
    The New York Exchange Company v. David R. De Wolf.
    1. Where a negotiable promissory note is made and delivered to the payee upon such fraudulent representations, that it is not valid in his hands, and a collection of it by his indorsee would operate as a fraud upon the maker; and such payee indorses and delivers that and other notes to liis landlord (being at the time indebted to him for.rent, past due), upon an agreement, that the same are “ to be credited to the account of the indorser, against the bills of the indorsee, for rent,” and some of such notes do not mature until after another quarter’s rent will fall due; the indorsee does not thereby become a holder for value, in such sense that the note in his hands cannot be impeached by proof of the facts which would defeat a recovery, in a suit upon it by the payee.
    2. The true construction of such an agreement is, that the sums which the indorsee may realize from such notes, shall be credited to the indorser, and that he shall remain liable for any deficiency: The indorsee did not, thereby, abandon his claim against the indorser for the rent.
    3. To make such an indorsee a holder for value, in such sense that the fact that the note was obtained by the payee from the maker by fraud cannot be made available by the maker as a defence to an action against him, the indorser and indorsee must have intended, and in effect agreed that the transfer and acceptance of the notes so indorsed should extinguish tile preexisting debt.
    ( Before Hoffman, Slosson and Pierrepont, J. J.)
    Heard, April 12;
    decided, April 24, 1858.
    This action comes before the Court, on an appeal by the defendant from a judgment entered on the report of a referee. It is brought upon a note which, with the indorsements thereon, reads thus, viz.:
    “$500. New York, Nov. 8, 1855.
    “ Six months after date I promise to pay to the order of the Atlas Mutual Insurance Company five hundred dollars, value IGC61VGCÍ»
    (Indorsed), “D. E. De Wolf,
    
