author: Cabdozo, Ch. J.

text:
    New Georgia National Bank of Albany, Georgia, Respondent, v. J. & G. Lippmann and L. J. Lippmann, Appellant.
    (Argued October 1, 1928;
    decided November 20, 1928.)

      Morris Ebenstein, Stanleigh P. Friedman, David Schenher and Joseph H. Hazen for appellant.
    L. J. Lippmann was not liable at common law as maker of the note and section 39 of the Negotiable Instruments Law does not change that rule and impose such a liability upon him. Section 39 was not intended to apply to cases of unauthorized agents, .but only to cases of authorized agents. (White v. Madison, 26 N. Y. 117; Haupt v. Vint, 68 W. Va. 657; Southern Supply Co. v. Mathias, 147 Md. 256.) The contention that section 39 impliedly imposes on the unauthorized agent the liability of a maker, violates every principle of statutory construction. (Fitzgerald v. Quann, 109 N. Y. 441; People v. Palmer, 109 N. Y. 110; Shaw v. Railroad, 101 U. S. 557; Sutherland v. Mead, 80 App. Div. 103; Commercial Nat. Bank of Syracuse v. Zimmermann, 185 N. Y. 210; Fehr v. Campbell, 288 Penn. St. 549; Wettlaufer v. Baxter, 137 Ky. 362; Young v. Bank, 152 Ky. 293; Matter of Mandelbaum, 80 Misc. Rep. 475; 159 App. Div. 909; United Drug Co. v. Bedell, 145 Ark. 96; Daniel v. Buttner, 38 Wash. 556.) As against L. J. Lippmann, the complaint states neither a cause of action for a breach of warranty of authority nor one in tort. (Dusenbury v. Ellis, 3 Johns. Gas. 70; Collen v. Wright, 8 El. & B. 647; Dickson v. Reuter’s Teleg. Co., L. R. 3 C. P. Div. 1; Oliver v. Bank of England, 21 Ch. 610; Simmons v. More, 100 N. Y. 140; Taylor v. Nostrand, 134 N. Y. 108; Dung v. Parker, 52 N. Y. 494; Baltzen v. Nicolay, 53 N. Y. 467; Mickles v. Atlantic Brokerage Co., 209 App. Div. 182; Hegeman v. Johnson, 35 Barb. 200; Fulton v. Sewall, 116 App. Div. 109; Dailey Bros., Inc., v. Clements Co., Inc., 120 Misc. Rep. 310.)

      N. F. George, H. E. Riddell and John G. McGovern for respondent.
    L. J. Lippmann, individually, is liable to the plaintiff-respondent on the instrument if he executed the note without authority. (Eisinger v. Murphy Co., 285 Fed. Rep. 931; Pain v. Holtcamp, 10 Fed. Rep. [2d] 443; Ryan v. Hebert, 46 R. I. 47; Austin Nichols & Co., Inc., v. Gross, 98 Conn. 782; Tuttle v. First National Bank, 187 Mass. 533; Jarski v. Jones, 52 N. D. 25; Schwab v. Getty, 145 Wash. 66; White v. Madison, 26 N. Y. 117; Miller v. Reynolds, 92 Hun, 400; Marsh v. Father, 40 N. Y. 562; Kountz v. Kennedy, 147 N. Y. 124.)
   Cabdozo, Ch. J.

Plaintiff, a national bank, is the owner through indorsement of a promissory note signed “ J. & G. Lippmann, L. J. Lippmann, Pres.” It asks for judgment in the alternative (Civ. Prac. Act, § 213) against the corporation, the maker of the note, or against the president personally if, in signing the note in behalf of the corporation, he acted without authority. We are to determine whether a cause of action is stated against the individual defendant.

At common law, the remedy against an agent signing a note without authority was not upon the note itself, but for breach of an implied warranty (White v. Madison, 26 N. Y. 117). The question is whether the remedy has been enlarged by section 39 of the Negotiable Instruments Law of New York (Cons. Laws, ch. 38; Uniform Negotiable Instruments Law, §20) which provides as follows: Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal, or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability.”

The draftsman of the statute, Mr. Crawford, holds the view that the. effect of this provision is to make an agent liable on the instrument if he has signed without authority (Crawford’s Annotated Negotiable Instruments Law [4th ed.], p. 52). A like view has been expressed by the Commissioners on Uniform Laws, Mr. Eaton, Judge Brewster, and Mr. McKeehan, defending the rule against an assault upon its policy (Brannon’s Negotiable Instruments Law [4th ed.], p. 163; Eaton, The Negotiable Instruments Law, 2 Mich. Law Rev. 260, 265, 272, 273; Brewster, A Defense of the Negotiable Instruments Law, 10 Yale L. J. 84, 90; Brewster, The Negotiable Instr. L., 15 Harv. L. Rev. 26, 27, 28; McKeehan, The Negotiable Instruments Law, 41 Am. Law Reg. [N. S.] 437, 462), and by commentators of great distinction dissenting in some instances as to policy, but concurring as to meaning (Ames, The Negotiable Instruments Law, 14 Harv. L. Rev. 241, 247; 16 Harv. L. Rev. 255, 256; Williston, Contracts, vol. 2, p. 2122; Chafee, Brannon’s Neg. Instr. Law, supra). There are decisions and dicta to the same effect (Pain v. Holtcamp, 10 Fed. Rep. [2d] 443, 444; Ryan v. Hebert, 46 R. I. 47; Austin, Nichols & Co. v. Gross, 98 Conn. 782; Schwab v. Getty, 145 Wash. 66; Jump v. Sparling, 218 Mass. 324, 326), though there are others to the contrary (Southern Supply Co. v. Mathias, 147 Md. 256; Haupt v. Vint, 68 W. Va. 657). The subject has not before been considered in this court.

We think the proviso that the agent or representative shall not be liable on the instrument “ if he was duly authorized ” to sign, carries with it a fair implication that he shall be so liable if not authorized. The proviso does not appear in the corresponding section of the British Bills of Exchange Act. It was inserted after debate and reflection (Eaton, Brewster, McKeehan, supra), and was meant to accomplish something. We think the end in view was nothing less than we have stated. Before the statute was adopted, all manner of subtle distinctions had to be drawn before one could say where liability would rest (Brannon, supra; Mechem, Agency, vol. 1, §§ 1122, 1123).- Many forms of signature indicating an intention to sign as agent for a designated principal were held to charge the agent personally. The hardship was mitigated by resort to extrinsic evidence when the controversy was one between the original parties to the paper, but not when the paper was in the hands of a holder in due course. Thus, a note bearing the name of a corporation in the margin, but signed by the president and treasurer in their own names with the addition of their official titles, and thereafter discounted by a bank without notice dehors the instrument, was in law their individual promise (Casco Nat. Bank v. Clark, 139 N. Y. 307; Merc. Nat. Bank v. Clark, 139 N. Y. 314; First Nat. Bank v. Wallis, 150 N. Y. 455). Many decisions to the like effect are collated in the text books (see, e. g., Brannon’s Negot. Instr. Law [4th ed.] by Prof. Chafee, note to § 20; Mechem, supra). Slight variations of form led to variant conclusions (see, e. g., Barker v. Mechanic Co., 3 Wend. 94; Miller v. Roach, 150 Mass. 140; Mechem, § 1124). The refinement of distinction was mystifying even to the courts. It must have been more mystifying to business men in the quick transactions of the market.

The statute, as we read it, sweeps these subtleties away. Whenever the form of the paper is such as fairly to indicate to the eye of common sense that the maker signs as agent or in a representative capacity, he is relieved of personal liability if duly authorized (Jump v. Sparling, 218 Mass. 324, 326; Consumers Twine Co. v. Mount Pleasant Co., 196 Ia. 64; Austin, Nichols & Co. v. Gross, 98 Conn. 782). But along with this relief there goes a new burden, the corrective of an exemption too broad if unrestrained. By hypothesis the signer has not meant to contract as an individual. Accordingly, there was need to make provision for the case where the agent or representative, though indicating an intention to contract otherwise than personally, had acted without authority. For this the proviso was inserted. As the price, so to speak, of relief from liability when authority exists, there is to be liability on the instrument when authority fails. Unless this was meant, the interjection of the proviso becomes an irrelevant futility. It will not do to say with the defendant that the agent is to be hable on the instrument in those cases and those only where the indication of his intention is so ambiguous that he would have been personally bound if the law had not been changed. The statute does not distinguish between cases where he has indicated his intention unmistakably and those where he has done so more obscurely, if only what he has done is sufficient to disclose his meaning fairly. Some courts were able to discover ambiguity in a form of signature as ■unequivocal as the one before us here (McCandless v. Belle Plaine Canning Co., 78 Ia. 161; Palmer v. Stephens, 1 Denio, 471). To make the rule dependent upon mere degrees of emphasis would be to keep alive the old distinctions with all their mystifying subtleties. The instrument has the same meaning whether there is authority or none. In form it is still by hypothesis the promise of the principal. Liability is imposed upon the agent, not in aid of his intention, for by hypothesis intention to the contrary has been adequately revealed. Liability exists as a duty imposed by law.

An able argument has been made to us for a narrower reading of the statute. We do not underrate its force. A choice is necessary between alternative constructions, neither of which is certain. We think the balance of persuasiveness inclines to the choice made. One other consideration of policy and convenience should be added to the scales. Courts of respectable authority have held that a right of action against an agent for breach of an implied warranty does not pass with the note unless specifically assigned (Miller v. Reynolds, 92 Hun, 400). If the agent, signing without authority, is not hable on the instrmnent, there might thus be a failure of justice when a note wrongfully issued was in the hands of later holders. No doubt a remedy in tort would be available to such a holder if the agent had so misrepresented his authority as to be guilty of a fraud (Polhill v. Walter, 3 B. & Ad. 114; White v. Madison, 26 N. Y. 117 at p. 125). It does not follow that there would be also a remedy in contract (White v. Madison, supra; cf. Chysky v. Drake Bros. Co., 235 N. Y. 468). We do not say that the ruling restricting liability in such- conditions would be accepted by this court. Cases such as Starkey v. Bank of England (1903, A. C. 114) and Sheffield v. Barclay (1905, A. C. 392) are cited to uphold another doctrine. On the other hand, section 115 of the statute, which defines the warranties incidental to the negotiation of commercial paper, makes a distinction between negotiation by indorsement and negotiation by delivery; in the latter case, the warranty extends in favor of no holder other than the immediate transferee.” Whatever the final outcome, the danger of a curtailment of the remedy is not so trivial or illusory that it could safely be ignored by the draftsman of the statute. In proportion as the agent was relieved of liability if he acted with authority, there was need to charge him with liability if authority was lacking.

