author: Lehman, J. Kellogg, J.

text:
    Meserole Securities Co., Inc., Respondent, v. Jack T. Cosman, Defendant, and National Evans Motion Picture Film Laboratories, Inc., et al., Appellants.

      (Argued November 26, 1929;
    decided February 11, 1930.)

      Louis J. Rosett and Solomon C. Stemher for appellants.
    The plaintiff discounted the notes in suit. (Morris v. Third Nat. Bank, 142 Fed. Rep. 25; Youngblood v. Birmingham Trust Co., 95 Ala. 521; Metcalf v. Morse Iron Works, 84 N. Y. Supp. 582; Farmers & Mechanics Bank v. Baldwin, 23 Minn. 198; New York State Loan & Trust Co. v. Helmar, 77 N. Y. 64; Nicholson v. National Bank of Newcastle, 92 Ky. 251; First Nat. Bank v. Sherburne, 14 Ill. App. 566.) The act of discounting violates the statutes in such case made and provided. By reason thereof the notes in suit are absolutely void and the plaintiff is precluded from maintaining the present suit on these notes. (Curtis v. Leavitt, 15 N. Y. 9; Pratt v. Short, 79 N. Y. 436; Matter of Tilden, 98 N. Y. 438; New York State Loan & Trust Co. v. Helmar, 77 N. Y. 64; People v. Brewster, 4 Wend. 498; Orinoco Realty Co. v. Bandler, 233 N. Y. 24; People ex rel. Outwater v. Green, 56 N. Y. 466.) The notes in suit are absolutely void under former section 22 (now section 18) of the General Corporation Law, and the plaintiff is precluded from maintaining its suit on these notes by virtue of that provision alone. (Pratt v. Short, 79 N. Y. 436; Crocker v. Whitney, 71 N. Y. 161; Bath Gas Light Co. v. Claffy, 151 N. Y. 24.)

      Louis Rosenberg for respondent.
    Section 140 of the Banking Law does not prohibit discounting by a corporation because not organized under the Banking Law. (De Graff v. American Linen Thread Co., 21 N. Y. 124; Williams v. Western Union Telegraph Co., 9 Abb. N. C. 443; People v. Brewster, 4 Wend. 497; People v. Cohen, 94 Misc. Rep. 355; People v. Draper, 169 App. Div. 479; People v. Duplan, 208 App. Div. 435; Willett v. Schiff, 208 App. Div. 616; People v. Gates, 56 N. Y. 387; Seligman v. Friedlander, 199 N. Y. 373; Matter of Meyer, 209 N. Y. 389; Matter of Brooklyn Elevated R. R. Co., 125 N. Y. 434; People ex rel. Wood v. Lacombe, 99 N. Y. 49; Chicago, M. & St. P. R. R. Co. v. Voelker, 129 Fed. Rep. 522; Curtis v. Leavitt, 15 N. Y. 9; New York State Loan & Trust Co. v. Helmar, 77 N. Y. 64; Pratt v. Short, 79 N. Y. 437.) Neither section 22 of the General Corporation Law nor section 5 of the Stock Corporation Law prohibits discounting by a non-banking corporation. (National Park Bank v. Koehler, 204 N. Y. 174; Union Trust Co. v. McCrum, 145 App. Div. 409; 207 N. Y. 721; Bissell v. Michigan R. R. Co., 22 N. Y. 258; Kent v. Quicksilver Mining Co., 78 N. Y. 159; Little v. Garabant, 90 Hun, 404; 153 N. Y. 661; Whitney v. Barlow, 63 N. Y. 63; Parish v. Wheeler, 22 N. Y. 494; Nassau Bank v. Jones, 95 N. Y. 115; Rider Life Raft Co. v. Roach, 97 N. Y. 378; Appleton v. Citizens Central Nat. Bank, 19 N. Y. 417.)
   Lehman, J.

The plaintiff is a corporation organized under the Business Corporations Law of the State of New York (Cons. Laws, ch. 4). Its certificate of incorporation purports to authorize it “ to loan money secured by personal property or real estate, to purchase, hold, own, sell, assign, deal in, pledge and otherwise dispose of shares of capital stock, bonds, mortgage debentures, notes and other securities, obligations, contracts and evidences of indebtedness of corporations of the State of New York or any other State of the Union.” The defendant National Evans Motion Picture Film Laboratories delivered to the plaintiff before maturity the two notes in suit. Each note is for the sum of $4,400 payable six months after date with interest from date at the rate of six per cent per annum. They are made by “ Bischoff, Incorporated ” to the order of J. T. Cosman, and at the time of delivery to the plaintiff the said notes were indorsed by all the defendants. At that time the plaintiff paid to said defendant National Evans Motion Picture Film Laboratories the sum of $4,000 on each note. The plaintiff, according to the stipulation of the parties, engaged among other of its transactions in numerous transactions of the same nature and of the same legal effect as the transaction at bar.”

There is nothing in the record to show that these notes did not have a legal inception before they were delivered to the plaintiff. If the plaintiff were not a corporation, then unquestionably the defendant-appellants would be liable in this action as indorsers. They deny liability on the ground that the plaintiff is a corporation and is not authorized by the law of the State of New York to discount notes, and that under section 140 of the Banking Law (Cons. Laws, ch. 2) it is prohibited from “ making discounts ” and all notes made or given to a corporation, other than a bank, for discount are void.

Doubtless the policy of the State of New York embodied in its statutes restricts corporations not organized under the Banking Law and not subject to the supervision of the Banking Department from engaging in any form of banking. In section 2 of the Banting Law it has defined banks to mean any domestic moneyed corporation, other than a trust company, authorized to discount and negotiate promissory notes, drafts, bills of exchange and other evidences of debt; to receive deposits of money and commercial paper; to lend money on real or personal security; and to buy and sell gold and silver bullion, foreign coins or bills of exchange.” Banks possess the totality of these powers. Other corporations may possess some of them, and the Banking Law provides for the incorporation of moneyed corporations which are not banks though they may possess some banldng powers and engage in some forms of banking.

It does not follow from the fact that banks possess these enumerated powers that every exercise of such powers is a form of banldng. Business corporations at times lend money on real and personal security without in any form conducting a banking business. So, too, the negotiation of bills of exchange, the purchase of foreign coins or bills of exchange, may be an incident of a commercial business. The Legislature has, of course, not attempted to forbid business corporations from exercising any of these powers occasionally and incidentally to a commercial business, but it has provided that no corporation shall by any implication or construction be deemed to' possess the power to carry on a business which constitutes a form of banking business (General Corporation Law, § 22, now § 18; Cons. Laws, ch. 23) and it has fortified the effect of tho restriction contained in that statute by express prohibition against certain banking operations. (Banking Law, § 140.)

The language of section 22 (now section 18 of the General Corporation Law) is significant. Prohibition of banking powers. No corporation, domestic or foreign, other than a corporation formed under or subject to the banking laws of this State or of the United States, and except as therein provided shall by any implication or construction be deemed to possess the power of carrying on the business of discounting bills, notes or other evidences of debt, of receiving deposits, of buying and selling bills of exchange, or of issuing bills, notes or other evidences of debt for circulation as money, or of engaging in any other form of banking.”

In our search for the legislative intent, we may not disregard either the similarities or the differences between the powers which banks are authorized to exercise under section 2 of the Banking Law, and the powers denied to other corporations, except as expressly permitted by that law. Not only the totality of banking powers is denied to corporations organized under other laws, but no such corporation is authorized to carry on the business of exercising any of these powers and which constitutes any form of banking. Discounting bills, notes or other evidences of debt is a form of banking carried on by banks of discount. Issuing bills, notes or other evidences of debt; receiving deposits, buying and selling bills of exchange; issuing bills, notes or other evidences of debt for circulation as money, are other forms of banking. Business corporations are not authorized to encroach upon the field of banking operation in any form. Specific enumeration of particular forms of banking is supplemented by a restriction against engaging in any other form of banking.

The general restriction against any other form of banking not only amplifies but characterizes the specific restrictions. It forms a guidepost to the legislative intent, made more conspicuous by the title of the section “ Prohibition of banking powers.” The powers conferred upon banks are, of course, banking powers when exercised in a banking operation; they may be ordinary business powers when exercised in connection with a business operation of other nature. Business corporations are not authorized to exercise banldng powers, but the legislative restrictions must be read in their context and construed in their natural sense, and may not by forced construction be given an application broader than their purpose.

It is argued that obviously a corporation “ other than a corporation formed under or subject to the banking laws of this State illegally engages in a “ form of banking when it habitually exerts a power confided to a bank organized under the Banking Law. That can be true only if the power has been confided solely to banks and its exercise constitutes a banking operation. (See Chase & Baker Co. v. National Trust & Credit Co., 215 Fed. Rep. 633.) Under section 2 and section 106 of the Banking Law some powers are conferred upon banks which, in some form, individuals and corporations customarily exercise in operations which clearly are not banking operations. We may cite an extreme example: Banks receive deposits of money payable on demand. That undoubtedly constitutes a form of banking. Dry goods stores at times receive deposits of money, similarly payable on demand. The purpose of the store may be to enable customers to charge purchases against these accounts, yet the operation of receiving moneys on deposit by a dry goods store is so closely analogous to the business of receiving deposits by a bank that it may reasonably be said to constitute a banking operation. On the other hand, some dry goods stores customarily demand and receive deposits of money from customers to be applied on purchases where either delivery or payment is postponed. Sometimes, indeed, merchants customarily receive deposits as evidence of good faith before a contract or sale is made. Certainly in such cases it may hardly be said that even habitual receiving of deposits of money constitutes a form of banking.

