
    Howard Ives, Pl’ff, v. Michael Jacobs and L. Lindad, Def’ts.
    
      (City Court of New York, Trial Term,
    
    
      Filed June 11, 1888.)
    
    1. Promissory notes—Complaint—Accommodation indorsement—What complaint must state.
    Where a promissory note is indorsed for accommodation before its delivery, the complaint must plead facts showing that the indorsement was made to give the maker a certain credit, and that the paper was to be valid and obligatory in the hands of the party suing on it.
    3. Same—Fiduciary holder—Defense to renewal note.
    If such indorsement was left with the maker to take up other notes, such maker is meanwhile a fiduciary holder only. And it is a good defense to such a renewal note that the former note has not been returned, except as against a bona fide holder for value.
    3. Same—Note left in trust with maker—Diverted—Proof neces SARY TO RECOVER AGAINST ACCOMMODATION INDORSER.
    If a note, indorsed for accommodation and, as aforesaid, left in trust with the maker, is diverted from the purpose for which the maker held it, there can be no recovery against the accommodation indorser, without proof the holder took it bona fide, and paid for the same, on the faith thereof, a valuable consideration; but receiving it merely for a precedent debt subjects the holder to all equities existing between the prior parties.
    4. Same—Burden of proof.
    The burden of proof is on the plaintiff to show he is, or succeeds to, a bona fide holder for value, if the note or indorsement or its transfer is assailed on the trial, and then defendant has onus of establishing notice.
    ■5. Same—Bona fide holder for value—Amount of recovery.
    In any event, a bona fide holder for value can only recover on the note the amount of what he parted with upon the faith and strength of such note, where the note would otherwise be liable to a defense.
    Motion to set aside a verdict and for a new trial.
    The two promissory notes, on which this action is brought, were delivered by Lindan (the maker and payee thereof) to one Breck, with Jacobs as prior indorsor thereon (for accommodation and without consideration), and by Breck directly passed to the plaintiff, in payment of an indebtedness for merchandise sold by plaintiff unto Breck, and by him previously received.
    Mr. Lindau, owing money to Breck, had given to Breck, as collateral, his (Lindau’s) notes, of three months each, with Jacobs’ indorsement for Landau’s accommodation, to be held until Lindau could gradually paythem off and to be-renewed (again similarly indorsed) from time to time; and. such indorsements were delivered to Lindau on the uncontradicted condition that he must not deliver them till he; had the preceding notes back—all so bearing Jacobs’ indorsement.
    The plaintiff further sent, or went, to Jacobs for information, and the particulars of such existing condition were, on. that occasion, made duly known by Jacobs.
    The last two notes, for which the notes sued on are renéwals, were never surrendered by Breck or Ives.
    The plaintiff did not testify on the trial.
    
      George M. Curtis, for def’ts for motion; L. J. Graus,, for plt’ff opposed.
   Pitshke, J.

The answer distinctly sets up that the transfer unto the plaintiff of the notes in suit, though before maturity, was not for value; and the indorsement by Jacobs was solely for the maker’s accommodation, for which Mr. Jacob’s received no consideration whatever. If the-plaintiff is not an indorsee for a valuable consideration, the question as regards his having had notice of the averred “diversion” of said notes becomes immaterial; for if not such an indorsee, he stands just where his transferor stood. That is the whole of this case - even were the plaintiff a transferee without notice of any diversion of said paper.

It must be kept in mind that Ives was not an indorsee directly from Jacobs, but from the “payee” (Lindau) of the notes. Jacobs’ indorsement was upon the notes before-the “maker,” Lindau, delivered them; that is, Jacobs indorsed each note before its payee did so.

First. Defendant Jacobs, therefore, was prima facie a second indorser only; that is, presumably, subsequent to the indorsement over of each note by the payee unto plaintiff (Phelps v. Vischer, 50 N. Y. 69). Hence, evidence dehors each instrument would be requisite to enable this plaintiff (as the payee’s successor) to recover, if not an 1 ‘ indorsee for value, without notice ” (Lester v. Paine, 391 Barb., 616; Ellis v. Brown, 6 Barb., 282). The “payee” is presumptively to become the first indorser, so that Jabobs (as indorser before delivery) is necessarily the next succeeding indorser, against whom ordinarily no suit can be brought by a preceding indorser. Therefore, there must be paroi proof that such indorsement was made to get the “maker” of the note credit. (Coulter v. Richmond, 59 N. Y., 478; Jaffray v. Brown, 74 N. Y., 393). The transferees from the payee, in order to recover from Jacobs as such indorsee before delivery and presumptive “second indorser,” must rebut such presumption by pleading (as well as proving) facts showing that the indorser Jacobs indorsed the notes to give the maker “credit,” with the knowledge and on the understanding that in the hands of the plaintiff thereon each such note was to be a valid obligation against such indorser Jacobs (2 City Ct. Rep., 52; 19 N. Y., 227; 37 N. Y., 614; 59 N. Y., 478). The complaint herein contains no such allegations, and therefore exhibits no cause of action.

