
    The Goshen Nat. Bank, App’lt, v. William Bingham et al., Resp’ts. William Bingham et al., Resp’ts, v. The Goshen Nat. Bank, App’lt.1
    
      (Court of Appeals, Second Division,
    
    
      Filed January 14, 1890.)
    
    1. Bills and notes—Pubchaseb oe unendobsed papeb holds subject TO EQUITIES.
    One Brown drew a sight draft of $17,000 on Bingham & Co., and with it and by false representations procured the cashier of the Goshen National Bank to cash the draft by giving him $12,000 in sight drafts and a certified check to Brown’s order for $0,000. Afterwards he called at the office of B. & Co. and they cashed the certified check without its being endorsed by Brown. The bank sued B. & Co to recover the check, and B. & Co., having obtained a power of attorney from Brown, who had fled to Canada, to endorse the check, sued the hank to recover the amount of the check. Eeld, that B. & Co. took the unendorsed check subject to all equities existing between the original parties, and that they and Brown could not by any subsequent agreement or act so_ change the legal character of the transfer as to affect the equities and rights which had accrued, to the bank.
    2. Same—Certification of check.
    The contract of certification on the part of the bank was that it would retain the money and apply it in payment, provided that the check should be endorsed by the payee.
    3. Same.
    The action by the bank against B. & Co. to recover possession of the check cannot be maintained.
    Appeals from judgments rendered by the general term of the supreme court of the first department, affirming judgments entered, upon the reports of a referee.
    On Movember 27, 1884, Benjamin D. Brown applied to the cashier of the Goshen Mational Bank, at Goshen, M. Y, to cash a sight draft for $17,000, drawn by him upon the firm of William Bingham & Co., of Mew York, accompanied by a quantity of the bonds of the West Point Manufacturing Co., of the face value of $17,000. Brown represented that he had negotiated a sale of these bonds at their face value with William Bingham & Co.; that they had directed him to draw upon them at sight for $17,000, the draft to be accompanied by the bonds, and that the draft would be paid upon presentation. Such representations were absolutely false. The bonds had no market value. Brown was a. bankrupt and had no funds in the bank except such as resulted, from the credit given him upon the faith of the draft on Bingham & Co., accompanied by the bonds.
    The cashier of the Goshen Mational Bank, relying upon such representations, cashed the draft of $17,000 and placed the proceeds to the credit of Brown upon the books of the bank. He gave Brown sight drafts on Mew York for $12,000, and certified a check drawn by Brown to his own order, dated ¡November 20, 1884, for $5,000.
    On the morning of Movember 28th Brown called at the office of William Bingham & Co., and stated that he wanted to get some currency. Mr. Bingham passed the check to the firm’s cashier directing him to give Brown currency for the amount. The cashier gave him a check drawn on the Corn Exchange Bank for $5,000.
    Brown had the check cashed at the Corn Exchange Bank; lie also had the Mew York drafts cashed, amounting to $12,000, which he had obtained from the Goshen ¡National Bank. After procuring the checks and drafts to be cashed, he fled to Canada, where he remained at the time of the trial of these actions.
    When Bingham & Co. took from Brown the check certified by the Goshen Mational Bank it was not endorsed.
    The referee found that “ at the time of the transfer of the said certified check by Brown to the plaintiffs it was intended, both by Brown and the plaintiffs, that said certified check should be endorsed by Brown, and it was supposed by both parties that he had so endorsed it, and if the plaintiffs had known that it was not endorsed they would not have paid the consideration therefor.” He further found “ that Brown made no statement to the defendants, or either of them, at the time of the transfer of the check, * * * that such check was endorsed.” And “ prior to the commencement of the action of replevin the defendants never requested Brown to endorse said check.”
    While Bingham & Go. held the check in question unendorsed, a demand for its return to the bank, accompanied by a full explanation of the circumstances under which the certification was ■obtained, was made upon Bingham & Co. in behalf of the bank, and upon their refusal to return it, an action to recover its possession was commenced by the bank against Bingham & Co. That action is firstly above entitled.
    Subsequently, and on December 16th, Bingham & Co. obtained from Brown a power of attorney to endorse the check. Pursuant thereto the check was endorsed and payment thereafter demanded of the bank. This was refused, and thereupon the action secondly above entitled was commenced by Bingham & Co. to recover the amount of the check.
    
