Harger v. Wilson

Talcott, J. This was an action on a promissory note. The defense was that the note was obtained of Wilson, the maker, by the fraud of one Nicholson, the payee, and one Scott. The plaintiffs claimed to be bona fide holders, without notice, for value, which claim has been sustained by the verdict; but in reaching this result, two rulings were made by the court at the circuit, which were- excepted to and are now claimed to have been erroneous. The note was for $1000, with interest. It was purchased by the plaintiffs, who are bankers and brokers, before maturity, for the sum of $900; and it is claimed by the defendant’s counsel that if the note was obtained from the defendant by fraud, so that the payee could not have recovered upon it from the maker, then that the purchase of it for less than the face was usurious; so that the plaintiffs cannot be bona fide holders, but are in fact holders under a usurious and void contract. Without doubt there is some difficulty in reconciling the language of some of the cases with the proposition that the plaintiffs are entitled to recover. It has been, held that a note made for the purpose of being discounted, if taken at a rate of discount greater than seven per cent per annum, by a party having no notice of the purpose for which the note was made, may nevertheless be attacked for usury. That a note made to be used in a certain manner, i. e., to be discounted at a certain bank, but diverted and sold at a discount greater than the legal interest, is usurious. (Munn v. Commission Co., 15 John. 44. Powell v. Waters, 8 Cowen, 669, &c.) It is also claimed to have been decided that a stolen note sold to a party having no notice of any defect in the title, if sold at a deduction greater than lawful interest, is, for that reason', invalid in the hands of the holder. (Hall v. Wilson, 16 Barb. 548.) In this class of — 247 — cases it is frequently said, as in the cases referred to, that the test is whether the note was valid in the hands of the payee so that he could have maintained an action upon it, and that if valid in this sense, it is valid in the hands of a bona fide purchaser, notwithstanding any defect in the title. There is no doubt, however, that a bona fide holder of commercial paper, for value, may recover, notwithstanding any defect in the title of the person from whom • he derived it. Even though such person may have acquired it by fraud, theft or robbery. (Story on Prom. Notes, §§ 191, 192. Hall v. Wilson, supra.) It is claimed that a holder under a usurious contract cannot be a bona fide holder; and that the purchase for less than the amount purporting to be due upon the note on which the seller could not for any reason maintain an action against the maker, is usurious. In the case of Ramsdell v. Morgan, (16 Wend. 574,) Mr. Justice Cowen says : “ There is a solecism in the expression, ' a bona fide purchaser upon usury.’ ” But in that case the contract was clearly usurious. The defendant had not assumed to purchase the property, but had made an usurious loan upon the pledge and security of the property. The case of Ramsdell v. Morgan was followed in Keutgen v. Parks, (2 Sandf. S. C. 60;) but in that case, also, the contract was clearly usurious, and the commercial paper taken by the party who advanced the money was not purchased by him, but taken merely as a collateral security for the loan. "Yet even these cases (Ramsdell v. Morgan and Keutgen v. Parks) are seriously questioned, and probably intended to be directly overruled in Williams v. Tilt, (36 N. Y. 319.) In the latter case it is held that “the term bona fide holder, or purchaser, has reference to the standing of the holder or purchaser in respect to the original owner ; that is, he shall be free from any privity with the fraud by having no part in it or notice of it, either actual or constructive and that “ the existence of usury in — 248 — the contract between the fraudulent purchaser and his vendee, who, without notice of the fraud, makes advances on the property, does not affect the relative rights existing between him and the original owner.” This late case, decided by the court of last resort, seems to determine the question presented in this case. That was a question, as in the case of Ramsdell v. Morgan, as to what was necessary to constitute a bona fide holder of personal property which had been procured from the original owner by fraud; but the question is the same, or rather the position of the holder of commercial paper, bona fide and for value, is better than that of the holder of personal property; for such paper is valid, as we have seen, in the hands of such a holder, although stolen from the maker; whereas, a purchaser of personal property, however innocent, and whatever value he may have paid for it, acquires no title as against the original owner from whom it has been stolen. The fallacy of the argument of the appellant’s counsel.in this case is, that there can be no usury in the contract under which the plaintiffs claim to hold the note in suit. To constitute usury there must- be a loan, direct or indirect, and an intention to reserve or take more than the lawful rate of interest on a loan. A note valid in the hands of the holder is property, which may be sold at any price. In this- case, the note was offered for sale as a chattel, .and was so sold and purchased, without indorsement. There was