      “ N. H. Osgood, Pres’t.”
    The complaint states the making of the note by the defendant; the indorsement and delivery of it by the payees to the plaintiffs; that it has become due and is unpaid, and prays judgment for its amount, with interest, and costs of the action.
    The answer, by way of defence, alleged a series of facts which, as the defendant claimed, established that the note was made and left with the Atlas Mutual Insurance Company, in such manner, upon such conditions, under such circumstances, and by reason of such false and fraudulent allegations as to the solvency of the Company; that it was not a valid note in the hands of the Company ; and that it was transferred by the latter to the plaintiffs as collateral security for a pre-existing debt.
    On the trial before the referee, on the 14th of November, 1857, the plaintiffs produced the note in question, and the signature of the defendant was admitted.
    The plaintiffs then produced, as a witness on their part, Simeon Baldwin, who being duly sworn, testified that he then was, and for the last four years had been, the president of the New York Exchange 'Company; that the said company once held the note in suit; that he gave a receipt for it at the time it was taken, stating how it was received; that receipt reads as follows:
    “New York, 1st March, 1856.
    Received from the Atlas Mutual Insurance Company, three notes, amounting to twelve hundred and fifty dollars, as per memorandum below, the same to be credited to the account of the Atlas Mutual Insurance Company, against the bills of this company, for rent.
    “New Yoke: Exchange Co.,
    S. Baldwin, President.”
    “Rich & Knowlton, $250, Jan. 15, 6 mos.
    “T>. R. De Wolf, 500, Nov. 8, 6 mos.
    “ Geo. Logan, 500, Nov. 8, 9 mos.
    . “ The note in suit is one of the notes mentioned in this receipt; these notes were credited accordingly to the Atlas Mutual Insurance Company, as mentioned in the receipt; they were credited, I think, in a few days, on the books of the company; about that time, within ten days, I should think, and long before the notes came to maturity; if it had been a cash payment we should have credited it immediately, but being a note, it was not necessary to enter it immediately; the notes were received just as it is expressed in the receipt.” The Atlas Mutual Insurance Company were then occupying an office, which they rented of the New York Exchange Company, at $4,500 per annum.
    Being cross-examined, the witness further testified as follows : “ The rent was due at the time we took the notes, and past due, exceeding the amount, or about the amount of the three notes; it would not vary $100 either way.
    “I don’t know whether there was any resolution of the directors of the Atlas Mutual Insurance Company authorizing the transfer of these notes ; I had always received the rent from one of the officers of the institution, and supposed they had authority, but I had usually received it in cash ... and one quarter’s rent was due the first of February previous; I sent to the company for the rent, and about a week previous to the transfer of these notes I had an interview in reference to the collection of the rent.” Being asked how long before taking these notes did they propose your taking them, he answers, “it was within five minutes. Mr. Osgood, the president of the Atlas Mutual Insurance Company, called upon me, and upon his proposing it, I immediately took them.
    On being re-examined by plaintiffs’ counsel, the witness further testified: “At the interview I have mentioned, about a week prior to th'e time I took the notes, I told them if they had good notes I would take them, if it was inconvenient to pay the money; the president or vice-president said they would prefer to pay the money, and hoped to be able to do so in a day or two ; I left them with the impression that they would attend to it; after a few days the president came and said they had been disappointed in the money, and offered these notes, and wanted it settled.”
    The plaintiffs then rested and the defendant moved for a non-suit, on the ground that it did not appear that the board of directors of the Atlas Mutual Insurance Company had authorized the transfer of the notes. The referee denied the motion, and the defendant’s counsel then and there excepted.
    The defendant’s counsel then called as a witness “ George H. Tracy, who being duly sworn, testified: I was secretary of the Atlas Mutual Insurance Company up to the 12th of Eebruary, 1856; after that I was vice-president, about the 1st of March, 1856; I was 2d vice-president; I knew of these notes being transferred; I don’t know that I was present during the conversation between Mr. Baldwin and the president of the Atlas Mutual Insurance Company; I don't know that I was present at any interview with Mr. Baldwin, president or any ofiicer of the company; I had charge of the notes of our company, and handed the notes to the president, for the purpose, as I understood, of settling the rent; I knew nothing further of the transaction until the receipt was returned to me.”
    The counsel for the defendant then proceeded to offer testimony to prove the several matters of defence set up in defendants’ answer; but the counsel for the plaintiffs objected to the giving or receiving of such testimony on the alleged ground, and claiming that the testimony showed, that the plaintiffs were bona fide holders of the note for value, and that therefore any existing defence which the defendant might have against the said note could not be set up or maintained as against the plaintiffs.
    The defendant’s counsel claimed that the defendant was entitled to prove on the trial the said matters of defence, that,
    “ First. The testimony did not show that plaintiffs were bona 
      
      fide holders of said note for value, in such sense as to entitle them to shut out the defence of - the defendant thereto.
    
