
    THE SIXTH NATIONAL BANK OF THE CITY OF NEW YORK, Appellant v. THE LORILLARD BRICK WORKS COMPANY, et al., Respondents.
    Promissory note, defence thereto ; that it was made and endorsed without consideration for the accommodation of one Simmons, and diverted by him from the purpose for which it was entrusted to him, and the evidence fully supported that position and required the plaintiff to show that it paid value for the paper, and the single and main point in the case was whether, upon the evidence, the plaintiff was entitled to go to the jury upon the question as to whether it parted with value upon the faith of the note.
    
      Held, that the evidence established that the plaintiff neither paid nor surrendered anything of value on the faith of the note in suit, and there was nothing to go to the jury on any of the questions involved in the action, and the verdict for the defendants was properly directed.
    Before Sedgwick, Ch. J., and McAdam, J.
    
      Decided May 2, 1892.
    Appeal from a judgment entered on the verdict of a jury directed in favor of the defendants, and from an order denying a motion for a new trial.
    
      Barlow & Wetmore, attorneys, and Francis C. Barlow of counsel, for appellant, argued :—
    I. Getting the notes discounted, and applying the cheques drawn against the proceeds in the way that these cheques ivere applied, has at least the same effect as though the notes had been applied directly for the same purpose. In' fact, however, as shown in Point Third infra, our position is much stronger than it would be if the notes had been applied directly to the overdraft of Satterlee & Co. Therefore the question is whether the plaintiffs would have parted with value if they had taken $21,210 worth of the notes in payment of the overdraft of John Satterlee & Co., and if they had taken $6,413.46 worth of the notes in payment of the two Meyer notes and the Cochrane note. First as to the cheque for $21,210, which was applied to the payment of the overdraft of John Satterlee & Co. Notwithstanding some apparent confusion in the cases, it is the settled law of this state that a person who takes negotiable paper in payment and satisfaction of an antecedent debt has parted with value and becomes the holder of the paper for value. This is held in the leading case in this State, Coddington v. Bay, 5 Johns. Chan., 57 and 20 J. R., 637. That case held that taking negotiable paper merely as security for an antecedent debt did not make the taker a holder for value, but, as the Court of Appeals says at p. 339 of 123 N. Y., “ it was explicitly conceded in Coddington v. Bay that taking paper in payment of an antecedent debt, makes one a holder for value.” What Judge Finch refers to in the case in 123 W. Y. is the statement at p. 646 of Coddington v. Bay, that if “ some existing debt be satisfied thereby * * * this would be paying value.” Without going into all the cases, we refer to Mayer v. Heidelbach, 123 N. Y., 332, where, at p. 339, the court sums up the law as follows : “ The respondents rely upon two propositions: (1) That the actual payment and absolute discharge of an antecedent debt is a valuable consideration for the transfer of commercial paper, and cuts off prior equities * * * I have no doubt as to the soundness of the first proposition. It was explicitly conceded in Coddington v. Bay, 5 Johns., 57; 20 Ib., 637, which originated the difference between the courts of this state and the concurring views of the federal court and those of England. While it was in that case ruled that the transfer of negotiable paper as collateral security merely for an an antecedent debt did not make the creditor a holder for value within the rule cutting off' prior equities, it was yet asserted that such result followed where, among other things, some existing debt was satisfied thereby. And that, I think, was a natural and logical conclusion from the reasoning upon which the decision rested. The argument was that the holder of the paper merely as collateral lost nothing by its failure, since his debt all the time remained, his original position was unchanged, and he had simply failed to get an added security, himself parting with nothing. It is apparent that the reasoning fails, whenever, as a result of the new contract, the original debt has been actually extinguished, when the paper received has been both transferred and accepted as payment, and the debt has been discharged within and by force of the acts and concurring intention of both parties. And so we have steadily decided (citing cases). These cases, and many more like them, however differing in their facts, and although the earlier ones have been more or less criticised, yet agree, as I read them, in the doctrine that where the pre-existing debt is actually and absolutely extinguished in consideration of the negotiable paper transferred, the transferee is protected against prior equities.” The confusion upon this subject has arisen chiefly from some careless and obiter remarks of Chancellor Walworth in Stalker v. McDonald, 6 Hill, 93, in the Court of Errors. In that case the paper was received merely as security for an antecedent debt, and not in payment of the debt. See Statement of facts at p. 94, and by the chancellor at foot of p. 111. But all doubt (if there ever were any), upon that subject is now set at rest by Mayer v. Heidelbach, 123 N. Y., 332 and at p. 339, from which an extract is quoted above. Now in the case at bar the cheque for $21,210 was applied “ in payment ” of the overdraft of Satterlee & Co., and was so entered on the plaintiffs’ books.
