
    A. H. Andrews & Company, Appellant, v. Oliver A. Hess, Respondent.
    
      Bills and notes—failure of consideration•—fraudulent diversion — bona fide holder.
    
    Where- promissory notes are executed and - delivered by their maker upon a promise made to him, by the secretary of a foreign corporation to the order of which they are made, to-the effect'that either he or the company will turn over to the maker advertisements sufficient to pay the notes, that the proceeds of these advertisements shall be applied to their- payment, and that the maker shall never be compelled to pay anything upon the notes, a-failure ever to turn over any advertisements to the maker constitutes a failure of consideration as well as a breach of the condition upon which the notes were delivered by the maker.
    Where the company subsequently transfers the notes in payment of an antecedent debt to a person who merely receipts for the notes and gives credit therefor upon his books, the transferee is not a bona fide holder and the maker may as.against him successfully interpose the defense of a fraudulent diversion.
    
      Appeal "by the plaintiff, A. H. Andrews & Company, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the cleric of the county of Onondaga on the 2d day of February, 1897, upon the decision of the court rendered after a trial at the Onondaga Trial Term, specific questions of fact having been submitted to the jury, who rendered a verdict in favor of the defendant. •
    
      Raymond Cobb, for the appellant.
    
      Charles S. Kent, for the respondent.
   Adams, J. :

The plaintiff brings this action to recover upon two promissory notes executed by the defendant on the 1st day of May, 1894, one of which was for $2,000, payable six months after date, and the other" for $500, payable four months after date. These notes were made payable to the order of the Patent Telephone Indicator Company, and upon the back of each was the following indorsement, viz.:

“ I secure the payment of this note by $27,000 worth of unincumbered stock I own stock in the United Glass Co., of Syracuse, N. Y.,'& any other assets I may this day be possessed of.

“O. A. HESS.”

Thes.e notes, as it appears, were given upon the assignment of certain territorial rights in the Patent Telephone Indicator Company, which was a corporation organized under tire laws of the State of Illinois, and engaged in "business within the State of New York, although it had never filed a certificate with the Secretary of State of the latter State, as required by. section 15 of chapter 687 of the Laws of 1892.

The evidence tends to show that one "Walter F. Burns, the secretary and manager of the indicator company, applied to the defendant to purchase these territorial rights, and to induce him to do so represented to him that the invention owned by the company was a very valuable one and that a large amount of money could "undoubtedly be realized therefrom if he would make the purchase.

This “ indicator ” was an instrument which" was designed to be hung alongside of telephones, and connected therewith was a curtain containing a list of telephone subscribers. Upon one side of the" curtain a space was left for advertisements, the idea being that these ' advertisements would be constantly brought to the notice of telephone subscribers, and that the indicator would consequently prove a valuable advertising’ medium.

It was represented that the revenue to be derived from these advertisements would exceed $500 a year on every 1,000 indicators ' in use, and this fact constituted the chief pecuniary value of the right to sell the indicator.

Upon the trial the defendant was permitted to prove that, at the time the notes in suit were given, and as an inducement to their execution and delivery, Burns stated to him that he simply wanted the notes to show the company that he had made a sale, and that if the plaintiff would give them, he (Burns) would obtain advertisements from some of the larger advertisers, such as “ Hood’s '” and “ Paine’s Celery Cure.” The defendant testified that he hesitated about giving the notes, whereupon Burns stated to him: “ If you will give me your notes, I will instruct my solicitors, to. get the ■ advertisements at once, and I will turn them over to you at ■ $480 apiece, and you can assign-them to me, and I will collect them and credit them on the notes. So you will never have to pay' one dollar. * ‘ * * In case I do not get the contracts to fill the outside spaces, I will hold the notes and they will not be presented till we have fulfilled our contracts together.”

And that the defendant thereupon said : “Under those considerations, as long as you will procure enough contracts and agree to hold the notes till you do that^ I will sign the notes. But I want it distinctly understood that I have no money to pay these notes' outside of the contracts that you will secure for me.” .

The defendant, relying, as he said, upon this assurance, executed and delivered the notes to Burns and took from him a Receipt'in writing which reads as follows, viz.

“ Syracuse, N. Y., lst May, 1894.
“Rec’d of O. A. Hess, Esq., three notes — two for $500, each payable in 4 m., and one for Two thousand dollars; payable in 6 months. Said notes are rec’d by me as Sec. and Gen. Mgr., Patent Telephone Ind. Co., Chicago, and as said Sec. & Gen. Mgr., I hereby bind said Patent Telephone Indicator Co. to issue unto said O. A. Hess a valid and good assignment of all our rights in Patent Tele-, phone Co. for Syracuse, & further, to issue to him a guarantee to protect said patents against any infringements for full time of patents.
“W. F. BURNS,
“Sec. & Gen. Mg., P. T. I. Co.”

No advertisements were furnished the defendant by either Burns' or the indicator company, and just prior to the maturity of the notes they were transferred to this plaintiff.

Upon the trial the facts which have thus far been-detailed were made to appear by the evidence-of the defendant,- and they were not contradicted by Burns, who was not even sworn as a "witness.

