
    Merchants’ National Bank of Binghamton, App’lt, v. Benjamin F. Tracy et al., Resp'ts.
    
      (Supreme Court, General Term, Fourth Department,
    
    
      Filed May 18, 1894.)
    
    1. Trial—Jury—Waiver.
    Jury may be waived by consent of parties after the trial has begun
    2. Bank—Knowledge of officers.
    Where the cashier of a bank conspires with another party to sell worthless property to defendant at par in order that the proceeds may be applied to the payment of a debt due the bank, it is chargeable with the knowledge which the cashier had of such conspiracy.
    3. Bills and Notes—Bona fide holder.
    The evidence was held sufficient, in this case, to sustain finding that plaintiff was not a bona fide holder of the check.
    Appeal from a judgment dismissing the complaint on the merits.
    
      Edmund O’ Connor, for app’lt; George B. Curtiss, for resp’ts.
   Hardin, P. J.

Although the trial of this action was commenced before a jury, and the jury found on the several questions submitted to them, and their further services in the case were waived by consent of both parties to the action, and further findings of fact were made by the court, it must be assumed there was not a mistrial. A somewhat similar course was adopted in Carr v. Carr, 52 N. Y. 252, and in the course of the opinion delivered in that case, which ivas decided by the court after the findings made by the jury, it was said: “It was, m substance, then, a trial by the court without a jury, and a decision upon the whole evidence, with the aid of the finding of the jury upon two questions of fact.” Opinion of Allen, J. (page 255).