      Henry Bacon, for app’lt; Joseph F. Mosher, for resp’ts.
    
      
       Reversing in part 7 N. Y. State Rep., 493.
    
   Parker, J.

As against Brown, to whose order the check was payable, the bank had a good defense. But it could not defeat a recovery by a bona fide holder to whom the check had been endorsed for value.

By an oversight on the part of both Brown and Bingham & Co. the check was accetped and cashed without the endorsement of the payee. Before the authority to endorse the name of the payee upon the check was procured, and its subsequent endorsement thereon, Bingham & Co. had notice of the fraud which constituted a defense for the bank as against Brown. Can the recovery had be sustained ?

It is too well settled by authority, both in England and in this country, to permit of questioning, that the purchaser of a draft or check, who obtains title without an endorsement by the payee, holds it subject to all equities and defenses existing between the original parties, even though he has paid full consideration, without notice of the existence of such equities and defenses. Harrop v. Fisher, 30 L. J., C. P., N. S., 283; Whistler v. Forster, 14 C. B., N. S., 248; Savage v. King, 17 Maine, 301; Clark v. Callison, 7 Bradwell, 263 ; Haskell v. Mitchell, 53 Maine, 468 ; Clark v. Whitaker, 50 N. H., 474; Calder v. Billington, 15 Maine, 398; Lancaster National Bank v. Taylor, 100 Mass., 18; Gilbert v. Sharp, 2 Lansing, 412; Hedges v. Sealy, 9 Barb., 214-218; Franklin Bank v. Raymond, 3 Wend., 69; Raynor v. Hoagland, 39 Supr. Ct., 11; Muller v. Pondir, 55 N. Y., 325 ; Freund v. Importers & Traders' Nat'l. Bank, 76 id., 352; Trust Co. v. National Bank, 101 U. S., 68; Osgood's Adm’rs v. Artt, 17 Federal Reporter, 575.

The reasoning on which this doctrine is founded may be briefly -stated as follows : -The general rule is that no one can transfer a better title than he possesses. An exception arises out of the rule of the law-merchant as to negotiable instruments. It is founded on the commercial policy of sustaining the credit of commercial paper. Being treated as currency in commercial transactions, such instruments are subject to the same rule as money. If transferred by endorsement, for value, in good faith and before maturity, they become available in the hands of the holder, notwithstanding the existence of equities and defenses which would have rendered them unavailable in the hands of a prior holder. This rule is only applicable to negotiable instruments which are negotiable according to the law-merchant.

When, as in this case, such an instrument is transferred but without an endorsement, it is treated as a chose in action assigned to the purchaser. The assignee acquires all the title of the assignor, and may maintain an action thereon in his own name. And like other choses in action it is subject to all the •equities and defenses existing in favor of the maker or acceptor against the previous holder.

Prior to the endorsement of this check, therefore, Bingham & Co. were subject to the defense existing in favor of the bank as against Brown and the payee. Evidence of an intention on the part of the transferee to endorse does not aid the plaintiff. It is the act of endorsement, not the intention, which negotiates the instrument, and it cannot be said that the intent constitutes the act

The effect of the endorsement made after notice to Bingham & Co. of the bank’s defense must now be considered. Did it relate back to the time of the transfer so as to constitute the plaintiffs holders by endorsement as of that time ?