Other situations suggested by way of illustration in the arguments of counsel are stated only to exclude them from the scope of our decision.

The question is not here whether the agent is to be held upon the instrument when the lack of authority, though unknown to him, was known to the holder. We assume without deciding that he may sign without recourse. Conceivably a like exemption may be attained in other ways (cf. Mechem, § 1369; Halbot v. Lens, L. R. 1901, 1 Ch. 344, 349).

The question also is not here whether the holder of the note who takes it in the belief that he is obtaining the obligation of the principal, may hold the agent for breach of warranty instead of suing on the instrument if he prefers the former remedy. The rule seems to have been well settled at common law that a remedy on the instrument where the agent had misrepresented his authority would in no event displace the cause of action for damages, but, if recognized at all, would be held to be concurrent (White v. Madison, supra, at pp. 124, 125; Dusenbury v. Ellis, 3 Johns. Cas. 70). Injustice might result if it were held to be exclusive.

Nothing in our present ruling is opposed to what was held in Megowan v. Peterson (173 N. Y. 1). There the maker signed the paper as trustee without mention of his principal. He had failed, in other words, to indicate by sufficient tokens of intention that he was signing as an agent. The holding was to the effect that as between the original parties to the instrument there might be evidence of the surrounding circumstances to show the meaning of the contract (cf. Metcalf v. Williams, 104 U. S. 93; Huntington Firnane Co. v. Young, [W. Va.] 143 S. E. Rep. 102; Phelps v. Weber, 84 N. J. Law, 630).

The order should be affirmed with costs, and the question certified answered yes.”

Pound, Crane, Andrews, Lehman, Kellogg and O’Brien, JJ., concur.

Order affirmed, etc.


source: Caselaw Access Project

author: O’Bbien, J.

license: Public Domain

text:
    The People of the State of New York ex rel. Patsy Battista, Appellant, v. Frank L. Christian, as Superintendent of the New York State Reformatory at Elmira, Respondent.

      (Argued October 1, 1928;
    decided November 20, 1928.)

      Dennis W. Hunt for appellant.
    Section 222 of the Code of Criminal Procedure, as enacted, is unconstitutional and void in that it authorizes and permits that which is forbidden by the express terms of section 6 of article 1 of the Constitution of the State of New York. (Joyce on Indictments [2d ed.], §§ 7,13, 30, 41, 43,46, 49, 53, 56; 1 Cooley on Cons. Lim. [8th ed.] 355; People v. Lawrence, 36 Barb. 177; People v. Roberts, 148 N. Y. 360; People v. Bank, 231 N. Y. 476; People v. Cowles, 13 N. Y. 350; People v. Fancher, 50 N. Y. 291; People v. Tompkins, 64 N. Y. 53; People v. Cook, 14 Barb. 290; 8 N. Y. 67; People v. Schermerhorn, 19 Barb. 540; People v. Draper, 15 N. Y. 532; Ex parte Wilson, 114 U. S. 417; Machia v. U. S., 117 U. S. 348; U. S. v. Moreland, 258 U. S. 433; People v. Bingham, 57 Misc. Rep. 66; People v. Acerno, 184 App. Div. 541; Mayor, etc., of N. Y. v. Manhattan Co., 143 N. Y. 1; Musco v. U. S. Surety Co., 196 N. Y. 459; Hopt v. Utah, 110 U. S. 579; Com. v. Hana, 195 Mass. 262; People v. Ringe, 197 N. Y. 143; People v. Griswold, 213 N. Y. 92; People v. Green, 201 N. Y. 172; State v. Toney, 81 Ohio St. 130; Jones v. Robbins, 8 Gray, 328; Com. v. Horregan, 127 Mass. 450; Nolan’s Case, 122 Mass. 330; People v. Jones, 142 App. Div. 180.) The Legislature cannot lawfully dispense with any of the substantial protections with which the Constitution surrounds the person accused of crime. (Ex parte Bain, 121 U. S. 1; Ex parte McClosky, 40 Fed. Rep. 71; State v. Queen, 91 N. C. 659; Davis v. Burke, 179 U. S. 399; People v. Jones, 142 App. Div. 3; People v. Warden, 112 N. Y. Supp. 439; Commonwealth v. McDonna, 13 Allen, 581; Hartung v. People, 22 N. Y. 95; Mack v. People, 82 N. Y. 235; People v. Dowling, 84 N. Y. 478.)

      Albert Ottinger, Attorney-General (Almon W. Burrell of counsel), for respondent.
    The relator was rightfully convicted and sentenced. (Cooley on Const. Lim. 152, 374.) The defendant by his application in writing to the Supreme Court, under and pursuant to the provisions of section 222 of the Code of Criminal Procedure, waived his constitutional right to be prosecuted by indictment for the crime of burglary, third degree, for which he. had been duly held to answer and conferred upon the court the power to try him in the same manner as if an indictment had been presented by a grand jury. (State v. Warden, 46 Conn. 349; People v. Courtney, 94 N. Y. 490; People v. Cignarale, 110 N. Y. 23; Connors v. People, 50 N. Y. 240; People v. Rosenheimer, 209 N. Y. 115; People v. Toledo, 150 App. Div. 403; People v. Quidici, 100 N. Y. 503; Webster v. People, 92 N. Y. 422; Whitaker v. Staten Island M. R. Co., 76 App. Div. 351; People ex rel. Berger v. Warden, 176 App. Div. 602; Stuart v. Palmer, 74 N. Y. 183; State v. Palson, 29 Iowa, 133; State v. Kaufman, 51 Iowa, 578; State v. Bowerman, 191 Iowa, 608.)

      Urbane C. Lyons, District Attorney (Frank L. Wooster of counsel), amicus curice.

    The plaintiff-respondent was granted, under the provisions of section 222 of the Code of Criminal Procedure, the privilege, upon his personal application and initiative for the purpose of gaining a personal advantage and benefit, to dispense with and waive the presentment and indictment of a grand jury and the plaintiff-respondent exercised that privilege. (Musco v. United Surety Co., 196 N. Y. 459; People ex rel. McLaughlin v. Police Comrs., 174 N. Y. 450; Egerton v. Earl Brownlow, 5 H. of L. Cas. 1; Story on Cont. [4th ed.] § 546; Eerier v. Muller, 159 N. Y. 28; People v. Hawkins, 157 N. Y. 1; People v. Palmer, 109 N. Y. 413; People v. McGrath, 202 N. Y. 445; People v. Spiegel, 143 N. Y. 107; People v. Rosenheimer, 209 N. Y. 115; People v. Ferola, 215 N. Y. 285; Ayers v. Russell, 50 Hun, 282.)
   O’Bbien, J.

The Constitution of this State, by article 1, section 6, provides: “No person shall bo held to answer for a capital or otherwise infamous crime * * * unless on presentment or indictment of a grand jury.” Relator was charged with burglary which is an infamous crime. He was held to answer for it, but not on any presentment or indictment of a grand jury. While awaiting action by that body, he petitioned the court for a direction that an information be filed against him and his petition was granted. Then he pleaded guilty and was sentenced to confinement in the reformatory at Elmira. This procedure conforms with the provisions of section 222 of the Code of Criminal Procedure.

The Constitution and the statute meet in direct collision. The statute assumes to authorize the thing which the Constitution expressly forbids. The organic law decrees that no one shall be held to answer for an infamous crime until after a grand jury shall have considered the evidence against him. The legislative enactment says that an individual may, if he pleases, strip himself of a protection common to all within the jurisdiction of our government. This right, attempted to be conferred by statute, was not granted solely for the benefit of the criminal. Probably it was thought to be in the interest of the State. Doubtless the purpose of its attempted creation was to shorten procedure by inducing a criminal to forego a fundamental right and, by swift admission of guilt, incidentally to mitigate his penalty but essentially to hasten justice. In practice, such a course is convenient. We are not dealing with policy, expediency or convenience as viewed by the Legislature but with public fundamental rights fixed by the Constitution. Whether the grand jury system erects a bulwark of liberty or operates as an engine of oppression is not for us to decide. In ancient times it may have formed a shield against the tyranny of the crown. Today it may serve as a check upon popular passion. Always it has been susceptible of utilization to pervert justice. Section 222 of our Code seeks to and does weaken the force of our Constitution and, for that reason, it is void. The statute, therefore, adds nothing and takes away nothing. If, without its existence, the criminal possessed the right to fling away any part of the protection which the Constitution imposes upon all, neither he nor the State is strengthened or weakened by its passage. So the only question in this case is whether, irrespective of the statute, the basic prohibition of article 1, section 6, is capable of waiver.