At times business corporations even discount commercial paper of their customers as a regular and customary part of a commercial business. Factors, as part of their business of selling on commission goods consigned to them, customarily agree to make advances of moneys to the consignors before the goods are sold and paid for in cash. At times such agreements require the advances to be made by “ discount ” of notes or drafts either made by the consignor or received in payment of goods. Certainly the commercial world would be somewhat astonished to learn that such ordinary commercial practices are prohibited and that the discounted notes are void because the factor in advancing moneys to a consignee by “ discount ” of commercial paper engaged in a prohibited form of banking.

Perhaps we may find in the variations of language in the descriptions of powers confided to banks under the Banking Law and the description of the powers withheld from other corporations under the General Corporation Law further evidence that the Legislature did not intend that in all cases the habitual exercise of a power confided to a bank shall constitute illegally engaging in a form of banking. Section 2 of the Banking Law authorizes banks to loan money on real and personal property. Certainly this constitutes a customary form of banking, yet there is no express restriction upon the power of a business corporation to engage in the business of loaning money, and no implied prohibition except where such business is carried on as a “ form of banking ” and not merely as a part or incident of a commercial business. So, too, the enumeration of powers which corporations may not exercise, as a business, does not include the power to buy and sell gold and silver bullion or foreign coins. Indeed, though a bank is authorized to discount and negotiate ” notes, yet there is no express provision excluding business corporations from the business of “ negotiating ” notes, except in so far as “ negotiation ” may be synonymous with or included in the term discount.” The Legislature by its disjunctive enumeration of banking powers which a corporation other than a bank may not exercise as a business, has unequivocally indicated that the statute applies even where a corporation assumes to exercise a single one of the enumerated powers. None the less, the juxtaposition of the enumerated banking powers and the term “ other form of banking ” indicates with scarcely less clearness that the Legislature did not intend that any definition of the enumerated powers should extend the application of the statute beyond the banldng field. We must determine specifically whether the Legislature in using the word “ discount ” either in the restrictive provisions of the General Corporation Law or in the prohibitory provisions of section 140 of the Banking Law intended to include the purchase at less than its face value of an existing note, payable thereafter, with interest till the date of payment, by a corporation which engaged in numerous transactions of the same nature but otherwise exercised none of the powers enumerated in section 22 (now section 18 of the General Corporation Law).

In Tracy v. Talmage (18 Barb. 456) it was said that “ ‘ to discount ’ includes to buy;’ for discounting, in most cases, is but another term for ( buying at a discount.’ ” Undoubtedly definitions of the word “ discount ” by lexicographers and economists may be found wide enough to cover every purchase of a debt or chose in action, yet in banking or finance it seems to have a meaning somewhat more restricted. Banks are not ordinarily permitted to speculate in the purchase of negotiable instruments made or indorsed by parties of doubtful financial responsibility. Banks of discount loan or advance moneys to the makers or holders of negotiable instruments, receiving at that time, by deduction from the sum loaned or advanced, the interest or compensation to be paid for the advance of the bank’s money. (See Jevons Prim. Pol. Econ. 114.)

Ordinarily perhaps the advance or loan is made by discount of negotiable paper created for that purpose and having no legal inception until delivered for discount. Sometimes the loan or advance is made to the maker, sometimes to an indorser, where the maker has signed the note for the accommodation of the borrower. If a bank loans or advances moneys to a customer upon an existing note indorsed by the customer upon deducting interest to the date when the note becomes due, the transaction may in form be a purchase of the note; for most practical purposes the transaction is the same as if the moneys advanced formed the consideration for the making of the note.

It has been authoritatively decided by this court that the power of a bank to discount notes includes the power to purchase existing notes at a discount from note brokers. (Atlantic State Bank v. Savery, 82 N. Y. 291.) There the question before the court concerned only the extent of the powers expressly or impliedly granted to banks organized under the Banking Law. There was no statutory prohibition against the purchase of negotiable instruments by banks, and the court decided only that in such case the grant of powers should not be.narrowly construed. Indeed, the court pointed out that If the statute contained words of prohibition, a different question would arise and the cases cited by the appellant (Bank of U. S. v. Davis, 2 Hill, 451; N. Y. State L. & Trust Co. v. Helmer, 77 N. Y. 64) would apply.”

Obviously a decision that the power of a bank to discount ” notes includes the power to purchase notes at a price determined by the deduction of interest in advance from the face value of the note cannot be an authoritative determination that a similar purchase at a discount by a business corporation constitutes an exercise of a banldng power or engaging in a form of banking. The distinction must always be borne in mind between the exercise in a commercial transaction of a power confided to a bank, and engaging in a form of banking.

This court has not, in the past, been oblivious to this distinction. In the case of New York State Loan & Trust Co. v. Helmer (77 N. Y. 64, cited in Atlantic State Bank v. Savery, supra, with approval) the court held that a moneyed corporation chartered by special act of the Legislature to engage in some, but not all, forms of banking might not discount notes in the same manner as banks of discount might do. In some respects the question presented was similar to the question before us. Differences in the facts, however, require opposite conclusion. In that case the plaintiff had power under its charter to grant, bargain, buy or sell real and personal property. In the present case the plaintiff’s charter in clearer terms purports to grant power “ to hold, own, sell, assign, deal in, pledge and otherwise dispose of * * * notes and other, securities, obligations, contracts and evidences of indebtedness of corporations of the State of New York or any other State of the Union.” Such distinction is, however, not important, because in both cases the court must consider the effect of an express prohibitory statute against making discounts.”

At this point it may be well to examine the prohibitory statute now in force; for the prohibitory statute and the restrictive statutes together form, as we have already pointed out, the statutory embodiment of the public policy of the State to exclude corporations not organized under the Banking Law from engaging in any form of banking. It provides in part: “ No corporation, domestic or foreign, other than a national bank or a federal reserve bank, unless expressly authorized by the laws of this State, shall employ any part of its property, or be in any way interested in any fund which shall be employed for the purpose of receiving deposits, making discounts, or issuing notes or other evidences of debt to be loaned or put into circulation as money. All notes and other securities for the payment of any money or the delivery of any property, made or given to any such association, institution or company, or made or given to secure the payment of any money loaned or discounted by any corporation or its officers, contrary to the provisions of this section shall be void.” (Banking Law, § 140.) At the time the earlier case was decided a statute was in force, similar in all respects, except that at that time there was no comma after the words making discounts ” in the first.sentence. (See Part 1, ch. 20, title 20, § 3; 1 Statutes at Large [Edm. ed., R. S.], p. 661.)

The court in the earlier case pointed out clearly the purpose of the statutes. These enactments are certainly very explicit, and in connection with others, some of which provide for the infliction of penalties for a violation of different provisions of the act, indicate quite clearly a settled policy of the Legislature to prevent corporations which are not formed for banking business from carrying on or in any way interfering with the same.” (New York State Loan & Trust Co. v. Helmer, supra, at p. 69.)

In that case the court pointed out that the records showed that the plaintiff kept a regular office for discount and deposit, carried on a regular banking business, discounted promissory notes and other commercial paper, bought and sold a large amount of exchange, received a large amount of deposits, and paid the same on the checks of depositors, and, in fact, did the ordinary business of a bank of discount and deposit.” It further appeared that the proceeds of the notes in question were credited upon the books of the plaintiff to the defendant, Bowen.” These facts, absent in the present case, dictated the decision of the court.

In deciding that under the facts of that case the banking corporation had “ made discount ” in manner prohibited by the statute, the court left no room for doubt as to the basis and scope of its decision.

“ Upon the facts alleged, the question to be determined is whether the plaintiff possesses authority, under its charter, to discount notes, the same as any other banking institution, credit the proceeds, and pay out the same upon the checks of one of the parties; and not whether the plaintiff can lawfully buy and receive promissory notes and advance moneys upon the same. There is a plain distinction between the two cases; and having that distinction in view, it is quite apparent that the plaintiff exceeded its powers in discounting the notes in question, and violated the provisions of its charter and the laws of this State passed to restrain illegal banking.”

Having that same distinction in view, it would seem that upon the facts the present case falls clearly upon the other side of the line of demarcation. Here it is not claimed that the plaintiff corporation maintained a regular office for discount and deposit or carried on a regular banking business or received deposits and paid out moneys on checks. It is the function of a bank of discount to employ its funds in the form of loans or advances to its customers, receiving compensation in the form of interest upon the moneys loaned or advanced. Such loans or advances are made upon the credit of the customers, either with or without the credit of other parties in addition. If it makes such a loan or advance in the form of a discount of a bill or note, payable at a future date, it pays to the maker or holder the face amount of the instrument after deducting interest for the use of the money till the date when the instrument is payable. Where such payment by the bank constitutes the consideration for the execution of the bill or note, the transaction is, both in form and in fact, a loan. Where such payment is the consideration for the transfer of a pre-existing instrument the transaction is in form a purchase; yet in both cases the transaction carried on by the bank is part of its function to loan or advance moneys to its customers, deriving its profit ‘from the receipt of interest in advance.

On the other hand, it is the function of a business corporation to employ its capital in its own business. The plaintiff corporation was not engaged in the business of loaning or advancing moneys to its customers, deducting interest in advance. It was engaged in the business of purchasing notes at less than their face value, apparently as a speculation. It did not in this case deduct interest in advance. The notes were in fact payable with interest and the purchaser, under their terms, was to receive that interest at the date when the notes were payable. The plaintiff made a trading bargain in order to reap a trading profit, in no manner measured by any rate of interest for use of the money. It maintained no office to which its customers might repair to obtain a loan or advance of moneys at interest, though, perhaps, it maintained an office at which customers might sell notes which the plaintiff in the course of its business might choose to buy.

