County Trust Co. v. Mara

Townley, J. These actions are brought on renewal notes made by the defendants to the order of the plaintiff for $50,000 and $20,000, respectively, dated November 24, 1930, and payable six months after date. The original notes were for $50,000 and $25,000, respectively. The answers admit making the notes but plead that they were made for the plaintiff’s accommodation without consideration; that the plaintiff is not a holder in due course, and that there was a delivery dependent on a condition precedent which never came into effect. The answer of Kenny also sets up that the plaintiff agreed to save the defendant harmless. The notes were given as the result of a transaction which took place during the campaign of Governor Smith for the presidency in 1928. Riordan, the then president of the plaintiff, was also a member of the finance committee of the Democratic National Committee of the State of New York. At a meeting of some of those interested in the campaign, during the month of October, 1928, the defendants at the request of Riordan, signed an underwriting agreement, under the terms of which each of them unconditionally guaranteed that he would “ on demand pay the amount set opposite his signature * * * toward the deficit if any incurred by the Democratic National Committee in the conduct of the presidential election campaign of 1928.” Mara signed for $50,000; Kenny signed for $25,000. There were other signatures which brought the total of the underwriting up to about $900,000. It is claimed by defendants' that the obligation under this agreement was limited to any deficit in an estimated budget of $4,000,000, although the agreement itself contains no such limitation. Evidence of such limitation was received on the trial over the objection of the plaintiff that the receipt of such evidence violated the parol evidence rule. The receipt of this evidence was error. While it is true that the rule has no general application in disputes involving strangers to the agreement, it is applicable when the matter in controversy originates in the relations estab — 208 — Iished by the instrument in question. The rule was correctly stated by Mr. Justice Bischoff in Spingarn v. Rosenfeld (4 Misc. 523, 527): “ True, the rule does not apply between the parties to the instrument and a stranger; but that is so only when the latter asserts a right independent of, and not growing out of, the instrument, or when the right asserted does not originate in the relations established by the instrument. Otherwise, the rule prevails.” (See, also, Selchow v. Stymus, 26 Hun, 145.) The bank was not a party to this agreement but the notes in suit were given by defendants in adjustment of the obligation assumed thereby. (See, also, Wigm. Bv. [2d ed.] § 2446.) After the defendants signed the underwriting agreement they heard nothing further about it until April 24, 1929, when they received a letter from John J. Raskob, as chairman of the Democratic National Committee, stating that there was a deficit and calling on them for payment of the full amount of their subscriptions. Following this demand, a meeting of the underwriters was held at which defendants and others claimed they were to be liable only in case $4,000,000 was not raised. The conceded subscriptions amounted to over $5,000,000. A committee, of which the defendant Mara was a member, was appointed to call on Raskob. Raskob refused to recognize any condition as attached to the subscription and insisted that the amount of the underwriting be paid. This was refused and suit upon the underwriting agreement was threatened. Thereafter, on or about the 15th of May, 1929, Riordan asked Kenny and Mara to come to the bank. Mara testified that at that meeting: “ He [Riordan] told me that they had arrived at a plan to straighten out the underwriting agreement; that the National Democratic Committee was indebted to the County Trust Company, and that they had formed a plan first to sign individual notes so that the bank could be secured instead of the security of the National Democratic Committee, and spread this money that was owed them amongst the different banks. I told Mr. Riordan I could not see it advisable for myself to take myself off one underwriting and put myself into a note proposition. Mr. Riordan at that time assured me, he said to me, don’t worry, this is only a matter of form to straighten this, matter out; it is helping the bank to straighten out the loans made to the National Democratic Committee, there will be no interest attached to the notes, you will never hear another thing about that.” Mara further testified that Riordan told him that the bank would take care of the note, but he disavowed any suggestion that the bank was to stand the loss. This conversation was not denied. Riordan had died prior to the trial and no one other than defendants was — 209 — present when the conversation took place. Both defendants testified that they understood the notes would have to be paid, but not by them. It is this conversation upon which defendants principally rely to establish their defense. We shall assume that such conversation took place substantially as