Second. Mr. Jacobs was entitled to treat the present indorsements herein as undelivered and invalid, until the surrender and return to him of his outstanding indorsements on the previous notes, whereof the notes in suit were in renewal; Lindau (as both “maker” and “payee, to his own order ’ ’) meanwhile possessed such present indorsements simply in trust, or in a sort of escrow, and as fiduciary holder. Chitty on Bills 210, 248; Jones v. Fort, 9 B. and C., 764; Baker v. N. Y. Nat’l Ex. B’k, 100 N. Y., 33; and see 73 N. Y., 277.

If a note, indorsed for the accommodation of the maker, is “ diverted” from the purpose for which it was left with the maker, and so is fraudulently put in circulation, there can be no recovery against such accommodation indorser, without proof that the holder received it “bonafide” and paid for it a valuable consideration. Moore v. Ryder, 65 N. Y., 441; Farmers and C. B’k v. Noxon, 45 N. Y., 762, 765; Wardell v. Howell, 9 Wend., 172; Cardwell v. Hicks, 37 Barb., 458; Ocean B’k v. Bill, 39 Barb., 577, 580; Weaver v. Barden, 49 N. Y., 293, 294. And one, who receives a negotiable note for a “precedent” debt, takes it subject to all equities existing between the original parties. Rosa v. Brotherson, 10 Wend., 86; Stalker v. McDonald, 6 Hill, 93, 100.

The present notes were indorsed for the purpose of taking up other notes. The present plaintiff parted with nothing upon the strength of the notes, but merely sold to his transferor (Breck) on general account a bill of merchandise, accepting the said notes in part payment; and he, therefore, took the notes (according to Breck’s testimony) for a “precedent ” debt.

Third. It is a good defense to a renewal note (like the ones in suit), that the former note has not been returned. Miller v. Ritz, 3 E. D. Smith, 253. And the common pleas general term, in Beauford v. Patterson (63 How. R., 81), reiterated that decision, and further held that the statement and proof that the note was lost at the time would be no excuse. Even an offer to surrender the old notes at the trial would have been insufficient—in view of the wrongful transfer of the paper. Ocean Bank v. Dill, 39 Barb., 579. To like effect, that non-surrender of the antecedent note is a “diversion,” defeating any recovery. Wardell v. Howell, 9 Wend., 172. But on this point, Nickerson v. Ruger (76 N. Y., 280), is decisive of the present case. There (as herein), a renewal note (at p. 282), delivered for accommodation, was deemed “diverted,” by not being used to take up the precedent note; and held (Danforth, J.), the “burden of proof” is on the plaintiff to show he is a bona fide holder, for value, though presumably without notice, and (p. 284) “if the note was thus diverted, the jury must determine to what extent the plaintiff has paid value for it—for only to that extent can the plaintiff recover, and not for that even if defendant could affect him with notice.” See 62 N. Y., 6.

Fourth. The plaintiff entirely failed to establish he was a “bona fide holder,” as indorsee. The burden of proof rests upon the indorsee to show that he took the particular note bona fide and for a valuable consideration. Ordiorne v. Woodman, 39 N. Hamp., 541. That is to say, proof of a diversion of commercial paper from the purpose for which it was delivered casts on the holder of it the “onus” of establishing that he is a bona fide holder, or has succeeded to the rights of such a holder. Farmers' and C. Bank v. Noxon, 45 N. Y., 765, 762; Benedict v. Degroot, 3 Trans. App., 66.

The burden is not on the defendant to impeach the plaintiff’s title; but when there is proof of a fraud or diversion, concerning the note or its indorsement or delivery, the plaintiff must prove he gave value for the note and also the manner in which he took it. A plaintiff suing upon a negotiable note or bill, acquired before maturity, is in the first instance presumed to be a bona fide holder; but when the maker (or indorser) has shown that the note (or indorsement) was fraudulently or wrongfully obtained or so used, the plaintiff then has to show under what circumstances and for what value he became the holder. First Nat. Bank v. Green, 43 N. Y., 300, 301. The law on this subject is plainly collated in Comstock v. Hier (73 N. Y., 273, 274), in the following language: “Where the bill or note is void in its creation, or was unduly obtained or wrongfully diverted from its purpose and fraudulently negotiated, the party suing on it is bound to show himself to be a bona fide holder. The affirmative thereon is with the plaintiff. If received over due, or with notice of the circumstances under and purposes for which it was issued, he, although he pays a valuable consideration, is not a bona fide holder. If received before maturity and without notice or knowledge of any fraud in its inception or in its transfer, and he gets it simply for a precedent debt, he takes it notwithstanding subject to all its infirmities. And when (like the notes herein) a note is made and indorsed to take up another note, to which the indorser is also a party, its use is not a matter of indifference to the indorser; but, if diverted, he may defend himself thereon—except as against a bona, fide holder for value.” Id., 274.

