
    C. Olivia Sabine, Appellant, v. Maggie S. Paine, Respondent, Impleaded with Eugene F. Vacheron, Defendant.
    Second Department,
    February 5, 1915.
    Negotiable instruments—usury — defense available against holder in due course—note made for sale at less than face value—rights of purchaser—effect of indorsement by maker — warranty as to validity of instrument.
    Although section 96 of the Negotiable Instruments Law provides that “ A holder in due course holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount thereof against all parties liable thereon,” nevertheless the rule still obtains that a negotiable instrument which is void in its inception because of usury is invalid as against the maker, even in the hands of a holder in due course. This is true in the case of individual holders who are not within the protection of the Federal and State Banking Laws, which in certain respects effected an amendment of the Usury Law.
    Where a person executes a promissory note and delivers it to an agent to sell for a sum greatly below its face value and it is thus sold, it is invalid in its inception because of usury.
    But, it seems, where such note is a valid obligation in its inception it may subsequently be purchased at less than its face value, although the price may be a circumstance bearing upon the bonafides of the purchaser.
    
      Although every indorser without qualification warrants to all subsequent holders in due course the genuineness of the instrument at the time of his indorsement, as provided in section 116 of the Negotiable Instruments Law, that rule does not obtain when the indorser is also the maker, for in such case he merely warrants the genuineness of his own contract.
    .Thomas, J., dissented.
    Appeal by the plaintiff, 0. Olivia Sabine, from a judgment of the Supreme Court in favor of the defendant Paine, entered in the office of the clerk, of the county of Suffolk on the 3d day of February, 1914, upon the verdict of a jury, and also from an order entered in said clerk’s office on the 24th day of December, 1913, denying plaintiff’s motion for a new trial made upon the minutes.
    
      Robert H. Elder [Herman Silverman with him on the brief], for the appellant.
    
      Hector M. Hitchings, for the respondent.
   Burr, J.:

On October 8, 1909, M. S. Paine executed and delivered to Eugene F. Vacheron her promissory note to his order for $2,100, payable four months after date. Subsequently she indorsed it. Vacheron also indorsed it, his name being written under hers. The note thereafter came into the hands of plaintiff. In an action upon the note the defense of usury was interposed. • Plaintiff appeals from a judgment in defendant’s favor, entered upon the verdict of a jury, and from an order denying a motion for a new trial upon the minutes.

It would be necessary to reverse this judgment and order for error in rulings upon evidence unless, disregarding all improper testimony, defendant was entitled to a direction of a verdict in her favor. The payee of the note, Vacheron, was the agent and attorney of defendant. He was called as a witness for the plaintiff, and upon cross-examination, against plaintiff’s objection and exception, was permitted to testify to various transactions between himself and defendant, some of which were wholly irrelevant to this controversy; and defendant was afterward permitted to go on the stand and contradict his testimony. It is not impossible that, before this case reached the jury, the minds of its members were led away from the real issue in the case to consider whether Vacheron had faithfully discharged his duties as defendant’s agent. It is incumbent upon us, therefore, to determine whether defendant was entitled to the direction of a verdict. The following facts are undisputed:

Plaintiff is the widow and was formerly the wife of John B. Sabine, a practicing lawyer in New York. At the date of the transaction here considered she had an account in the People’s Trust Company, and her husband was authorized to draw checks thereon. He not only drew all of the checks, but also made all of the deposits to its credit. Plaintiff and defendant never met until after this note matured. On a previous trial Sabine was called as a witness. Having since died, the testimony which he then gave was read to the jury upon the new trial. After testifying that he was his wife’s agent in the transaction he testified that he bought the note in°question from Eugene F. Vacheron on October 20, 1909, and gave him therefor three checks upon his wife’s account, one for $1,600, one for $100 and the third for $150, all of which checks were subsequently paid. They amounted in the aggregate to $1,850, and represented the purchase price of this note for $2,100, dated October 8, 1909, and payable four months thereafter. There is a conflict of testimony whether defendant’s indorsement was made, as she testifies, “when the note was made out,” or whether the note was brought back to her for such indorsement. Vacheron says that, after offering the note for sale to others he finally offered it to Sabine, and after a conversation with him he went back to defendant with the note and told her that Sabine would buy the note if she would indorse it on the back, guaranteeing its payment. He testifies that she then did so, and he took it back to Sabine and sold it to him. That is all that the evidence discloses respecting the transfer of this note.

