
    Arthur Lysaght v. Jonas Phillips.
    The defendant, at the request, and for the accommodation of L. P. & Sons, of London, drew a bill of exchange upon them, which they accepted, for £1,304 lis. 5d. But the acceptors placed the bill in the hands of another house, to be discounted for their benefit, and this house transferred the bill, before its maturity, to the plaintiff, as collateral security for the repayment of a loan of stock.
    
      Held, that the finding of the referee, that the bill had been transferred to the plaintiff for a valuable consideration, and without notice of its misapplication, was sustained by the evidence.
    The acceptors failed, and after their failure entered into a deed of composition with their creditors, to which both they and the plaintiff, as one of the creditors, were parties. The deed contained an absolute release of the acceptors, and also a covenant not to sue them, but it contained also a reservation of the rights and remedies of the creditors against third persons, not parties to the deed, who were or might become liable as drawers, endorsers, or otherwise.
    
      Held,, that the effect of this reservation was, not only to preserve the plaintiff’s right of action against the defendant, but to continue the liability of the acceptors to the defendant, in case he should be compelled, as drawer, to pay the bill, and that consequently the release and covenant in the deed, as they did not affect the rights of - the defendant, constituted no defence to the present action.
    Judgment for plaintiff affirmed, with costs.
    (Before Doer, Bosworth and Slosson, J.J.)
    Heard, October;
    decided, December, 1855.
    Motion for a new trial, upon a report of a referee, and an appeal from a judgment entered thereon, on the ground of its being contrary to evidence, and for error in matters of law, as to which exceptions were taken to the decision.
    The action was by the plaintiff, as holder and endorser of an accepted bill of exchange, against the drawer, upon protest of the same for non-payment, and notice to Mm.
    
      The bill was dated 30th August, 1847, at sixty-days’ sight, drawn by Jonas Phillips & Co., of New York, on Lawrence Phillips & Sons, of London, for £1,304 17s. 5d, to the order of the drawers, and endorsed by them and by Lysaght, Smithett & Co., of London. It was duly accepted, but protested for non-payment 17th November, 1847.
    The cause was tried before the Hon. William Kent, as referee.
    The referee found as facts, that the bill “was drawn by the defendant, at the request and for the accommodation of the firm of Lawrence Phillips & Sons, aforesaid, (the acceptors,) and that no value or consideration passed from the said last-mentioned firm to the said defendant, for or on account of the said bill of exchange.”
    The bill was delivered by the acceptors to Sargeant, Gordon & Co., to get discounted for the acceptors; and Lawrence Phillips & Sons never received any consideration or value for it, and never received it back. Sargeant, Gordon & Co. delivered it to Lysaght, Smithett & Co., without any consideration, to be discounted for them, Sargeant, Gordon & Co, and never received any value for it.
    The plaintiff, Arthur Lysaght, was a vice-admiral in the British navy, and was examined as a witness on the part of the defendant. There was no other evidence of his title to the bill than his own. He says, “The bill was handed to me by Messrs. Lysaght & Smithett, of London, in consideration of my having advanced £6,000 stock, 3í per cent. It was endorsed to me by Messrs. Lysaght & Smithett, and handed over with other bills. I produce a letter which covered the bills.”
    This letter is dated Londdn, November 6, 1847, addressed by Lysaght, Smithett & Co. to the plaintiff. Its language is, “In consideration of your having advanced to us the sum of £6,000 of 3t per cent, stock, we hereby lodge with you the undermentioned securities, which we authorize you to dispose of in any way you may think fit, on our failing to replace in your name the same amount of stock in the course of the present month.”
    The letter inclosed bills to the amount of £7,463 13s. 5d.
    
