Credit Co. v. Howe Machine Co.

Carpenter, J. (After stating the facts.) As this case was commenced before the practice act went into operation the pleadings are under the old practice. The defendant denies the matters alleged in the declaration, and gives notice, in substance, that it will prove that the treasurer of the defendant corporation was not authorized to accept these drafts, that the drafts being solely for the accommodation of the drawer the company itself under its charter and by-laws had no power to accept them, and that the plaintiff is not a bond fide holder for value. The defendant’s notice alleges that these bills were not accepted by the defendant, or by or with its authority or consent, but were accepted by one of its officers without authority and contrary to the provisions of its by-laws, of which the plaintiff had notice. It is not contended that the treasurer had no power under any circumstances to accept any draft; for the votes of the directors and the course of dealing by the defendant clearly show that he had such power; but it is claimed that under the circumstances he had no power to accept these particular drafts. Obviously the authority or want of authority in the treasurer to accept these drafts depended not upon the nature of the act but upon the attending facts and circumstances. That he had power to accept drafts under some circumstances is not denied. Hence, if they were drawn on account of the defendant’s business, or to draw out of its treasury money which belonged to A. B. Stock-well, the power of the treasurer to accept them would be conceded. But the strength of the defendant’s position in this part of the case lies in the fact that the defendant was not owing Stockwell, and the money was not wanted for any purpose connected with the defendant’s business. As between the Stockwells, or either of them, and .the defendant, the acceptances were unauthorized and void; but, as between the plaintiff and the defendant, the answer to the question we are considering hinges upon the answer to another question,—is the plaintiff a bond fide holder for value ? — 381 — The proper answer to that question we shall consider later; but assuming for the present that the answer may be an affirmative one, we pass to the next question, which is,— was the defendant authorized to accept accommodation drafts ? Clearly not as to all parties with notice. But as corporations may accept drafts for some purposes, and as the purpose for which a draft is drawn does not ordinarily appear on its face, the question as to all parties with notice is—was it drawn for a legitimate purpose ? As to all others the important inquiry is,—is the plaintiff a bond fide holder for value ? And that brings us to the main question in the case. A preliminary question of some importance which bears directly on this question is—on whom was the burden of proof ? In the pleadings the defendant assumes that burden ; and properly so upon principle. The drafts apparently may be for a legitimate purpose. As there is some presumption that all parties act properly and within the scope of their powers, the plaintiff establishes a primd facie case when it presents the drafts duly drawn and accepted, there being no circumstances indicating fraud or illegality. And so are the authorities. Edwards on Bills, 686, 689; Daniel on Negotiable Instruments, 626, 662 ; 1 Parsons on Notes & Bills, 255. It is insisted that the plaintiff does not sustain to this defendant the relation of a bond fide holder for value, for the reason that the drafts were indorsed and negotiated by the plaintiff before they were accepted; and that therefore the plaintiff parted with nothing of value upon the credit of the acceptances. In support of this position the case of Farmers’ & Mechanics’ Bank v. Empire Stone Dressing Co., 5 Bosworth, 275, is cited. We are unable to accept that decision as a correct exposition of the law. The Court of Appeals says of that case, in the case of Heuertematte v. Morris, 101 N. York, 63:—“ It is true that some expressions of the learned judge writing in that case may justify the citation, yet it should be considered that those remarks were unnecessary to the decision of the case, and the same court — 382 — have twice since then refused to follow it. We conceive the rule there laid down finds no support in the doctrines of the text writers or the reported cases. * * * If a party becomes a bond fide holder for value of a bill before its acceptance, it is not essential to his right to enforce it against a subsequent acceptor, that an additional consideration should proceed from him to the drawee. The bill itself implies a representation by the drawer that the drawee is already in receipt of funds to pay, and his contract is that the drawee shall accept and pay according to the terms of the draft. The drawee can of course upon presentment refuse to accept a bill, and in that event the only recourse of the holder is against the prior parties thereto; but in case the drawee does accept a bill, he becomes primarily liable for its payment, not only to its indorsees but also to the drawer himself.” It is not therefore true that the purchaser of a bill before acceptance trusts wholly to the credit of the drawer. He believes and expects that the drawee will accept; and upon such belief and expectation he acts. When Stock-well presented these bills to the plaintiff, he contracted that the drawee would accept and pay them. Upon that, promise the plaintiff relied. The reply to Heuertematte v. Morris is, that in that case the acceptor was