At the conclusion of the evidence the defendant asked leave to amend his answer to conform the- same to the. proofs, and this motion was granted upon conditions which it is unnecessary to detail. But it Was thereupon stipulated in open court that a single question of fact might be submitted to the jury, and that, upon the rendition of a verdict thereon, the remaining issues should be determined by the court. In pursuance of this stipulation, the following question was duly submitted to the jury, viz.: “Was it agreed by Burns with Hess, at the time-the notes in suit were given, that he or the Patent. Indicator Company, which he represents, would turn over to Hess advertisements enough to pay the notes; that the notes would be held and the proceeds of the advertisements applied to their payment, and Hess not be compelled to pay anything on them ? ”

This question was. answered -by the jury in the affirmative, and their verdict was subsequently adopted by the court, which also found, upon evidence which fully sustains the finding, that no advertisements were furnished the defendant, and that the plaintiff took these notes to apply upon an antecedent debt owing it by the indi.cator company.

Upon these facts the court concluded, as matter of law: (1) That the notes were fraudulently transferred by the Patent Indicator Company to the plaintiff; (2) that they were wrongfully and fraudulently diverted from the purposes for which they were given and from fheir true destination by the Patent Telephone Indicator Company when it transferred them, to the plaintiff; (3) that the failure of the Patent Telephone Indicator Company to keep the notes in suit and perform its agreement with the defendant would have constituted a defense to the notes if the same had been retained by the original payee ; (4) that the plaintiff is not a bona fide holder of the notes before maturity for a, valuable consideration, and (5) that the defendant is entitled to judgment dismissing the complaint,, with costs.

The issues, as finally framed, and the proofs contained in the record before us justify the conclusions reached by the learned trial court provided the evidence'of the defendant respecting the; contemporaneous oral agreement entered into between him and Burns at the time of the execution of the - notes' in suit was properly received over the plaintiff’s objection.

It is quite obvious, we think, that the main inducement which led the defendant to execute and deliver the notes in suit was the oral agreement on the part of the indicator company to furnish him advertisements or business and to hold the notes until the profits from these advertisements and business were sufficient to pay the same. It is-equally plain, so far as we are able to discover from reading the testimony in the case, that these advertisements were the principal source from which the defendant anticipated any profit or benefit from the purchase of the territorial rights assigned to him by the indicator company.

It is fair, to assume, therefore, that had not this inducement been held out to him lie would not have made the purchase. In deed, "he so states, and we think it follows that this promise furnished a part of, if not the entire, consideration for these notes, and that when the indicator, company failed to fulfill its promise it may be'said that the notes were practically without consideration. .We have -Consequently this state of facts presented to us, which is virtually undisputed :

The notes in suit were given for the purchase, of a patent right-' on the oral agreement of the payee that it would retain the same in its possession until it had furnished the-maker with advertisements from which sufficient profits could be derived to pay the notes, and this agreement has been wholly disregarded by the payee. This state of facts, in our judgment, constitutes a defense to these- notes in the hands of any one but a bona fide holder thereof for value. For it brings the case fairly within the rule that the delivery of the notes having been limited by the conditions upon which the delivery was made, the performance of those conditions was essential to the validity of the notes. (Miller v. Gambie, 4 Barb. 146; Seymour v. Cowing, 1 Keyes, 532.)

The doctrine established by the authorities just cited has been repeatedly recognized and adopted by the courts of this State. (Benton v. Martin, 52 N. Y. 570; Bookstaver v. Jayne, 60 id. 146 ; Reynolds v. Robinson, 110 id. 654; Higgins v. Ridgeway, 153 id. 130; Garfield Nat. Bank v. Colwell, 57 Hun, 169.)

In the case of Benton v. Martin (supra) it was held that the annexing of conditions- to the delivery of a note is- not an oral contradiction of the written obligation, though the instrument be negotiable, as between the parties to it or others having notice thereof; and in the case of Higgins v. Ridgeway (supra), which is the latest decision involving a consideration of this question, the rule as stated in the Benton case is reiterated and'the precise language of the latter case is adopted.

We think the fair and reasonable import of the defendant’s evidence in this case, is that the delivery of the notes in suit was conditional ; that such delivery was simply to enable Burns to prove by some tangible evidence that he had made a sale for his company; that there was- practically no consideration for the notes, and that in violation of the oral agreement they were diverted from their true destination.

If, as a matter of fact, such diversion was fraudulent; as was found by the trial court, and as we think it was fully justified in finding, then the case seems to fall within still another rule, which is, that an oral agreement, made contemporaneously with a written instrument, may be proved when the circumstances would make the use of the latter, for any purpose inconsistent with the oral agreement, dishonest or fraudulent. (Juilliard v. Chaffee, 92 N. Y. 529.) But, of course, as has been already intimated, the defense of diversion, whether fraudulent or otherwise, is not available to the defendant in this action if the notes in question came into the plaintiff’s hands before maturity, for value and without notice., It only remains, therefore,' to determine whether such was the fact.

The uncontradicted evidence upon this branch of the case is that the Patent Telephone Indicator Company was indebted to the plaintiff in the sum of $6,000; that the notes in suit were turned over to the plaintiff to apply upon this indebtedness; that a receipt therefor was given by the plaintiff to the indicator company, and that the notes were credited to the latter upon the books of the plaintiff. These facts, we think, are insufficient, within the authorities, to constitute the plaintiff a bona fide holder for value, so as to' exclude the defense that the notes were wrongfully diverted by the payee from the- purposes for which they were made. (Phoenix Ins. Co. v. Church, 81 N. Y. 218; Vietor v. Bauer, 11 N. Y. St. Repr. 531; affd., 143 N. Y. 672.)

We are fully persuaded, therefore, that the judgment appealed from should be affirmed.

J ndgment affirmed, with costs.

All concurred.

■ Judgment affirmed, with costs.  