Many judicial opinions can be found in which declarations are made that constitutional rights and privileges may be waived. Most of these expressions occur in civil actions (Matter of N. Y., L. & W. R. R. Co., 98 N. Y. 447, 453; Mayor, etc., v. Manhattan Ry. Co., 143 N. Y. 1, 26; People ex rel. McLaughlin v. Police Comrs., 174 N. Y. 450, 456), but some also appear in criminal cases (Pierson v. People, 79 N. Y. 424, 429; Diaz v. U. S., 223 U. S. 442; People v. Gowasky, 244 N. Y. 451, 463.) From this mass of opinions and decisions, the rule can be deduced that waiver is not permitted where a question of jurisdiction or fundamental rights is involved and public injury would result. A privilege, merely personal, may be waived; a public fundamental right, the exercise of which is requisite to jurisdiction to try, condemn and punish, is binding upon the individual and cannot be disregarded by him. The public policy of the State as expressed in the Constitution, takes precedence over his personal wish or convenience. Article 1, section 6, proceeds far beyond the point of conferring a mere personal privilege. Unqualifiedly, it prohibits the trial of any one charged with infamous crime except on presentment or indictment by a grand jury. Until the grand jury shall act, no court can acquire jurisdiction to try. In the most solemn and absolute language the Constitution dictates the only method by which one can be held to answer for murder, burglary, arson or any other infamous crime. Without the prescribed action, by a grand jury, all our other tribunals are powerless to proceed. Such action is the foundation of jurisdiction.

The principle which exacts compliance with constitutional mandates and prohibitions is illustrated by many cases here and in the Federal courts. Consider Cancemi v. People (18 N. Y. 128). A prisoner on trial for murder in the first degree expressly requests, consents and stipulates in open court that a juror be withdrawn and that the verdict be rendered by eleven jurors. Our Constitution declares that trial by jury in all cases in which it has been heretofore used shall remain inviolate forever.” (Art. I, § 2.) This requirement cannot be waived. The constituent parts of the tribunal and the fundamental mode of its proceeding are not within the power of the parties. In criminal prosecutions are involved public wrongs and public rights. The State has an interest in the lives and liberties of all within its boundaries even though some may be criminal. Accordingly, prosecutions must be conducted in substance and without essential change as the Constitution commands. A conviction otherwise obtained is a nullity. That the doctrine enforced in Cancemi’s case respecting the necessity of a trial conducted according to essentials as established by the Constitution may not be deemed to have been superseded as antiquated and obsolete is attested by the fact that in recent years it has again been recognized and treated with respect. (Pierson v. People, 79 N. Y. 424, 429, 430; People v. Cosmo, 205 N. Y. 91, 96, 104.) Consent cannot give a court jurisdiction or authorize a substantial change in its fundamental mode of proceeding. (People v. Guidici, 100 N. Y. 503, 508.) A prerequisite to try for crime is a duly organized court. (People v. Schmidt, 216 N. Y. 324, 342, 343.) Examine the principle of Hopt v. Utah (110 U. S. 574). A defendant charged with murder was absent during that part of his trial when six jurors were challenged by his counsel for actual bias. When later thq defendant was present at the trial, he failed to object to these jurors’ retirement to the deliberations of the jury room. He could not waive his rights. The statute of Utah deemed it essential for the protection of one whose life or liberty is involved in a prosecution for felony to be personally present at every stage of the trial when his substantial rights might be affected. We might rest content with the decision in Ex parte Bain (121 U. S. 1, 10, 13) for a principle quite similar to the one in the case at bar was there present. The language of the Fifth Amendment of the Federal Constitution is the same as the words in article 1, section 6, of the New York Constitution; “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury.” The prisoner was convicted in the Circuit Court of the United States after indictment by a Federal grand jury. A year after the indictment had been found, the court amended it by striking out certain words which it deemed superfluous and it was upon that amended indictment that the conviction rested. The Supreme Court had no difficulty in holding that the indictment upon which that defendant had been tried was no indictment of a grand jury and that the" “ great importance which the common law attaches to an indictment by a grand jury, as a prerequisite to a prisoner’s trial for a crime, and without which the Constitution says ' no person shall be held to answer,’ may be frittered away until its value is almost destroyed.” The defendant was not left to an appeal from a judgment of conviction, but was released on habeas corpus. There was nothing before the court on which it could hear evidence or pronounce sentence. In Ex parte McClusky (40 Fed. Rep. 71, 74) the precise principle involved in the present appeal required vindication. There an information was filed but no indictment found. The defendant was held incapable of waiving a constitutional right which is essential to jurisdiction. On principle and on authority, therefore, appellant’s conviction, even on his plea and attempted waiver, is a nullity. He has not been placed in jeopardy, for the court was without jurisdiction to try or condemn him. No obstacle to a grand jury’s consideration of the charge against him can be seen. The power of indictment now exists in no lesser degree than before his sentence and incarceration.

If the Legislature and the electors of this State vote to delete the words of article 1, section 6, from the Constitution, the historic if not venerable institution of the grand jury may be abolished. Not by indirection can it be subverted or overthrown. Citizens of other States have decided by their Constitutions to allow the prosecution of infamous crime without intervention by grand juries and their action has been held not to impede due process of law. (Hurtado v. California, 110 U. S. 516; Bolln v. Nebraska, 176 U. S. 83, 89.)

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

Cardozo, Ch. J., Pound, Crane, Lehman and Kellogg, JJ., concur; Andrews, J., dissents.

Ordered accordingly.


author: Kellogg, J. Crane, J.

text:
    First National Bank of Bridgeport, Connecticut, Appellant, v. Nathan Blackman et al., Copartners under the Firm Name of Nathan Blackman & Company, Respondents.

      (Argued October 10, 1928;
    decided November 20, 1928.)

      Paul Bonynge, Robert J. Sykes and Daniel A. Dorsey for appellant.
    Payment by the defendants to the warehouse company did not discharge their obligation to the plaintiff. (Presser v. Central Trust & Savings Co., 189 App. Div. 721; 232 N. Y. 573; First Nat. Bank of Newark v. Collamer, 217 App. Div. 249; First Nat. Bank of Newark v. Hauss, 214 App. Div. 689; Becker v. Hart, 129 App. Div. 511; Doubleday v. Kress, 50 N. Y. 410; Smith v. Kidd, 68 N. Y. 130; Fellows v. Northrup, 39 N. Y. 117; Crane v. Gruenewald, 120 N. Y. 274; Bank of the University v. Tuck, 96 Ga. 456; 101 Ga. 104; State Nat. Bank of St. Louis v. Hyatt, 75 Ark. 170.) An agency cannot be established by either custom or estoppel in' the absence of knowledge or affirmative acts on the part of the principal. (People v. Bank of North America, 75 N. Y. 547; Utica Trust & Deposit Co. v. Decker, 244 N. Y. 340; Standard S. S. Co. v. Corn Exchange Bank, 220 N. Y. 478; Marine Bank of Buffalo v. Fiske, 71 N. Y. 353; Muller v. Pondir, 55 N. Y. 325; Higgins v. Moore, 34 N. Y. 417; F. & M. Nat. Bank of Buffalo v. Sprague, 52 N. Y. 605; Rawson v. Holland, 59 N. Y. 611.)

      Jonah J. Goldstein, Thomas G. Frost and Joseph W. Ferris for respondents.
    Payment of the notes in controversy to the warehouse company by the defendants had the legal effect of discharging defendants from liability thereon. (Caton v. Andalusia National Bank, 14 So. Rep. 74; Cool v. Phillips, 66 Ill. 216; 21 R. C. L. 817; City Savings & Trust Co. v. Peck, 92 Vt. 310; Crane v. Gruenewald, 120 N. Y. 274; Yeoman v. McClenehan, 190 N. Y. 121; Armour v. Michigan R. R. Co., 65 N. Y. 111; Northern Bank v. Washington Savings Bank, 172 App. Div. 341.) The notes in suit herein are non-negotiable instruments. (Third Nat. Bank v. Bowman-Spring, 50 App. Div. 66; Manhattan Company v. Morgan, 242 N. Y. 48; Kimpton v. Studebaker Bros. Co., 14 Ida. 552; Great Falls Nat. Bank v. Young, 67 Mont. 328; Iowa Nat. Bank v. Carter, 144 Iowa, 715; Puget Sound Bank v. Washington Paving Co., 94 Wash. 504; Lincoln Nat. Bank v. Perry, 66 Fed. Rep. 887; Commercial Nat. Bank v. Consumers Brewing Co., 16 D. C. App. 186.) Plaintiff is not a holder in due course of the notes set forth in its first and second causes of action herein. (Hoberg v. Sofranscy, 248 N. Y. 141; Jacobus v. Jamestown Mantel Co., 211 N. Y. 161; Meuer v. Phenix National Bank, 94 App. Div. 331; 183 N. Y. 511; Martz v. State National Bank, 147 App. Div. 250; Goshen Nat. Bank v. Bingham, 118 N. Y. 349; Steinburger v. Hittleman, 93 Misc. Rep. 105; Manufacturers Commercial Co. v. Blitz, 131 App. Div. 17; Penning v. Giponi, 86 Ore. 110; Consterdine v. Moore, 65 Neb. 291; Hart v. Freeman, 42 Ala. 567.)
   Kellogg, J.

The plaintiff seeks recovery upon four promissory notes executed by the defendants and delivered for value to the Eastern States Warehouse & Cold Storage Company, the payee named therein. Two of the notes were dated July 7, 1925, and evidenced, in each instance, a promise to pay the sum of $937.50, with interest. The remaining notes were dated July 16, 1925; one evidenced a promise to pay $1,176.00, with interest; the other a promise to pay $924.00, with interest. The defendants admitted that the payee named in the four notes indorsed and delivered the same to the plaintiff for value. Proof was offered by the defendants that, between July 7, 1925, and October 1, 1925, they paid to the Eastern States Warehouse Company, the payee, sums of money sufficient to satisfy the two notes of July 16, 1925, and one of the notes of July 7, 1925; that the payments were intended to be made and received in discharge of such notes. They also offered to show that the two notes of July 7, 1925, were a duplication; that the payee through fraud advanced the principal sum of one note only; that it nevertheless retained both notes and sold the same to the plaintiff. The defendants admitted, however, that the plaintiff had no knowledge of the fraud. There was also offered, by the defendants, proof of an alleged custom in the warehouse business whereby depositors of .merchandise borrow money from warehouse companies upon notes secured by their deposits, and, upon partial withdrawals of the merchandise, make payments pro tanto to such companies. The offers were refused and a verdict directed in favor of the plaintiff for the amount of the four notes, with interest. The Appellate Division reversed the judgment entered upon the verdict on the ground that the proof of custom should have been received, and directed a new trial. The plaintiff has appealed, stipulating for judgment absolute in the event of an affirmance.