It cannot be now disputed that, as between Vacheron and defendant, the note had, in the first instance, no validity. It was given to him to sell. She was then in need of money and she told him that he might “pay $500 if it was necessary to have it discounted.” We shall also assume that plaintiff was the “holder in due course” of the note in suit. (Neg. Inst. Law [Consol. Laws, chap. 38; Laws of 1909, chap. 43], § 91.) If we consider, for the sake of the argument, that all knowledge which her husband had, plaintiff is chargeable with and for all of his acts she is responsible, still there is nothing to contradict the evidence that he took the note without knowledge or actual notice of the defect therein, and relying upon the presumption that the note was given for a good consideration. (Sabine v. Paine, 148 App. Div. 730.) If it was at that time a valid obligation, she had the right to purchase it at less than its face, although the price paid may be a circumstance bearing upon “ bona fides ” (Canajoharie National Bank v. Diefendorf, 123 N. Y. 191.) We are not unmindful that Sabine and Vacheron occupied rooms in the same suite of offices, although not engaged in business together, and we shall assume that Sabine asked Vacheron to take the -note back for defendants indorsement before he purchased it. The Negotiable Instruments Law (supra, § 116) provides that “Every indorser who indorses without qualification, warrants to all subsequent holders in due course: * * * 2. That the instrument is at the time of his indorsement valid and subsisting.” And it has been held that a third person indorser could not impeach a note so indorsed for usury between the original parties. (Horowitz v. Wollowitz, 59 Misc. Rep. 520.) Whatever the rule may be as to third persons who are indorsers, when the indorser is also the maker of the obligation, we cannot see how any strength is added to the instrument by reason of such indorsement. It is like a person warranting his own contract; but, if that contract is void by reason of some statutory provision as to the making thereof, his warranty can be no stronger than the contract itself. Sabine appears to have been uninformed as to the bonafides of the note. There is no evidence that he had any actual knowledge on the subject. He may have supposed the law to be as stated in the case above cited, and assumed by this method to remove all possible question respecting the note’s validity. But the rights of the holder of negotiable paper cannot be defeated without proof, either of actual notice of the defect in title, or bad faith on his part established either by direct or circumstantial evidence. (Neg. Inst. Law, supra, § 95.) He may have been negligent in taking the paper, and omitted precautions which a prudent man would have taken. Nevertheless, unless he acted mala fide, his title, according to settled doctrine, will prevail. (Cheever v. Pittsburgh, etc., R. R. Co., 150 N. Y. 59, 66; Second Nat. Bank v. Weston, 172 id. 250; Hibbs v. Brown, 112 App. Div. 214.) There is not the slightest evidence either of bad faith or of actual notice, and plaintiff’s agent was entirely justified in assuming that the note was just what it purported to be, a valid obligation in the hands of Vacheron. But, at its inception, it was disposed of for a sum which would result in taking more than the lawful rate of interest upon the sum secured to be paid thereby. And the next question is, did this constitute the contract void for usury ? The taking of usury is forbidden (Gen. Business Law [Consol. Laws, chap. 20; Laws of 1909, chap. 25], §§ 370, 371), and “All * * * notes, * * * whereupon or whereby there shall be reserved or taken, or sectired or agreed to be reserved or taken, any greater sum * * * for the loan or forebearance of any money * * * than is above prescribed [six dollars upon one hundred dollars for every year], shall be void.” (Id. § 373.) If this note was not a valid obligation in Vacheron’s hands, then this transaction was not a sale of such an obligation, but the loan of money secured to be paid thereby. It may be urged with some force that, so far as plaintiff is concerned, there is no evidence of a mutual agreement between her and defendant for the payment of additional interest (Morton v. Thurber, 85 N. Y. 550), and that if any such sum was reserved, it was reserved and paid to her agent without her knowledge, and that she received no part thereof. (Stillman v. Northrup, 109 N. Y. 473.) We think, however, that the evidence in this case warrants the conclusion that plaintiff, at least by acquiescence, became a party to the transaction in all of its features. She did, indirectly, receive an amount equal to the excess taken; that is, she did not advance to her agent all that the note called for, a part of which he reserved to himself, paying over the residue to defendant. The entire sum advanced in connection with the transaction was advanced from her funds in the People’s Trust Company. Her balance therein remaining was undiminished by the amount of the excess of the value of the note, with lawful discount deducted, over the sum actually paid. To that extent, she did receive this excess, and may be said to have acquiesced in the receipt thereof by seeking to hold defendant liable for the entire amount of the note. In addition, the testimony as to the very broad powers of her agent in the transaction constrains us to hold that she must be treated as though she herself had conducted the same.