2. It is insisted in behalf of the plaintiff that it paid full value for the check in question, and became a bona fide holder for value! In considering this question it is appropriate to recall some of the leading features of the evidence bearing upon the question of the ownership by the bank of the first and second checks. From the evidence it appears that in the fall of 1886 F. E.- Ross and Gregg had become instrumental in the organization, and actors in bringing into existence, a gas-machine company. A patent had been issued for a gas machine which was owned by one Hanford, and one-lialf interest therein was purchased by Ross for some $1,000, and that patent was put into the company, which was capitalized at $25,000, and the stock was issued to Ross and Hanford, each taking one-lialf in the concern, which commenced business, and began to borrow money of the plaintiff. This company apparently continued until early in July, 1888, when it was embarrassed, and its stock became of little or no value. The gas machine did not prove of much value. Frederick E. Ross was president, and Clinton Ross, a brother, ivas treasurer, and Gregg acted as secretary, and they were directors. In June, 1887, Fred Ross, Gregg, Clinton Ross, and others initiated and organized a company known as the Binghamton Hydraulic Power Company. One Van Deusen had obtained a patent for a water motor. It was first proposed to organize the company with a capital of $15,000. Subsequently Fred Boss and Gregg concluded to capitalize it at $25,000. Steps were taken to organize the hydraulic company, and the stock thereof was to be divided to them—Boss, $6,000; Gregg, $6,000; Clinton Boss, $6,000 ; and Van Deusen, for his patent, $5,000; and Scott was to receive $1,500 for some tools, and Grift $500. Tims the stock — 250 shares'— was distributed. _ Fred Boss, Clinton Boss, and Gregg received their stock from the company without paying any money to the company; and the company set out in business by borrowing from the plaintiff some $750. Its directors were: Clinton Boss, president; Scott, vice-president; Gregg, secretary and general manager. In bringing into existence these two companies, Fred Boss and Gregg were active instruments,' and in January,.. 1888, efforts were made to consolidate the two companies, and changes were made in the certificates of stock of the hydraulic company, so that there was inserted in the certificates the words “ Fully paid capital stock, $50,000,” instead of the words, “Fully-paid capital stock, $25,000.” From about that period of time it would seem that the gas-machine company was regarded as dormant, and was abandoned. The shares of stock that had been issued in the gas-machine company apparently were attempted to be extinguished by the issuance of shares in the hydraulic company. After these changes were made in a somewhat irregular manner, it appears that Brastus Boss became the owner of some 20 shares of the hydraulic stock, and Fred Boss some 200 shares, and Clinton Boss of some 70 shares, and Gregg of about 160 shares ; and apparently the hydraulic company was supposed to assume the debts of the gas company. The banking business of the two companies was transacted with the plaintiff. Brastus Boss was its president, and F. E. Boss was it cashier, and Clinton Boss was a director; and they owned a large portion of the stock of the plaintiff. It was conceded on the trial that no certificate was ever filed that the hydraulic power company’s stock had been paid for in full, and that no annual report was ever made. It appears that a meeting of the directors of the Automatic Gas-Machine Company Was held on May 5, 1887, “ at the Merchants’ National Bank,” at which all the directors were present except Mr. Hanford, and that a motion was there adopted “that this company pay a royalty or license fee of fifty per cent, upon the selling price of such motors and blowers machines which have been or may be used by them; said royalty to be paid to Mr. Frederick É. Boss and Mrs. Anna C. Gregg ” (she being the wife of D. W. Gregg). It appears that on January 28, 1889, Gregg sold 10 shares of the stock for 25 cents on a dollar. In May, 1889, the plaintiff held notes of the hydraulic company amounting to some $21,000, and the plaintiff held drafts which it had discounted, and which had not matured, something over $9,000 ; and evidence was given tending to show that the liability of the company exceeded their nominal assets by some $12,0.00. Other evidence was given, tending to show that the hydraulic company was insolvent in the month oí May, and that its stock had little or no intrinsic value ; and that the sales of the company fell off from some $4,200 in January, to some $1,200 in the month of May; and that in the month of May their expenses were more than their receipts; and that their sales in the month of April were but a small sum above the actual expenses of operating the company ; and that during many of the days in the month of May their account was overdrawn at the bank of the plaintiff,, to wit, on the 20th day of May the account was overdrawn $3,599 ; on the 21st, $2,356 ; on the 24th, $774; on the 25th, $2,533 ; on the 27th, $971; on the 28th, $1,576 ; on the 29th, $1,809 ; and that the president and cashier of the plaintiff, in the early part of 1889, had become somewhat alarmed, restive, and impatient with the situation of the financial affairs of the hydraulic company, and were taking measures to have the indebtedness of the hydraulic company to the plaintiff reduced and reinforced, and such solicitude and action of the officers of the plaintiff were communicated to Gregg, and he was urged to devise some means by which the desired result could be accomplished. Apparently lie set out with a view of selling some of the stock of the conip'ahy held by him and Cashier Ross, and with that end in view he obtained an option from Cashier Ross, and, armed with that, he commenced negotiations for the sale of the stock of the hydraulic company ; some of it standing in the name of the cashier, and s’ome of it standing in his name (and apparently some of the stock of the company had been hypothecated to the plaintiff). On the 20th May, 1889, the defendant Frank Tracy went to the office of the hydraulic company to buy an oil engine, and while there observed that he was out of active business. Thereupon Gregg, commenced a negotiation with him, and made statements as to the situation and condition of the affairs of the hydraulic company. That was followed by other interviews, and subsequently Frank Tracy, whose relations with Fred Ross had been somewhat intimate, and althotigh he did not know that the Rosses were connected with the company, visited the plaintiff’s bank, going directly from the hydraulic company’s office to see Fred Ross, and while at the bank asked him if he knew anything about the Binghamton Hydraulic Power Company, and he testifies that Ross replied, “ The company is all right, and, if properly managed, will make $30,000 a year.” On the 30th of May, Gregg, in accordance with a telephone sent to Frank Tracy, went to Apalachiu, and Mr. Tracy met him there, and drove him over to his farm, where he renewed his solicitations to young Tracy that he come into the company, and buy some of the stock; and in the course of the interview it was learned that Richards held a contract with the company for the right to manufacture the engine under the patent for two years, and, when making some objections to that, Gregg immediately said that Richards was willing, provided Tracy would come come into the company, to make an agreement with the company to manufacture the engine during the life of the patent, “ for the entire world.” Thereupon a proposition -in writing to that effect was drawn and signed by Richards, who shortly thereafter left and Gregg continued his negotiations with Tracy, who assured Gregg that he would not “come into the company without first consulting his father.” Upon representations further made in the course of that interview, Frank Tracy was induced to and did prepare two checks, one for $1,000 and one for $4,000, and delivered them to Gregg, and at the same time took from him a receipt in the following language :

“ Binghamton, May 31st, ’89.