    
      The cheque for $21,210 was charged to the account of Simmons the drawer, going, with the cheque for $6,413.46, to make up the whole of the proceeds of the discount, and on the same day the cheque was credited to John Satterlee & Co. on their overdraft. Mr. Jordan acting for Simmons directed that the cheques should be applied as they were applied. There is no contradiction about the facts in the matter, but if there had been we were entitled to go to the jury upon the facts. Our request to go to the jury was improperly refused unless it be the law that taking negotiable paper in absolute payment of a debt, does not make the taker a holder for value.
    II. There remains to be considered the fact that the plaintiffs did not give up to Satterlee & Co. the $30,000 cheque the return of which produced the overdraft. The fact is that the cheque was given to the United States Attorney to be used in the criminal proceeding, but apart from that fact it is utterly immaterial whether the $30,000 cheque was surrendered or not. All that can be said is that it is a circumstance which the jury might consider in determining whether the overdraft was really paid. If the jury believed on the whole evidence that tha cheque for $21,210 was taken in payment, it would make no difference whether the $30,000 cheque was surrendered or not. When a debt is paid by taking paper, it is absolutely gone, and if the paper cannot be enforced the debt is lost. When the paper instead of being taken in absolute payment of the debt is taken merely as security, of course the rule is otherwise, since the debt is not gone. If this debt were in fact paid as we prove, by the check, the plaintiffs can never enforce it against John Satterlee & Company, nor could they collect the $30,000 check. If, in considering the question whether new paper is taken in absolute payment or satisfaction of the old paper, or merely as additional security, the fact that the creditor retains the physical custody of the old paper conclusively shows (instead of being a mere circumstance), that the transaction was not payment, it must also be held that surrendering up the old paper conclusively shows that the transaction was a payment. But this is not the law. In Olcott v. Rathbone, 5 Wend., 491, a bank upon receiving a cheque surrendered up the old note, but it was held that the surrender did not show that the cheque was taken in absolute payment of the note, and that, the check not being paid, the bank might recover upon the surrendered note. The rule is that where the creditor receives paper of a person other than the debtor on account of the debt, the debt is not satisfied and extinguished by the paper unless the parties shall so agree, and the burden is upon the debtor to show that the paper was taken in absolute payment. Noel v. Murray, 13 N. Y., 167. As the surrender of the old paper does not conclusively show that the new paper was taken in absolute payment, so the failure to surrender the old paper does not conclusively show that the new paper was not taken in absolute payment. Olcott v. Rathborne has been repeatedly followed. Bank v. Morgan, 6 Hun, 346, affirmed 73 N. Y., 593 ; Bank v. Webb, 39 N. Y., foot of p. 330 and topp. 331; Powell v. Charless, 34 Mo., 485, and at p. 495; Hubbard v. Surney, 64 N. Y., 467. And the Auburn City National Bank v. Hunsiker, 72 N. Y, 252, shows that retaining the old paper does not conclusively show that the new paper was not taken in absolute payment of the old. There, upon the delivery to the bank of the new note, the old note was retained by the bank, and it was marked “ paid,” and entered as paid in the books of the bank. A controversy arising whether the new note was taken in absolute payment of' the old note, the Court of Appeals held that it was a question of fact for the jury upon all the circumstances.