      “Second. That it appeared from the testimony that said note was taken by the plaintiffs merely on account of an antecedent indebtedness of the Atlas Mutual Insurance Company to the plaintiffs, and without parting with anything of value, or relinquishing any security upon the faith of the note 'so taken, and that it did not appear that there was any agreement that said notes should be taken in absolute payment of said indebtedness.
    “ Third,. That if there was any valid transfer of said notes to the plaintiffs, it was a transfer by assignment, or mere delivery, and, not by indorsement, according to the law merchant, and that therefore proof of the defendant’s defence was admissible.”
    “And the defendant’s counsel further offered to prove, each of the several matters of defence set up in the defendant’s answer, but the plaintiffs’ counsel objected to the giving and receiving of all or any part of such testimony, on the grounds aforesaid; and the referee sustained the objection, and refused to allow such testimony, or any part thereof, to be given on the part of the defendant; to which ruling and decisions of the referee the defendant’s counsel then and there duly excepted.” The foregoing is all the testimony that was given.
    The referee in his report found, as matters of fact, “ that the Atlas Mutual Insurance Company occupied certain offices in the Merchants’ Exchange, in the city of New York, during the years 1855 and 1856, as tenants of the plaintiffs, at the yearly rent of four thousand five hundred dollars, payable quarterly, on the usual quarter days, to wit, on the first day of August, November, February and May; and became and were on the first day of February, 1856, indebted to the plaintiffs for one quarter’s rent, to wit, for the sum of $1,125; that being so indebted, the said Atlas Mutual Insurance Company, on the first day of March, 1856, transferred to the plaintiffs three certain promissory notes, including the promissory note mentioned in the complaint, upon the terms mentioned in a certain receipt, thereupon given by the plaintiffs therefor, as follows: “New York, March 1st, 1856; received from the Atlas Mutual Insurance Company three notes, amounting to twelve hundred and fifty dollars, as per memorandura below, the same to be credited to the account of the Atlas Mutual Insurance Company, against the bills of this Company for rent.
    “New York Exchange Co.,
    S. Baldwin, President.
    “ Rich & Knowlton, $250, Jan. 15, 6 mos.
    “D. R. Be Wolf, 500, Not. 8, 6 mos.
    “ George Logan, 500, Nov. 8, 9 mos.”
    That the plaintiffs received the said notes without notice of any of the matters stated by way of defence in the answer of the defendant; and said note, when so transferred, was only indorsed by the name of N. H. Osgood, Prest, (or president), he being the President of said Atlas Mutual Insurance Company, and authorized to make such transfer and indorsement on its behalf.
    That no resolution of the directors of said Atlas Mutual Insurance Company, authorizing’ such transfer and indorsement by its President, was shown; but it appeared that on the application to the financial officers of that Company by the plaintiffs, for the payment of such rent, it was proposed to take good notes belonging to that Company in payment therefor; and that in consequence of such proposition, said three notes were tendered by the President of the Atlas Mutual Insurance Company to the plaintiffs, and accepted upon the terms mentioned in said receipt.”
    The referee found, as matters of law:
    “That the plaintiffs are holders and owners of said promissory note of the defendant, by indorsement from said Atlas Mutual Insurance Company.
    “ That they received the same from the Atlas Mutual Insurance Company in part payment for $1,125 rent, due the plaintiffs on the first day of February, 1856.
    “ That the parties, by force of such arrangement, changed the nature of the debt; and the plaintiffs also gave time to the said Atlas Mutual Insurance Company (for the amount of said notes until maturity), and thereby gave a valuable consideration therefor, and became and were holders thereof before maturity for value and without notice of any defence existing against the same. That the plaintiffs are entitled to recover the amount of said note, with twenty-one dollars and eight cents interest thereon since maturing to the date of this report, for which said principal sum and interest together amounting to five hundred and twenty-one dollars and eight cents, besides costs, judgment ought to be entered for the plaintiffs.
    “ All of which is respectfully submitted.
    “H. W. Robinson, Referee.
    
    “December 18th, 1857.”
    “To which report of the referee the said defendant excepted, on the ground that said report and finding of the referee as to matters of fact is against the weight of evidence; and also that said referee erred in his conclusions of law upon the facts shown by the evidence.
    . “ And also that he erred in his conclusion that the plaintiffs are holders and owners of said promissory note of the defendant, by indorsement from the Atlas Mutual Insurance Company; and also in his conclusion that the plaintiffs received said note in part payment of rent due the plaintiffs, so far as by the term payment he means or intends absolute payment.
    “ And also in his conclusion that the parties, by force of the taking of said notes, changed the nature of the debt; and also in his conclusion that by reason of their thereby giving time to the Atlas Mutual Insurance Company for the amount, until the maturity of said notes, the plaintiffs gave a valuable consideration therefor, and became and were holders thereof before maturity for value, in such sense or manner as to preclude any existing defence of the defendant.
    
      “ And also in his conclusion that the plaintiffs are entitled to recover the amount of said note, with the -interest, as mentioned in said report.”
    Judgment having been entered on the report, the defendant appealed from it to the General Term.
    