The case hinges upon deductions to be made from undisputed proof, oral and documentary, evidencing the following:

The Eastern States Warehouse Company had its principal office, as well as its principal warehouse, at Springfield, Mass. Its bank of deposit was the Chicopee National Bank of Springfield, Mass. On July 8, 1925, the Eastern States Warehouse Company borrowed $25,000 of the plaintiff bank; on July 16,1925, it borrowed $10,000. On each of these occasions it delivered to the plaintiff its promissory note whereby it promised, in four months from date, to repay the sum borrowed. Each of the notes recited that the maker had deposited, as collateral security for the payment thereof, certain receivables of the Eastern States Warehouse & Cold Storage Company,” of a face value equivalent to the amount of the note, secured by warehouse receipts for goods stored with said Eastern States Warehouse & Cold Storage Company as per certificate attached herewith.” Each contained the provision: “Should the face value of the receivables pledged to secure this note become less than the face value of the same, we hereby agree to deposit additional collateral at once, so that the face value of the receivables deposited shall always be equivalent to the face value of this note.”

The certificate attached ” to the $25,000 note of July eighth was a document executed by the Chicopee National Bank, wherein it was stated that the Chicopee Bank had received for the plaintiff, and held for its account, as security for the payment of the note, the notes of variously named customers of the Eastern States Warehouse Company; that these customers had warehoused merchandise, consisting of cases of eggs and tubs of butter, the lot numbers of which were given, with that company and had procured advances thereupon; that such notes were “ secured by warehouse receipts for goods stored in the Eastern States Warehouse & Cold Storage Company.” The notes were specifically described in the certificate and totaled $25,303. Listed among the notes so held was a note of Nathan Blackman & Co. for $937.50, stated to have been secured by the deposit of “ 125 cases of eggs.” The note was made by the defendants and is one of the notes now in suit. “ The certificate attached ” to the $10,000 note of July sixteenth was a similar document, executed by the Chicopee National Bank, certifying to the deposit of similar notes, similarly secured, totaling $10,205.50, to be held as security for the note in chief. Among the notes listed in the certificate were notes of Nathan Blackman & Co., one for $937.50, one for $1,176.00, and one for $924.00, stated to have been secured by a specified number of cases of eggs. These notes were made by the defendants and are the other three notes now in suit. Each of the certificates expressed the understanding ” of the Chicopee National Bank “ that we may exchange same from time to time for other notes and warehouse receipts, provided that such notes at all times aggregate in face value the amount of said note of the Eastern States Warehouse & Cold Storage Company.”

The Eastern States Warehouse Company had in fact deposited with the Chicopee National Bank, as agent of the plaintiff, the four Blackman notes, to be held as collateral to secure the two notes given by the Eastern States Warehouse Company to the plaintiff. It had also deposited with the Chicopee Bank, as the agent of the plaintiff, four warehouse receipts issued by it for the merchandise deposited by Blackman & Company, which were held as collateral to the Blackman notes. These receipts, curiously enough, were issued, not to the Black-man Company, but directly to the Chicopee National Bank. They recited that certain cases of eggs, identified by lot numbers, had been received by the Eastern States Warehouse Company “ for the account of Chicopee National Bank, Trustee, Springfield, Mass.” In each receipt the amount of advances made upon the merchandise was stated. The amount, so expressed, corresponded with the amount of a Blackman note, which the receipt accompanied.

The four Blackman notes, which were delivered to the Chicopee Bank to secure the notes of the Eastern States Warehouse Company to the plaintiff, and which are now in suit, were payable on demand to the order of Eastern States Warehouse & Cold Storage Company at its office in Springfield, Mass. Each note contained a recital that certain specified cases of eggs had been deposited by the makers of the note with the payee as collateral security for the payment of the note. Each contained a provision that the makers agreed “ to deliver to the said company additional securities, to its satisfaction, should the market value of the said securities, as a whole, suffer any decline.” Each contained the further provision that upon the failure of the makers to furnish satisfactory additional securities in case of decline, as aforesaid, or in the case of insolvency, bankruptcy, or failure in business ” of the makers, then, “ this note and all other liabilities ” of the makers should forthwith become due and payable.”

In October, 1925, the Eastern States Warehouse Company became financially insolvent and at a later date was adjudged a bankrupt. In the month named the Chicopee National Bank, learning of the condition of the warehouse company, sent the Blackman notes, which it had been holding as the agent of the plaintiff, and the warehouse receipts securing them, to its principal, the plaintiff. The Eastern States Warehouse Company defaulted in the payment of its notes to the plaintiff. Thereafter this action was brought upon the Blackman notes to procure their collection.

An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable.” (Negotiable Instruments Law, sec. 24; Cons. Laws, ch. 38.) In many jurisdictions it has been held that a promise to furnish additional collateral, further to secure an instrument for the payment of money, should the collateral originally supplied depreciate in value, does not render the instrument non-negotiable. (Empire National Bank v. High Grade Oil Ref. Co., 260 Penn. St. 255; Kennedy v. Broderick, 216 Fed. Rep. 137; Hunter v. Clarke, 184 Ill. 158; Finley v. Smith, 165 Ky. 445; Mechanics & Metals National Bank v. Warner, 145 La. 1022.) In other jurisdictions a contrary opinion has found support. (Lincoln National Bank v. Perry, 66 Fed. Rep. 887; Holliday State Bank v. Hoffman, 85 Kan. 71.) We take the view expressed in the group of decisions first above cited, that such a stipulation is not a promise to do an act in addition to the payment of money,” but a promise, rather, to do an act in aid of, and incidental to, the payment of money. “ The question in every case is not whether the act is technically additional ’ to the payment of money, but whether it is substantially so. If its real purpose is to aid the holder to secure the payment of money and protect him from the risks of insolvency, if it steadies the value of the note, and makes it circulate more readily, then it should not be fatal to negotiability. The promise to furnish more collateral is, it seems to me, such an incidental promise.” (Chafee — Acceleration Provisions in Time Paper, 32 Harvard Law Review, at p. 783.) “ It is not, strictly speaking, ‘ an order or promise to do an act in addition to the payment of money/ but is rather an order or promise to do an act that will better secure the promise to pay the money stipulated at the time fixed in the note.” (Carroll, J., in Finley v. Smith, supra.) In our judgment, therefore, the notes in suit were not rendered non-negotiable by reason of the provisions requiring the giving of additional security. We think, also, that the provisions contained in the notes to the effect that, in case additional security was not. furnished, the notes should become due immediately, did not affect their negotiability. In some jurisdictions similar provisions for the acceleration of the maturity of paper, payable at a specified future time, have been held destructive of negotiability. (Iowa National Bank v. Carter, 144 Iowa, 715; Murrell v. Exchange Bank, 168 Ark. 645; Mathews v. Wilson, [Cal.] 175 Pac. Rep. 647.) Authority of equal, if not greater, weight holds to the contrary. (Nickell v. Bradshaw, 94 Ore. 580; De Hass v. Roberts, 59 Fed. Rep. 853; State Bank of Halstad v. Bilstad, 162 Iowa, 433; Chicago Railway Equipment Co. v. Merchants Bank, 136 U. S. 268.) In the case last cited it was said by Harlan, J.: “ But a contingency under which a note may become due earlier than the date fixed is not one that affects its negotiability.” In this conflict of authority, however, it is not necessary that we now participate. All of the cases cited deal with time paper; we are dealing with demand paper. An instrument to be negotiable “ must be payable on demand, or at a fixed or determinable future time.” (Negotiable Instruments Law, section 20.) The volition of the holder or the maker of demand paper is complete; the former may at will declare the paper presently payable; the latter may presently pay if he elects so to do. Self-evidently, that which is instantly payable, at the will of either of the parties, cannot, through a so-called acceleration clause, be rendered more immediately payable. Therefore, the essential nature of an obligation “ payable upon demand ” is not affected by an acceleration clause. Moreover, the cases which hold that a clause of that nature destroys negotiability are directed to the point that the paper affected thereby ceases to be payable “at a fixed or determinable future time.” Demand paper, although it may not be then payable, is nevertheless made negotiable by the statute. To such paper, therefore, the argument cannot appropriately be addressed. We think that the notes in suit were negotiable instruments. They could be extinguished only by payments made to their holder, this plaintiff, or by payments made to an accredited agent on its behalf. Moreover, the defense, in the case of one of the notes, that fraud was committed in its making, does not obtain against the plaintiff, a bona fide purchaser for value.

