
    James S. Laing, Respondent, v. Sula Hudgens and Henry J. White, Defendants, Sula Hudgens, Appellant.
    (Supreme Court, Appellate Term, First Department,
    October, 1913.)
    Negotiable instruments — action against maker of promissory note — bona fide holders — contracts — amendment of pleadings.
    Where the complaint, in an action against the maker .of a promissory note, alleges that after its making and indorsement by the payee, and before its maturity, it lawfully came into the possession of plaintiff for value, a separate defense, that defendant entered into a contract in writing with the payee to buy its business and to pay a certain sum therefor in four monthly installments for which notes were to.be given; title to the business was passed to defendant on the final payment; that if she should be unable to make any of the payments either party to the contract should have the right to rescind whereupon the business should be returned to the payee of the note and any payments previously made by defendant should be returned to her; that it was thereafter agreed that the notes set forth in. the complaint should be given in place of the four notes above mentioned, but that the payments were to be at intervals and in the amounts set forth in the original contract; that subsequently defendant became unable to make a certain payment and notified said payee of her election to rescind the contract; that said payee retook possession of the business and kept it, and defendant further alleged on information and belief that plaintiff was not a bona fide holder for value of the note in suit, is good, and the direction of a verdict in favor of plaintiff upon a dismissal of said defense is reversible error.
    Upon an appeal taken only from an order denying plaintiff’s motion for a new trial, all errors committed by the trial court were brought up for review.
    The allegations of said defense were sufficient to show that by subsequent oral agreement the parties modified the written contract by substituting one note for the-'four notes originally promised.
    The allegation of the complaint that the note lawfully came into the possession of plaintiff for value is not equivalent to a plea that plaintiff was a holder in due course, and in any aspect was defective as stating merely a legal conclusion, and should plaintiff rely on the presumption accorded in section 98 of the Negotiable Instruments Law that he was a holder in due course defendant was entitled to have considered the allegation of her answer that plaintiff was not a bona fide holder for value.
    Had the point been raised at the trial that the allegation that plaintiff was not a bona fide holder for value was a legal conclusion, defendant would have been entitled to amend so as to plead that plaintiff at the time he negotiated the note had knowledge of the facts set forth in the separate defense.
    Appeal from an order denying the motion of appellant, Sula Hudgens, to" set aside a verdict directed in favor of plaintiff in the City Court of the city of New York, and for a new trial under section 999 of the Code.
    Murphy & Fultz (David L. Fultz, of counsel), for appellant.
    Frank J. Eyan, for respondent.
   Bijub, J.

Plaintiff sues as the holder of a promissory note made by the appellant December 1,1911, for $1,000, payable in twelve months. The complaint alleges that the note was originally made to A. M. Kendrick & Co., by whom it was indorsed “ and that, thereafter and before its maturity it lawfully came into possession of plaintiff for value.”

Appellant’s answer contains some general denials, but on the trial these were evidently abandoned and no point is made thereof here.

The entire case turns upon the defendant’s separate defense, which is, in substance, that she entered into a contract in writing with Kendrick & Co. to buy their business and to pay $1,000 for the same in four monthly installments for which notes were to be given, title to the business to pass to her upon final payment. It was a further condition of the contract, that, if she should be unable to make any of the payments, either party should have the right to rescind, whereupon the business should be returned to Kendrick & Co. and any payments previously made by her should be returned to her. “ Thereafter it was agreed that the note set forth in the complaint should be given in place of the four notes above mentioned, but that the payments were to be at the intervals and in the amounts set forth in the original contract;” that subsequently she became unable to make the payment due March 1, 1912, and notified Kendrick & Co. of her election to rescind the contract; that Kendrick & Co. retook possession of the business and kept it. Finally, she alleges “ On information and belief that plaintiff is not a bona fide holder for value of said note sued upon.”