no intention, on the one side, of making a loan, or on the other, of borrowing money to be repaid. It may be said that this would be so in the case of a note made for the purpose of being discounted, but discounted at a greater rate than lawful interest, by a party ignorant of the true origin of the note; and that this was also the case in Hall v. Wilson, (supra.) But in such cases the note had not been delivered by the maker for the purpose of being put into circulation as a note. In Hall v. Wilson, the court say: “ The mere act of signing the paper — 249 — without a delivery of it, as evidence of a subsisting debt, did not make it the note of the signer.” The same is true of notes made to be discounted. And herein may, perhaps, be found a distinction which may enable the purchaser, at less than the face, to recover in the one case and not in the other. In the one case, the note has not been issued and putin circulation as a-valid note. In cases like the one at bar, the maker has intentionally issued the note and put it in circulation as a valid note, although induced to do so by the fraud of the payee. In support of the proposition that he who purchases at a discount greater than lawful interest, a note which has been obtained from the maker by fraud, cannot be a bona fide holder, reference is made to the language of the opinions in many cases, to the effect that, in order to be a bona fide purchaser, the purchase must be for a full and fair consideration. Justice Allen, in the opinion in Hall v. Wilson, says: “ Although not necessary to the decision of this case, there is ground for saying that the consideration must be full and fair as well as valuable.” He apparently meant by this to suggest that, as a matter of law, the purchaser of a promissory, note, in order to be protected against a defense existing as against the payee, must have paid the full face of the note. This appears to us to be erroneous in principle and a misconstruction of the meaning of the authorities. Of course, we concede that the purchase of a note for much less than its value is a circumstance to go to the jury on the question of the good faith of the purchase, as a matter of fact. What is a full and fair consideration? Is it necessarily the face of the note? Is every man’s note fairly worth the amount purporting to be secured by it ? Manifestly not; and we apprehend the law can be guilty of no such absurdity as to declare peremptorily, that a purchaser has not paid a full and fair consideration for any note, who has not paid the face of it. Take the present case, for instance. The note in question — 250 — was for $1000, dated May 25, 1869, "payable seven months after date. It was purchased by the plaintiffs, a few days after its date, for $900. The plaintiff who proved the purchase was cross-examined by the counsel for the defendant, as to the circumstances of the defendant, his occupation, &c., and among other questions was asked, “ You knew him [the defendant] to be a man of limited means, didn’t you, sir ?” This cross-examination was apparently for the purpose of showing that it was unnatural and unlikely that the plaintiffs would have paid so much as they did- for the note, as a bona fide business transaction. So manifest is it, as a matter of common sense, that all notes are not equally valuable fro rata, that the defendant sought to throw suspicion upon the transfer in this case, by showing that the plaintiffs had paid more than the reasonable value of the note in the market. We think the .price paid on the purchase of the-note may go to the jury on the question of good faith, but that it cannot as a matter of law be held to impeach the title of the holder, who is otherwise a purchaser in good faith, for value, and without notice. The other exception is to the ruling of the judge, that the plaintiffs were entitled to recover the full face of the note, with interest, and were not limited to a recovery of the amount they had paid for the note, with interest. This presents the question whether the holder of a note in good faith, for value, which has been obtained from the maker by fraud, is entitled, as against that maker, to be protected beyond his advances, with interest. That question we have decided at this term, upon an examination of the authorities. (Huff v. Wagner.) (a) A majority of the court think, the bona fide holder of a note thus fraudulently obtained, has no equity as against the party defrauded, beyond the amount of the advances he has made upon the faith of the note. That protection, to — 251 — this extent is all that 'justice or the policy of the law requires. If we are correct in this holding, then the court below erred in the ruling referred to, and the judgment should be reversed and a new trial ordered, unless the plaintiffs stipulate to deduct from their verdict the sum of $100, with interest from the date of the transfer of the note ; in which case the judgment must be affirmed, with costs of -the appeal to neither party. [Fourth Department, General Term, at Buffalo, June 4, 1872. Johnson, J., concurred. Mullin, P. J. I think the plaintiffs were entitled to recover the whole amount of the note, under the case of the Park Bank v. Watson, (42 N. Y. 490.) That case, it seems to me, reverses all the cases On which my brother Talcott relies. Judgment reversed. Mullin, Johnson and Talcott, Justices.] Footnotes [(a)] Ante, p. 215.