The defendants insist that the Eastern States Warehouse Company was the agent of the plaintiff to receive, on its behalf, payments which might be made upon the notes and, therefore, that error was committed in not receiving the offered proof that such payments had been made. In support of their contention, they particularly call our attention to that clause contained in each of the notes given by the Eastern States Warehouse Company to the plaintiff, which provides that “ should the face value of the receivables pledged to secure this note become less than the face value of the same, we hereby agree to deposit additional collateral at once, so that the face value of the receivables deposited shall always be equivalent to the face value of this note.” They reason that the only imaginable event in which the face value of the receivables ” could become less than the face value of one of the notes in chief was an act of payment upon the notes, constituting the receivables,” made by the makers to their payee, the Eastern States Warehouse Company. To this argument, employed to support the claim of agency, the answer is that the documents themselves outline a possible situation wherein, without payments made to the Eastern States Warehouse Company, the receivables ” might become less than the principal notes. The Chicopee Bank was authorized to exchange the “ receivables,” and warehouse receipts securing them, for other notes and warehouse receipts, provided that such notes at all times aggregate in face value the amount ” of the Eastern States Warehouse Company notes given to the plaintiff. If the defendants paid to the Chicopee National Bank the amount promised to be paid by one of the notes, the face value of the collateral notes momentarily might be reduced below the face value of one of the principal notes. The amount paid might be deposited by the Chicopee National Bank to the credit of the Eastern States Warehouse Company provided that company immediately made up the deficiency in collateral by supplying, for the account of the plaintiff, another approved receivable for a like amount, secured by another warehouse receipt. The particular argument, therefore, fails. Otherwise there is not a word of proof, oral or documentary, to establish the proposition that the Eastern States Warehouse Company was authorized to act as the agent of the plaintiff to collect these notes. Certainly, no express words, creating an agency, were ever employed by the plaintiff, nor does the implication arise from any of the transactions between the parties that the plaintiff ever gave its consent that the Eastern States Warehouse Company might act as its agent. The plaintiff knew that the “ receivables ” were in the possession of the Chicopee Bank, as its agent; that the warehouse receipts were in its possession; that these receipts ran not to the defendants but to the Chicopee Bank. It had the right to assume that no payments would be made except to the bank which held the notes and the receipts. Even if suspicion might momentarily have crossed the mind of a cautious banker, that payments would be offered to the Eastern States Warehouse Company, all thought of danger arising therefrom would immediately have been dispelled when the facts were recalled that if payments were thus tendered, the warehouse company would be unable to exhibit the notes which the defendants might seek to pay, as required by section 134 of the Negotiable Instruments Law, and likewise the defendants, who were not named in the warehouse receipts, would be unable, by presenting the receipts, to establish their right to withdrawals of deposits, in consideration of the payments tendered. We can find nothing in the proof to indicate that the plaintiff ever authorized the Eastern States Warehouse Company to act as its agent, or ever had reason to suspect that it might undertake so to act.

The Appellate Division has found that the evidence as to custom, offered to be given by the defendants, might have tended to establish an agency in the Eastern States Warehouse Company to receive payments in behalf of the plaintiff. We cannot see that the offered proof would have had any bearing whatever to establish a relationship of agency. The offer made was as follows: Now, the defendants offer to prove the custom of the trade in the cold storage and warehouse business of depositing merchandise collateral with the warehouse companies, the obtaining of loans from the warehouse company, the payment of these loans to the warehouse company, and the withdrawal of a proportionate share of the collateral at the time of withdrawal.” It will be quickly noted that the offer fails to outline such a situation as is found here, viz., the giving of negotiable notes by the depositor to represent the loans made by the warehouse company, the sale of the notes for value to an innocent third party, and a subsequent payment made by the depositor to the warehouse company, not then the holder of the note. It seems to us that the offer was wholly irrelevant to the issues involved and that, therefore, the offered proof was properly excluded. In this view, it is unnecessary to consider what the ruling should have been, had the offer been addressed to a situation, such as existed here. It might be observed, in passing the question, however, that if a custom, appropriate to the situation, could ever be employed to defeat the collection of negotiable paper by a bona fide holder, then the integrity and security of such paper would prove to have been far less than the mercantile world has very generally deemed it to possess.

We think that the rulings of the trial cotut were in all respects correct, and that the plaintiff was entitled to a verdict in its favor, as directed. 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.

Crane, J.

(dissenting). I dissent on the ground that the Eastern States Warehouse Co. was the agent of the plaintiff to receive payment. The merchandise stored, for which warehouse receipts were issued, consisted of eggs. The bank taking the collateral warehouse receipts knew, or should have known, that the eggs were to be taken out by the merchants storing them, and sold in the market. They were stored until sales could be made. The storehouse was in Jersey, across the river from the city of New York. The merchants were in the city of New York. The bank which held this collateral was in Massachusetts. When it gave consent to the substitution of collateral, it must have known that the substitution was to be occasioned by the withdrawal of eggs, and could not have expected that upon each withdrawal the parties would have to wait for the mailing of papers from Massachusetts before deliveries of eggs could be made. Business in New York could not be done in any such way. The warehouse company was doing business with the merchants. The banks were doing business with the warehouse company. In fact the banks and the warehouse company were closely identified financially. They had a common interest. The warehouse company received the money in full for all the goods stored, and now this bank seeks to collect the money once again from the merchants. I think under the circumstances as they appear here, considering the nature of the business and the notice which the instruments gave to the bank, that it constituted the warehouse company its agent to receive payment. The loss should fall upon it and not upon innocent third parties.

I also agree with the Appellate Division that it was competent to prove the method in which egg merchants do business. How can we say that a custom is not material or relevant until we know what it is? What do courts know about the egg business? It is their place to listen and ascertain how merchants conduct business, and frame their decisions accordingly.

Cardozo. Ch. J., Pound, Andrews, Lehman and O’Brien, JJ., concur with Kellogg, J.; Crane, J., dissents in memorandum.

Ordered accordingly.


author: Crane, J. Lehman, J.

text:
    In the Matter of the Accounting of Guisippina Parascandola, as Administratrix with the Will Annexed of Joseph Auditore, Deceased, Respondent, v. National Surety Company et al., Appellants. Mechanics Bank, as Trustee, et al., Respondents.

      (Argued October 5, 1928;
    decided November 20, 1928.)

      James F. Donnelly and Mark Eisner for National Surety Company, appellant.
    The judgment obtained in the Supreme Court is res adjudícala against respondent-petitioner, and she is bound by the estoppel of such judgment. (Bouchaud v. Dias, 3 Den. 238; Henriques v. General Privileged Dutch Co., 2 Ld. Raym. 1532; Trogden v. Cleveland Stone Co., 53 Ill. App. 206; Darrell v. Hilligoss, etc., Gravel Road Co., 90 Ind. 264; Lillard v. Porter, 2 Head [Tenn.], 177; Clausen v. Head, 110 Wis. 405; Houghton v. Thomas, 220 App. Div. 415; Dodds v. McColgan, 222 App. Div. 126; Mattey Const. Co. v. The Junction, Inc., 170 N. Y. Supp. 35; Brock v. Poor, 216 N. Y. 387; Feinberg v. Allen, 208 N. Y. 215; Buck v. Hunter, 98 Vt. 163; Fulsom v. Mason, 107 Okla. 70; Kavanaugh v. Commonwealth Trust Co., 181 N. Y. 121: Niles v. N. Y. C., etc., R. R. Co., 176 N. Y. 119; Leonard v. Pierce, 94 App. Div. 266; 182 N. Y. 431; Steinbach v. Relief F. Ins. Co., 77 N. Y. 498; Collins v. Bennett, 46 N. Y. 490; International Paper Co. v. Purdy, 136 App. Div. 189; Boyd v. Boyd, 53 App. Div. 152; Baker v. Rand, 13 Barb. 152; Gardner v. Buckbee, 3 Cow. 120; Johnson v. Smith, 8 Johns. 383; Bracken v. Atlantic Trust Co., 42 App. Div. 621; 167 N. Y. 510; Stowell v. Chamberlain, 60 N. Y. 272; Fulton v. Canno, 200 App. Div. 253.) The Surrogate neither possesses jurisdiction nor power to declare that the moneys belonging to Auditore Contracting Co., Inc., and Auditore Company of New York and which were misappropriated by Frank Auditore, for which a judgment has been obtained against Frank Auditore, that as to one-half of the amount misappropriated it was to be considered a dividend or informal distribution of assets which was due and diverted from the estate and that Frank Auditore and his surety, National Surety Company, be surcharged therefor. (Matter of Raymond v. Davis, 248 N. Y. 67; Matter of Schaefer, 65 App. Div. 378; 171 N. Y. 686; Matter of Brown, 78 Misc. Rep. 342; Matter of Beach, 122 Misc. Rep. 261; Matter of O’Connell, 123 Misc. Rep. 955; Matter of Mathewson, 210 App. Div. 572; Matter of Hyams, 237 N. Y. 211; Matter of Isaacs, 208 App. Div. 61; Continental Tyre & Rubber Co. v. Daimler Co., 1 K. B. 893; Almirall v. McClement, 207 App. Div. 320; 239 N. Y. 630; Brock v. Poor, 216 N. Y. 387.)

      Anthony J. Ernest for Frank Auditore, appellant.
    The claims of the petitioner herein are merged in the judgment recovered in the action brought by the petitioner, as administratrix of Joseph Auditore, against Frank Audi-tore, individually and as administrator of Joseph Audi-tore, deceased, and others. (Alexander v. Donohue, 143 N. Y. 203; Singers-Bigger v. Young, 166 Fed. Rep. 82; Sullivan v. Baxter, 150 Mass. 261; Hughes v. Un. P. Lines, 119 N. Y. 423; Hamer v. N. Y. R. Co., 244 U. S. 266; Guita

      Percha Co. v. Mayor, 108 N. Y. 276; Matter of Whitney, 146 App. Div. 45.) The prior judgment, for conversion, necessarily adjudicated that the title to property and money converted was in the corporations, Auditore Contracting Co., Inc., Auditore Co., Inc., and Auditore Company, Inc. (Johnson v. Blaney, 198 N. Y. 312; Marsden v. Cornell, 62 N. Y. 223; Rosenberg v. Lewis, 210 App. Div. 690; Ellis v. Feeney, 187 App. Div. 481; 236 N. Y. 565; Salisbury v. Segal, 189 App. Div. 400; Island T. Co. v. Berg, 239 N. Y. 239; Tuska v. O’Brien, 68 N. Y. 449; Hughes v. U. P. Lines, 119 N. Y. 423; F. N. Bank v. Valentine, 209 N. Y. 145; Marsden v. Cornell, 62 N. Y. 223; Oakland Co. v. Linde, 162 App. Div. 543; Dietz v. Field, 10 App. Div. 425.) The petitioner has elected to take the benefit of the judgment in her favor as plaintiff in the Supreme Court action, and her claims are merged therein. (Officer v. Owens Co., 252 Fed. Rep. 337; Amer. Encyc. [2d ed.] 466, 479; Bank v. Beale, 34 N. Y. 473; American Woolen Co. v. Samuelson, 226 N. Y. 61; Assets Realization Co. v. Roth, 226 N. Y. 374; Sanborn v. Sanborn, 106 Ohio St. 641; U. S. & City of New York v. Benedict, 261 U. S. 294; Fields v. Bland, 81 N. Y. 239; Terry v. Munger, 121 N. Y. 161; Droege v. Ahrens & Ott Mfg. Co., 163 N. Y. 466.)