One single question remains: Under the Negotiable Instruments Law, is a note, otherwise void for usury, invalid in the hands of “ a holder in due course ? ” If so, then the errors in the trial may be disregarded, for defendant was entitled to a direction of a verdict in her favor; if not, then the action must be tried again. There are conflicting decisions upon this point in the lower courts. We think the question has not been finally determined by the Court of Appeals. It seems desirable that it should be. The Negotiable Instruments Law provides that “A holder in due course holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon ” (§ 96). Before the passage of that statute, it was the law that “A note void in its inception for usury continues void forever, whatever its subsequent history may be.” (Claflin v. Boorum, 122N. Y. 385.) In Klar v. Kostiuk (65 Misc. Rep. 199) a majority of the Appellate Term in the first department held that the defense of usury between the original parties to commercial paper is no longer available against a subsequent bona fide holder in due course. In Strickland v. Henry (66 App. Div. 23) this court held that the former Negotiable Instruments Law (Gen. Laws, chap. 50; Laws of 1897, chap. 612), identical in language with the present law, had not changed or affected the rule as above stated. And again, in Oppikofer v. Murphy (146 App. Div. 581) this court restated the original rule, relying upon Strickland v. Henry (supra). But in the latter case the provisions of the Negotiable Instruments Law seem not to have been called to the attention of the court, nor considered in its opinion. And, in the former case, the judgment was reversed upon the question of whether plaintiff was the holder in due course, and its language is not necessarily controlling. When this case was here upon a former appeal (Sabine v. Paine, supra) this court repeated the statement that, if in its inception the transaction was tainted by usury, the subsequent transfer before maturity did not validate it; hut held that, at that time, there was a question for the jury whether there was a valid consideration for the note between the original parties. In this case, also, the Negotiable Instruments Law seems not to have been considered. If there was any question as to the validity of the note between the original parties upon the previous trial, we think that no such question arises in the present case. It clearly had no inception until its transfer to Sabine. In Schlesinger v. Kelly (114 App. Div. 546) plaintiff, who was a receiver of a Federal bank, and into whose hands notes signed by the defendant had come, brought suit upon the same, and the defendant contended that the notes, being usurious in their inception, were absolutely void no matter into whose hands they came. A majority of the court, without expressing any opinion as to the effect of the Negotiable Instruments Law upon the paper in question, held that the provisions of the State Usury Law had been repealed by implication, so far as they related to State hanks. And this conclusion was based, first, upon the provisions of the Federal Banking Law (U. S. R. S. §§ 5197, 5198) when read in connection with section 55 of the State Banking Law (Gen. Laws, chap. 37 [Laws of 1892, chap. 689], as amd. by Laws of 1900, chap. 310), which statute, it was held, was intended to, and did, put State banks on an equality with National hanks in respect to the penalty for taking an excessive rate of interest. The United States Supreme Court has held that the provisions of the Federal Banking Act affected National banks within this State, and that loss of the entire debt was not incurred as a penalty or otherwise by reason of the provisions of the Usury Law. (Farmers Nat. Bank v. Dearing, 91 U. S. 29.) Mr. Justice Laugi-ilin, however, placed his affirmance of the judgment upon the ground that section 96 of the Negotiable Instruments Law rendered .the defense of usury inapplicable to the bona fide holder of negotiable paper securing the same in due course. The question of the applicability of the Usury Law to State banks was again considered by the Court of Appeals in Schlesinger v. Gilhooly (189 N. Y. 1). This case was affirmed in the Appellate Division (116 App. Div. 914) on the authority of Schlesinger v. Kelly (supra). In that case the court affirmed the judgment appealed from. The prevailing opinion was written by Judge Vann. Upon the threshold of the opinion, he stated that he would not pass upon the effect of the Negotiable Instruments Law, and then proceeded to discuss the effect, first, of the Federal Banking Act, and then of the State Banking Law. Although he said in his opinion that “The notes in question were void as between the