Technically the discount of the note in New York State Loan & Trust Co. v. Helmer (supra) may also have been a purchase, but it was a purchase made by a corporation engaged in a form of banking for the purpose of advancing money to a customer upon interest deducted in advance. The court, indeed, regarded it as if a loan, and in its opinion characterized the prohibited transaction as “ a loan of money obtained upon a promissory note by discount of the same to the maker or holder.”

The same considerations dictated a like decision in Pratt v. Short (79 N. Y. 437), much relied upon by the appellants. There again an institution endowed by charter from the Legislature with power to engage in some forms of banking, but not the power to discount notes, advanced money to a customer upon the purchase or discount of a note held by the customer and indorsed by him. Technically the transaction was not a loan though the court so regarded it.

An examination of the record on appeal reveals, even more clearly than the opinion, the facts upon which the court based its decision. The record is meagre, but it was admitted as a fact that the “ note was discounted by the said People’s Safe Deposit and Savings Institution at the banking office of said company in Syracuse and the money proceeds of said note less the discount was paid by said bank at its counter to the said defendant in the ordinary way that a bank of discount and deposit discounts short paper.” (Italics are ours.) Again it appears that the parties and the court by common consent considered that the discount was in fact a loan. The briefs of the parties, as well as the opinion of the court, so characterized it. Though the court decided that the transaction constituted a prohibited form of banking and that the note was void when received by the banking institution, it allowed a recovery against the customer for money loaned. A resolution of the board of directors of the corporation was introduced in evidence, That all discounts of promissory notes made at the Syracuse office of the institution by Patrick Lynch are hereby sanctioned and approved by this Board and said Lynch is fully empowered and authorized by this Board of Directors to discount and loan the funds of the Syracuse office on such promissory notes and securities as he may deem fit.” Finally, there is a finding that immediately or very soon thereafter ¡> e., the delivery of the note to the defendants] the defendants indorsed the said note and afterwards and in consideration of and to secure the payment of the sum of $1,873.03 lent and advanced to said defendants at their request, by the said People’s Safe Deposit and Savings Institution; they, said defendants, transferred and delivered the said promissory note to the said institution, receiving therefor the sum of $1,873.03, and they gave the makers of the said note credit for the money they had thus obtained on their indorsement from said institution.” In view of these circumstances disclosed by the record, it seems impossible to view the decision in that case as any authority for the view that the purchase of a note at less than its face value by a corporation which habitually engaged in such transactions, but which otherwise carried on no form of banking, is the exercise of a banking power which under the law only banks or corporations, specially authorized by the Legislature, may lawfully exercise.

In no case cited by the parties; or which we have found, has any court of this or any other jurisdiction found that the terms “ discount notes ” and purchase or negotiate ” notes were coextensive in their application. In those cases where the courts of this jurisdiction have construed, the words discount notes in a sense wide enough to include the purchase of a note at less than its face value, the courts were dealing with statutes applicable only to banks or bankers, or the purchase of the notes was made by. a bank as an advance to a depositor by payment of the face value of the notes after deducting interest to the date of payment. So in Nash v. White’s Bank of Buffalo (68 N. Y. 396) the court in construing a statute which limited the amount of interest which any bank or banker might take or reserve on a loan or discount made ” to seven per cent, held that the words loan or discount included a purchase of a note by such bank or banker, though no loan in a technical sense be made. Decision there was based on the fact that the statute plainly was intended to cover all loans or advances made by banks in any form for interest, and special provision was made in the statute for a reasonable charge for collection upon the purchase, discount or sale of an instrument payable in another place (Laws of 1870, ch. 163, the substance of which is included in section 114 of the Banking Law). (See, also, Johnson v. National Bank of Gloversville, 74 N. Y. 329.)

Section 140 of the Banking Law is derived from chapter 236 of the Laws of 1818, enacted pursuant to a message of Governor Clinton, pointing out the dangers of banking inflation. It has existed in its present form since 1828. (1 R. S., ch. 20, tit. 20, § 3, p. 712.) In some respects its language is confused and its punctuation seems casual and varies in different re-enactments of its provisions. Even so, it certainly suggests, if, indeed, it does not expressly provide, that the prohibited “ discounts are the usual discounts of banking institutions made for the purpose of loaning money to their customers. Since that time there has been no suggestion in any case that its prohibitions apply to a purchase of a note by a business corporation not conducting a banking business nor loaning or advancing money at interest to banking customers. Now after the lapse of more than one hundred years we are asked to give it an application broad enough to bring within the reach of its drastic provisions other transactions, certainly not within its spirit, even if it could possibly be said that they fall within its letter. If wherever a business corporation receives deposits or “ makes discounts,” it performs a prohibited act, and all notes made or given for such purpose are void, then for one hundred years factors and other merchants have unsuspectingly broken the law and have enforced, without question, notes which were void.

Many instances may be found in the Banking Law and other statutes where the Legislature has used the terms purchase ” or negotiate ” notes or evidences of debt in-a sense not coextensive with “discount.” Indeed, it is significant that in section 2 of the Banking Law, cited above, the Legislature has defined a bank as a moneyed corporation “■ authorized to discount and negotiate promissory notes,” yet it has not expressly restricted the power of a business corporation organized under the General Corporation Law to carry on the business of “ negotiating ” promissory notes, nor expressly prohibited under the Banking Law the purchase or negotiation of notes or other evidences of debt. By chapters 326 and 327 of the Laws of 1929 the Legislature has unmistakably evidenced the intention that at least in the future stock corporations may purchase, hold and dispose of notes or choses in action of persons or corporations and that such business is not confined to corporations organized under the Banking Law. Though such statutes cannot be given a retroactive effect, they may be considered as a legislative declaration that our interpretation of the earlier statutes is not contrary to the public policy of the State.

For these reasons it seems clear that under a reasonable construction of the relevant statutes business corporations may not encroach upon the field of banking occupied by banks of discount by making discounts ” even though they perform no other banking function; yet they are not restrained or prohibited from purchasing notes at a discount where such purchase is not a mere device for carrying on the business of advancing or loaning money at" interest, a form of banking customarily conducted by banks of discount, but is in fact as well as in form a commercial transaction of bargain and sale. There may be times when it is difficult to draw the fine. Here the line seems clear.

The order of the Appellate Division should be affirmed and judgment absolute ordered against appellant on the stipulation, with costs in all courts.

Kellogg, J.

(dissenting). The plaintiff purchased two promissory notes, aggregating $8,800, which were made by Bischoff, Incorporated, and were payable to the defendant Jack T. Cosman. The notes bore the indorsement of Cosman, the defendants Tom Evans, Mark M. Dintenfass and National Evans Motion Picture Film Laboratories. The last named defendant transferred the notes to the plaintiff and received therefor the sum of $8,000. Default in payment of the notes at maturity was made, and this action was brought against the indorsers to recover the balance due and payable thereon. The defendants resisted payment on the ground that the plaintiff, having been organized as a business corporation and not as a bank, was not authorized to purchase or discount the notes, and that the notes in its hands, under section 140 of the Banking Law, were void and uncollectible.

On the trial it was stipulated that the plaintiff was incorporated pursuant to the provisions of the Business Corporations Law, now the Stock Corporation Law; that the purposes of its organization, as expressed in its certificate of incorporation, were these: “ To loan money secured by mortgage on personal property or real estate, to purchase, hold, own, sell, assign, deal in, pledge and otherwise dispose of shares of capital stock, bonds, mortgages, debentures, notes and other securities, obligations, contracts, and evidences of indebtedness of corporations of the State of New York or any other State of the Union.” It was further stipulated “ that the plaintiff at the present time is engaged in and that prior and subsequent to and coincident with the transaction at bar the plaintiff engaged, among other of its transactions, in numerous transactions of the same nature and of the same legal effect as the transaction at bar.” It thus appears, not only that the plaintiff was organized for the purpose, among others, of buying notes, but that it has, in pursuit of that corporate purpose, on various occasions made such purchases, paying to the selling indorsers sums of money less than the face value of the notes. The conclusion follows that the plaintiff was engaged in the business of buying notes at less than face value, and that, in the conduct of such a business, it bought the notes in suit.

It is provided in section 18 (formerly section 22) of the General Corporation Law that no corporation, “ other than a corporation formed under or subject to the banking laws of this State or of the United States,” shall by any implication or construction be deemed to possess the power of carrying on the business of discounting bills, notes or other evidences of debt, of receiving deposits, of buying and selling bills of exchange, or of issuing bills, notes or other evidences of debt for circulation as money, or of engaging in any other form of banking.” It is said that, under this provision, there is denied to a business corporation the possession of the four enumerated powers in combination, but not the possession singly of any one of the powers. Under this interpretation, if the certificate of incorporation of a business corporation were drawn to sanction its exercise of the powers of discounting bills and notes, receiving deposits, and buying and selling bills of exchange, without specifying the power of issuing bills to pass current as money, the corporation might carry on a business quite characteristic of banking and be wholly free from supervision or control by the State Banking Department. It is unthinkable that the Legislature intended to permit a business corporation to exercise such powers. That it did not so intend is shown by its use of the disjunctive “ or ” rather than the conjunctive and ” as a connective for the several clauses of the quoted provision. The implication is clear that a corporation, other than a banking corporation, may not exercise any one of the powers enumerated in the provision. It may not carry on the business of discounting bills, notes or other evidences of debt;” it is prohibited from engaging in any other form of banking.” Consequently, if the plaintiff, in carrying bn the business of buying and selling notes, has engaged itself in discounting ” or any other form of banking, its actions have been unauthorized, notwithstanding the terms of its certificate, and its purchase of the notes in suit was an illegal act.