      Edward H. Wilson and John J. Kean for executrix, et al., respondents.
    The Parascandola judgment constitutes no estoppel. (Kavanaugh v. Commonwealth Trust Co., 181 N. Y. 121; Simpson v. Simpson, 44 App. Div. 492; Matter of Slingerland, 36 Hun, 575; Matter of Ehret, 70 Misc. Rep. 567; Jasper v. Rozinski, 228 N. Y. 349.) Frank Auditore, as administrator, was liable for the sums charged against him and his surety is liable. (Burden v. Burden, 159 N. Y. 287; Hiscock v. Lacy, 9 Misc. Rep. 578; Wormser, Disregard of Corporate Fiction & Allied Problems, 170; Harrington v. Keteltas, 92 N. Y. 40;
      O’Connor v. Gifford, 117 N. Y. 275; McQuaide v. Perot, 223 N. Y. 75; Matter of Allmann, 228 N. Y. 512; Matter of Griefenstein, 86 Misc. Rep. 173; Matter of Friedlander, 189 App. Div. 90; Northup v. Northup, 92 App. Div. 5. The decree was properly entered against the surety company in this proceeding. (Matter of Spaulding, 112 Misc. Rep. 317; Matter of Tilden, 118 Misc. Rep. 729; Jessup-Redf. Surr. Pr. [1925 ed.] 938; Kelly v. West, 80 N. Y. 139; Altman v. Hofeller, 152 N. Y. 498; Bodine v. Williamson, 134 App. Div. 688; Hood v. Hayward, 124 N. Y. 1; Fassbender v. American Surety Co., 66 Misc. Rep. 6.)

      Thomas Craddock Hughes for Pauline Auditore et ah, respondents.
    Neither under the rule of res adjudicata nor on the theory of estoppel is the administratrix barred from the relief asked for and granted by the decree appealed from. (Griffin v. Keese, 187 N. Y. 454; Rudd v. Cornell, 171 N. Y. 114; Cromwell v. County of Sac, 94 U. S. 351; Townsley v. Niagara Life Ins. Co., 218 N. Y. 228; Wager v. Wager, 89 N. Y.- 161.)
   Crane, J.

The case of General Rubber Co. v. Benedict (215 N. Y. 18) is authority for the principle applied by the courts below. Frank Auditore occupied two positions of trust; one as an officer and director of the Auditore Contracting Co., Inc., and the other as administrator with the will annexed of the estate of his brother Joseph Auditore.

For the misappropriations of the corporate funds by Frank, he has been held liable to the corporation in a suit brought in its behalf by a stockholder. The judgment has not been paid. The estate of Joseph Auditore owned fifty per cent of the stock. This was held in trust for the estate by Frank Auditore as administrator. As such he owed to the estate an active duty to use diligence and care to preserve its value and prevent its loss. By wrongfully talcing all the assets of the corporation and applying them to his own use, he violated this trust and destroyed or lowered the value of this stock or the assets of the estate. For the damage done he and his surety should be held liable. The damage is the reduced value of the stock due to Frank’s misappropriations while administrator. The judgment recovered by the corporation is no bar to this proceeding. The remedies are not inconsistent; they are applied to different duties and relationships. The money taken or used by Frank is not a dividend of the corporation received by him as administrator, nor do we have to ignore the corporation or the corporate form. The action by the corporation stands. If its judgment had been paid, no harm would have been done the assets of the estate. It has not been paid and the stock has become valueless. The loss of value is due to the act of the one chosen to sustain its worth. The trustee is liable for the loss in value which he has occasioned. Of course if the liabilities of the corporation exceeded its assets there could be no damage done. The value depends upon the financial condition of the corporation as of the time of Frank’s appointment as administrator and his misappropriations.

If we take as illustration an extreme case, we will at once, I think, see clearly the application of this principle. A president of a corporation-is made administrator of an estate owning ninety per cent of the stock. The stock is worth par. The president steals all the assets of the corporation and the stock becomes valueless. The corporation can sue him for his misappropriations, but if he be insolvent, the stock remains valueless. He owed a duty to the estate as a trustee of its assets. Has he betrayed that trust? The shares of stock which he held as administrator have value because of the proportional interest in the capital of the company. The administrator has stolen and misappropriated that capital. His deed has caused an actual loss to the estate by rendering the stock valueless. Can it be that the only breach of duty was that which he owed the corporation as an officer and that this absorbs and swallows up the duty which he owed the estate? His bond as administrator was given for the faithful performance of his duties as administrator. He has failed in his duty as administrator; his theft has caused a loss. This illustration probably is unnecessary, for it states the exact facts of this case. The findings are that Frank Auditore, as administrator of his brother’s estate, held fifty per cent of the stock of the Auditore Contracting Co., Inc. He was also an officer and director of the corporation owning the other half of the stock. He took all the assets rendering the stock valueless as he became insolvent. The judgment recovered against him by the company requiring him to put back the assets was unenforceable as Frank Auditore has no property. Body execution has been issued against him and he has spent six months in jail. Under these circumstances, is the estate which he represents powerless? Has he faithfully performed his duties as administrator? The only answer that can possibly be given is that he has not. The surety company undertook by its bond to be liable for his faithless performance. His breach of duty as an officer of the corporation does not expunge or obliterate his breach of duty as administrator.

This is a much clearer case for the application of this principle than General Rubber Co. v. Benedict (supra). There the defendant was a director of a New Jersey company which owned all the stock of a subsidiary known as the Brazilian company. The general manager of the Brazilian company, one named Hutter, took the assets of the Brazilian company and misapplied them to such an extent as to reduce the value of the stock of the Brazilian company held by the New Jersey company. The defalcations and misappropriations of the general manager injured the stock held by a third party. The defendant; was not a director of the Brazilian company, but he was a director of the owner. He knew of the defalcations. He was in a position to prevent them, but instead of preventing them acquiesced in them. ' Unlike the Auditore case, he did not himself steal the money, but he knew that it was being misapplied. His silence and acquiescence would not have created any liability, but for one thing. He was in a position where he was called upon to act. He was a director in the company which owned the stock and as such director was a trustee of its property with a duty to protect it and a duty to speak. This court said that his failure to be vigilant or informative made him liable to the owner of the stock for the loss occasioned in the depreciation of that stock traceable to his breach of trust. The Brazilian company of course had an action against Hutter as general manager to recover the funds taken by him. If Benedict, the defendant in the case, had stolen the money instead of Hutter, the fact that the Brazilian company would have had a cause of action against him, whether officer or stranger, to recover the moneys taken, would in no way have barred the independent cause of action for a breach of duty which Benedict owed as a director of the New Jersey company which owned the stock. The amount collected in the action by the Brazilian company of course would have reduced the loss or the damage, but would not have affected the rights and remedies.

The Appellate Division has remitted the proceeding to the Surrogate to ascertain the claims of the creditors of the corporation. We are of the opinion that the rehearing should not be limited but that the Surrogate should ascertain the value of the stock and its depreciation due to the illegal acts of the administrator, i. e., the damage done to the value of the stock. This may require the examination of many items of assets and liabilities. The value of the stock is to be determined as in any other case. The Surrogate is not dealing with the corporation but with the value of its stock at specified times.

We notice that' two or more of the items for which . Frank Auditore and his bonding company have been held liable refer to alleged misappropriations of corporate funds prior to August 18, 1920, the date of the letters of administration. The surcharges as they may be called in two instances go back to June of 1920. This gives rise to a different question. These misappropriations occurred before Frank Auditore became administrator. The bonding company is only hable for his acts as administrator. Was there any duty which the administrator owed regarding the funds misappropriated by him before he became administrator?

Debts due the estate were to be collected. The administrator and his bondsman would be hable for any neglect in gathering in the assets of the estate. If the administrator himself owed money to the estate it would be his duty to pay it. If he could have paid the amount of his indebtedness, but delayed doing so until he was insolvent, the bondsman might be hable for this loss dependent upon the circumstances. Here, however, we have through the misappropriations of Frank Auditore prior to his appointment as administrator claims due from him to the corporation, the Auditore Contracting Co., Inc. What duty did he owe to the estate regarding his indebtedness to the corporation? Permit me to answer it by using an illustration. Suppose Frank Auditore, as administrator, had in his possession stock representing nearly all the capital in the corporation. The stock was worth par. The administrator had knowledge that an officer of the corporation had taken and misappropriated all of the capital of the company and had put it as cash in his own bank account. This rendered the stock valueless. Would the administrator having these facts before him owe any duty to the estate even though the misappropriation of the president happened before the appointment of the administrator? Having the stock in his possession, the administrator could have brought action in the name of the corporation to have recovered this money from the president. (Niles v. N. Y. Central & Hudson River R. R. Co., 176 N. Y. 119.) The corporation could have sued or upon its failure or refusal so to do, the administrator representing the stock could have brought the action. Would he have been guilty of negligence and carelessness in failing to compel the corporation to bring the action or in bringing the action himself, if he knew by so doing the money could be restored to the corporation? To put this proposition I think is to answer it. Of course if the president in my supposed case were insolvent or became insolvent before the administrator in the exercise of reasonable diligence could act, he would be guilty of no breach of duty in failing to pursue the fund.