Fifth. The maker, indorser and payee of the notes in suit herein clearly proved, by uncontradicted evidence, a “diversion” and ‘(unauthorized transfer ” of said notes, as against the accommodation indorser, Jacobs. And on plaintiff’s part no testimony was given, except of the receipt by him of such notes in partial payment of an indebtedness created on a sale of merchandise. That was not enough. It was requisite, upon plaintiff’s part, to show that he, as holder, had parted with value for the notes and on the faith of them; which is a case entirely different ffom the acceptance of such notes for property previously sold to the transferor of the notes. Grocers’ Bank v. Penfield, 69 N. Y., 502, 505. Indeed, the plaintiff, though within the jurisdiction, utterly neglected to appear on the trial and testify, as he should have done. These notes, on their face portrayed that Jacobs was but an irregular and accommodation indorser, and the plaintiff thereby was put on his inquiry as to the particulars of the indorsement (.Phelps v. Vischer, 50 N. Y., at p. 74). And, as Jacobs claims, the plaintiff or holder accordingly called upon Jacobs, who duly informed him of the conditions of said indorsement, previous to plaintiff’s acceptance of the paper in question. That alone would bar a recovery by plaintiff, Ives. Crandall v. Vickery, 45 Barb., 156.

The testimony is clear that these notes were only given unto plaintiff in payment of goods bought of Mr. Ives, the plaintiff, and that this was simply an ordinary transaction; also, that plaintiff’s transferor, at the time, owed to plaintiff something further, “a month’s indebtedness”—i. e., an account summing up a month or so—besides those goods which were delivered immediately. Upon all this, said notes were received in partial payment—that is, for a “precedent ” debt.

Sixth. The purchaser of the merchandise became, by his purchase, generally liable for the value or price of the articles; that created at once an indebtedness from such vendee unto plaintiff Ives, in addition to the said month’s indebtedness, upon which aggregate the notes were taken protanto. Consequently, said notes were accepted wholly for an “already arisen” indebtedness; and hence, the plaintiff cannot maintain this action as tried against Jacobs, the accommodation indorser.

The law of this state is : “ Prior equities of antecedent parties to negotiable paper, transferred in fraud of their rights, will prevail against an indorsee who has received it merely as payment for a precedent debt, there being no evidence of an intention to receive the paper in absolute discharge and satisfaction beyond what may be inferred from the ordinary transactions of accepting or receiving it in payment, or crediting it on account. The law regards the payment under such circumstances as conditional only, and the right of the creditor to proceed upon the original indebtedness, after the maturity of the paper, is unimpaired.” Phoenix Ins. Co. v. Church, 81 N. Y., 221, citing numerous authorities.

Seventh. The notes were made by Lindau to his own order, with Jacobs as indorser thereon before their delivery. Lindau passed and indorsed these notes over to Breck, who transferred them, as above mentioned, to plaintiff. The chain, of deliveries is, therefore: Lindau, as maker and payee, to Breck, and thence immediately to Ives, plaintiff; Jacobs was outside of that chain and never delivered the notes, and that made him an accommodation indorser only, before delivery, right upon the face of the transaction between Breck and Ives_, in which Ives acquired the notes, who thereby necessarily had knowledge that Jacobs was but an accommodation indorser, and that the notes, if misused and diverted, as aforesaid, had against-the said Jacobs no validity in plaintiff’s hands, as received in mere payment for property sold. This was evident from the very form of the notes taken by plaintiff from Breck, and not from Jacobs, the apparent second indorser thereof.

It follows the complaint is, therefore, insufficient, as above shown ; furthermore, the plaintiff did not prove that he paid anything for this diverted paper, now sued on, for only that value by him parted with on the faith of the paper, could he claim to recover. Huffy. Wagner, 63 Barb., 215, and 76 N. Y., 284. There must, hence, be an amended complaint herein, and a new trial granted thereupon.

The verdict rendered is set aside, and the plaintiff has liberty to amend his complaint within twenty days, and without costs, in which event a new trial will be ordered thereon upon the plaintiff’s motion, showing a proper amendment, and in default of any such amendment, the complaint herein is dismissed as against defendant Jacobs, with taxable costs and disbursements in favor of defendant Jacobs.  