an individual and not a corporation; so that no question arose as to the validity of the acceptance. But the validity of the acceptance is not the question we are now considering. We have already endeavored to show that the acceptance in the case at bar bound the corporation as to a bond fide holder for value. The precise question now is—whether a person who receives an accommodation bill before acceptance, no new consideration moving from him to the drawee, can avail himself of a subsequent acceptance. In Farmers’ & Mechanics' Bank v. Empire Stone Dressing Co., 5 Bosworth, 275, it was held that he could not. In Heuertematte v. Morris, 101 N. York, 63, it was held that he could. The latter case was put upon the broad ground that the former was not law; and not upon any supposed dis — 383 — tinction between corporations and individuals. Tbe good faith of the holder must not be confounded with the validity of the acceptance. Although the latter may and often does depend upon the former, yet they are distinct questions for most purposes. An accommodation acceptance being valid, and the plaintiff otherwise a holder in good faith, the mere fact that he received the bill before acceptance does not make him a maid fide holder. In Arpin v. Owen, 140 Mass., 144, the court say:—“ It is immaterial when an acceptance is made; it may be made at any time, and the rights of the payee and of the indorsee are the same after it is made, whether they were acquired in anticipation of it or subsequent to it.” These drafts were indorsed and sold by the plaintiff, and the avails were paid over to A. B. Stockwell. Stockwell paid the money so received to Hume Webster & Co. So far the transaction on its face is free from suspicion. It is not claimed that any fraud or illegality is found in terms. The most that can be claimed is, that there are certain circumstances in the case from which fraud may be inferred. Those circumstances are that Stockwell had been previously speculating in stocks with the knowledge of Webster; that in doing so he had become largely indebted to Hume Webster & Co., a firm in which J. Hume Webster was a partner; that J. Hume Webster was the agent by whom the plaintiff indorsed and sold these drafts; and that the money received therefor was in a short time paid over to Hume Webster & Co. in part liquidation of Stockwell’s indebtedness to that firm. But these circumstances are not, in law, equivalent to fraud. At one time in England the question was held to be whether the plaintiff had taken the bill under circumstances which ought to have excited the suspicion of a prudent and careful man. Gill v. Cubitt, 3 Barn. & Cress., 466. After-wards the rule was so far modified as to require gross negligence. Crook v. Jadis, 5 Barn. & Adol., 909. Later still gross negligence was held to be evidence of mala fides merely, and not the thing itself. In Goodman v. Harvey, 4 Adol. & — 384 — El., 870, Lord Djehmah says:—“I believe we are all of opinion that gross negligence only would not be a sufficient answer where the party has given consideration for the bill. Gross negligence may be evidence of mala fides, but is not the same thing. We have shaken off the last remnant of a contrary doctrine.” In Swift v. Tyson, 16 Peters, 1, Story, J., says:—“ There is no doubt that a bond fide holder of a negotiable instrument for a valuable consideration, without any notice of facts which impeach its validity as between the antecedent parties, if he takes it under an indorsement made before the same becomes due, holds the title unaffected by those facts, and may recover thereon, although as between the antecedent parties the transaction maybe without any legal validity.” “ Notice of facts which impeach its validity ” means knowledge of those facts. Goodman v. Simonds, 20 Howard, 343; and by “ facts ” is intended facts which of themselves impeach the transaction,—in this case fraud, and not other facts which tend to prove fraud or which excite suspicion. Goodman v. Simonds, supra. And such is the law of this state. Brush v. Scribner, 11 Conn., 388. We think that is the law of this country; at least we are aware of no contrary decision. “ But it must still be true,” as is said in 1 Parsons on Notes & Bills, 259, “that while gross or even the grossest negligence is a different tiling from fraud, the negligence may be such, and so accompanied, as to afford reasonable and sufficient grounds for believing that it was intentional and fraudulent.” By this we apprehend that no more -is meant than that the evidence may be so strong as to justify the court in finding fraud; and applies only to courts that pass upon both questions of fact and law, and has no application to this court, which must take the facts as they are found by the court below. It may be further claimed that the fraud here contended for is not the fraud of antecedent parties to the bills, but fraud, if it exists, to which the plaintiff itself is a party; and that if the facts and circumstances establish fraud with — 385 — reasonable certainty, tbe court ought so to regard it, notwithstanding the fact that fraud is not expressly found. We apprehend that the proposition does not relieve the ease of the objection that the question is still one of fact and not of law. Nevertheless, assuming that the principle involved in the proposition is a correct one, we will briefly examine the facts to see if it has any application to this case. To make the principle applicable we think the facts should be of a conclusive character. If they are ambiguous, or consistent with the absence of