence, or the apprehension of a multiplicity of suits, may not, any one of them separately, be a sufficient ground for restraining suits at law upon, or decreeing the cancellation of written instruments, especially where proof of extrinsic facts is not necessary to establish the defense, yet when all these elements are combined and extrinsic proof is necessary to establish the defense, a proper case for equitable relief is established. (Town of Springport v. Teutonia Savings Bank, 75 N. Y. 397; De Kalb Holding Co. v. Madison Theatre Co., 165 App. Div. 202; Metler’s Admrs. v. Metler, 18 N. J. Eq. 270.) The notes held by the defendants were obtained by Garifalos from the plaintiff by a fraud practiced upon it. They were obtained for a specific purpose, but, instead of using them for that purpose, he converted them to his own use. So far as Garifalos was concerned it was as though he had stolen them. Each of the appellants took them with knowledge of that fact or with such information as put them upon inquiry, and had such inquiry been made, it would at once have been ascertained that Garifalos had no right to use them as he did, or the appellants to take them from him. Under such circumstances, I think the plaintiff had a right to resort to a court of equity to have the notes canceled, not only to avoid a multiplicity of suits, hut to preserve the evidence establishing that they were not legal instruments in the hands of the defendants. The weight of modern authority, as I read the decisions, supports the doctrine that a suit may be maintained in equity, under facts similar to those here involved, for the cancellation of written instruments obtained by fraud. The court exercises its equitable powers under such circumstances, for the purpose [677] of affording relief against an invalid executory contract in possession of another, where the invalidity is not apparent upon the instrument itself, and where the defense may be nullified by intentional delay to sue until the evidence in support of it is lost. (Fuller v. Percival, 126 Mass. 381.) In Hamilton v. Cummings (1 Johns. Ch. 517) Chancellor Kent, after an examination of the English cases bearing upon the subject, said he was of the opinion that equitable jurisdiction ought to be upheld whether the instrument were or were not void at law, and whether it be void from material appearing upon its face, or from proof taken in the cause, and he added: “ Perhaps the cases may all be reconciled on the general principle that the exercise of this power is to be regulated by sound discretion, as the circumstances of the individual case may dictate; and that the resort to equity, to be sustained, must be expedient, either because the instrument is liable to abuse from its negotiable nature, or because the defense not arising on its face may be difficult, or uncertain at law, or from some other special circumstances peculiar to the case, and rendering a resort here highly proper and clear of all suspicion of any design to promote expense and.litigation.” The plaintiff is entitled to have the notes returned to it, and for that purpose is not obliged to wait until an action at law has been brought against it, when the evidence that the appellants took their notes with notice of Garifalos’ fraud may have been lost; nor is it obliged to take the risk of having its credit impaired by having the notes negotiated, or of defending a multiplicity of actions. I am of the opinion the judgment is right and should be affirmed, with costs. Laughlin and Smith, JJ., concurred; Ingraham, P. J., and Dowling, J., dissented.