Grocers' Bank v. Penfield

Brady, J.: The defendant Truax was a depositor with the plaintiffs. He procured from them the discount of a note made by Reon Barnes to his order. When it became due he paid a part of it, and gave two notes of Penfield and Stone, the other defendants, payable to his order, for the balance. These notes were made for his accommodation, but without restriction as to their use. It seems, from the testimony, that they were obtained for the purpose to which they were applied, and it may be said, as also warranted by the testimony, that the plaintiffs [280] knew that they were made for his accommodation. The plaintiffs, when the notes were given, refused to give up the prior note made by Barnes, and parted, therefore, with no new consideration. The defendants Penfield and Stone think that, under these circumstances, the notes cannot be enforced against them, and the referee agrees with them. They are mistaken. The notes having been given without restriction as to their use are available in the hands of one holding them only as a collateral security. (East River Bank v. Butter worth, 45 Barb., 476; Cole v. Saulpaugh, 48 id., 104; Edwards on Notes, 316.) It is only when a note is diverted from the purpose for which it was made, or fraudulently obtained and negotiated, that such a defense can be successfully interposed. (Bay v. Coddington, 5 Johns. Ch., 637; Farrington v. Frankfort Bank, 24 Barb., 554; Weaver v. Barden, 49 N. Y., 286; Cary v. White, 52 id., 138; Barnard v. Campbell, 58 id., 77; Edwards on Notes, 316.) In such cases, unless the holder parts from something of value, money, property, or existing securities, or discharges the pre-existing debt for which the note is given, the note cannot be enforced. It is considered, unless the element suggested be present, that the holder is not one for value within the law-merchant, and the superior equities must prevail. The statement of the rule is not always accompanied by the qualification mentioned, and leads to confusion in some minds. The judgment, for these reasons,.must be reversed, with costs to abide the event. Davis, P. J., and Daniels, J., concurred.