Obviously a corporation, other than a corporation formed under or subject to the banking laws of this state,” illegally engages in a “ form of banking ” when it habitually exerts a power confided to a bank organized under the banking laws. Such a bank is defined, in section 2 of the Banking Law, as follows: “ The term, 1 bank,’ when used in this chapter, unless a different meaning appears from the context, means any domestic moneyed corporation, other than a trust company, authorized to discount and negotiate promissory notes, drafts, bills of exchange and other evidences of debt; to receive deposits of money and commercial paper; to lend money on real or personal security; and to buy and sell gold and silver bullion, foreign coins or bills of exchange.” By section 306 a bank is empowered to exercise all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange and other evidences of debt; by receiving deposits; by buying and selling exchange, coin and bullion, and by lending money on real or personal security.”

In Atlantic State Bank v. Savery (82 N. Y. 291) the question was whether the plaintiff, organized as a bank under chapter 260 of the Laws of 1838, was empowered to buy the promissory notes in suit. Under section 18 of the act it was empowered “ to carry on the business of banking, by discounting bills, notes and other evidences of debt; by receiving deposits; by buying and selling gold and silver bullion, foreign coins and bills of exchange, in the manner specified in their articles of associations for the purposes authorized by this act; by loaning money on real and personal security; and by exercising such incidental powers as shall be necessary to carry on such business.” It was held that the plaintiff, in buying the notes in suit, lawfully exercised the statutory power of discounting bills, notes and other evidences of debt.” The court quoted with approval the statement that “ to buy or purchase a debt is always in commerce termed to discount it,” made in MacLeod on Banking (at p. 43); and the statement made in Tracy v. Talmage (18 Barb. 456), as follows: Now, to discount ’ includes to buy;’ for discounting, in most cases, is but another term for buying at a discount.’ ” It is noticeable that the statute under consideration did not expressly confer upon banks, as does our statute, the power “ to negotiate ” as well as to discount ” promissory notes. There is authority to the effect that “ to negotiate ” means not only to transfer or assign (as a bill, etc.) to another ” but to obtain or give value for (bills, cheques, etc.) in money.” (Oxford Dictionary.) In construing a statute similar to ours, the Supreme Court of Illinois, in the case of First National Bank of Greenville v. Sherburne (14 Ill. App. 566) has suggested that to “ negotiate ” means not only to sell but to buy. However that may be, the decision in Atlantic State Bank v. Savery (supra) is clear authority to the effect that a bank authorized to discount ” promissory notes is necessarily empowered to buy ” them. Under this authority, therefore, it is clear that the plaintiff, in buying the notes in suit, according to its practice, was engaged in a form of banking which it was prohibited from exercising by section 18 of the General Corporation Law. The purchase was, therefore, illegal. Whether the notes were void and uncollectible is another question.

It is provided in section 140 of the Banking Law that no corporation, other than a banking corporation, shall employ any part of its property, or be in any way interested in any fund which shall be employed for the purpose of receiving deposits, making discounts, or issuing notes or other evidences of debt to be loaned or put into circulation as money.” Again, the disjunctive or ” is used to connect the prohibitory clauses. The enumerated powers, thus forbidden to business corporations, are the precise powers conferred upon banks by sections 2 and 106 of the Banking Law. A bank is permitted to employ its funds in “ discounting ” commercial paper; other corporations are forbidden to use their funds in making discounts.” Obviously the discounting forbidden and the discounting sanctioned are identical. A bank in the exercise of the “ discounting ” power may purchase promissory notes. It would seem that a corporation to which making “ discounts ” is forbidden might never legally buy them. The provision quoted from section 140 is followed by this: All notes and other securities for the payment of any money or the delivery of any property, made or given to any such association, institution or company, or made or given to secure the payment of any money loaned or discounted by any corporation or its officers, contrary to the provisions of this section, shall be void.” Notes “ made or given ” to secure money loaned or discounted,” in violation of the section, shall be void. Moneys “ discounted,” then, are something not comprehended in the expression moneys loaned;” nor are notes given ” included in the phrase “ notes made.” The inference is that notes “ given ” to secure moneys discounted ” are notes which have been purchased, without the creation of an attendant loan. The conclusion is thereby strengthened that a business corporation which makes a business of purchasing notes at a discount violates the section under consideration. If it conducts such business, the notes purchased in the course thereof are void.

In section 114 of the Banking Law a “ loan ” is distinguished from a discount.” The same distinction appeared in the act of 1870 (Ch. 163), from which the provisions of section 114 were derived. It was there provided that every bank might make a charge of seven per cent on every loan or discount made;” that if a greater sum were charged and paid, the person paying might recover from the bank twice the amount of the excess payment. The provisions of the act of 1870 were considered in Nash v. White’s Bank of Buffalo (68 N. Y. 396). It had been found that the plaintiff had presented commercial paper to the defendant bank for discount; that he had indorsed and transferred the paper to the defendant; that the defendant had credited the plaintiff on its books with the amounts for which the paper was made or drawn, less an amount charged for discount; that the amount charged in each case was greater than the sum of seven per cent per annum. Rapallo, J., writing for the court, said: “ There was no loan, but an absolute transfer of the paper to the bank.” It was held that, since there was no loan, the transaction was not usurious under the general statutes against usury; that nevertheless there had been a discount and the plaintiff was entitled to a recovery of double the amount thereof. In Johnson v. National Bank of Gloversville (74 N. Y. 329) a provision of the United States Banking Act, identical with the provisions of the act discussed in Nash v. White’s Bank of Buffalo (supra), was considered. Under it a recovery of double the excess discount charged by the defendant in buying commercial paper from the plaintiff was approved. Rapallo, J., again writing for the court, said of the act of Congress: “ It limits the rate of interest to be taken on loans and discounts. If the rate were limited only on loans there might be some plausibility in the argument that the purchase of business paper at a discount did not fall within the limitation. But it distinctly specifies discounts as well as loans, and it is well known that the principal office of banks of discount, is to discount the business paper of their customers.” If the association of “ discounts with loans was of determinative importance in the case last cited, the association of moneys discounted ” with moneys loaned in section 140 of the Banking Law is of equal importance. In any event the two decisions are definite authority to establish the proposition that to purchase a promissory note, at a discount from its face, is to discount the note, a thing prohibited to business corporations, the doing of which renders the note void.

In the case of Pratt v. Short (79 N. Y. 437) the plaintiffs, as assignees of a corporation not organized to do a banking business, sought a recovery from the defendants, who were the indorsers of a promissory note. The note was made payable to the defendants, and represented a debt owed by the maker to them. The note was indorsed by the defendants and transferred to the corporation, which paid the defendants the proceeds of the discount. The plaintiffs declared upon three counts, seeldng a recovery upon the note, a recovery for money loaned, and a_recovery for money had and received. The Restraining Act then in force (1 R. S. 712) provided that “ no incorporated company, without being authorized by law, shall employ any part of its effects, or be in any way interested in any fund that shall be employed, for the purpose of receiving deposits, making discounts or issuing notes or other evidences of debt, to be loaned or put in circulation as money.” The words of the prohibition are identical with the prohibitory words of section 140 of the Banking Law under discussion. The act further provided that all notes or other securities for the payment of money “ made or given to secure the payment of any money loaned or discounted by any incorporated company, contrary to the provisions of the third section of this title, shall be void.” Identical words are used in section 140. The court held that “ the discount by the corporation of the note in question, was unlawful ” and that, under the quoted provision of the Restraining Act, the note was void.

While the court denied a recovery upon the note, it permitted the recovery of an amount equal to the sums advanced upon the discount. It is not at all clear that the permitted recovery was for money loaned. Thus, the court said that while “ the law will not enforce the prohibited contract, it will take notice of the circumstances, and if justice and equity require a restoration of money or property, received by either party thereunder, it will, and in many cases has given relief.” Again it said: “If the defendants avoid their indorsement it is the plainest equity that they shall restore the money which they received on the faith of it.” In support of its conclusions the court cited the Utica Insurance Company cases (Utica Insurance Co. v. Kip, 8 Cow. 20; Utica Insurance Co. v. Cadwell, 3 Wend. 296; and Utica Insurance Co. v. Bloodgood, 4 Wend. 652). In each of these cases the notes, with indorsements made for accommodation, were presented by the maker to the plaintiff, and the moneys paid by it were received by the maker. Manifestly, the notes had no inception, as binding obligations, until presented to the plaintiff, so that the transactions were clearly loans to the makers. It would be quite a different thing to say that on a transfer of a note, embodying a binding obligation of the maker, by the indorser to a person paying money therefor, a loan is made to the indorser. It is noteworthy, also, that in the first case, the court, in support of a recovery of the moneys advanced, quoted 2 Comyn on Contracts, 109, to the effect that the holder of an illegal instrument, received in exchange for moneys advanced, may disregard it, and, to prevent the defendant from retaining the benefit which he derived from an unlawful act,” may have a recovery. The court also cited Munt v. Stokes (4 Durnford & East Rep. 561, 4 T. R. 561). In that case Lord Kenyon expressed the opinion that a person paying out money on the security of an illegal instrument could maintain an action for money had and received.” The Utica Insurance Company cases were severely criticized in Tracy v. Talmage (14 N. Y. 162), where the court said: “ Recoveries are not had in such cases upon the basis of the express contract, which is tainted with illegality; but upon an implied contract, founded upon the moral obligation resting upon the defendant to account for the money or property received.” This, it seems to the writer, is the true principle underlying the recovery permitted in Pratt v. Short (supra). The obligation to restore was in quasi contract to prevent unjust enrichment; not in assumpsit to repay money loaned.