“ Received of Frank B. Tracy his check dated June 1st; amt., one thousand dollars ($1,000.) This sum to he applied on the fifty shares of stock owned by F. E. Ross. He to give an option on his fifty shares for ten days from June 1st, and in case Mr. Tracy does not purchase the balance of the fifty shares, to return the check, or its equivalent. Also his check for four thousand dollars ($4,000), dated June 15th, for which I agree to deliver on June 15th ninety-six shares of Binghamton Hydraulic Power Company’s stock. In case said Tracy does not come into the company, said check, or its equivalent, to be returned, and the ninety-six shares returned to me.

“ [Signed] D. W. Gregg.”

Gregg and Fi’ank then agreed to go to Washington, and have an interview with the senior Tracy, and they were to meet in Brooklyn on the morning of June 1st; and before they parted Frank testifies that he said to Gregg, “Under no condition must those checks be used until you hear from me.” On the following day Gregg sent the certificates for ninety-six shares of stock, by a messenger, to Frank Tracy. On the morning of May 31st, Gregg saw Frank Ross at the Merchants’ National Bank, and he had the two checks with him at the time he went to the bank, and he handed both checks, one for $1,000, first to Chashier Ross, and “ told him that was his check for his option on the fifty shares,” and thereafter handed him the check for $4,000, and told him it was for ninety-six share, of my stock, and that I was depositing it to the credit of the Binghamton Hydraulic Power Company.” Gregg testifies that he was selling it to the Tracys at par, and he adds in his testimony:

“ I think I told him the agreement. I cannot recollect the full conversation. I remember telling him that Frank was going to investigate the company, and see his father, and that I was going to Washington with him, to see his father in regard to raising the balance of the money; and I thought he would go that very evening, and perhaps I should go with him ; and that is about all I can remember. I think I said that Mr. Tracy was going to Washington that night, to see his father in regard to raising the money to come into the company; but nothing was said in regard to investigating it, that I remember,—not at that time.”

Gregg presented to Cashier Ross the paper which he had heretofore received from him, giving him an option, and took a receipt for the $1,000 on the back of it, which option bore date May 22, 1889.

We are of the opinion that the evidence, although conflicting, warranted a finding that the scheme which was on foot to obtain from the Tracys money for the stock at par was fraudulent, and was known to be so by Gregg and by Ross ; and that when Gregg received the check of $4,0Q0 it was with an, understanding that it was not to be used until after a conference was had with the senior Tracy, and a determination made to purchase greater interest in the hydraulic company; and that the check of $4,000 was diverted from its proper use by Gregg when he delivered it to th„e cashier, and that it was a breach of the agreement made with Frank Tracy, as shown by the quotation made. Gregg testifies that he communicated the agreement to Cashier Ross at the time he delivered the $4,000 check. While this fact may be said to be. disputed by the testimony of Ross as a witness, it was for the trial court to determine whether faith and credence should be given to the testimony of Ross, situated as he was, largely interested in the financial affairs of the plaintiff, and charged with a perpetration of a wrong upon the defendants. According to the tenor of the opinion delivered by Ruger, C. J., in Canajoharie Nat. Bank v. Diefendorf 123 N. Y. 191; 38 St. Rep. 389, his testimony might, in accordance with the rule laid down in that case, be disbelieved and doubted. As said in that case, the onus was on the plaintiff to establish that it received the $4,000 check in good faith. We think the trial court was warranted in finding that the plaintiff did not acquire in good faith title to and ownership of the check of $4,000 delivered to it on the 31st day of May, 1889, under the circumstances disclosed by the evidence. Canajoharie Nat. Bank v. Diefendorf, supra; Vosburgh v. Diefendorf, 119 N. Y. 357; 29 St. Rep. 448. With the antecedent knowledge of the affairs of the hydraulic company, and with the negotiations that had' been initiated between Gregg and Frank Tracy on the 20th of May, with the circumstance that the knowledge two days thereafter, to wit, on the 23d of May, Fred Ross gave an option to sell fifty shares of his stock at par, with the facts relating to the obtaining of that option to the facts testified to by Gregg in respect to the negotiations with Tracy, and with the whole features of the case, we are unwilling to say that' the court committed any error in disregarding the testimony of Ross upon the subject of want of knowledge or notice of the qualified rights of Gregg in the check of $4,000. It may be observed that the check, although delivered on the 31st of May to the bank, was post-dated to the 15th of June ; and that circumstance is suggestive of the idea that for some reason the party presenting the check was not entitled to receive the proceeds thereof until that lapse of time; and that is a circumstance, coupled with the testimony of Gregg, worthy of some consideration in determining the conflict found in the, testimony between the version given by Ross as a witness and the other evidence before the court relating to the subject of the bona fide ownership of the plaintiff of the check of $4,000. We think the contention of the plaintiff that it was a bona fide holder without notice of the check for $4,000 must fail. We are also of the opinion, upon all the evidence, it was a question of fact to be determined as such, and not a question of law. Franc v. Dickinson, 34 St. Rep. 864. And we are further of the opinion that the finding is not against the weight of evidence. Bullion v. Bullion, 73 Hun, 437; 56 St. Rep. 24.