fraud, they are not sufficient. There are certain facts essential to the conclusive character of this evidence, which are wanting; and their absence is significant. It is not found that Webster knew that Stockwell had no funds in the defendant’s treasury against which these drafts were drawn. If Stockwell had in fact had funds there, that would have effectually repelled any imputation of fraud. Webster’s knowledge of the purpose of the drafts, a previous agreement even with Stock-well that the avails should be paid to Hume Webster & Co., would have been of no consequence. So also if he really believed that the bills were drawn against funds. That he did so believe is probable, as certain undisputed facts afford a reasonably good foundation for such a belief. For about three years Webster had known and had business dealings with Stockwell. Within a period of four months immediately preceding this transaction the plaintiff indorsed and negotiated drafts by Stockwell on the defendant for $75,000. Two days after the drafts in suit were negotiated, it indorsed and negotiated drafts by and on the same parties for $30,000 more. All these drafts were in fact accepted by the defendant and paid at maturity. In December, 1876, when Stockwell presented to the plaintiff drafts to the amount of $45,000, he in legal effect represented that he had funds in the defendant’s hands; he virtually pledged his honor and reputation as a business man that it was true. When the defendant accepted those drafts it admitted that those representations were true. The same representations were repeated by the parties in Febru — 386 — ary, 1877, and on March 28th. All those representations were, for all the purpose of this case, true; for those drafts were all paid at maturity. Is it strange that the same representations made on the 26th day of March should be believed ? It is not found that Webster knew that the drafts were drawn for the purpose of raising money to pay to Hume Webster & Co. If he had not such knowledge how could he be justly chargeable with a fraudulent intent ? Again. There is no finding that Stockwell was then in poor credit, or that Webster or Hume Webster & Co. supposed that they were in danger of losing by him. Hume Webster & Co. had, in the space of about one month, paid his checks to an amount exceeding $100,000. The plaintiff, during the same month, indorsed his drafts to the amount of $75,000. These facts afford some ground for believing that both parties regarded him as trustworthy. If they did, pray what reason had they for colluding with Stockwell for the purpose of drawing money illegally and unjustly from the defendant ? Moreover, the circumstances relied on as showing fraud are in themselves weak and will hardly justify, much less require, the inference claimed for them. We may add that if bills of exchange, which are supposed to be the highest type of negotiable instruments, can be successfully impeached by such circumstances as exist in this case, the integrity of all such instruments must be seriously impaired, and their usefulness as a circulating medium well nigh destroyed. In the next place, it is claimed that the plaintiff is not a bond fide holder because the defendant’s treasurer had no power to accept accommodation drafts, that the corporation itself had no such power, and that the plaintiff was bound to take notice of the powers of a corporation and its officers, and of the extent of their authority. On account of the complex character of this proposition it can only be properly considered by treating each branch of it separately. We may admit generally that the treas — 387 — urer had no authority to accept accommodation paper, and that the directors had no power to confer upon him such an authority. But in order to prevent injustice and maintain the integrity of mercantile paper it is necessary to limit the application of the principle to parties with notice. This limitation necessarily results from the fact that every business corporation has power to deal in negotiable paper in the line of its business. As such paper does not ordinarily show on its face the circumstances of its origin or the purpose for which it is made, it becomes important to distinguish those who have notice of its character and purpose from those who have not. To say indiscriminately that the holder of accommodation paper made by a corporation cannot be a bond fide holder simply because it is accommodation paper, ignores this important distinction and amounts practically to begging the question. We pass now to the second branch of the proposition— that persons dealing in commercial paper of a corporation are bound to take notice of the extent of its power. Here too we may properly admit that the proposition is a correct one ; but care should be exercised in its application not to extend it beyond its appropriate limits. To clearly understand those limits a distinction is to be ohserved between the terms of a power and the circumstances under which it is exercised. Parties may well be required to take notice of the former; but to require them to have knowledge of the latter would in many cases result in gross injustice. Especially is this so where the agent or officer of the corporation which exercises the power, at the same time represents the corporation, and speaks for it in giving information as to the circumstances under which it is exercised. No better illustration is needed than the case at bar. The treasurer of the defendant was the officer specially authorized by vote of the directors to accept bills of exchange; at