It is now the rule in this State that where business paper is transferred and indorsed by the payee, or a subsequent indorser thereof, to a third person who makes payment therefor, no new relationship of debtor and creditor is created, and the transaction is not usurious, although the payment made involves a deduction of a greater sum than accrued interest. (Eastman v. Shaw, 65 N. Y. 522; Joy v. Diefendorf, 130 N. Y. 6; Nash v. White’s Bank of Buffalo, supra; Johnson v. National Bank of Gloversville, supra.)The rule which renders void a note in the hands of a third party, who has purchased at a discount greater than the legal interest applies to instruments that have no inception between the parties or which are not intended to be available until discounted.” (Joy v. Diefendorf, supra.) If the note transferred evidences a binding obligation on the part of the maker, the transferor merely sells that obligation, accompanying the sale by a guaranty, implied in his indorsement, that the maker will pay, or in default thereof that the indorser will. No loan to the indorser is involved; no present indebtedness on his part is created. (1 Daniels Neg.Inst. § 768; 2 Parsons Notes & Bills 429,430; Nichols v. Fearson, 7 Pet. [U. S.] 103.) In Nichols v. Fearson (supra) the court said that the cases holding that a transfer by indorsement involved the making of a loan rested upon the theory that an indorsement involved a promise to pay which ordinarily has that significance; that the reasoning was erroneous for the contract between indorser and indorsee is at best but a conditional or provisional contract; the indorsement of a business note produces a real transfer of interest, and the indorsement may well be regarded in the light of a guarantee against the insolvency of the promisor.” In view of the rule, now well established in this State, that a transfer by indorsement for a discount greater than legal interest is not usurious, it necessarily follows that a transferor through his indorsement never becomes a debtor to the transferee. If it be true, therefore, as urged by the respondent, that there is a “ discount ” only where there is a loan, promissory notes are discounted only in cases where the primary obligors present them to the money lenders, and themselves receive the advances made thereupon. Of course the payee of a note may engage himself generally to make payment of money borrowed, and to secure his promise may indorse and transfer the note to the lender. Obviously in such an instance, the note is not discounted;” it is merely deposited. “ A banker discounts a bill, as opposed to taking it for collection or as security for advances, when he takes it definitely and at once as transferee for value.” (Halsbury, Laws of England, vol. 1, p. 629.) The distinction between a discount and a deposit of bills depends upon the intention to make an absolute transfer, or to enable the transferee to receive the moneys for the transferor; “ Indorsement prima facie evidence of the former; unless the object of mere deposit is clearly shown.” (Headnote: Twogood, Ex Parte, 19 Vesey Ch. 228.) If the respondent’s argument were to prevail, therefore, business corporations would be subject to the sole restriction that they might not discount notes for the benefit of the primary obligors. They might exercise at will what Judge Batallo has termed “ the principal office of banks of discount,” viz., to discount the business paper of their customers.” The'argument ought not to prevail.

The respondent argues that the opinion in Pratt v. Short (supra) indicates that- the court deemed that a loan was involved in the transfer of the note sued upon, and, therefore, a true discount ” had been made. The proof showed that the maker, Alice Van Cleek, gave the note in suit to the payee, H. W. Short & Co., to apply on her account for lumber purchased. It was stipulated that the note in question was made by Mrs. Van Cleek payable to the order of Henry W. Short & Co., which company consisted of Henry W. Short and George B. Leonard, the defendants in this action, and upon the application of the payees and indorsers Henry W. Short & Co., said note was discounted by the said Peoples’ Savings Bank and Safe Deposit Company at the banldng office of said company in Syracuse, and the money proceeds of said note less the discount was paid by said bank at its counter to the said defendant in the ordinary way that a bank of discount and deposit discounts short paper.” (See record of case on appeal.) It will be seen that the stipulated facts indicated a transaction which involved no more than the ordinary transfer of business paper for moneys paid. If the court thought that a loan was involved, it must have so considered upon the theory, once obtaining in our courts, that a transferor of a note by indorsing it assumes with the transferee the relationship of debtor and creditor. (Cobh v. Titus, 10 N. Y. 198, and cases cited.) If this were the basis of the court’s opinion, then, upon the same theory, the notes in suit involved equally well the initiation of a loan, and, therefore, a discount.” Certainly no fact distinguishes our case from Pratt v. Short (supra) to indicate in the latter a loan and in the former a mere sale. If there was a loan in either there was a loan in both. We think that in each instance there was a purchase of commercial paper without more, and that such a purchase, though not involving a loan, is nevertheless a discount ” within the prohibition of section 140 of the Banking Law. Accordingly, the notes in suit, like the note in Pratt v. Short (supra), were void and uncollectible.

The order of the Appellate Division should be reversed and the judgment of the Trial Term affirmed, with costs in this court and in the Appellate Division.

Pound, O’Brien and Hubbs, JJ., concur with Lehman, J.; Kellogg, J., dissents in opinion in which Crane, J., concurs; Cardozo, Ch. J., not voting.

Order affirmed, etc.


source: Caselaw Access Project

author: Kellogg, J.

license: Public Domain

text:
    Gaetano Pimpinello, Respondent, v. Swift & Company, Inc., Appellant.

      (Argued January 6, 1930;
    decided February 11, 1930.)

      James G. Purdy for appellant.
    In the absence of an allegation that the -defendant participated in or had knowledge of the alleged fraud perpetrated upon plaintiff by his attorney, who concededly had authority to settle the action, the amended complaint sets forth no cause of action against appellant. (De Louis v. Meek, 2 G. Greene [Ia.], 55; Dalton v. West End St. Ry. Co., 159 Mass. 221; North Whitehall Township v. Keller, 100 Penn. St. 105; Davis v. First Nat. Bank, 139 Ga. 702; Mandeville v. Reynolds, 68 N. Y. 528.) The plaintiff’s own negligence is the direct cause of the situation in which he is placed. (Albert v. Milwaukee & Superior R. R. Co., 87 Wis. 105; Bates v. Bates, 124 Ala. 424; Spitze v. B. & O. R. R. Co., 75 Md. 162.)

      Paul Jones for respondent.
    If the plaintiff was ignorant of the contents of the paper he signed through inability to read it, and as there was fraud in its procurement, it is immaterial that the defendant did not participate in the fraudulent transaction; the instrument is void in its hands and it cannot retain its benefits. (Whipple v. Brown, 225 N. Y. 237; Huguenin v. Baseley, 14 Vesey, 289; Bedell v. Bedell, 37 Hun, 419; Smith v. Ryan, 19] N. Y. 452; Cleary v. Municipal Electric Light Co., 139 N. Y. 643; Battle v. Clavetta, 132 Misc. Rep. 48.) Plaintiff’s attorney was without authority to settle his client’s cause of action for the consideration specified in the alleged release; and the procurement of plaintiff’s signature to the instrument in question being accomplished by fraudulent means, he is entitled to be relieved against it. (De Louis v. Meek, 2 G. Greene [Ia.], 55; Dalton v. West End St. Ry. Co., 159 Mass. 221; Halker v. Parker, 7 Cranch, 436; Morecroft v. Taylor, 225 App. Div. 562; Moore v. Bonbright & Co., 202 App. Div. 281.)
   Kellogg, J.

The complaint alleges that in December, 1925, the plaintiff commenced an action against the defendant to recover damages for personal injuries sustained through the negligent operation, by the defendant’s servants, of a certain motor truck; that in April, 1928, the plaintiff’s attorney represented to the plaintiff that the defendant had agreed to pay $750 on account of the plaintiff’s claim, and that when the case was reached for trial the defendant would pay a larger amount in full settlement. The complaint then alleges as follows: that the plaintiff, relying on the said representation so made to him, and believing the same to be true and it being represented to him by his said attorney that in order to obtain his agreed share or portion of the said $750, offered by the defendant in part payment of his claim, as plaintiff believed, was induced by his said attorney to sign a paper, the nature and contents of which were not explained to him by his said attorney and the plaintiff not being able to read or write English, was unable to ascertain on his own account the nature and contents of the said paper but believed the same to be a receipt in payment of the said $750, represented to him to be a payment on account of his claim in said action and delivered the same to his said attorney.” It further alleges that the paper was delivered by the attorney to the defendant; that the plaintiff afterwards leaned that the paper signed by him was a general release of all his claims against the defendant; that it was fraudulently obtained from the plaintiff; that he was induced to sign it by false and fraudulent representations; that had he known its true nature he would not have signed it; that the consideration paid for the paper was $750; that this was a grossly inadequate sum to compensate the plaintiff for his injuries; that immediately upon discovery of the true nature of such paper purporting to be a general release, the plaintiff repudiated the same and offered to repay the consideration received; that the defendant refused to accept the same. The complaint demands judgment for the cancellation of the general release signed by him under the circumstances stated.

It will be noted that, in the sentence of the complaint which we have quoted, the subordinate clause beginning with the words “ it being represented ” is incomplete in that the pleader has omitted to state the fact represented. In the same sentence the pleader has asserted that the paper was “ represented to him to be a payment on account of bis. claim,” without naming the person who made the misrepresentation. However, although the sentence, when analyzed, discloses the omission of material words, we think sufficient have been employed to convey the meaning, that it was u represented ” by the plaintiff’s attorney that, in order to obtain the part payment offered, it was necessary for the plaintiff to sign the paper, and that the attorney represented the paper to be a receipt for such payment.