On the trial, the learned court asked what the defense was and defendant-appellant’s counsel confined himself to stating this separate defense. The court remarked that the plaintiff was not a party to the agreement between the defendant and Kendrick & Co.; to which defendant-appellant’s counsel replied: We contend that the note is not good in the hands of the payee,” and added: Does your honor hold that the payee could endorse that note to a person who had knowledge of these facts and that that person could then bring action against the maker of the note and recover upon it? ” To this the court replied: I think he can.” The court had previously remarked: “ I do not see how this defense can be maintained in a case against a holder for value. ’ ’

It is quite evident that the learned court below was of opinion that this defense was not available against a holder for value, even though he had notice of defendant’s equities. In thus ruling, the learned court confounded a holder for value with a holder in due course as that term is defined in the Negotiable Instruments Law. ‘ ‘ A holder in due course ” of a note, under section 91, is one who has no notice of any “ defect in title of the person negotiating it.” Section 94 describes the title as defective when the holder obtains the instrument1 ‘ in breach of faith or under such circumstances as amount to fraud.” The defense here asserted alleged such a negotiation, and if proved would overcome the presumption established by section 98 that plaintiff was a holder in due course; and put him to his proof that he had no knowledge of defendant’s equities under the agreement with Kendrick & Co. German American Bank v. Cunningham, 97 App. Div. 244; Ginsberg v. Shurman, 71 Misc. Rep. 463; Canajoharie Nat. Bank v. Diefendorf, 123 N. Y. 191. The defense is, therefore, good.

There was also some discussion in the court below —■ and apparently respondent advanced the claim — to the effect that defendant’s reliance on the collateral agreement was an attempt “ to vary the terms of a written instrument by parol testimony,” citing Jamestown Business College Assn. v. Allen, 172 N. Y. 291. That case, hewever, has no application. The defendant appeals to no parol testimony, but, on the contrary, refers to a written contract as modifying the terms of the note — and, although, as pleaded, the written contract did not originally refer to a note but to four installment notes, the allegation is sufficient to show that by subsequent oral agreement (for which, from its very terms, there was mutual consideration) the parties modified the contract by substituting the one note for the originally promised four notes.

The court granted the plaintiff’s motion to dismiss the defense and directed the jury to find a verdict for the plaintiff. Defendant-appellant now makes the point that the dismissal of a defense at the trial is not permissible. In this, however, he is in error. See Ampersand Hotel Co. v. Home Ins. Co., 198 N. Y. 495.

The respondent contends that, inasmuch as the defendant-appellant has not appealed from the judgment but only from the order denying his motion for a new trial, he cannot avail on this appeal of any alleged errors of law committed below. In support, he cites, among others, the case of Alden v. Knights of Maccabees, 178 N. Y. 535. That case, however, held merely that an appeal from the judgment alone does not bring up for review questions of fact. The converse is by no means true. On the contrary, it has been held repeatedly that an appeal solely from an order denying a new trial brings up for review in the Appellate Division (and evidently in this court as well, see Code, §■§ 3188, 3189, 3192) all errors committed below. Alden case, supra, 178 N. Y. 541, 542; Raible v. Hygienic Ice Co., 134 App. Div. 705; Voisin v. Commercial Mutual Ins. Co., 123 N. Y. 120.

Respondent’s other contentions are not very clear, but, apparently, he urges that the separate defense does not contain a denial of material allegations of the complaint and is, therefore, incomplete under the rule laid down in Douglass v. Phenix Ins. Co., 138 N. Y. 209. Evidently, the “ material ” allegations to which he refers is that the note “ lawfully came into the possession of plaintiff for value.” That, however, is not equivalent to the plea that plaintiff is a holder in due course. Moreover, it is, in any aspect, defective as stating merely a legal conclusion. Browning King & Co. v. Terwilliger, 144 App. Div. 516; Fulton v. Varney, 117 id. 575. If, however, plaintiff should rely on the presumption accorded in the Negotiable Instruments Law, that he is a holder in due course, then defendant is entitled to have considered the allegation of the answer that the plaintiff is not a bona fide holder for value. The plaintiff-respondent’s claim that this pleading states merely a legal conclusion might have force had it been raised below, but it is not available here; for, had it been raised below, defendant, under the pleadings, would have been entitled to permission to amend so as to plead that plaintiff at the time he negotiated the note had knowledge of the facts of the defense as set forth. See McCarton v. City of New York, 149 App. Div. 516; Ramsay v. Miller, 202 N. Y. 72; Boynton Furnace Co. v. Trohn, 141 App. Div. 773.

Order reversed and new trial ordered, with costs to appellant to abide the event.

Seabuby and Guy, JJ., concur.

Order reversed and new trial ordered, with costs to appellant to abide event.  