      M iS. Young, for defendant (the appellant).
    I. The referee erred in excluding the testimony to prove the several matters of defence set up in the defendant’s answer, for 1. The testimony did not show that the plaintiffs were bona fide holders of said note for value, so as to ^entitle them to shut out the defence of the defendant thereto.
    2. That it appeared from the testimony that said note was taken by the plaintiffs merely on account of an antecedent indebtedness of the Atlas Mutual Insurance Company to the plaintiffs, and without parting with anything of value, or relinquishing any security upon the faith of the note so taken; and it did not appear that there was any agreement that said note should be taken in absolute payment of said indebtedness. It was consequently taken subject to the defence of the defendant existing at the time. (Bay v. Coddington, 20 J. R., 646; Edwards on Bills,. 192; Stalker v. McDonald, 6 Hill, 93, 97, 98, &c.; Noel v. Murray, 3 Kern., 167, 169; Vail v. Foster, 4 Com., 312, 314; Tobey v. Barber, 5 J. R., 68, 72; Schermerhorn v. Loines, 7 J. R., 311, 313, and note; Johnson v. Weed, 9 J. R., 310, 311; Ontario Bank v. Worthington, 12 Wend., 600; Muldonv. Whitlock, 1 Cow., 290, 306.)z
    3. If there was any valid transfer, or transfer that would pass the title of said note to the plaintiffs, it was a transfer by assignment or mere delivery, and not by indorsement according to the law merchant, and therefore proof of the defendant’s defence was admissible. (Edwards on Bills, 286; Hedges v. Sealy, 9 Barbour, 214, 217.)
    The indorsement is not the indorsement of the Atlas Mutual Insurance Company. The indorsement, to be effectual as an indorsement in the commercial sense, should have been in the name of the company. (Moss v. Livingston, 4 Com., 208; Chitty on Bills, 11 Am. ed., 32, 33; Bank of Rochester v. Monteath, 1 Denio, 402, 404; Pentz v. Stanton-, 10 Wend., 271; Babcock v. Beman, 1 Kern., 200.)
    Adding the word “President ” was an indication that N. H. Osgood did not intend to assume a personal responsibility. The indorsement in the form adopted was perhaps sufficient to transfer the title, but was not sufficient to bind the Atlas Mutual Insurance Company as indorsers. (Babcock v. Beman, 1 Kern., 200.)
    II. The finding of the referee as to matters of fact is against the weight of evidence, in so far as he finds that the President of the Atlas. Mutual Insurance Company was authorized to make such transfer and indorsement on behalf of said company, and in so far as he finds that said note was taken in payment of rent (if by payment he means absolute payment), there being-no evidence of such authority, or of any agreement that said note was to be taken in payment otherwise than on account.
    III. The referee erred in his conclusions of law, stated in his report.
    1. In holding that the plaintiffs are holders and owners of said promissory note of the defendant by indorsement from said Atlas Mutual Insurance Company.
    The indorsement by the name of N. H. Osgood, President, is not the indorsement of the plaintiffs. (See above point I, sub. 3.)
    2. In his conclusion that the plaintiffs received said note in part payment of rent due the plaintiffs, so far as by the term payment he means absolute payment.
    3. In his conclusion that the parties by force of the taking of said notes changed the nature of the debt. For the taking of the notes did not extinguish the original debt, it merely postponed the payment until default in the payment of said notes. (Tobey v. Barber, 5 J. R., 68, 72; Schermerhorn v. Loines, 7 J. R., 313, and note.)
    4. In his conclusion that, by reason of the plaintiffs giving time to the Atlas Mutual Insurance Company for the amount until the maturity of said notes, they thereby gave a valuable consideration therefor, and became holders thereof before maturity for value, in such manner as to preclude any existing defence of the defendant. (Muldon v. Whitlock, 1 Cow., 290, 307.)
    