This is the situation which confronts us as to these items of which I am speaking. ' Only it so happens that the administrator and the president of the corporation misappropriating the funds are one and the same person. At the time Frank Auditore was appointed administrator it was his duty to return to the corporation the moneys he had wrongfully taken. It was his duty to demand of the corporation to take action to recover those moneys, and if the corporation refused to act to bring action in the name of the corporation. If he were solvent and could have paid back the moneys, then his failure to so act would result in a loss to the estate by depreciating by just so much the value of the shares. If, on the other hand, he become insolvent within the time that an ordinarily prudent administrator would have acted under like circumstances, then he as administrator would not be hable to the estate for failure to pay back the money to the corporation or for failure to commence the appropriate proceedings to collect it. In other words, as to acts happening before Frank Auditore was appointed administrator, whether these be his own acts or the acts of third parties, he and his bondsman are only liable for negligence, the failure to pursue that diligence which reasonably prudent and careful men would use. But as to the things which happened after he was appointed administrator, he is- here held hable not for negligence or carelessness, but for his own acts of misappropriation, for the larcenies which he committed, resulting in loss to the estate. As to both items, whether those before his appointment as administrator or those afterwards, the basis of the liability, if any, is the breach of trust. The breach, however, is determined by a different measure; the one by negligence, the other by misappropriation. The one includes the element of solvency and ability to collect, the other has in it no such consideration; the administrator and his bondsman are liable for the misappropriations irrespective of the solvency of the administrator.

The perplexity has here arisen by reason of the administrator being a director and officer of a corporation, and also an administrator of an estate interested in that corporation. He holds dual trust positions. The matter is simplified when we separate these capacities and consider what would be the administrator’s duty if a third party officer of the corporation had stolen the funds.

The courts below have had the main principle in mind and attempted to apply it. The Surrogate sought to approach the matter by considering the moneys taken by Frank Auditore from the corporation in the nature of dividends of the corporation which he held in trust for the estate. The Appellate Division sustaining the Surrogate in part thought that the corporate entity of the Auditore Contracting Co., Inc., might be ignored, and remitted the matter to the Surrogate to take proof of the debts of the corporation as bearing upon the value of the stock. We think the whole matter should be remitted to the Surrogate for a rehearing.

The order of the Appellate Division should, therefore, be modified in accordance with this opinion and the matter remitted to the Surrogate’s Court for further proceedings in accordance with the decision of this court.

As explained or qualified in opinion the questions certified should be answered: No. 1, No; ” Nos. 4, 6, 7, 8, “ Yes.” Questions Nos. 2, 3 and 5, not answered.

Lehman, J.

(dissenting). Joseph Auditore and his brother Frank Auditore each owned fifty per cent of the corporate stock of Auditore Contracting Co., Inc., and together managed its corporate affairs. Joseph Auditore died May 9th, 1920. Letters of administration with the will annexed were issued to his wife, Guisippina, and to Frank Auditore, on August 18th, 1920. The National Surety Company executed its bond as surety for the administrators. From the death of Joseph Auditore, Frank Auditore continued to control the corporate affairs of the Auditore Contracting Company, Inc., with one Joseph Stockham who was elected secretary and a director thereof on June 10th, 1920. Together they appropriated to their own use corporate property. Thereafter Guisippina Parascandola, the former wife of Joseph Auditore, as administratrix of his estate brought a representative action in behalf of the corporation against Frank Auditore and Joseph Stockham to recover the corporate property appropriated by them. The action resulted in an adjudication that Frank Auditore and Stockham had looted the corporate treasury, and a final judgment was made and entered in favor of the corporation for the amount stolen. That judgment has never been paid and probably is uncollectible.

Frank Auditore has, of course, been removed as administrator of the estate of Joseph Auditore. He has proven himself a faithless guardian of that estate. Upon the settlement of the accounts of Guisippina Parascandola a decree has been entered charging Frank Auditore, as former administrator, with the sum of $208,143.75, which is one-half of the amount of corporate property which Frank Auditore diverted and which, the courts below held, would have come to the estate if the corporate funds had not been diverted from the corporate treasury into the pockets of Frank Auditore and Stockham. There is no more probability that the amount found due to the estate can be collected from Frank Auditore than the amount found due to the corporation, but the decree which charges Frank Auditore with half the amount of his peculations from the corporation which he controlled also grants judgment for the same amount against the surety company as surety of the administrators.

Unquestionably the evidence establishes that Frank Auditore stole corporate funds through his control of the corporation. Unquestionably his theft reduced the value of the corporate stock belonging to the estate of which he was an administrator, though the assets he stole belonged to the corporation and not to the stockholders. The decision of the courts below that, as administrator, he or his surety must make good the damage to the assets of the estate through his theft of the property of the corporation, in which the estate is a stockholder, has be~r based upon the view that there are circumstances in U*is case which may properly lead the court to disregard the concept of a corporate entity apart from the stockholders. This court is about to affirm the judgment of the courts below on the theory that though we may not disregard the corporate entity which, at the suit of the administrator of the estate, has recovered a judgment against its faithless officer, the estate of Joseph Auditore is also entitled to a judgment against its faithless administrator for damages caused to the estate by the breach of some duty owed to it. This court finds authority for its decision in General Rubber Company v. Benedict (215 N. Y. 18).

In that case the defendant was a director of the plaintiff corporation. He knew that the president of a subsidiary company whose capital stock was owned by the plaintiff was stealing the assets of the corporation: The defendant, knowing these facts, perhaps even acting in collusion with the dishonest president of the subsidiary corporation, neglected to inform the plaintiff. “ He withheld and concealed the truth, so it is charged, intentionally and for his own profit.” The defendant was not a director of the subsidiary corporation. He is liable to it, if at all, only as a stranger might be liable. If he has joined in a conspiracy to plunder it, he must, like any other tort feasor, make compensation for the plunder.” As a director of the plaintiff corporation the defendant owed to it a duty of fidelity and care. That duty the defendant breached, and for the consequent depreciation in the value' of the stock owned by the plaintiff this-court held that the defendant was liable directly to the plaintiff, regardless of whether or not the defendant was also liable to the subsidiary corporation for the conversion of its assets.

The opinion in General Rubber Co. v. Benedict (supra) distinguishes such cases as Smith v. Hurd (12 Metcalf, 371); Niles v. N. Y. C. & H. R. R. R. Co. (176 N. Y. 119), in which it was held that an individual stockholder has no right of action in his own behalf against one who has injured the corporation, however much the wrongful acts have depreciated the value of his shares, and this court adopted the language of Taft, J., in Ritchie v. McMullen (79 Fed. Rep. 522) that we are of opinion that this principle has no application where the wrongful acts are not only wrongs against the corporation, but are also violations by the wrongdoer of a duty arising from contract or otherwise, and owing directly by him to the stockholders.”

The language of that statement, torn from its context and read without regard for the reason of the rule and its application to the particular circumstances to which it was intended to apply, is, perhaps, broad enough to constitute authority for the decision which this court is now about to make. Language in an opinion may not be so read. Though there is no privity between a director of a corporation and á stockholder, it can hardly be said that a director does not occupy a fiduciary relationship to the stockholders. The corporate entity stands between the stockholders and the directors, but the doctrine of a corporate entity may not blind us to the fact that a director of a corporation owes some duty, even if indirect, of good faith and honesty to all those who are interested in the assets of the corporation, be they stockholders or even creditors. The limits of that duty need not now be decided. Certainly the duty not to steal is sufficiently broad that it applies towards all who may be injured by the theft, and the sound reason why a stockholder ordinarily has no individual right of action for waste of the corporate property is that ordinarily a stockholder suffers no damage, of which the law takes cognizance, by waste of corporate assets. Those assets in law belong only to the corporate entity. The individual stockholders have no direct interest in those assets and hence suffer no injury, for which they may seek redress in the courts. Other holding would be in disregard of the doctrine of a corporate entity under circumstances and for purposes in which it was peculiarly intended to apply. Damage to the stockholders arises only indirectly through damage done to the corporation, and may be redressed only by action which seeks reimbursement for the corporation. (See opinion in Smith v. Hurd, supra.) Breach of a duty which is directly owed to a stockholder may, however, also result in direct damage to the stockholder, which cannot be repaired by a representative action in behalf of the corporation. The duty and the breach, coupled * * * with damage, make out a cause of action.” That is the reasoned basis of the decision in General Rubber Co. v. Benedict (supra).

It is to be noted that in all the cases cited in that opinion, including the case of Ritchie v. McMullen (supra), the “ duty owed directly ” by the wrongdoer to the stockholders was broader than any duty to the corporation not to waste the corporate assets, and gave rise to direct damage which ordinarily could not be made good by reimbursement to the corporation. Waste of assets in those cases constituted merely the means by which injury was directly inflicted upon the aggrieved stockholder. Where directors waste the assets of a corporation as part of a successful scheme to acquire the stock of the corporation at a depressed price, it would be idle to say that the only remedy left open to the wronged stockholder who has parted with his stock is by a representative action which would result only in an increase in the value of the stock in the hands of the wrongdoer. In the case of General Rubber Co. v. Benedict, it is true, all damage to the stockholder would be repaired if the corporation were made whole for the waste of its assets. In that case, however, the court pointed out that the defendant was not a director of the subsidiary company. He was a director of the plaintiff ” which in turn owned the stock of the subsidiary company whose assets were wasted. That circumstance I think was decisive. As a director the defendant owed a duty of care to the plaintiff corporation. He owed no such duty to the corporation whose assets were wasted. True, “ if he has joined in a conspiracy to plunder it, he must, like any other tort feasor, make compensation for the plunder,” but he was not sued for conversion but for failure to do his duty as a director. Only the' plaintiff might sue for failure to perform that duty and the court pointed out that under the circumstances “ the breach of that duty, and the resulting damage, would seem to call for the application of a principle that there is no wrong without a remedy.” Wrong and damage to the shareholder was not merely an indirect result of wrong to the corporation, for as to the corporation there may have been no wrong. In that action the question of whether the defendant had also committed some further wrong to the corporation by plundering it was irrelevant, except that, as the court expressly pointed out, proof that the corporation could itself collect damages for the waste of its assets, either from the defendant of any other wrongdoer, would reduce or perhaps even eliminate any damages which the stockholder might recover against the defendant for breach of a duty directly and peculiarly owed to the public.