    III. We have discussed the case as Simmons, instead of getting the note in suit and the other six notes discounted, and using the proceeds as he did, had taken these notes directly to the plaintiff’s bank and delivered 021,210 of them to the bank in payment of the overdraft of John Satterlee & Co. We claim that in that case it would have been for the jury to say whether the bank did not take the notes in absolute payment and satisfaction of the overdraft, and if this were found to be the fact, we claim that the bank would be a holder of the notes for value paid. In the case supposed, the plaintiffs would have taken the notes of third persons in payment of an antecedent debt (the overdraft), due to it from a customer, and it would be for the jury to say whether the transaction was payment of the debt. But Satterlee having got the notes discounted, and having delivered to the bank his cheque upon itself in payment of the overdraft, and the bank having accepted it as such payment and charged it against the account of the drawer and credited it to Satterlee & Co., there is a series of decisions in the Court of Appeals which conclusively establish that the transaction ipso facto extinguished the debt of the bank to Simmons and acted as a satisfaction of the debt of Satterlee & Co. to the bank upon the overdraft. The Court of Appeals say that such a transaction is precisely the same in its effect as though Simmons had drawn out this 021,210 in money and had then brought it to the bank to pay the overdraft, in which case no one could deny that the bank had paid out that amount of the proceeds of the discount. And the same is true in regard to the cheque for 06,413.46 which went to pay the two Meyer notes and the Cochrane note. In Pratt v. Foote, 9 N. Y., 463, the plaintiff (a bank), held a note made by the defendants and endorsed by one Scudder, and a few days before it became due the defendant got Seudder’s cheque for the amount drawn upon the plaintiffs’ bank and delivered it to the bank to take up the note. The bank accepted it and credited it as a payment of the note, but after-wards erased the credit (applying to other purposes the deposit of Scudder, who had become insolvent), and then sued Foote the maker upon a new note which he had given in place of the old one upon being told by the bank that the old one had not been paid. The bank contended that Scudder’s cheque had not paid the note because it was not proved that the bank had accepted it in absolute payment, but the court distinguished between the effect of a bank’s taking the cheque or paper of a third person on account of a debt (which would have been the case if Simmons had delivered the discounted notes directly to the plaintiff in this case), and the bank’s taking a cheque drawn upon itself in payment of a debt due to itself, and the court holds that in the latter case it is not necessary, as it would be in the former, to show by evidence aliunde that the cheque was taken in absolute payment, but that the legal effect of the transaction was the same as it would1 have been had the money been drawn out upon the cheque and paid in satisfaction of the paper. In Mayer v. Heidlebach, 123 N. Y., 332, the court approves and follows Pratt v. Foote. In Oddie v. Bank, 735, Pratt v. Foote is approved and followed, and near the foot of p. 741, the court say: “ The legal effect of the transaction was precisely the same as though the money had been first paid to the plaintiff and then deposited,” or, as in the case at bar, paid by Simmons on the overdraft.