the same time by virtue of his office, he was the person held out by the corporation as the proper one to inform holders whether the drawer draws against funds. The corporation virtually says—“you may safely trust the word of our — 388 — treasurer on that subject.” When he speaks, the corporation speaks. By accepting the draft he declares that the drawer has funds, and that is the declaration of the corporation. Mercantile paper does not require those who would become its holders to go to the acceptor and insult him by the question—did you tell the truth when you accepted that paper ? They have a right to assume that he tells the truth and to act accordingly. If the treasurer in fact misrepresents the corporation, the corporation and not the person who trusts him should bear the loss. An instructive and very interesting case on this subject is The Farmers’ & Mechanics’ Bank v. The Butchers’ & Drovers’ Bank, 16 N. York, 125. The defendant’s counsel cite that case and quote from it this sentence—“ One who deals with an agent has no right to confide in the representation of the agent as to the extent of his powers.” The court however clearly recognise the distinction to which we have adverted,—namely, between the terms of a power, and extrinsic facts, which may or may not, according to the circumstances, affect the rights of third persons when the power is exercised. That was an action on a certified check. The defense was that the bank had no funds of the drawer. Immediately following the sentence quoted the court uses this language:—“If therefore a person, knowing that the bank has no funds of the drawer, should take a certified check, upon the representation of the cashier or other officer by whom the certificate was made that he was authorized to certify without funds, the bank would not be liable. But in regard to the extrinsic fact, whether the bank has funds or not, the case is different. That is a fact of which a stranger, who takes a cheek certified by the teller, cannot be supposed to have any means of knowledge. Were he held bound to ascertain it, the teller would be the most direct and reliable source of knowledge, and he already has his written representation upon the face of the check. If, therefore, one who deals with an agent can be permitted to rely upon the representation of the agent as to the existence of a fact, and to hold the principal respon — 389 — sible in case the representation is false, this would seem to be such a case. It is, I think, a sound rule, that where the party dealing with an agent has ascertained that the act of the agent corresponds in every particular, in regard to which such party has or is presumed to have any knowledge, with the terms of the power, he may take the representation of the agent as to any extrinsic fact which rests peculiarly within the knowledge of the agent, and which cannot be ascertained by a comparison of the power with the act done under it.” This case also holds that a certified check is substantially an accepted bill of exchange. The principle involved therefore applies to this case and is an authority against the defendant. It is true that, in the case at bar the bills of exchange were not accepted when the plaintiff indorsed them; but we apprehend that that will not prevent the application of the principle. It is no uncommon thing for the payee to indorse a bill and put it in circulation before acceptance. The fact that he does so is in itself no evidence of bad faith. The principle seems to be, that a person dealing with a corporation is bound to know whether or not the officer or agent who represents it and acts in its name is authorized so to do. If he is, and the act is within the apparent scope of his authority, he is not bound to have knowledge of extrinsic facts making it improper for him to act in that case. We must conclude therefore that the fact that the drawer had no funds in the hands of the drawee at the time these bills were drawn and negotiated, that fact being unknown to the plaintiff, is not a sufficient reason for holding that the plaintiff is not a bond fide holder. It is further claimed that the plaintiff is not a bond fide holder for value on account of the use which was, made of the proceeds of these bills, they having been paid to Hume Webster & Co. to apply on a debt due that firm from Stock-well. This argument assumes, what we cannot admit, that the payment was equivalent to a payment to the plaintiff on a debt due it. The firm of Hume Webster & Co. and the — 390 — plaintiff axe in fact and in law two distinct persons; and we must so regard them until fraud or collusion is established which will make one responsible for the acts of the other. If the plaintiff was guilty of no fraud, and for reasons already suggested we must assume that it was not, then the plaintiff in good faith paid full value for these bills. If we were at liberty to regard this as a scheme devised by Webster (acting in the name of the plaintiff but really for Hume Webster & Go.) and Stockwell, to defraud the defendant for the benefit of Hume Webster & Co., we might be justified in holding that the plaintiff is not a bond fide holder. But we cannot reach that result as a legal conclusion from the facts as they appear. The main fact, the one thing essential to that conclusion, an arrangement to that effect then or previously made, is not found. For these reasons a majority of the court are of the opinion that the plaintiff is entitled to recover, and the Superior Court is so advised. In this opinion Pardee, Loomis and Granger, Js., concurred.