      John M Parsons, for plaintiffs (the respondents).
    I. The note in suit was received in part payment for the rent which became due on February 1st, 1856. There having been no offer to prove notice to the plaintiffs of the defendant’s alleged equities, and it appearing that they took the note without such notice, they are holders of the note in good faith and for a valuable consideration. (Booth v. Smith, 3 Wend., 66; Bank of Salina v. Babcock, 21 Wend., 499; Bank of Sandusky v. Scoville, 24 Wend., 115; Mohawk Bank v. Corey, 1 Hill, 513; zzzWhite v. 
      Springfield Bank, 3 Sand. S. 0C. R., 222, commenting on Stalker v. McDonald, 6 Hill, 93, and establishing the difference between the case where a note is taken in payment, and that where it is only taken as collateral security. (Youngs v. Lee, 2 Kern., 551.)
    1. The note was received in payment. The receipt operates as a contract between the parties and shows this. Its language is that the notes were tó be credited to the Atlas Mutual Insurance Company. This is the language of all the authorities in cases where the transfer was determined to be in payment. They were given as cash, and merely because the company had been disappointed in getting money in which they preferred to pay. The balance of the face of the notes over the amount of the February rent was to be applied on the accruing rent. The transaction operated as a discount of the notes by the plaintiffs and application of the proceeds to the rent due and accruing due. (Vide authoritiés cited. New York Marbled Iron Works v. Smith, 4 Duer, 362, 377.)
    2. It was proper that the note should be indorsed by the company, and this did not vary the character of the transaction. The liability of the company continued, but became collateral to the obligation of the defendant as maker of the note. The company could not be charged upon the original debt. They got the benefit of the extension of credit. There was the substitution of a new contract between the parties and an absolute payment of the original indebtedness, which thereby became extinguished. (Vide, all authorities above cited, in all of which the notes in suit were indorsed by the original debtor.)
    TT The defence offered to be proved by the defendant was no defence, as against a holder for value in good faith and without notice. Evidence to sustain it was therefore properly rejected.
    III. The indorsement of the note was a sufficient indorsement in form. It was the indorsement of the Atlas Mutual Insurance Company. (Bank of Genesee v. Patchin Bank, 3 Kern., 309.)
    1. The indorsement of the note having been for a valuable consideration, and without notice to the plaintiff of any defence against it, or that its indorsement was not authorized by a previous resolution of the board of directors of the company, it was not necessary that it should be authorized by such resolution. (1 R. S., 4thed", p. 1115, § 8.)
    2. Were this otherwise, this defendant could not raise the objection. It can only be taken by the company or its creditors. (Guernsey v. Burns, 25 Wend., 411; Hall v. Gird, 7 Hill, 586; Aspinwall v. Meyer, 2 Sandf., 180.)
    3. The note being but for $500, does not come within the provision of the statute.
    4. The twelfth section of the act incorporating the Atlantic Mutual Insurance Company, made part of the charter of the Atlas Mutual Insurance Company, provides that the company may receive notes for premiums in advance of persons intending to receive its policies, and may negotiate such notes for the purpose of paying claims or otherwise in the course of its business. This was such a note, and the act excepts it from the provision of section eight above referred to. (Aspinwall v. Meyer, 2 Sandf. S. C. R., 180.)
   By the Court.

Hoffman, J.

—The question is, have the plaintiffs shown, that in this transaction, they became purchasers for value of the note in question, in that sense which enables them to shut out a defence on the part of the maker of the note, clearly available against the original payee ?

In the first place, I think we must regard as of some influence upon the case, the credit which was given upon the books of the company of the notes in question, against the debit for the rent. This was not done until several days after the first of March, the date of the receipt. Baldwin says that it was within ten days. How one statement of the answer which is offered to be proven is, that the Atlas Company suspended business about the fifth of March. The credit was not given, as we are justified in assuming, until after that day, and then all hope of payment from the company was given up as vain. This circumstance rather sustains the inference that the plaintiffs did not intend to discharge the Atlas Company.