    IV. What has been said applies to the cheque of $6,413.46. That cheque was given by Simmons in payment of the two Meyer notes for $2,500 each, and in part payment of the Cochrane note for $3,000. And it was charged against the account of Simmons, together with the cheque for $21,210. Under the doctrine of Pratt v. Foote the application of the cheque for $6,413.46 rests upon precisely the same ground as the application of the other cheque, that is, it is the same in legal effect as though Simmons had drawn out the amount of the cheque and paid the money on the three notes, on two of which he was an endorser prior to the Meyers. And even if, instead of procuring the seven notes (including the note in suit), to be discounted, and paying the proceeds to the extent of $6,413.46 on the two Meyer notes and the Cochrane note (which is unquestionably a payment of those three notes under the doctrine of Pratt v. Foote), Simmons had applied the notes which were discounted, to the extent of $6,413.46, directly to pay or take up the Meyer notes and the. Cochrane note, there could ■ have been no question that the plaintiffs would have been holders for value of the former notes, provided the two Meyer notes and the Cochrane note had been actually surrendered to Simmons. The plaintiffs then would have come directly within a long line of cases. See Young v. Lee, 12 N.Y., 551; Park Bank v. Watson, 42 Ib., 490; Brown v. Leavitt, 31 Ib., 113, and at p.114; Pratt v. Cowan, 37 Ib., 440; Paddon v. Taylor, 44 Ib., 371; Clothier v. Adriance, 51 Ib., 322; Day v. Saunders, 1 Abb. Ct. App. Decisions, 495. But we have sought ■ to show above, that the mere fact that the Meyer notes were not given up does not conclusively show that they were not paid, or that the cheque for $6,413.46 was not taken in lieu of the three notes. The cheque for $6,413.46 was, as directed by Simmons through Jordan, applied to the payment of the two Meyer notes and in part payment of the Cochrane note for $3,000. This was certainly sufficient to go to the jury, and whether the cheque for $6,413.46 is to be considered as a payment of the two Meyer notes and a part of the Cochrane note, or as a substitution of the cheque for these notes, is wholly immaterial. And in the case at bar the Meyer notes stand as business paper, paper given for a valuable consideration, as is above pointed out. But the result would be the same even if the Meyer notes were accommodation paper, so long as they had not been diverted. Accommodation paper is of course always made or endorsed without consideration between the immediate parties, but unless its use is restricted the person for whose accommodation it is made or endorsed may use it in any manner that he sees fit, and when the accommodation party issued upon it it is no answer for him to say that he got no consideration for it, unless it has been diverted. The person to whom it is given may pledge it as security for an antecedent debt, and yet the creditor can enforce it. Robbins v. Richardson, 2 Bos., 248; Seneca County Bank v. Neass, 3 N. Y., 442; Grocers’ Bank v. Penfield, 69 Ib., 502; Freund v. Bank, 76 Ib., 352. There is no evidence that at the time the plaintiffs took the cheque for $6,413.46 they had any knowledge or suspicion that the note in suit was diverted accommodation paper, or accommodation paper at all, and if the plaintiffs had taken the note in suit directly in payment of or in place of the Meyer notes, it could not be pretended that the Meyer notes were not a sufficient consideration for the note in suit. And, under Pratt v. Foote, supra, the case is still stronger.
    
      Glover, Sweezey & Glover, attorneys, and Richard L. Sweezey of counsel, for respondents, argued :—
    I. Defendants having shown accommodation and diversion of the note, the burden was upon plaintiff to prove that it took the note in due course of business without notice, and actually parted with value upon the ' faith thereof. Comstock v. Hier, 73 N. Y., 269; Canajoharie Nat. Bk. v. Diefendorf, 123 Ib., 191.
    II. The mere formal discounting of the notes and passing the proceeds to the credit of Simmons upon the books of the bank did not make the bank a holder of the notes for value as against an accommodation maker and endorser of diverted paper. The bank must have actually paid out and parted with the proceeds of the discount. Central Nat. Bank v. Valentine, 18 Hun, 417; Platt v. Chapin, 49 How., 318. Practically, all the plaintiff did in the case at bar was to take two cheque from Simmons to its own order, together aggregating the amount of the proceeds of the discount. One of these it credited as a nominal book-keeping payment to the account of John Satterlee & Co. Under the well settled law of this state such a book-keeping entry constituted no parting with value, Phoenix Ins. Co. v. Church, 81 N. Y., 218; McQuade v. Irwin, 39 Supr. Ct., 396; Burnham v. Baylis, 14 Hun, 608. But it may perhaps be urged that a different presumption as to payment arises in respect to the receipt and crediting by a bank of a cheque drawn upon itself. Conceding that such may be the