
    THE GROCERS’ BANK v. PENFIELD.
    
      N. Y. Court of Appeals;
    
      May, 1877.
    [ Qualifying 7 Hun, 279.]
    Bills, Notes and Checks.—Accommodation Paper.—Bona Pide Holder.
    The holder of an accommodation note, without restriction as to the mode of using it, may transfer it either in payment or as collateral security for an antecedent debt, and the maker will have no defense. A pre-existing debt is a sufficient consideration for the transfer of accommodation paper, and no new consideration need be shown.
    It is only where a note has been diverted from the purpose for which it was entrusted to the payee, or some other equity exists in favor of the maker, that parting with value must be shown by the holder.
    Appeal from a judgment.
    The Grocers’ Bank of the City of New York sued Thomas D. Penfield, Benjamin D. Stone and Charles H. Truax, on two notes made by Penfield & Stone, and indorsed by Truax.
    The answer of Penfield & Stone alleged that the notes were given by them to Truax without consideration, solely for his accommodation, and on his promise to pay them at maturity; that plaintiff was not a bona fide holder for a valuable consideration, but received them with notice of the foregoing facts, and as collateral to secure an antecedent debt, and without paying any consideration.
    
      The referee, before whom the issues were tried, found that the notes were made without consideration being received by the makers, and were indorsed by Truax to the plaintiff without any consideration being paid or given to the plaintiff therefor, and that they were received by plaintiff solely as collateral security for a precedent debt, and that no agreement to extend the time of payment of such precedent debt was made. There was no finding that plaintiff had notice of the original want of consideration ;—and accordingly he awarded judgment in favor of defendants.
    The supreme court reversed the judgment; and held that defendants were liable, it seems, upon the grounds stated in the opinion of Daniels, J. (reported in 7 Hun, 279, 282), that an agreement for extension was implied in law from the circumstances.
    The opinion of Beady, J., adopted in the opinion of the court of appeals was as follows:
    Brady, J. The defendant, Truax, was a depositor with the plaintiffs. He procured from them the discount of a note made by Reon Barnes to his order; when it became due, he paid a part of it and gave two notes of Penfield & Stone, the other defendants, payable to his order, for the balance.
    These notes were made for his accommodation, but without restriction as to their use. It seems from the testimony that they were obtained for the purpose to which they were applied, and it may be said as also warranted by the testimony that the plaintiffs knew that they were made for his accommodation. The plaintiffs, when the notes were given, refused to give up the prior note made by Barnes, and parted therefore with no new consideration.
    The defendants, Penfield & Stone, think that under these circumstances the notes cannot be enforced against them, and the referee agrees with them. They are mistaken. The notes having been given without, restriction as to their use, are available in the hands of one holding them only as a collateral security (East River Bank v. Butterworth, 45 Barb. 476; Cole v. Saulpaugh, 48 Barb. 104; Edwards on Notes, 316). It is only when a note is diverted from the purpose for which it was made, or fraudulently obtained and negotiated, that such a defense can be successfully interposed (Coddington v. Bay, 20 Johns. 637; Farrington v. Frankfort Bank, 24 Barb. 554; Weaver v. Barden, 49 N. Y. 286; Carey v. White, 52 Id. 138; Barnard y. Campbell, 58 Id. 77; Edwards on Notes, 316.
    In such cases, unless the holder parts from something of value, money, property, or existing securities, or discharges the pre-existing debt for which the note is given, the note cannot be enforced.
    It is considered, unless the element suggested be present, that the holder is not one for value within the law-merchant, and the superior equities must prevail.
    “The statement of the rule is not always accompanied by the qualification mentioned, and leads to confusion in some minds.”
    The judgment, for these reasons, must be reversed, with costs, to abide the event.
    