    The notice of the protest of the bill was served upon the defendant in New York, on the 10th December, the bill having matured the 17th November, twenty-three days before. There was no evidence of the time when the notice was transmitted from London, but the witness who served the notice stated that he had received the bill protested by the earliest conveyance.
    Lawrence Phillips & Sons; Sargeant, Gordon & Co.; and Lysaght, Smithett & Co., failed before the maturity of the bill, and their estates passed into the hands of inspectors. Dividends, amounting in the whole to 12s. and 2d., were declared by the various assignees, and some of the dividends have been received by the plaintiff.
    The deed of inspection on the estate of Lawrence Phillips & Sons, is set forth in the case, and is executed by the plaintiff, as a creditor for the bill in suit.
    By this deed the plaintiff agreed—
    1. To the assignment of the estate of Lawrence Phillips & Sons, to James Bonar, Edward Howley Palmer, and David Hoes, as inspectors.
    2. To grant them a letter of license during such inspectorship.
    3. To give the inspectors full power and discretion.
    
      (a.) To pay creditors -under £25 in full.
    (6.) To make compromises.
    (c.) To allow the partners for their services.
    
      (d.) To release the partners after a dividend.
    4. That the household property of each partner should be retained by him.
    5. To the retaining, by the partners, of a subsistence or allowance out of the estate.
    6. To be governed and controlled, as to his interest in the estate, from time to time, by the vote of a majority of the creditors.
    7. To the absolute control of his interests by the inspectors.
    8. That unless a fiat in bankruptcy should be issued by some creditor not signing, or the inspectors should certify to a wilful default by the debtors, he would not sue, seize, or attach.
    9. That if this latter agreement should be violated, it should operate and might be pleaded as a full and general release of the debt.
    10. That upon the certificate of the inspectors, of performance by the debtors, “ these presents shall operate and enure as a full and general release from all and every of the said creditors, * * * to the said parties hereto of the first part, * * * and may be pleaded in bar as a good and effectual release and discharge of all, and all manner of actions, suits, bills, claims and demands whatsoever, both at law and in equity.”
    The deed, then, contains the following clause:—“ Provided, always, and it is hereby agreed and declared by, and between the said parties to these presents, that nothing herein contained, shall extend, or be deemed or construed to extend, to prevent or hinder the said several parties hereto of the second and third parts, or any of them, or their or any of their partner or partners, heirs, successors, executors, administrators, or assigns, from enforcing or otherwise obtaining the full benefit and advantage of any charge or lien which they, or any of them, now have or hath upon any estate or effects whatsover, or from suing or prosecuting any person or persons other than the said parties hereto of the first part, or either of them, their respective heirs, executors or administrators, who is, or are, or shall, or may be liable or accountable to pay, or make good to the said several parties hereto of the second and third parts, or any of them, or their, or any of their partners or partner, executors, administrators, or assigns, all, or any. part of their said respective debts, either as drawers, endorsers, or acceptors of any bill or bills of exchange, or promissory note or notes, or as being jointly or severally bound in any bond or bonds, obligation or obligations, or other instrument or instruments, or as being liable or accountable for the payment of any such debt or debts, without having subscribed any bill, note, or other instrument whatsoever or otherwise, as if these presents had never been made.”
    The inspectors, in pursuance of the power given them in the deed on the 81st of December, 1849, certified that the acceptors ought to be released, on paying a dividend of Is. 2c?. in the pound, in addition to the dividend of 5s. previously paid.
    This further dividend was provided and ready for the plaintiff, but he avoided taking it. The referee reported as follows:—
    