But supposing this fact inconclusive; then the evidence, irrespective of the receipt of the first of March, is indecisive; indeed it does not give any explanation of the receipt, or support any version of it in favor of either party. The Atlas Company could not pay in money, offered the notes and wanted the matter settled. The plaintiffs took the notes.

The case, in my judgment, mainly rests upon the receipt of the first of March. It expresses that the notes, amounting to $1,250, “ were received, to be credited to the account of the Atlas Insurance Company, against the bills of this company (the plaintiffs) for rent.” The rent then due was $1,125.

It is consistent with the most critical construction of the receipt, and with a common sense interpretation of it, to hold, that the amount of the notes when and as collected, was to be credited to the account of rent; that if less than the rent due was received, that alone should be credited, but if the whole face of the notes was collected, the excess should be accounted for.

But the phrase “against the bills of this company” is used. There was but one quarter’s rent then due, that of February. Now some of the notes would not fall due until the May quarter became due; and in this view, the meaning may have been, that after paying the February quarter, the proceeds should be applied to that of May.

Without asserting that the receipt will not bear the meaning of an absolute acceptance of the notes in discharge of the rent due, and on account of that to accrue in May, we think it a more reasonable and apparent construction, that the sums the plaintiffs might realize should be credited as received, and The Atlas Company remain liable for any deficiency.

The principle, to be deduced from the authorities applicable to the present question, we consider tobe this: that the parties must have intended, upon a transfer and reception of other securities, to extinguish the subsisting debt. If one note is substituted for another not yet due, and the latter is given up, the intention is evident. If it is not surrendered, the presumption is the other way. All cotemporaneous acts, declarations, or receipts are to be used to shed light upon the question of intent. The extinction of a legal demand in its original form, is to be proven affirmatively: and the question, whether a party is a holder for value of the new securities, so as to displace in his favor any right or equity against the party to whom they were given, depends upon the fact being established of an intended and actual extinguishment. (Clark v. Ely, 2 Sandf. Ch. R., 168; White v. The Springfield Bank, S Sandf. Sup. Ct. R., 222; Youngs v. Lee, 2 Kern., 551; The N. Y. Marbled Iron Works v. Smith, 4 Duer, 377; Farrington v. The Frankfort Bank, 24 Barb., 554.)

The case of Farrington v. The Frankfort Bank, was decided with the concurrence of the four judges of the fourth Circuit, and is very pertinent to the present action. The defendants had been in the habit of discounting drafts of the firm of Osborn, Turnbull & McDonald. On the 14th of January, 1856, they held two protested drafts, chargeable to such firm. Osborn, one of the firm, induced the plaintiff to indorse two drafts made by his firm, by false and fraudulent pretences. These were delivered to the defendants on the 17th of January, 1856. There was no agreement between the bank’s agent and Osborn, that the drafts should be received in payment of those under protest, but Osborn intended that they should be held as additional and collateral security, for the indebtedness then existing. Pomeroy, the cashier of the bank, on the 19th of January, 1856, passed the drafts in suit to the credit of Osborn, upon the books of the bank, and charged him with the protested drafts, and stamped them with the canceling iron; but they remained in the possession of the bank, in a drawer with papers of the like character.

It was held that the plaintiff, indorser of the drafts, was not precluded from any defence he was entitled to against them; that there was not an absolute discharge of the old debt within the rule of law; and relief was given to him, the action being on his behalf to obtain a cancelment of his indorsements.

So in the present case, I do not think that the plaintiffs ever abandoned their claim upon the Atlas Company for the rent; and therefore did not become purchasers, for value, of the note sued upon, so as to prevent the maker insisting upon any defence he possesses as against the payee.

The referee has therefore erred in his conclusion. A new trial must be had; and the order of reference discharged. The costs to abide the event.

Judgment accordingly.  