      William F. Shepard (L. M. Doscher, attorney),
    for appellants.—The questions before the court seem to be: 1. Whether, from the uncontradicted testimony in the case, there must be implied in law an agreement to extend payment of the past due debt, as held by Judge Daniels 1 2. Whether the plaintiff is entitled to recover on these accommodation notes, merely on a finding that they were delivered as a collateral for a past due debt without any agreement to extend its payment, as held by Judge Beady ?
    I. To entitle a party to recover on an accommodation note transferred by the person for whose accommodation it was made, some consideration must accrue to such person, or be advanced by the person to whom transferred (East River Bank v. Butterworth, 45 Barb. 476; Cole v. Saulpaugh, 48 Barb. 104; Schepp v. Carpenter, 51 N. Y. 602 ; Dezeng v. Fyfe, 1 Bosw. 335; Lathrop v. Morris, 5 Sandf. 7; Farrington v. Frankfort B’k, 24 Barb. 554 ; Turner v. Treadway, 650 N. Y. 550 ; Bowman v. Van. Kuren, 20 Wis. 110; Bramhall v. Beckett, 31. Me. 205).
    II. The mere taking of collateral security for an existing indebtedness does not per se extend the time of payment, or suspend the remedy on the original indebtedness (Gahn v. Neimcewicz, 11 Wend. 312, 320, 321; Bank of Utica v. Ives, 17 Id. 501; Stalker v. McDonald, 6 Bill, 93-114; Austin v. Curtis, 31 Verm. 64; Wood. v. Robinson, 22 N. Y. 564; Cary v. White, 52 Id. 138; Place v. McIlvain, 38 Id. 96; Fellows v. Prentiss, 3 Den. 512 ; Bangs v. Mosher, 23 Barb. 478; Albany City Ins. Co. n. Devendorf, 43 Id. 444 ; Hubbard v. Gurney, 64 N. Y. 457).
    III. The judgment not having been reversed on the facts, the only question before the court is whether the referee committed an error of law (Mason v. Lord, 40 N. Y. 476 ; Matthews v. Coe, 49 Id. 57-60; Devlin v. Mayor, 63 Id. 13 ; Caswell v. Davis, 58 Id. 223.
    
      Bdmon & B. J. Blankman, for respondent.
    I. The facts and the evidence before the referee clearly show that the two notes in suit were regularly indorsed, delivered to the plaintiff by the payee and the plaintiff discounted them in the regular course of business and they thereby became the property of plaintiff (Demmon v. Boylston Bank, 5 Cush. (Mass.) 194; Montgomery County Bank v. Albany City Bank, 8 Barb. 396 ; Essex County Bank v. Russell, 29 N. Y. 673).
    II. The maker or indorser of an accommodation note cannot set, up want of consideration as a defense against it in the hands of a third person (Work v. Case; 34 Pa. St. 138 ; Lord v. Ocean Bank, 20 Id. 384).
    III. Where a note is made for the accommodation of the indorser, without any restrictions, it may be used by him for that purpose, and the holders may recover upon it, even if he had knowledge of its origin,-to any amount for which he holds it as security, not exceeding the sum named in the note (East River Bank v. Butterworth, 45 Barb. 476; Cole v. Saulpaugh, 48 Id. 104).
    IV. The defendants are clearly liable as makers of these notes, even though they loaned the notes to the payee (Schepp v. Carpenter, 49 Barb. 542 ; Deems v. Crook, 1 Edm. Sel. Cas. 95; Robbins v. Richardson, 2 Bosw. 248 ; De Zeng v. Fyfe, 1 Id. 335 ; Edwards on Notes, 316).
    V. Truax’s liability as indorser on the Barnes note had been extinguished and plaintiff was a bona fide holder of the notes in question (Bank of Salina v. Babcock, 21 Wend. 499 ; Essex Co. Bank v. Russell, 29 N. Y. 673).
   Rapadlo, J

We think that the order in this cáse must be affirmed on the ground stated by Brady, J., in his opinion delivered at General Term. Whatever confusion may have existed upon the point, we think that we may now safely say, in the language of Professor Parsons (1 Parsons on Notes and Bills, 226), that “it is universally conceded that the holder of an accommodation note, without restriction as to the mode of using it, may transfer it either in payment or as collateral security for an antecedent debt, and the maker will have no defense” (Story on Bills, § 192, note m, and Story on Notes, § 195, and authorities cited).

The existing debt is a sufficient consideration for the transfer, and no new consideration need be shown. It is only where the note has been diverted from the purpose for which it was entrusted to the payee, or some other equity exists in favor of the maker, that it is necessary that the holder should have parted with value on the faith of the note in order to cut off such equity of the maker (Cole v. Saulpaugh, 48 Barb. 104; Bank of Rutland v. Buck, 5 Wend. 66; Lathrop v. Morris, 5 Sandf. 7). It has been held by high authority that an antecedent debt is sufficient, even in the case of a note fraudulently diverted, to constitute the holder a bona fide holder for value, without any extension of time or surrender of securities or other new consideration (Swift v. Tyson, 16 Peters, 1). But in this State that'doctrine does not prevail (Stalker v. McDonald, 6 Hill, 93). The leading authorities upon the subject are reviewed in the case of Maitland v. Citizens’ Bank (40 Maryland, 540). Whatever difference of opinion may have existed as to the case of a note diverted or fraudulently put in circulation, it must be regarded as settled that an indorsee of a negotiable note made for the accommodation of the indorser, but without restriction as to its use, taking the note in good faith as collateral security for an antecedent debt and without other consideration, is entitled to the position of a holder for value and not affected by the defense of want of consideration to the maker. We should not have deemed it necessary to discuss the point so much at length, but for the reason that it does not appear ever to have been previously expressly adjudicated in this court.

The order should be affirmed, and judgment absolute, &c.

All the judges concurred.  