      To the Justices of the Superior Court of the city of New York:—
    The undersigned, a referee in the above entitled action, appointed by the honorable court, respectfully reports:—
    That he has been attended by the attorneys of the respective parties, plaintiff and defendant, and has heard the proofs and allegations of the parties, and the arguments of the counsel thereon, and having duly considered the same, he finds as facts in this action—
    That the defendant, under the name of Jonas Phillips & Co., made and drew the certain bill of exchange in the complaint described, addressed to the persons doing business in the name of Lawrence Phillips and Sons; also, in the pleadings in this action mentioned, which bill of exchange was made payable to the order of the said Jonas Phillips & Co., and was endorsed by, and with the name of the said Jonas Phillips & Co.
    That the said bill of exchange was accepted by the said firm of Lawrence Phillips and Sons, as stated in the said complaint.
    That the said bill of exchange was drawn by the defendants at the request, and for the accommodation of the firm of Lawrence Phillips and Sons aforesaid, and that no value or consideration passed from the last-mentioned firm to the said defendant for, or on account of said bill of exchange.
    That the said bill of exchange, endorsed as aforesaid, was, before its maturity, transferred and delivered to the plaintiff for a good and valuable consideration, and that the said plaintiff became, and was the Iona fide holder thereof.
    That the said bill of exchange was duly presented for payment, as stated in the complaint, and payment thereof demanded and refused, as in the complaint stated; and the said bill of exchange was protested for non-payment, as in the complaint stated, and that notice of said presentment, demand, non-payment, and protest was given to the defendant, as in said complaint alleged.
    That some time thereafter, to wit, on or about the 7th day of April, 1848, a. certain indenture was made between the persons, comprising, as aforesaid, the said firm of Lawrence Phillips and Sons, of the first part, and James Bonar and Edward Hawley Palmer of the second part, and several other persons, of whom the plaintiff was one, being creditors of Lawrence Phillips and Sons, of the third part, such deed being known in the law as a deed of inspection, which said deed is set forth in the schedule hereto annexed, marked A, to which the referee refers, and makes part of this his report.
    And as matter of law, the said referee decides and adjudges that the said plaintiff did not, by said deed, nor in any other manner, so far as the said referee is advised, release or discharge the said defendant from Ms liaMlity, upon or by reason of said bill of exchange.
    And further, that the said plaintiff, upon the facts of this case, is entitled to recover against the defendant the amount of said bill, together with ten per cent, damages thereon, and interest on said amount of said bill and damages, less the credits allowed in the complaint as claimed in said complaint, besides the costs of suit to be taxed, which said amount of said bill, damages and Mterest, to' the date of this report, is the sum of $7,400.62.
    The referee decides that judgment be entered in this cause for the plaintiff agamst the defendant, for the sum of $7,400.62, with costs to be taxed. W. KENT, Referee.
    The deed of inspection referred to as annexed to the report, has been before stated, as far as it is material.
    
      J. Larocque, for the defendant,
    the appellant, contended that the judgment upon the report of the referee ought to be reversed, and a new trial be granted, upon several grounds.
    I. That there was no sufficient evidence that the notice of protest of the bill had been transmitted from London in due season. (5 Cowen, 363.)
    II. That the'finding of the referee, that the bill, before its maturity, had been transferred to the plaintiff for a valuable consideration, and that he was a bona fide holder thereof was against evidence. That the fair result of the evidence was, that the oMy consideration of the transfer was a precedent debt.
    r> III. That the necessary legal effect of the release of the acceptors in the deed of composition, was to discharge the defendant, as drawer, from all liability; and that the reservation of the plaintiff’s rights and remedies agamst the defendant, did not bar the case from the operation of the general rule of law.
    And, lastly, That the covenant in the deed, by wMch the plaintiff bound Mmself not to sue the acceptors for a defimte period, operated of itself, as a release of the debt, and of the defendant as the surety of the acceptors, and that this was not helped by the reservation. In support of this last point he cited the following cases. (Rathbone v. Warren, 10 John. 589; Manch. Iron Manufacturing Co. v. Sweeting, 10 Wend. 162; Hoffman v. Hulbert, 13 Wend. 375; Bonchard v. Dias, 3 Denio, 238; Fellows v. Prentiss, 3 Denio, 512.)
    