fact in certain cases, the one at bar is clearly not such a case. The debit balance of the Satterlee account was produced by the act of the bank in charging against this account a cheque for $30,000 of some third party deposited by Satterlee & Co. on the 28th of January, 1890, which came back through the clearing house on the 29th unpaid. If the $21,210 cheque was intended to be accepted by plaintiff in absolute payment of anything it was the amount remaining unpaid upon this returned cheque for w’hich it held Satterlee & Co. responsible by reason of the firm’s endorsement thereof at the time of its deposit. But while nominally crediting the Simmons cheque to the unpaid balance of the Satterlee account, it took pains to hold on to the returned cheque, thereby retaining its claim against Sat- ■ terlee & Co. if the Simmons cheque should not prove to be good to the bank by reason of failure of the title of the bank to the notes discounted for Simmons’s account and negativing any possible presumption that the crediting of this Simmons cheque was intended to be an absolute payment of the returned cheque. The tentative character of the transaction further appears from the fact that the bank never canceled the two Simmons cheques upon its iron file, according to the custom of banks respecting paid cheques, and kept these cheques also in its possession. Furthermore, there is really no evidence in the case that Satterlee & Co. ever had anything to do with this transaction. The cheque for $21,210 was payable, not, to Satterlee & Co., but directly to plaintiff. That Conrad N. Jordan, who handed the cheque to plaintiff, had any authority or claimed to have any authority to represent Satterlee & Co., there is not a particle of evidence. That the hank intended to part with nothing but to hold on to everything and to its claims against everything is too apparent for dispute. The other Simmons cheque for $6,413.46 the bank, in order to make some excuse for its possession, entered as a nominal payment of three notes included in this very discount and none of which had yet matured. The utter sham character of this pretended payment is shown by the fact that the bank retained all three notes, collected one at maturity and brought suit on the other two, which suit is still pending. Although it was claimed that the commencing of this suit was a mistake, it appeared that after the discovery of the alleged mistake the suit was noticed for trial, and no offer has ever been made to surrender these notes. But if the hank had surrendered the notes under the circumstances it would have constituted no parting with value. If a hank discounts a note and passes the proceeds to the credit of its customer and then takes a cheque back from the customer for the amount of the proceeds and surrenders up the note, wherein does such surrender of the note constitute any parting with value ?
    III. Defendant was entitled also to a direction upon the ground that plaintiff failed to prove want of notice of the character of the notes in suit. The burden was on plaintiff to prove not only that it parted with value, but that at the time it so parted with value it had no notice of the equities, Canajoharie Nat. Bk. v. Diefendorf, 
      supra. If the bank parted with any value it was not at the time the discount was made, but on the 6th of February when it received the cheques. There is not a particle of evidence in the case to show that at this time the bank did not havé notice of the facts respecting- this paper. The persons then in charge of the bank had certainly acquired knowledge of the rascally character of the parties who had been in possession of the bank at the time the paper was taken.
    IV. Plaintiff’s paying-teller was clearly right when he testified that plaintiff had parted with nothing upon the faith of the note in suit, and the judgment and order appealed should be affirmed, with costs.
   By the Court.—McAdam, J.

The action is on a past due promissory note for $5,000 made by the Lorillard Brick Works Company to the order of James A. Simmons and endorsed by him and by Jacob Lorillard and passed before maturity to the credit of said James A. Simmons on the books of the plaintiff. The evidence established the fact that the note was made by Lorillard in the name of the Brick Company (he being its President) and endorsed by him individually, all for the accommodation of Simmons, and that it was diverted by him from the purpose for which it was intended. This made it necessary for the plaintiff to show two things. First. That the plaintiff paid value for the paper. Second. That the plaintiff had no notice that the paper had been diverted. Comstock v. Hier, 73 N. Y., 269; Vosburgh v. Diefendorf, 119 Ib., 357; Canajoharie Nat. Bk. v. Same, 123 Ib., 191. The plaintiff proved want of notice of the diversion, and the contest narrowed itself down to the single question, whether the plaintiff paid value for the paper within the meaning of that term as declared by the courts. The mere formal discounting of the note, and passing the proceeds to the credit of Simmons upon the hooks