3. It is contended in behalf of the appellant that, although Fred Ross was guilty of a conspiracy with Gregg; the bank is not affected by his knowledge and acts and co-operation in carrying out the fraudulent scheme. The evidence discloses that he was, and had been for some time, acting as the cashier of the plaintiff, having supervision of its affairs, and that he had charge of the discounts and collections in behalf of the plaintiff ; and it also discloses that when he received the check of $4,000 he was acting in such capacity as cashier and his acts were binding upon the plaintiff, and the plaintiff is therefore chargeable with the knowledge or the notice that Ross had in the premises.

This case differs from Mayor, etc., of New York v. Tenth Nat. Bank, 111 N. Y. 457; 19 St. Rep. 133, referred to by the appellant. In that case the directors, who were conspirators, did not represent the bank in the transactions; and in the opinion, at page 457, 111 N. Y., it is said: The sole agent and representative of the bank was Bliss, its president; and he was entirely innocent of any wrong. The knowledge these conspirators had while engaged in their fraud for their own benefit could not, therefore, be attributed to the bank; and to this effect are all the decisions.”

Atlantic State Bank v. Savery, 82 N. Y. 307, is also distinguishable from the case before us. Nor do the cases of Casco Nat. Bank v. Clark, 139 N. Y. 307; 54 St. Rep. 590, and Merchant's Nat. Bank v. Clark, 139 N. Y. 314; 54 St. Rep. 593, support the contention of the appellant. We think this case is nearer like Holden v. N. Y. & Erie Bank, 72 N. Y. 286, where it was held: “ Where an agency is continuous, and made up of a long series of transactions of the same general character, knowledge acquired by the agent in one or more of the transactions is notice to the agent and the principal, which will affect the latter in any other transaction in which the agent, as such, is engaged, and in which the knowledge is material.”

In Cragie v. Hadley, 99 N. Y. 134, it is said: “But the general rule is well established that notice to an agent of a bank or other corporation intrusted with the management of its business, ;or of a particular branch of its business, is notice to the corporation in transactions conducted by such agent, acting for the corporation, within the scope of “his authority, whether the knowledge of such agent was acquired in the course of the particular dealing or on some prior occasion.”

In the course of the opinion delivered by Mason, J., in Davis v. Bemis, reported in 40 N. Y. 454, he said: “ For it is a general principle of law that the principal is held liable to the public or third persons in a civil action for the frauds, deceits, concealments, misrepresentations, torts, negligence, and other malfeasances in the course of his employment, although the principal did not authorize or justify or participate in it, or, indeed, know of such conduct.”

In Garner v. Mangam, 93 N. Y. 642, it appeared that defendants, by means of false representations, induced plaintiff to purchase 120 shares of stock which were utterly worthless. Each of the defendants contributed 40 shares, and all were parties to the fraud. In the course of the opinion it was said that one of the defendants “ could not receive the fruits of the bargain without being responsible for the fraud through which it was effected. ”