stated. Defendants did not sign the notes on that occasion, but did a few days later when Riordan told them that all of the other underwriters had signed. The notes were payable without interest. In exchange for the notes defendants received checks of the plaintiff for $50,000 and $25,000, respectively. On the back of each of these checks was a typewritten indorsement “ Pay to the order of Democratic National Committee.” Each of the checks was indorsed by the defendant-payee and returned to the bank. They were deposited to the credit of the Democratic National Committee and the committee was credited with the amount thereof as a payment in reduction of their debt to the bank. By this transaction the bank released the obligation of the Democratic National Committee to the extent of the amount represented by the notes and accepted the obligation of the defendants in place thereof. The notes were renewed several times extending over a period of nearly two years. After a time defendants were required to pay interest which they testified was done on the assurance of the officers of the bank that the matter would shortly be closed up by subscriptions coming into the Democratic National Committee. Later there was a partial reduction of Kenny’s indebtedness by the application of $5,000 which had come into Riordan’s hands from contributors. The only issue which was submitted to the jury was that of conditional delivery.1 The court charged the jury in this connection as follows: “ The defendants have admitted the regularity of the note and execution. They set up the fact * * * that the notes were delivered upon a contingency which affected the liability of the defendants; they were, it is argued, only to be hable in the happening of a certain contingency and not if that contingency did not occur. In other words, the notes and their consequent liability, they claim, were to come into existence only if the $4,000,000 were not raised. “ You have heard the testimony of the conversations had with Riordan, now deceased, and, of course, unable to give his version. You remember for yourselves all that has been said concerning the whole transaction and the relation of the parties, what they were, for the purpose of telling whether or not the notes in suit were made and delivered under any condition, and, if so, what the condition was.” — 210 — At the conclusion of the charge, counsel for the plaintiff duly-excepted to the submission to the jury of the facts assumed by the court in its charge and to the submission of any question of conditional delivery. The colloquy between court and counsel in this connection was as follows: “ Mr. Proskauer: You stated at the time they gave the note they understood they were not to pay if the budget exceeded $4,000,000. The testimony is, at the time they gave the note that they knew the $4,000,000 bad been raised and that the budget had been raised. The incident to which you refer was at the time the underwriting agreement was made. “ The Court: I think there is no doubt about it. I correct my statement. You must not pay too much attention, gentlemen of the jury, to what the court said, about the facts; your own memory controls, not the court’s or counsel’s. “ Mr. Proskauer: I except to the submission of the case to the jury at all on the ground that there is no evidence of a condition precedent of the delivery of these notes, and I except to the submission of that question to the jury.” The court by this subsequent instruction withdrew from the jury the only condition which had been stated as possibly affecting defendants’ liability upon the notes and yet the jury were left to exonerate the defendants upon some theory of conditional delivery of which there was no evidence in the record. The conversations with Riordan express no condition which was to attach to the delivery of the notes, but are at most an assurance by him that the defendants would never be called on to pay the notes. The submission of this wholly false issue to the jury necessarily calls for a reversal of this judgment. This appeal, however, presents the further question of whether any defense to these notes was established and whether the plaintiff’s motion for a directed verdict should not have been granted. There is no substantial issue of fact involved in this case. Its final disposition must depend upon the legal effect of the promise made by Riordan to the defendants prior to the delivery of the notes and what followed immediately thereafter. The first claim upon which defendants rely is that there was no consideration for the notes. The second claim is that since the arrangement was for the benefit of the bank in permitting it to substitute these notes for the obligation of the committee, Riordan’s agreement that defendants would not be hable on them was binding on the bank. Considering these claims in the order in which they have been stated, if we are to assume that the obligation of the defendants under the terms of the underwriting agreement was unaffected — 211 — by the condition relied on by them and that these notes were given in discharge of this obligation, there is ample consideration for the notes. If we are to