Ordinarily, the signer of a deed or other instrument, expressive of a jural act, is conclusively bound thereby. That his mind never gave assent to the terms expressed is not material. (Wigmore on Evidence, § 2415.) If the signer could read the instrument, not to have read it was gross negligence; if he could not read it, not to procure it to be read was equally negligent; in either case the writing birds him. (Chicago, St. P., M. & O. Ry. Co. v. Belliwith, 83 Fed. Rep. 437.) “ So, if the party that is to seal the deed, can read himself and doth not, or being an illiterate or a blind man, doth not require to hear the deed read, or the contents thereof declared, in these cases albeit the deed be contrary to his mind, yet it is good and unavoidable.” (Sheppard’s Touchstone, p. 56.) That a party should be bound by a contract, or by a conveyance, which he had no will to make may seem anomalous. Professor Wigmore, in explanation, reasons that the actor, having the will to sign the writing, is bound by the consequence, reasonably to have been anticipated ” from the signing of a document unread, that its terms might not truly express the intent of the signer. (Wigmore on Evidence, § 2413.) In Hunter v. Walters ([L. R.] 7 Ch. 75, 82; 41 L. J. Ch. 175) Lord Hatheely said that the signer cannot affect not to know what he was doing;” and in the same case, James, L. J., said that the man who has made the representations ” (that is, the man who signed the writing) “ must bear the consequences.” Mr. Ewart attributes the conclusiveness of the, writing, as against the signer, “ albeit the deed be contrary to his mind,” to the doctrine of estoppel. (Ewart on Estoppel, ch. 25, p. 435.) Whether all the elements of a legal estoppel be present or not, nevertheless, in the sense that he may not dispute the deed, the signer is in fact estopped. However, there are instances where "an unexpressed intent can be allowed to overthrow the outward act.” (Wigmore on Evidence, § 2405.) If the signer is illiterate, or blind, or ignorant of the alien language of the writing, and the contents thereof are misread or misrepresented to him by the other party, or even by a stranger, unless the signer be negligent, the writing is void. (Cleary v. Municipal Elec. Light Co., 19 N. Y. Supp. 951; affd., 139 N. Y. 643; Wilcox v. American Tel. & Tel. Co., 176 N. Y. 115; Smith v. Ryan, 191 N. Y. 452; Whipple v. Brown Brothers Co., 225 N. Y. 237; Thoroughgood’s Case, 2 Coke, 9; Shulter’s Case, 12 Coke, 90; Foster v. Mackinnon, [L. R.] 4 C. P. 704; Trambly v. Ricard, 130 Mass. 259.)

In Thoroughgood’s Case (supra) the facts were these: Thoroughgood had signed a deed for lands to Chicken, supposing that the document was a mere release of certain arrearages due him from Chicken. On the occasion of its execution, John Ward, a total stranger to the transaction, took the paper into his hands and said: “ Goodman Thoroughgood, you are a man unlearned, and I will declare it unto you, and make you understand it better than you can by hearing of it read,” and then said further to him: “ Goodman Thoroughgood, the effect of it is this, that you do release to William Chicken all the arrearages of rent that he doth owe you. and no otherwise.” Thoroughgood, saying “If it be no otherwise, I am content,” signed the document. In an action by Thoroughgood against Cole, the successor of Chicken, to recover damages for his trespass upon the lands described in the document, it was held that the instrument was absolutely void. The court said that “it is not material, who readeth the writing, so as he who maketh it be a lay-man, and being not lettered, be (without any covin in himself) deceived.”

The case is cited with approval by Mr. Justice Story (Story’s Equity Jurisprudence, § 60) and by Chief Judge Cullen in Smith v. Ryan (supra). Story says: “ Thus, for example, reading a deed falsely to an illiterate person, whether it be so read by the grantee or by a stranger, avoids it as to the other party at law.” The instrument fails because its conclusiveness is destroyed by the misrepresentation, and it then appears that the signer had no volition to promise or act as therein represented. The document then has no more validity than a forged writing. (Vorley v. Cooke, 1 Gift. 230; 27 L. J. Ch. 185; Trambly v. Ricard, supra.) The conclusiveness of the writing, however, is not avoided, if the signer, in crediting the representa’ion made, has in any wise been negligent. (Foster v. Mackinnon, supra; Trambly v. Ricard, supra; Wigmore on Evidence, § 2415.)

Assuming that the allegations of this complaint correctly state the facts, it appears that the plaintiff has not been negligent. Not being competent to read the document, the plaintiff was told by his attorney that it was a mere receipt. In relying upon the word of one who had been his trusted lawyer, surely the plaintiff was less careless than was Thoroughgood in relying on the word of a stranger. Nor should the plaintiff be held responsible upon any principle of agency. The attorney had no express or implied authority from the plaintiff, to procure the signing of the writing in question or to make a. settlement of the plaintiff’s claim upon terms involving the complete acquittance of the defendant. The question of his apparent authority is not involved, for the defendant relies, not upon some act of an ostensible agent, but upon a document which was executed by the principal himself. Neither should the doctrine of reasonable consequence defeat the plaintiff. It was not to have been expected by the plaintiff that, as a natural consequence of his reliance upon the word of his attorney, relating to the contents of the instrument, a writing which in no wise expressed his will would be executed by him.

The case of Herchmer v. Elliott (14 Ont. Rep. 714) presents a striking parallel to the case, at bar. The plaintiff in that case was the owner of a bond and mortgage which she left with her solicitor for safekeeping. She was induced by her solicitor to execute an assignment of the mortgage to a creditor of the solicitor. In order to obtain her signature the solicitor falsely represented and caused her to believe that the writing contained provisions merely extending the time of payment of the mortgage. It was held that the writing was void and that no title to the mortgage was thereby conveyed to th" solicitor’s creditor. There, as here, the false representation was made by a person not a party to the instrument; there, as here, the person who misrepresented the fact was the trusted lawyer of the signer. The signer, duped by her own attorney, was not precluded, by her execution of the document, from showing that its terms had not been assented to by her, either on the ground that the attorney was her agent or upon the ground that she had been negligent in relying upon his statement of its contents. We agree with the conclusions reached by the court in that case, and, applying its reasoning here, are of the opinion that the complaint has stated a cause of action.

The order should be affirmed, with costs, and the question certified answered in the affirmative.

Cardozo, Ch. J., Pound, Crane, Lehman, O’Brien and Hubbs, JJ., concur.

Order affirmed, etc.


author: Lehman, J.

text:
    Oscar L. Richard et al., as Surviving Partners of the Firm of C. B. Richard & Company, Respondents, v. American Union Bank, Appellant.

      (Argued January 16, 1930;
    decided February 11, 1930.)

      Edwin T. Murdoch, Edwin L. Garvin and Frederick T. Kelsey for appellant.
    The complaint in the present action does not meet the suggestions made by the Court of Appeals in its opinion in the former action as to how the plaintiffs might have sought to obtain relief. (Cox v. Stokes, 156 N. Y. 491; Kley v. Healy, 127 N. Y. 555.) The first defense is sufficient because if the action be considered as being one to recover damages and not for reparation based on rescission the defense establishes that the complaint at bar, although differing in form, is in effect the same as the complaint which has been dismissed, thereby making the former decision one on the merits, and if the action be for rescission it must fail because the plaintiffs have already elected to sue for damages. (Richard v. American Union Bank, 210 App. Div. 22; Hirshbach v. Ketchum, 79 App. Div. 561; Pollak v. Dodge Mfg. Co., 81 Misc. Rep. 216; Sokoloff v. National City Bank, 239 N. Y. 158; Terry v. Munger, 121 N. Y. 161; Clark v. Kirby, 243 N. Y. 295; Matter of Garver, 176 N. Y. 386.) The action is barred by the Statute of Limitations; therefore, the second defense which pleads the statute should be allowed to stand. (Wakulaw v. State Bank, 214 App. Div. 673.) The third defense is sufficient because it establishes ratification by plaintiffs, in answer to their claims' of rescission, and facts in mitigation of plaintiffs’ alleged damages. (Sokoloff v. National City Bank, 239 N. Y. 158.) The fifth defense is sufficient because it shows that the delay in performance was due entirely to the default of plaintiffs’ agent. (Myers v. Brown, 142 App. Div. 658; Spopetz v. American Express Co., 146 N. E. Rep. 262; Richard v. Credit Suisse, 242 N. Y. 346.)

      Walter H. Poliak, J. Charles Weschler and Ruth I. Wilson for respondents.
    The first defense to each cause of action is insufficient in law. The prior judgment was not upon the merits nor is it alleged that the judgment declares that it was upon the merits. The deficiencies of the complaint in the prior action have been supplied in the present complaint. (Richard v. American Union Bank, 241 N. Y. 163; Civ. Prac. Act, § 482; Genet v. Delaware & Hudson Canal Co., 170 N. Y. 278; Peterson v. Ocean Electric R. R. Co., 214 N. Y. 43; Stowell v. Chamberlain, 60 N. Y. 272; Pollak v. Dodge, 81 Misc. Rep. 216; Marsh v. Masterton, 101 N. Y. 401; Richard v. Credit Suisse, 242 N. Y. 346; Kantor v. Aristo Hosiery Co., Inc., 222 App. Div. 504; 248 N. Y. 630; Poppenberg v. Owen & Co., 84 Misc. Rep. 126; 165 App. Div. 946; 221 N. Y. 569; Hoppe v. Russo-Asiatic Bank, 235 N. Y. 37; Sokoloff v. National City Bank, 250 N. Y. 69; Schenck v. State Line Telephone Co., 238 N. Y. 308; Clark v. Kirby, 243 N. Y. 295.) The second defense to each cause of action — the six-year Statute of Limitations — is insufficient in law. The first action was started within six years, and this action within a year after the termination of that action. (Silverstein v. Brown, 153 App. Div. 677; Slater v. Slater, 208 App. Div. 567; 240 N. Y. 557; Standard Fashion Co. v. Thompson, 137 App. Div. 588; Devine v. Melton, 170 App. Div. 280; Wooster v. 42nd St. R. R. Co., 71 N. Y. 471; Deyo v. Hudson, 226 N. Y. 685.) The third defense, alleging that defendant attempted to perform more than a year after the date set for performance, is manifestly insufficient when pleaded to causes of action based upon a failure to perform a contract as to which time is of the essence. (Gravenhorst v. Zimmerman, 236 N. Y. 22; Trainor v. Amsinck, 236 N. Y. 392; Mawhinney v. Millbrook, 234 N. Y. 244; Richard v. American Union Bank, 241 N. Y. 163; Richard v. Credit Suisse, 242 N. Y. 346; Hoppe v. Russo-Asiatic Bank, 235 N. Y. 37; Kantor v. Aristo Hosiery Co. Inc., 222 App. Div. 502; 248 N. Y. 630; Pers. Prop. Law, § 130; Kugel