      W. M. Fvaris, for plaintiff,
    insisted that the evidence clearly established that the plaintiff the maturity, and without notice, and was therefore entitled to judgment for the balance due, unless he had so released the acceptors, as to discharge the defendant as drawer; and that the release of an acceptor is never available as a defence to the drawer, unless it has. the effect of depriving the drawer, in case of a payment by him, of any right of action over against the acceptor; and he contended that it was clear, upon the authorities, that the reservation in the deed, to which the acceptors were parties, operated as a valid agreement by them, that if the defendant should pay the bill, the release should not be interposed as a defence to any future action that he might bring against them for such payment. He cited, among other cases, the following: Stewart v. Eden, 2 Caines, 121; Kearsley v. Cole, 10 M. & W. 128; North v. Wakefield, 13 Queen’s B. 336; Nichols v. Norris, 3 B. & Adol. 41; Maltby v. Clairstairs, 1 Mann. & Ryl. 549; Owen v. Hiram, 13 Beav. 196.
   By the Court. Slossoh, J.

The two material questions in this case, are:

1 Whether the plaintiff is a Iona fide holder, for value, of the bill in question.

2 Whether, if he be such a holder for value, he has not, by executing the inspection deed of April 7th, 1848, released the defendant from his liability as drawer of the bill.

First. The referee has found that the bill was drawn by the defendant, for the accommodation of Lawrence Phillips & Sons, (the acceptors) without any consideration having passed from the latter to the former. The evidence shows that Lawrence Phillips & Sons, delivered the bill to Sargeant, Cordon & Co., to get discounted for them; who, instead of doing this, delivered it to Lysaght, Smithett & Co., to be discounted, and the proceeds to be paid to them, and that this latter firm, instead of procuring the bill to be discounted, transferred it to the' plaintiff as security for' a debt of their own.

The question then is, what was the consideration which the plaintiff paid or gave for the bill ?

The bill being confessedly a mere accommodation bill, as respects the defendant, the drawer, and no value having been given therefor by any of the intermediate parties, its validity as an obligation, on the part of the defendant, depends on the question whether the plaintiff received it for value, and without notice of its previous misapplication; and the burden of showing value is on him. It is not disputed that he received it before maturity. As it was an accommodation bill, without restriction as to the manner in' which it was to be used by Lawrence Phillips & Sons, had they transferred it to the plaintiff even as security for an antecedent debt, the defendant could not have objected the want of value in his hands. (Grandin v. Le Roy, 2d Paige, 509; Lathrop v. Morris, 5 Sandf. 7.)

But it was actually diverted from the purpose for which it was made by those to whom Lawrence Phillips & Sons, for whose accommodation it was made, delivered it; and that firm never received any benefit from it. In such a case, the taking of the paper as security for a pre-existing debt, is not such a parting with value, by the transferee, as to make it available in his hands against the accommodation party to the bill. (Stalker v. McDonald, 6 Hill, 93.)

The defendant contends that it is evident, both from the testimony of Lysaght, the plaintiff, and the letter of Lysaght, Smithett & Co., to him, of November 6th, 1847, that the plaintiff received the bill as a security for an advance previously made by him to that firm. The language both of the witness and the letter is ambiguous, and is certainly easily susceptible of the interpretation put upon it by the defendant’s counsel. They both speak of the plaintiff’s having advanced the £6,000 of stock as security, for the replacing of which the acceptance was deposited.

The referee has found that the bill was transferred for a good and valuable consideration, which, under the circumstances and law of the case, can only mean a consideration at the time of the transfer, and the question is, whether this finding is against the evidence. The letter, taking all its expressions together, is certainly not inconsistent with this finding, however susceptible it may be of the opposite interpretation. It authorizes the plaintiff to dispose of the securities of which this draft was one, on the failure of Lysaght, Smithett & Co., who deposited them, to replace in the plaintiff’s name the same amount of stock in the course of the then present month, language which would naturally imply a loan of the stock, made at the time the securities were deposited. The language used by the plaintiff, in his testimony, is susceptible of the like interpretation. At all events, the finding of the referee is not so clearly against the evidence as to warrant us in disturbing it on this account.