It seems to follow from what has already been said that when the check which was delivered to the plaintiff, dated the loth of June, matured, the plaintiff had not acquired an ownership thereof in good faith; and it appears by the evidence that its cashier operated with Gregg in a scheme to procure an extension of time or the renewal check which is made the basis of this action. There is testimony to the effect that Gregg prepared a letter to be addressed to the cashier, with a view of securing an extension of time for the payment of the first check. Inasmuch as the plaintiff did not have title as a bona fide holder of the first check, it had no valid claim against the defendants by reason of that check, which was tainted with the fraud relating thereto. It is, however, contended in behalf of the appellant that, because the first check was not returned to the plaintiff before the commencement of this action, it is in a situation to recover on the second check. In dealing with that question it is to be observed that the first check was made payable to the order of Gregg, indorsed by him, and also by the hydraulic power company. Gregg was an officer of the hydraulic power company, and through him it derived knowledge of the fraud being perpetrated by him, and his knowledge is imputable to that company. In Putnam v. Schuyler, 4 Hun, 166, it was held to be error to ■exclude evidence to show that notes were obtained by fraud, and that they were without consideration, in an action against the defendant, who had guaranteed the payment of them; and in the course of the opinion it is said: “If, in the principal obligation, there is essential vice which may annul it, as if it has been contracted by force, if it is contrary to law or to good manners, if ie be founded only on a fraud, or on some error which may suffict to annul it,—-in all these cases the obligation of the surety is likewise annulled. ”-

It does not seem too much to say that, if the bank held a fraudulent piece of paper, with the notice of the fraud, indorsed by one of the parties perpetrating the fraud and by another party having knowledge of the fraud, and, after such knowledge, having received moneys wrongfully thereon, the holding of such paper by the plaintiff would not give it any additional right of recovery against the indorsers of the paper. Besides, it seems anomalous to require of a party to a piece of fraudulent paper to return it to a person not entitled to enforce it, because it is tainted with fraud as a condition precedent to the right to defeat a recovery upon another piece of, paper given in substitution therefor in continuation of the fraud, and as a part of the'scheme fraudulent in itself, which defeats the right of recovery against the makers of it. Such a piece of paper would seem to be of no more value to the plaintiff than one where the name of the drawer of a check was stricken therefrom, leaving only theindorsements thereon. The defendants are in a position of asserting that the contract for the purchase of the stock was fraudulent and void, and of repudiating that contract; and whatever the defendants received under that contract they offered to return at the trial, to wit, the surrender of stock which were delivered to the defendants on the 1st of June. Surely the defendants have acquired nothing more of value to them; and, if the observations already made are correct, they have received nothing under the contract—which they repudiate—of any value to the plaintiff. In this case the defendants are seeking to withhold their moneys from the payment of a check that is tainted with fraud. They allege and furnish evidence indicative that the first check was obtained and diverted by fraudulent representations, and that in continuance of the fraud and scheme in which the conspirators were engaged; that the second check was obtained from them in furtherance and continuation of the fraud attempted to be perpetrated upon them. When they surrendered the certificates they surrendered all that they had acquired in the premises. In cases of rescission of a contract the rule is, “ that the party shall not retain the thing whicli is the subject of the contract.” Harris v. Equitable L. A. Soc., 64 N. Y. 200. It may be said the respondents’ defense is both legal and equitable, and, as said by Boardman, J., in Green v. Smith, 29 Hun, 168: “If the plaintiff suffers, it is due to his own fraudulent and dishonest act, and courts will not go to the romantic extent of striving to protect a fraudulent purchaser of property from the consequences of his own dishonest act.”

In Masson v. Bovet, 1 Denio, 74, in the course of the opinion delivered by Beardsley, J., he said, in speaking of a party who had perpetrated a fraud, that: “If, therefore, he has so entangled himself in the meshes of his own knavish plot that the party defrauded cannot unloose him, the fault is his own; and the law only requires the injured party to restore what he has received, and, so far as he can, undo what had been done in the execution of the contract. This is all that the party defrauded can do, and all that honesty and fair dealing require of him. If these fail to extricate the wrongdoer from the position he has assumed in the execution of the contract, it is in no sense the fault of his intended victim; and, upon the principles of eternal justice, whatever consequences may follow, they should rest on the head of the offender alone.”

Assuming, as I think we should, upon the whole evidence, that the second check was obtained by means of fraudulent representations, and in furtherance of the scheme to defraud the defendants, probably the plaintiff is entitled to recover damages by reason of the fraud which induced it to part with its moneys to the hydraulic company against Gregg and the hydraulic company, irrespective of that indorsement upon the check, which was fraud u-lent in its inception, and to which, as before seen, the plaintiff' did not acquire title in good faith.

The foregoing views lead to the conclusion that the decision made at the circuit, and the judgment entered thereon, should remain.

Judgment affirmed, with costs.

All concur.  