      man v. Ritter, 90 Misc. Rep. 279.) The fourth defense, that delayed performance was accepted, is insufficiently alleged, and is insufficient in view of the clear notice given reserving the right to damages for delay. (Houston v. Coombs, 224 App. Div. 396; Root Co. v. N. Y. C., etc., R. R. Co., 166 App. Div. 137.) The fifth defense, that defendant’s obligation was not to make payment, but merely to give instructions to the foreign banks, that the foreign banks were plaintiffs’ agents and that both their delay and their acceptance of the belated delivery were chargeable to plaintiffs, is insufficient. (Richard v. Credit Suisse, 242 N. Y. 346; Gravenhorst v. Zimmerman, 236 N. Y. 22; Sokoloff v. National City Bank, 250 N. Y. 69; Benton v. Morningside College, 202 Iowa, 15; Everett v. Drew, 129 Mass. 150; Seymour v. Mechanics & Metals Nat. Bank, 108 Misc. Rep. 138.)
   Lehman, J.

The complaint alleges as a first cause of action that at the city of New York on November 14, 1919, plaintiffs and the Nemeth State Bank, whose obligations defendant later assumed and undertook to pay, entered into agreements whereby the Nemeth State Bank, in consideration of the sum of $72,500 then paid to it by the plaintiffs, sold to the plaintiffs 2,000,000 lei, being the currency of the country of Roumania, to be transferred by cable to the bank of Marmoresch, Blank & Co. at Bucharest, Roumania, for the account of the plaintiffs. That the said Nemeth State Bank wholly failed and neglected to establish or effect a credit in favor of these plaintiffs with said bank Marmoresch, Blank & Co. in said 2,000,000 lei or any part thereof. As a second cause of action, the complaint alleges a similar failure to carry out another contract for the sale and transfer by cable of Roumanian lei. The plaintiffs now seek redress for the alleged breach of these contracts by the Nemeth State Bank. Since, except for differences in time, place and amounts, the allegations contained in the two causes of action are identical, we shall for convenience confine our consideration to the allegations of the first cause of action.

In a prior action the plaintiffs sought redress for the same breaches of contract. In that action the complaint was dismissed on the ground that it did not set forth a cause of action.” There the complaint showed on its face that long after the stipulated date the defendant had made a transfer of credit to the plaintiffs in the sum of 2,000,000 lei. Damages were sought for the delay, since in the interval the value of the lei measured in American money had declined. The court held that in the absence of special circumstances we will not assume either that the parties contemplated a liability for damages to one intending to use the lei in the markets of Roumania because there might be a depreciation in the value of the lei when measured by our currency, or that in fact such depreciation did cause the plaintiffs any damage.”

The prevailing opinion pointed out that the defect in the complaint was one of form. The plaintiffs “ elected to give to their complaint a form which, as we think, deprives them of relief which they might otherwise have secured.” (Richard v. American Union Bank, 241 N. Y. 163.)

In the complaint in the present action the plaintiffs have attempted to remedy the defect which this court held rendered the complaint in the previous action insufficient. The defendant again moved on the pleadings to dismiss the complaint. From the denial of that motion at Special Term the defendant never appealed. We may now examine the allegations of the complaint only to test the sufficiency of the affirmative defenses which have been stricken out. (Baxter v. McDonnell, 154 N. Y. 432.)

The first separate defense sets forth the judgment dismissing the defense in the prior action. That dismissal was not on the merits. There was no final adjudication of any question of fact or law except that under the allegations of the complaint the plaintiffs could not show that they were damaged by the alleged breach of contract. We have in the subsequent case of Richard v. Credit Suisse (242 N. Y. 346) pointed out the narroiv scope of our earlier decision: “ Richard v. American Union Bank (241 N. Y. 163) did not hold that upon sales of foreign money there cannot in any circumstances be a recovery of damages occasioned by delay. The case went upon the narrow ground that the pleader by the form of his complaint had excluded the conclusion that damage had been suffered.”

Obviously upon no possible theory can the prior judgment bar a recovery in a new action in which the complaint is sufficient. True, in determining the sufficiency of the new complaint, the court will follow the same rales and principles which guided the majority of the court in its earlier decision. The prior decision may embody authoritatively the test which the court should apply when the sufficiency of the new complaint is questioned; it may form the starting point for judicial examination of the sufficiency of the complaint; it cannot of its own force preeludé such examination in the new action.

The earlier complaint sought only damages for delayed performance. It admitted that the delayed performance had been accepted. Therefore, there could be no rescission of the contract and recovery of the consideration paid. The plaintiffs’ remedy, if any, was confined to an action for damages. Here the complaint is perhaps equivocal. It contains allegations appropriate to an action based upon a rescission of the contract, and there is no unambiguous allegation that delayed performance was accepted. Since, however, it appeared upon the argument of this appeal that the plaintiffs probably did accept such delayed performance and that they expect to prove under the complaint only a cause of action for damages for delayed performance, we may, at least for the present, confine our consideration to the question of whether the complaint sets forth such a cause of action.

The conclusion in the earlier case rested largely, if not solely, upon the premise that “ presumably the plaintiffs when they made a contract to obtain foreign money or credit abroad intended to use it as money in the country where it is the recognized medium of exchange. Fluctuations in the value of the money when measured by currency of this or any other country may not affect the use for which plaintiffs are presumed to have intended it.”

Allegations contained in the complaint in this action which were omitted from the complaint in the earlier action conclusively rebut the presumptions upon which the earlier decision rested. They show that the plaintiffs did not intend to use the money in the country where it is the usual medium of exchange, and that fluctuations did affect the use for which plaintiffs actually intended it. Both the plaintiffs and the Nemeth State Bank were engaged in the business of foreign exchange in the - city of New York and the plaintiffs intended to use that credit when established in that business.

“ Said business consisted in the selling of foreign money or currency and the delivery thereof' at specified times at specified banking houses in foreign countries by depositing to the credit of the purchaser such foreign money or currency which the purchaser desired for his use thereat * * *. In order to enable such sales to be made, a dealer in foreign exchange was required to have on deposit in banks in foreign countries the currency so dealt in and such deposits and credits were established by him by his purchasing such exchange on such banks from other persons or corporations having same on deposit in such foreign banks. * * * A seller of foreign exchange in the United States received as his consideration for such sale the value of such foreign currency at "the time of the sale in dollars and that a purchaser thereof paid as such consideration in dollars, the value of such foreign currency at the time of sale; that the foreign money so bought and sold fluctuated from day to day and from hour to hour as measured by American money * * * during every minute of the business day. * * * That plaintiffs only purchased foreign exchange for the purpose of having it available for resale as aforesaid, and this fact was known to the said Nemeth State Bank, at the time of the making the agreements hereinafter referred to.”

Money, in the country where it is current, is both a measure of value and a medium of exchange. In other countries it is a commodity bought and sold in the market and its value fluctuates in the market like that of other commodities. Damages for failure to perform a contract for the delivery of a commodity are measured by the value of performance at the stipulated time. Delayed performance of the contract may be less valuable than the performance as stipulated. Though a buyer of a commodity may accept delivery of the commodity after the stipulated date, he may still retain his right of action for damages caused by delay. (Pers. Prop. Law [Cons. Laws, ch. 41], § 130.) At least where the commodity is purchased for resale and has a fluctuating market value the damages suffered by delayed delivery of the commodity are measured by the difference between the market value at the stipulated time of delivery and the market value at the time of the delayéd delivery.

Here though the purchase was made in America where Roumanian money is a commodity of fluctuating market value, delivery was to be made in Roumania where it is a medium of exchange, which from its nature cannot have a market price there. The problem presented is whether for the purpose of this contract the money or credit delivered in Roumania may still be regarded here as a commodity with a fluctuating market value.

Fluctuations in the value of Roumanian currency when measured in dollars might not affect its value as a medium of exchange in Roumania. So, at least, the court held in the prior action. In the opinion of the court the conclusion followed that, in the absence of special circumstances showing that the purchase of money or credit for delivery in Roumania was made for some use in which its value would continue to be measured by its market price here, fluctuations in such market price would furnish no economic measure for' damages for delay. The allegations of the complaint in the present action show that the parties dealt in foreign moneys or credits as a commodity. The price was fixed by the value of the foreign money or credit in the market here. Both parties understood that the commodity was purchased here for resale as a commodity in the market here. The fact that the commodity purchased for resale here might in a foreign country be used as a medium of exchange becomes irrelevant when it appears that the parties understood that the purchase was made by the plaintiffs not for use in Roumania but for resale here.

The value of performance at the stipulated time of delivery was fixed by the price of lei at that time in the market here. Increase in the market price, after default in delivery, could not increase the plaintiff’s damages. According to the comnlaint the Nemeth State Bank and the defendant chose to delay delivery till the value to the plaintiffs of performance of the contract and the cost of performance to the defendant had decreased. The defendant has retained in the form of profit the resultant difference. To that difference the plaintiffs are entitled as damages. If the contract had been performed according to its terms and the foreign moneys or credit delivered at the stipulated time, the buyer would have assumed the chance of profit and the risk of loss from fluctuations in the market price thereafter. By delay in delivery the seller has retained the profit created by intervening-fluctuations and has imposed a loss upon the buyer. For the loss so imposed the buyer is entitled to damages. It follows that the complaint in the. present action sufficiently alleges a cause of action for damages suffered by delay in performance of the contract even if the plaintiffs cannot prove a rescission of the contract.