original parties thereto, and they would have continued void in the hands of any individual to whom they might have been transferred,” we think we are right in concluding that in this respect he was only stating the law as it existed in this State before the passage of the Negotiable Instruments Law, the effect of which he stated he would not consider. Judges G-ray and Chase concurred with Judge Vann. Judge Willard Bartlett concurred for affirmance upon the ground that under the Negotiable Instruments Law a bona fide purchaser took a note free from the defense of usury. Chief Judge Cullen and Judges Werner and Hisoocic dissented; and, in his dissenting opinion, Chief Judge Cullen said: “If, however, the decisions in this case were to proceed on the effect of the Negotiable Instruments Law, I should confine myself to the expression of my vote. Though I cannot concur in such a decision, I appreciate that it would eliminate from the usury laws their most harsh and drastic features, and probably be far more just than the provisions of the old law. Such a decision would inure to the benefit of all purchasers in good faith of commercial paper.” Shortly thereafter the Court of Appeals again considered the status of State banks in the case of Schlesinger v. Lehmaier (191 N. Y. 69), and in that case held that the National and State banks are entitled to protection in the purchase of negotiable paper originally usurious, only in so far as the officers of such banks act in good faith, not where they knowingly and intentionally join with wrongdoers in an attempt to evade the laws. Where, therefore, a bank discounts promissory notes which are void for usury, with full knowledge of the payment of an usurious rate of interest thereon, such usury may be pleaded as a defense to an action on the notes, and the provisions of the State Banking Law, modifying, for the benefit of banking institutions, the general statutes in relation to usury, have no application. In that case, the court, speaking of the Usury Law, said: “These statutes still remain in full force as to individuals and corporations except in so far as they have been modified or superseded by the Banking Law enacted for the benefit of banking corporations and private and individual bankers.” It is true that in the same opinion the court said: “ In the Negotiable Instruments Law it is expressly provided that a holder, who becomes such before maturity in good faith and for value without notice of any infirmity, holds the same free from any defect of title of prior parties and free from defenses available to prior parties among themselves, and may enforce the payment of the instrument for the full amount thereof against all parties liable thereon.’ Here we have the legislative intent expressed in clear and unmistakable language. It establishes a just and proper rule which protects the bank in making purchases of commercial paper in good faith before maturity, for value and without notice of infirmity. But where it purchases with actual knowledge of the infirmity or defect, or knowledge of such facts that its action in taking the instrument amounted to bad faith, it is not protected.” I fail to see why, if the language of the Negotiable Instruments Law is applicable at all, it should be limited in its effect to banks, and why the “just and proper rule,” which the learned judge states, should not relate to individuals also. In this opinion, five of the judges concurred,' two only dissenting, and the ground of their dissent is not stated. Inasmuch as that decision which, so far as we are informed, is the latest decision on this question of the court of last resort, leaves the matter in doubt, and inasmuch as this court, in the cases above referred to, has held that the Negotiable Instruments Law did not effect any change in the previous existing law, we conclude that the errors committed on the trial should be disregarded as immaterial errors, and that the judgment and order should be affirmed, upon the ground that, although the plaintiff was a holder in due course for value, the note had no valid inception until its purchase and discount by plaintiff’s agent; that this discount was at a usurious rate for the sum loaned, and that the Negotiable Instruments Law has not changed the previous existing law, which made the paper void even in the hands of a holder in due course and for value.

Jenks, P. J., Stapleton and Rich, JJ., concurred; Thomas, J., dissented on the ground that the husband had no authority to make the usurious contract; that plaintiff had no knowledge of the condition of the bank account, drew no checks against it during her husband’s life, and did nothing to ratify the transaction.

Judgment and order affirmed, with costs.  