88 A.D. 265 | N.Y. App. Div. | 1903
The action is on two promissory notes admitted to have been made by the defendants, payable to their own order, "and indorsed in blank by them. The plaintiffs produced the notes upon the trial and upon the signatures being admitted, introduced them in evidence and rested their case.
By their answer the defendants in effect alleged, that the notes, were given to one Smith as a mere memoranda of amounts paid out in cértain litigation in which he and defendants were interested, that they were not given as evidence of an indebtedness, and that Smith fraudulently diverted them and procured them to be discounted.
The evidence on the part of the defendants established that Smith and themselves were engaged in a series of litigations, seeking to set
The appellants insist that conceding these facts they were not sufficient to overcome the pi-esumption of law that the plaintiffs were bona fide holders before maturity, and that the burden was not cast upon them to prove what they paid for the notes, or the circumstances under which they came to their hands. This was the course pursued upon the trial, the plaintiffs standing upon the presumption which it was assumed the law raised in their favor, as conceded holders of negotiable paper.
We think the plaintiffs misapprehended the rule of law applicable to the facts established. If the notes were given as a mere memoranda of the amounts which Smith had advanced in the Hall litigation, and were to be used only for that purpose, and were not to be discounted, as it was proved Smith agreed, then the discounting of them by Smith was a fraudulent diversion, and the burden of proof was shifted to the plaintiffs to show that they were bona fide purchasers for value.
There is a class of commercial paper, void between the parties, in which the burden is on the defendant to establish knowledge and lack of good faith on the part of the holder. The presumption that the indorsee of a negotiable note is a bona fide holder for value is not repelled merely by proof that the paper, as between the immediate parties, was without consideration. (Hanger v. Worrall, 69 N. Y. 370.) Nor does proof that the proceeds of a
But when the maker has shown that the note was obtained from him under duress, or that he was defrauded of it, or • that it was without consideration and fraudulently put in circulation, the holder will then be required to show under what circumstances and for what value he acquired the instrument. (First National Bank v. Green, 43 N. Y. 298; Ocean National Bank of N. Y. City v. Carll, 55 id. 441; Vosburgh v. Diefendorf, 119 id. 357, 366 ; Canajoharie National Bank v. Diefendorf, 123 id. 191, 205; Joy v. Diefendorf, 130 id. 6; Comstock v. Hier, 73 id. 269, 273 ; Nickerson v. Ruger, 76 id. 279, 282; McCammon v. Shantz, 49 App. Div. 460.)
The case of Harger v. Worrall (supra) well illustrates the rule. There the bill was claimed to -have been accepted as an accommodation paper, and discounted for a purpose different from that agreed upon between the parties. The defendants showed these facts and insisted that the burden of proof was then shifted to the plaintiff to show what he paid. Rafallo, J., says : “ Such would undoubtedly be the case had the acceptance been obtained by fraud or duress, or had it been fraudulently diverted from the purpose for which it was given. * * * But in the absence of proof of fraud or misappropriation, the presumption is that the indorsee of a negotiable bill or note is a bona fide holder for value, and this presumption is not repelled merely by proof that the bill or note as between the immediate parties was without consideration.”
In Ocean National Bank of N. Y. City v. Carll (supra) the only point presented to the court was whether the plaintiff failed to prove that it was a bona fide holder of the noté upon which the action was brought, and the court held that possession of the note was sufficient prima facie to establish this; but upon its being proved that the note was given without consideration, and fraudulently put in circulation, it was incumbent upon the plaintiff to prove its bona fide character.
In Nickerson v. Ruger (supra) the defendants offered to show that the note in suit had been given to renew a. former accommodation note, but had been fraudulently diverted.. The exclusion of
In Vosburgh v. Diefendorf (supra) the notes in controversy were claimed to have been given as memoranda showing the defendant’s interest in a partnership, on the agreement that they were not to be used or transferred; and upon that state of facts the court held that the burden was upon the plaintiff to show, not only that he paid value-before maturity, but that he had no knowledge or notice of the fraudulent diversion.
The Negotiable Instruments Law (Laws of 1897, chap. 612), which is but a codification of the law of negotiable instruments, does not change but recognizes this rule. Section 98 of that law provides that every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on -the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. Section 91 defines what constitutes a holder in due course and, among other things, provides that the holder must have taken the instrument in good faith and for value and without notice of a defect in the title; while section 94 defines a defective title, amongst others, as one where a note has been negotiated in breach of faith, or under such circumstances as amount to a fraud.
The learned trial court was, therefore, right, on the proofs before him, in holding that the plaintiffs had failed to show that they were bona fide holders of the notes.
But, notwithstanding this, we think the judgment must be reversed because of error in the admission of evidence by the witness Lowman. The witness Douglass had testified as to communications which he had made to the defendants- by direction of Smith, and communications from the defendants to Smith, with respect to the notes and their renewals, and that they were mere memoranda
While under some circumstances this error might seem to be harmless, yet in the present case there was a very delicate question of fact for the' court to decide, and we cannot say that this evidence did no harm. Upon the defendants’ own showing there might be very grave doubt that the notes were given under the circumstances claimed. They were renewed in negotiable form every three months, for a series of years, with interest. If they were given as a mere memoranda, these renewals would seem useless and Bear very strongly against their contention, and the declarations of Smith, erroneously received in evidence, may possibly have turned the scale in defendants’ favor.
The judgment should be reversed and a new trial granted, with costs to the appellants .to abide the event.
All concurred.
Judgment reversed and new trial granted, with costs to appellants to abide event.