No extended analysis of the other five defenses in the answer is necessary. Since the judgment in the prior action was not on the merits, the plaintiffs’ cause of action was not barred till one year thereafter. (Civ. Prac. Act, § 23.) The other defenses on their face are plainly insufficient to defeat the plaintiffs’ cause of action for damages if all the allegations of the. complaint are proven. True, in the fifth affirmative defense, and perhaps in some of the other defenses, the defendant has alleged facts which if proven at the trial may demonstrate that plaintiffs’ alleged cause of action is without substance. In that defense the defendant alleges in effect that the seller tendered performance of the contracts at the stipulated time, but that plaintiffs’ agent to receive delivery failed to accept such performance. Upon this motion the court must assume the truth of the allegations of the complaint that the seller agreed to establish a cable transfer of 2,000,000 lei to the account of the plaintiffs in a named bank, and that the seller had no credit or lei deposits with the bank for two million lei or any part thereof and did not purchase a transfer of such two million lei by cable or otherwise for the purpose of making available to these plaintiffs a credit of two million lei or any other sum with the said bank * * * and wholly failed and neglected to establish or effect a credit in favor of these plaintiffs with said bank.”

It may be that upon the trial the proof will not sustain these allegations or some of them. Then the court must pass upon the legal consequences of the facts established by the proof. If, as we must assume, the material allegations of the complaint are true, then the allegations contained in the fifth defense cannot be true. Under a denial of the material allegations of the complaint the defendant might introduce any relevant evidence which would tend to show the falsity of the allegations of the complaint. The defendant cannot change argumentative denials into an affirmative defense by pleading them affirmatively. If the plaintiff established its cause of action as alleged, then the affirmative defenses must fall. That is all that we may now pass upon.

The order should be affirmed, with costs, and the questions certified answered No.”

Cardozo, Ch. J., Pound, Kellogg, O’Brien and Hubbs, JJ., concur; Crane, J., not voting.

Order affirmed, etc.


author: Per Curiam.

text:
    Chemical National Bank of New York, as Executor of and Trustee under the Will of Roger R. Hill, Deceased, Respondent, v. Susie R. Hill et al., Respondents; Barbara Hill et al., Respondents and Appellants, and American National Red Cross, Appellant and Respondent.
    (Argued January 8, 1930;
    decided February 11, 1930.)

      Frank H. Hiscock, Joseph M. Hartfield and Kenneth C. Johnson for American National Red Cross, appellant and respondent.
    The will contains no provision that either infant niece shall receive any principal of the residuary estate unless she attains the age of forty years. (Lewisohn v. Henry, 179 N. Y. 352; International Text Book Co. v. Connelly, 206 N. Y. 188.) The will makes no provision in favor of the infant nieces except in article sixth, subsection (c). (Cammann v. Bailey, 210 N. Y. 19; Matter of Allen, 111 Misc. Rep. 93; 202 App. Div. 810; 236 N. Y. 503; Matter of Goldmark, 186 App. Div. 447; Hatch v. Bassett, 52 N. Y. 359; Locke v. Farmers’ Loan & Trust Co., 140 N. Y. 135; Tabernacle Baptist Church v. Fifth Avenue Baptist Church, 60 App. Div. 327; Matter of Ingersoll, 95 App. Div. 211; Brown v. Quintard, 177 N. Y. 75; Dreyer v. Reisman, 202 N. Y. 476; Matter of Koss, 177 N. Y. 371; Leggett v. Stevens, 185 N. Y. 70; Matter of Hansen, 72 Misc. Rep. 610; Rewis v. Rewis, 79 Fla. 126; Perkins v. O’Donald, 77 Fla. 710.) The residuary clause contained in article seventh of the will is a valid provision for the distribution of the property of the testator not disposed of in article sixth. (Langley v. Westchester Trust Co., 180 N. Y. 326; Kerr v. Dougherty, 79 N. Y. 327; Riker v. Cornell, 113 N. Y. 115; Wechsler v. Drey, 203 App. Div. 692; Thomas v. Thomas, 43 Misc. Rep. 541; Matter of Hitchcock, 222 N. Y. 57; Matter of Berry, 154 App. Div. 509.)

      Murray Hulbert and S. Whitney Landon, Jr., for Barbara Hill et at, respondents and appellants.
    The appellant American National Red Cross is not entitled, as a matter of law, to any more than it receives under the judgment entered upon the determination of the trial court. (Connelly v. O’Brien, 166 N. Y. 406; Brown v. Quintard, 177 N. Y. 75; Matter of Edie, 117 App. Div. 310; Tucker v. Bishop, 16 N. Y. 402; Smith v. Edwards, 88 N. Y. 92; Roberts v. Coming, 89 N. Y. 225; Vanderpoel v. Loew, 112 N. Y. 167; Sorrells v. McNally, 89 Fla. 457; Young v. McKinnie, 5 Fla. 542.)

      Dallas S. Townsend and Henry W. Proffitt for Chemical National Bank, as executor and trustee, respondent.
    The law favors the vesting of estates and will construe a will as creating vested interests unless it clearly appears that the testator intended otherwise. (Davids, New York Law of Wills, vol. I, p. 821; Hersee v. Simpson, 154 N. Y. 496; Matter of Hammond, 74 App. Div. 547; Matter of Munroe, 107 Misc. Rep. 408.) The words of a will are to.receive an interpretation which will give to every expression some effect rather than one which will render any of the expressions inoperative. (Adams v. Massey, 184 N. Y. 62; Sorrells v. McNally, 89 Fla. 457; Harrison v. Jewell, 2 Dem. 37; Brown v. Quintard, 177 N. Y. 75; Rewis v. Rewis, 79 Fla. 126 Tilden v. Green, 130 N. Y. 29.)

      George W. Hinckley for Susie R. Hill et ah, respondents.
   Per Curiam.

In this action for the construction of the will of Roger Richardson Hill, deceased, we have reached the conclusion that the judgment as rendered by the Special Term and approved by the Appellate Division must be modified in some particulars.

The principle controlling our modification is this, that upon the death of each niece under the age of forty years, the American National Red Cross succeeds to the interest in the residuary estate of the niece so dying, i. e., to the interest in the share described in subsection (c) of article sixth by force of the second paragraph of subsection (d) and to the interest in the share described in subsection (d) by force of article seventh, and that there is no succession to such interest by the heirs or next of kin. On the other hand, the Red Cross does not succeed to any part of the principal or income payable to a niece at a given age if in fact when the time for such payment has arrived the niece is still in being.

Adherence to that principle will call for changes of the judgment in several subdivisions:

The subdivision numbered 27 provides as follows: That under the second paragraph of subsection (d) the American National Red Cross is to become vested with one-half of that half of the residue dealt with in subsection (c) in case either Barbara Hill or Suzane Wickes dies before receiving payment in full of their interest under subsection (c) both as to principal and •income. The second paragraph of subsection (d) does not again operate in case the surviving niece likewise dies before receiving payment in full of her interest under subsection (c).”

A direction similar in effect is contained in subdivision 16.

Those subdivisions are erroneous in so far as they provide that the second paragraph of subsection (d) does not again operate in case the surviving niece likewise dies before receiving payment in full of her interest under subsection (c). In our opinion such interest of the niece last dying (like the interest of the niece first dying) will be payable in that contingency to the American National Red Cross.

The subdivisions of the judgment numbered 28 to 33, inclusive, contain provisions as to the disposition of the three-quarters of the residue that will remain in the estate after one-half of that half of the residue dealt with in subsection (c), i. e., one-quarter of the whole residue, shall have been paid to the American National Red Cross following the death of the niece first dying under the age of forty years.

As to such portion of the estate (three-quarters of the whole residue), the judgment should provide as follows:

In respect of the part thereof included in subsection (c), the income and principal are to be paid to the survivor of the two nieces in accordance with subdivisions 17 and 18 of the judgment of the Special Term. If the niece so surviving shall die under the age of forty years, her interest in such portion shall thereupon be payable to the American National Red Cross.

In respect of the part thereof included in subsection (d), one-half {i. e., one-quarter of the whole residue of the estate) is to be devoted in the first place to the payment of the annuities provided for in subsections (a) and (b), and if any balance of income remains, and the trustee is of the opinion that it can be spared and the capital still kept intact, it is to be paid to the surviving niece in the same manner as the income derived from subsection (c). Subject to the same annuities and to the duty of the trustee to hold the capital intact in order to preserve them, the surviving niece shall be vested with title to the installments of the principal as she attains the several ages at which principal is payable. If, however, she shall die under the age of forty years, her interest in any portion then unpaid will pass under article seventh of the will to the American National Red Cross.

In respect of the other half of the residue included in subsection (d) (one-quarter of the whole residue), this share (being the part previously held for the benefit of the niece first dying under the age of forty) will pass upon her death to the American National Red Cross under article seventh of the will, subject, however, to the payment of the annuities and to the duty of the trustee to preserve them and, in aid of their preservation, to hold the principal intact.

The judgment of the Appellate Division and that of the Special Term should be modified in accordance with these views and as so modified affirmed with costs to all parties payable out of the estate.

Cardozo, Ch. J., Pound, Crane, Lehman, Kellogg, O’Brien and Hubbs, JJ., concur.

Judgment accordingly.