While the referee finds that it was intended both by Brown and the plaintiffs that the check should be endorsed, and it was supposed that he had so endorsed, it, he also finds that Brown made no statement to the effect that the check was endorsed; neither •did the defendants request Brown to endorse it. There was therefore no agreement to endorse. Nothing whatever was said upon the subject. Before Brown did agree to endorse, the plaintiffs had notice of the bank’s defence. Indeed, it had commenced an action to recover possession of the check. It would seem, therefore, that having taken title by assignment, for such was the legal effect of the transaction, by reason of which the defense of the bank against Brown became effectual as a defense against a recovery on the check in the hands of- the plaintiffs as well, that Brown and Bingham & Co. could not, by any subsequent agreement or act, so change the legal character of the transfer as to .affect the equities and rights which had accrued to the bank. That the subsequent act of endorsement could not relate back so as to destroy the intervening rights and remedies of a third party. This position is supported by authority. Harrop v. Fisher; Whistler v. Forster; Savage v. King; Haskell v. Mitchell; Clark v. Whitaker; Clark v. Callison; Lancaster National Bank v. Taylor; Gilbert v. Sharp, supra; Watkins v. Maule, 2 Jac. & Walk., 243, and Hughes v. Nelson, 29 N. J. Equity, 547, are cited by the plaintiff in opposition to the view we have expressed.

In Watkins v. Maule, the holder of a note, obtained without endorsement, collected it froni the makers. Subsequently the makers complained that the note was only given as a guarantee to the payee, who had become bankrupt. Thereupon the holder refunded the money and took up the note upon the express agreement that the makers would pay any amount which the holders should fail to make out of the bankrupt payee’s property. The makers were held liable for the deficiency. Hughes v. Nelson did not involve the precise question here presented. The views expressed, howevér, are in conflict with some of the cases cited, but we regard it in such respect as against the weight of authority. Freund v. Importers & Traders’ Bank, supra, does not aid the plaintiff. In that case it was held “that the certification by the bank of a check in the hands of a holder who had purchased it for value from the payee, but which had not been endorsed by him, rendered the bank liable to such, holder for the amount thereof. By accepting the check the bank took, as it had the right to do, the risk of the title which the holder claimed to have acquired from the payee. In such case the bank enters into contract with the holder by which it accepts the check and promises to pay it to the holder notwithstanding it lacks the endorsement jjrovided for, and it was accordingly held that it was liable upon such acceptance upon the same principles that control the liabilities of other acceptors of commercial paper. Lynch v. First National Bank of Jersey City, 107 N. Y., 183; 11 N. Y. State Rep., 389.

But one question remains. The learned referee held, and in that respect he was sustained by the general term, that the bank by its certification represented to every one that Brown had on deposit with it $5,000; that such amount had been set apart for the satisfaction of the check, and that it should be so applied' whenever the check should be presented for payment, and that Bingham & Co. having acted upon the faith of these representations, and having parted with $5,000 on the strength thereof, the bank is estopped from asserting its defense.

The referee omitted an important feature of the contract of certification. The bank did certify that it had the money, would retain it, and apply it in payment, provided the check should be endorsed by the payee. Lynch v. First National Bank of Jersey City, supra. If the check had been transferred to plaintiffs by endorsement the defendant would have had no defense, not because of the doctrine of estoppel, but upon principles especially applicable to negotiable instruments. Mechanics’ Bank v. N. Y. & N. H. R. R. Co., 13 N. Y., 638. If the maker or acceptor could ever be held to be estopped by reason of representations contained in a negotiable instrument he certainly could not be in the absence of a compliance with the provisions upon .which he had represented that his liability should depend. But it is well settled that the maker or acceptor of a negotiable instrument is not estopped from contesting its validity because of representations contained in the instrument. In such cases an estoppel can only be founded upon some separate and distinct writing or statement. Clark v. Sisson, 22 N.Y., 312; Bush v. Lathrop, id., 535 ; Moore v. Metropolitan N. Bank, 55 id., 41; Fairbanks v. Sargent, 104 id., 108; 5 N. Y. State Rep., 531; Mechanics' Bank v. N. Y. & N. H. R. R. Co., supra.

The views expressed especially relate to the action of Bingham & Co. against the bank and call for a reversal of the judgment.

We are of the opinion that the action brought by the bank against Bingham & Go. to recover possession of the check cannot be maintained, and in that case the judgment should be affirmed.

All concur, except Haight, J., not sitting.  