of the bank did not make the plaintiff a holder for value as against the accommodation maker and endorser of diverted paper. The plaintiff must have actually paid out and parted with the proceeds of the discount before it could acquire an indisputable title thereto. Central Natl. Bk. v. Valentine, 18 Hun, 417; Platt v. Chapin, 49 How., 318. The plaintiff concedes the proposition stated, but claims to have paid out the proceeds within the meaning of that term as decided by the cases of Pratt v. Foote, 9 N. Y., 463, and Mayer v. Heidelbach, 123 Ib., 332. Those cases hold substantially, that where a pre-existing debt has been actually and absolutely extinguished in consideration of the transfer of negotiable paper, the transferee is a holder for value within the rule protecting such holder against prior equities. In Pratt v. Foote, supra, it appeared that the Prattsville Bank (owned by the plaintiff) held the defendant’s note for $1,000 and interest, payable to and endorsed by Samuel Scudder. That five days before the note matured, the defendant called at the bank with Scudder’s check on the bank for the amount of the note and interest (payable on the day the note fell due), and proposed to the cashier that he should take the cheque and give up the note which the latter declined to do. It was then agreed that .the cheque should he left, that the cashier should pin it to the note, and if Scudder’s account was made good on the day both fell due, the cheque would pay the note. Five days after the note matured several sums were credited to Scudder, more than sufficient to meet the cheque, which was thereupon charged to Scudder’s account, and the note posted in the bill-book and tickler as paid, and the charge of the cheque to Scudder was posted from the cash-book into the ledger. The maker of the note in that case interested himself in its payment, and could on the day the credit was made, have withdrawn^ the money from the bank on Scudder’s cheque, and returned it in extinguishment of the note, if the bank had required him to do so, and the court held that in legal' effect the same result Avas produced by the mode Aviiich the bank adopted.

In Mayer v. Heidelbach, supra, the proposition decided, Avas that where a depositor in a bank, having sufficient funds standing to his credit, teriders to the bank a cheque in payment for negotiable paper it has for sale, and the bank accepts the cheque, charges it against the deposit, cancels and files it as a voucher, and delivers over the paper purchased, the purchaser is a holder for value, the antecedent debt of the bank being pro tanto actually and in fact extinguished.

In the present instance, there was no agreement whereby any other obligation was to be paid with the moneys credited to Simmons, as in the Pratt case, and no delivery up of other securities as in the Mayer case. Practically all the plaintiff did in the case at bar, was to take two cheques from Simmons to its own order, together aggregating the amount of the proceeds of the discount. One of these it credited as a nominal bookkeeping payment to the account of John Satterlee & Co. (a firm in which Simmons was a member). The debit balance of the Satterlee account was produced by the act of the bank in charging against this account a check for $30,000 of some third party deposited by Satterlee & Co. on January 28, 1890, which came back through the clearing house on the 29th unpaid. While nominally crediting the Simmons cheque to the unpaid balance of the Satterlee account it held on to the return cheque, thereby retaining its claim against Satterlee & Co. if the Simmons cheque should not prove good to the bank by reason of failure of the title of the bank to the notes discounted for Simmons’ account, thereby negativing any presumption that the crediting of this Simmons cheque was intended to be an absolute payment of the returned cheque. The tentative character of the transaction further appears from the fact that the bank never canceled the two Simmons checks upon its iron file, according to the custom of banks respecting paid checks, but kept these checks also in its possession. In short, the plaintiff surrendered nothing on the faith of the note in suit, its position will not in a legal sense be changed for the worse by its failure to recover anything upon it, and it cannot by its own volition on any ex parte system of credits or debits conjure up a theory of payment or satisfaction, not manifested or intended by the other parties to the transaction. The book-keeping entries constitute no parting with value within the rule making a plaintiff a bona-fide holder, so as to exclude existing equities between the parties. Phoenix Ins. Co. v. Church, 81 N. Y., 518; McQuade v. Irwin, 39 N. Y., Superior Ct., 396; Buhrman v. Baylis, 14 Hun., 608, and other cases before cited. There was nothing to go to the jury on any of the questions involved, and the verdict in favor of the defendant was properly directed, and the judgment entered thereon, and the order denying the motion for a new trial, must he affirmed with costs.

Sedgwick, Ch. J., concurred.  