Second. Does the inspection deed of April '7th, 1848, operate to discharge the liability of the defendant, as drawer of the bill in question. It is executed by Lawrence Phillips & Sons, the acceptors of the bill, of the first part, the inspectors, of the second part, and the creditors of that firm, of the third part, among whom is the plaintiff in this action, who appears to be a creditor in respect to this bill only.

It provides, among other things, that unless and until a fiat in bankruptcy shall be issued against the parties of the first part, or unless and until the inspectors should certify to a wilful default on the part of said parties of the first part, in the performance of some material covenant therein contained, &c., the creditors will not commence or prosecute any action, or suit at law or in equity, against them or either of them, or make any seizure or attachment, &c.; and that, in case any creditor should commence or prosecute such action or other proceeding, then the instrument was to operate, and might be pleaded, as a full and general release of all and every the debts, claims and demands of such creditor. The deed then provides, that, upon the inspectors’ certifying that the parties of the first part ought to be released from their partnership debts, either simply and absolutely, or upon their complying with certain conditions therein specified, then, upon their compliance with such conditions, if prescribed, or immediately upon the signature of such certificate, the deed was to operate and enure, and might be pleaded as a full and general release and discharge, by creditors signing it, from all actions, debts, claims and demands whatsoever, both at law and in equity, which such creditors had or might have, by reason of their several claims, or of any other matter, cause or thing whatsoever, in respect of said debts and liabilities, or any of them; and then follows a promise and agreement, between all the parties, that nothing therein contained should extend, or be construed to extend, to prevent the creditors “from suing or prosecuting any person or persons, other than the parties of the first part,” “who is or are, or shall or maybe, liable or accountable to pay, or make good to them, all or any part of their respective debts, either as drawees, endorsers, or acceptors of any bill of exchange, promissory note, &c., &c., or as being liable or "accountable for the payment of any such debt or debts, without having subscribed any bill, note, or other instrument whatsoever, or otherwise, as if those presents had never been made." The deed contains, furthermore, a recital, that the creditors “signed the agreement, under the express reservation of all the securities they held."

If the legal operation of this release, or covenant not to sue, whichever its construction, be to deprive the drawer (the defendant) of his resort to the principal debtor, (the acceptors of the bill,) then, unquestionably, he is discharged. No principle is better settled. But if the effect of the promise, by which the plaintiff reserves his right of action against the drawees of the. bill, be to continue the liabilityof the acceptors to the drawees, in case the latter aré sued, then the covenant constitutes no defence to this action; and upon this question my mind is very clear. Lawrence Phillips & Sons, the acceptors, are parties to this deed. The reservation of the rights of the plaintiffs, against the drawer of the bill, is, therefore, with their assent. Such a reservation would be ineffectual, unless the drawer, in case he is sued, might resort to the acceptors for indemnity. The relative position of the drawer and acceptors, as principal debtor and surety, is not changed by the agreement between the creditor and acceptors; and the drawer can only be sued as a party standing in the position of surety for the latter. When, therefore, the acceptor accepts a release from the creditor, with a reservation of the latter’s right to sue the drawer, he, in effect, assents to remain bound to the drawer, in the contingency of such a suit being'brought against the latter. Any other construction would render the proviso unmeaning. The covenant not to sue, must be limited to the acts of the creditor, and the proviso must be construed as limiting the discharge of the acceptors by the rights of the drawer, who, by agreement of the acceptors, is thus still to remain liable.

The test of the question is, whether the acceptors could set up this deed, in bar of an action against them by the defendant, in the present suit ? If they could, the defendant in this action is discharged; that they could not, is very clear, if the intention of the parties is to be regarded, in the construction of the instrument. The courts, in construing instruments of this kind, have adhered to this intention, when manifest, and not in conflict with some fixed and inflexible rule or policy of the law, as the standard, or test, by which it is to be interpreted—adopting the equity rule, which will not permit even an absolute release to operate, beyond the clear intention of the parties.