assume, however, that there was no obligation on their part under the underwriting agreement at the time these notes were given, there would nevertheless be sufficient consideration in the change of position on the part of the bank involved in its release of the Democratic National Committee from its obligation to the bank and its acceptance of the notes in suit in place thereof. The Court of Appeals so held in Grannis v. Stevens (216 N. Y. 583), where the facts with regard to consideration were substantially the same as those involved herein. In their opinion in the Grannis case the court distinguished Higgins v. Ridgway (153 N. Y. 130), relied on by respondents, on the ground that there was no consideration for the note litigated in that case. The discharge of a pre-existing debt owing by a third person is a legal consideration for the promise of another to pay such debt. (Citizens’ National Bank v. Lilienthal, 40 App. Div. 609; Bacon v. Montauk Brewing Company, 130 id. 737.) In other words, to have an adequate consideration for a promise, the benefit need not move to the promisor and the discharge of one person from liability under a debt is a sufficient consideration for the promise of another to pay. (Hayes v. Mestaniz, 9 Misc. 705; affd., 150 N. Y. 561; Rector, etc., v. Teed, 120 id. 583.) In the latter case Vann, J., said: “ The consideration did not rest upon any advantage to the defendant, but upon the abandonment by Thomas Wright of his position as a contestant. By discontinuing his effort to overthrow the will, he relinquished a right secured to him by law and lost his chance of inheriting the estate. He did this at the request of the defendant who promised to pay for it.” Defendants’ other claim is that the whole arrangement was for the accommodation of the bank to avoid embarrassment with the bank examiners and that the defendants’ absolute promise to pay was to have no legal effect. Concerning this type of claim, Wig-more (Ev. [2d ed.j § 2406) lays down the rule of law as follows: “ When the document is to serve the purpose of a mere sham, this principle in strictness exonerates the makers; but a just policy would seem to concede this only when the pretense is a morally justifiable one (as, to calm a lunatic or to console a dying person), and not when it is morally beyond sanction.” (See, also, Gumz v. Giegling (108 Mich. 295); Denny v. Fishier (36 S. W. [2d] 864); Niblack v. Farley (286 111. 536); Pauly v. O’Brien (69 Fed. 460); Iglehart v. Todd (178 N. E. 685). In Hurd v. Kelly (78 N. Y. 588) and Best v. Thiel (79 id. 15) the Court of Appeals held that on the suit of a receiver the obligors of promises made to banks — 212 — to deceive bank examiners were, on grounds of public policy, estopped from setting up a secret agreement with the bank. In Mars National Bank v. Hughes (256 Penn. St. 75) and State Bank v. Olson (116 Kan. 320) it was held that such obligors are estopped from setting up such defenses even as against the bank itself. In principle, the bank officers manifestly have no power to make agreements for the purpose of deceiving the State’s bank examiners. They certainly have no authority to substitute notes for existing assets and agree that the notes shall not be enforcible. The interests of the stockholders, general creditors and depositors are thereby jeopardized. The recovery allowed by estopping the obligor - from setting up the illegal and immoral contract may incidentally inure in part to the benefit of the officer of the bank who negotiated it, but the protection of the interests of innocent stockholders and depositors is paramount. It would involve a complete misconception of values to hold that under such circumstances, the bank, regarded as a separate entity, is in pari delicto with the obligors on the instrument. In this connection, the language of Mr. Justice Martin used in discussing in general the State’s statutory policy setting up safeguards relating to banks is peculiarly apt: “ To uphold the transaction upon which this litigation is founded would largely reverse this policy and seriously augment the risks and dangers to the public inherent in the business of banking.” (Norwalk v. Marcus, 235 App. Div. 211, 213.) The cases discussed above establish the rule that a person may not participate in a transaction, the object of which is to give the assets of a bank a more favorable appearance than they would otherwise have and then except liability upon the obligation given to create that appearance. In those cases there was no element of loss to the bank by the discharge of good liabilities in exchange for fictitious notes. In the case at bar this further element is present. Plaintiff has changed its position by reducing its assets in the amount of $70,000. If these notes are declared void, plaintiff will, therefore, suffer an actual loss of that amount. It is clear that there is no defense to these notes either in law or in fact. The judgments accordingly should be reversed, with costs, and judgments should be directed for the plaintiff as prayed for in the complaints, with costs. Finch, P. J., and O’Malley, J., concur; Martin and Glen-non, JJ., dissent and vote for affirmance.