An unqualified release, or covenant not to sue the acceptor, would undoubtedly release the drawer; but a release of the acceptor, except from such liability as he may be under to the drawer, or, which is the same thing, with a reservation of the creditor’s rights against the drawer, is a qualified covenant or release only, and limited to the acts of the creditor himself, and is, consequently, no defence, as against an action on the part of the drawer.

The construction of these inspection or composition deeds, in their effect upon the rights of sureties, has undergone ranch discussion in England, where they appear to have become a favorite, as they certainly seem to be, a very wise and beneficent mode of administering the estates of insolvents; but the result has been, clearly to establish their validity as operative covenants not to sue the principal debtor, while, at the same time, the rights of the creditor against the surety, and of the surety against the principal, are, by virtue of the reservation contained in the deed, fully preserved. A very recent case, in the Queen’s Bench, Price et al. v. Barker et al. (30 L. Eq. R. 157,) has definitely settled the question, in that country, at least, for the present; and, on a similar deed to the one in question in the present action, the court held, as the result of the authorities, that a covenant not to sue, qualified by a reserve of the remedies against the sureties, is to allow the surety to retain all his remedies' over against the principal debtor; and that the covenant, not to sue, is to operate only so far as the rights of the surety may not be affected.”

On this whole subject, see also 1 Parsons’ Contr. 236; Kirby v. Taylor, 6 J. C. R. 242; Stewart v. Eden, 2 Caines, 121; Owen v. Hernan, 13 Beav. 196; Solly v. Forbes, 2 Brod. & Bing. 38; Clayell Salmon, 5 Gill & John. 314, where the general doctrine is fully sustained.

A case in our own court, Mottram v. Mills, (2 Sandford, 189,) is relied upon by the defendant, as establishing a different doctrine, and as holding, that a promise like the one in question in a composition deed of like nature, does not operate as a reservation of the rights of the creditor against the sureties, nor, consequently, of the rights of the latter against the principal debtor released. That case appears to have been decided upon a point, which the facts, in the present action, do not present. The acceptors of the bills, in that case, had, at the time of their failure, in their possession, large consignments from the drawer, against which the bills had been drawn, and also bills of lading of other goods, then on the way, consigned to them in the same manner, and in respect to which it does not appear they had, as yet, made any acceptances; and they had also actually received some £11,000 of the proceeds of previous consignments, in excess of what they had paid of the defendant’s bills, and which was a clear debt from them to him. And the case showed, that, on applying all they had thus received, and were yet to receive, under the bills of lading then in their possession, and charging the defendant with all the payments which the acceptors had already made for him, and with the amount of the outstanding bills, (£22,000,) there would still be a balance in his favor. By the terms of the agreement, the acceptors were to transfer to the trustees, who were parties to the instrument, all the goods thus consigned to them by the drawer, and the bills of lading then in their possession, with a certain surplus in the hands of another house, belonging also to the drawer; all which were to be applied in extinguishment of the bills, and this constituted the consideration to the creditors (the plaintiffs) of the release, or covenant not to sue the acceptors. In other words, the consideration consisted in a transfer, to the trustees, of the drawer’s own properly, as a fund with which to take up the bills; and the court seem to have considered this as decisive, in the construction of the instrument. “There was no reservation,” say the court, “of the rights of the holders of the bills against other parties, as is attempted in the composition deed. It was an agreement, upon a valuable and sufficient consideration, and was fully performed, on the part of Major & Wallace, (the acceptors.) The plaintiffs were, therefore, obligated, according to its terms, never to sue, &e. There would have been more difficulty in sustaining the defence, if it rested wholly upon the stipulations in the compromise deed, but we are spared the necessity of deciding the point. On the other ground, the defendant is entitled to judgment." .

We do not consider this case as at all decisive upon the effect of a reservation in a deed like the one at bar; but regard it as a case decided on in its own peculiar circumstances, and as leaving entirely open the question of the construction of a proviso in a composition deed, given under other and different circumstances.

We have not adverted to the point made, that notice of the protest for non-payment was not in time, as we consider the contrary too clear for argument.

The judgment on the report of the referee is affirmed with costs.  