Therein lies, I think, a decisive distinction between the case of General Rubber Co. v. Benedict and the present case. In both cases the wrongdoer occupied a fiduciary relation to a shareholder of a corporation. In both cases he was false to his trust. There, T think, analogy ceases. In the former case there was a breach of duty to the shareholder alone, and that breach was completely independent of any wrong to the corporation, indeed as to it there may have been no wrong. Here the shareholder shows and can show no breach of duty to the shareholder except by proof that the defendant wasted the assets of the corporation. The shareholder has not been wronged except indirectly through wrong to the corporation by the waste of its assets. True, the wrongdoer owed not only a direct duty to the corporation and an indirect duty to its shareholders as such, but also a direct duty to the estate of Joseph Auditore because of his special fiduciary relationship to it, but his breach of all these duties was the same. He has been a faithless administrator only because he has stolen the assets of the corporation. He stole no assets of the estate, and the estate has not been injured by the waste of corporate assets, except indirectly. For loss indirectly suffered by the shareholder through wrong to the corporation, the shareholder has never been accorded an individual right of action. In Ritchie v. McMullen (supra) and the cases there cited, there was a direct wrong to a shareholder beyond the waste of assets which caused the shareholders direct damage which would not be repaired even by complete restitution to the corporation. In General Rubber Co. v. Benedict the shareholders’ cause of action was for a breach of a direct duty which was entirely independent of a waste by the wrongdoer of the corporate assets and might be proven even if the defendant was guilty of no wrong to the corporation. Here the defendant is being held liable as administrator for damages indirectly caused to the estate by his wrongful diversion of corporate funds perpetrated as a corporate officer. Distinctions which seem to me without substance between the acts of an administrator and a corporate officer are drawn to fasten upon the administrator’s surety liability for damages resulting indirectly to the estate from a wrong to the corporation committed by an officer of the corporation, and which falls entirely without the purview of the bond when reasonably construed.

•What I have said is intended to' apply to the entire decree against the administrator and his surety. It applies, I think, with special force to that part of the decision of this court which holds Frank Auditore as administrator and his surety liable to the estate for damages caused by the theft of corporate assets even prior to his appointment as administrator. Concededly at that time no privity of any kind existed between Auditore and that estate. Theft or waste of corporate assets were at that time concededly a wrong only to the corporation, and the estate as shareholder had no cause of action against the wrongdoer. The theft gave rise only to a debt to the corporation, and not a debt to the stockholder. Only through his control of the corporation or by an action brought in its behalf could Frank Auditore have compelled restitution. His failure to bring such an action and to collect the damages may again have constituted a wrong to the corporation; it constituted no independent wrong to any stockholder as such, and I fail to see how a direct wrong to the corporation which constitutes no injury to its stockholders can become an injury to a particular stockholder merely because the man who wronged the corporation occupied a special fiduciary relation to the stockholder. To permit a recovery by the stockholder for wrong to it, there must be proof that independently of the wrong done to the corporation there was a wrong done to the stockholder. A wrong to the corporation may become morally greater when the wrongdoer stood in a fiduciary relationship to a stockholder, but when the only breach of a duty owed by the wrongdoer to the stockholder is a waste of corporate assets causing no direct damage to the shareholder, I fail to see any sound ground for transmuting the injury done to the corporation into an injury to the stockholder in order to create a new liability against the surety on the administrator’s bond.

For these reasons I think the decree should be reversed.

Cardozo, Ch. J., Pound, Andrews and O’Brien, JJ., concur with Crane, J., Lehman, J., dissents in opinion in which Kellogg, J., concurs.

Ordered accordingly.


author: Lehman, J.

text:
    Maurice A. Mack, Appellant, v. Walter A. B. Mendels, Respondent.
    (Submitted October 19, 1928;
    decided November 20, 1928.)

      Max L. Arnstein and Boardman Wright for appellant.
    The Statute of Limitations does not bar this suit. (Isenberg v. Ranier, 70 Misc. Rep. 502; 145 App. Div. 256; Ubart v. Baltimore & Ohio R. R. Co., 117 App. Div. 831; Persick v. Phil. & Reading Coal & Iron Co., 182 App. Div. 291; Buegger v. Ashley, 161 App. Div. 576; Whitney v. Whitney E. & W. Co., 121 Misc. Rep. 461; Dodge v. Hol

      brook, 107 Misc. Rep. 257; Mayer v. Friedman, 7 Hun, 218; 69 N. Y. 608; National Surety Company v. Ruffin, 242 N. Y. 413; Olcott v. Tioga R. R. Co., 20 N. Y. 210; Dalrymple v. Schwarts, 177 App. Div. 650; Miller v. Brenham, 68 N. Y. 83.)

      Allen McCarty and Donald B. Riker for respondent.
    Since the amendment of 1888 non-residence and absence, taken together, are conditions necessary to toll the Statute of Limitations. (Hart v. Kip, 148 N. Y. 306; Costello v. Downer, 19 App. Div. 434.)
   Lehman, J.

On the 29th day of May, 1918, the defendant made, executed and delivered a note for the sum of five thousand dollars payable to the order of Clarence C. Perpall at 50 Broad street, New York city. At that time the defendant was a “ curb broker,” having an office at 50 Broad street, New York city, where the note was made payable, but resided in New Jersey. The ■ note was delivered as additional margin to Clarence C. Perpall & Co., a firm of brokers who were members of the Consolidated Exchange, and with whom the defendant was then doing business. Clarence C. Perpall & Co. became bankrupt. The defendant made some payments to the receiver in bankruptcy. No demand was made upon the defendant for payment of the note he had given. It was not included in the schedule of the bankrupt’s assets. Four years after the note was made, the plaintiff’s assignor purchased the outstanding accounts and unadministered assets of the bankrupt, including this note, for the sum of twenty-five dollars. More than seven years after the note was made the plaintiff began this action.

It is said that the payments to the receiver in bankruptcy constituted payment of the defendant’s entire indebtedness for which the note was collateral security to the bankrupt. The evidence upon this point is not very satisfactory and we do not pass upon the question of whether the defense of payment was conclusively established. The courts below have held that, in any event, the defense that the cause of action is barred by the Statute of Limitations was established, and we agree with their conclusion. The defendant has resided continuously in New Jersey from 1915. He has done business as a curb broker in New York city continuously since May, 1918. He has during all that time maintained an office in the city of New York, either at 50 Broadway or 29 Broadway, and he has come to his office regularly on every business day to attend to his business. The statutory period during which an action may be brought upon the note against the defendant has now expired.

An action upon a note must be brought in this State -within six years after the cause of action accrued. (Section 48 of the Civil Practice Act.) The State of New Jersey, in which the defendant at all times resided, has a similar limitation. The Legislature * * * never intended to drive residents of this State into other States for the purpose of preserving and enforcing their claims as against a Statute of Limitations.” (National Surety Co. v. Ruffin, 242 N. Y. 413.) Absence of a defendant from the State at the time the cause of action accrued prevents the running of the statute until the defendant returns to the State. Departure from the State and continuous absence for the space of one year or more interrupts the running of the statute. (Civil Practice Act, section 19, formerly Code of Civil Procedure, section 401.) The question here presented is whether non-residence constitutes absence from the State within the meaning of the statute, when the non-resident maintains an office in the State for the transaction of his business and visits his office regularly on each business day.

Doubtless the general object of the statute was to save the remedy of the creditor in all cases where he was prevented from prosecuting the debtor in our courts, in consequence of the. absence of the latter from the State.” (Olcott v. Tioga Railroad Company, 20 N. Y. 210.) The Legislature determines under what circumstances the time limited by statute for commencing an action shall be suspended. The courts construe provisions made by the Legislature creating exceptions or interruptions to the running of the time limited by statute in which an action may be begun. They may not themselves create such exceptions. (Ruggles v. Keeler, 3 Johnson, 265.) General language in judicial opinions must be regarded as merely a gloss on the text of the statute under consideration, not as the formulation by judicial authority of a general rule.

It is significant that in the statute which- we must construe, the Legislature has not expressly stated that non-residence of a debtor at the time the cause of action accrued, or departure from the State thereafter, coupled with non-residence, shall postpone or interrupt the running of the statutory limitation.

Similar language, in analogous statutes of this and other States, has received the construction that the period of limitation runs whenever a debtor is physically present in the State, though he may be resident elsewhere. “ The question is not one of domicile, but of personal presence.” (Hoggett v. Emerson, 8 Kansas, 262, per Brewer, J.) True, there are casual expressions in some judicial opinions that might suggest that physical absence and non-residence are merely varying forms of the same concept. Such expressions have little, if any, significance. When one becomes a non-resident, he does not, as a rule, remain in the State. Hence in most cases, so long as absence and non-residence were concurrent, the court, not having its attention directed to the matter, might use one word or the other indifferently.” (Webster v. Citizens Bank of Omaha, 2 Nebraska [unofficial], 353, per Roscoe Pound, C.)

The first clause of the statute that if, when the cause of action accrues against a person, he is without the State, the action may be commenced, within the time limited therefor, after his return into the State,” is of ancient origin and has been frequently construed by the courts. “ The statute (4 Anne, ch. 16, § 19), provides, in nearly the' same language as our act, that if the person against whom a cause of action shall accrue shall at the time be beyond the seas, the action may be brought within the time limited after his return.” (Olcott v. Tioga Railroad Company, supra.) “ ‘ Beyond sea,’ and out of the state,’ are analogous expressions, and are to have the same construction.” (Faw v. Roberdeau’s Executor, 3 Cranch [U. S.], 174, per Marshall, Ch. J.) Within the meaning of the statute of England and the statutes of the States of this country which use similar language, a person is beyond the seas ” or out of the State when physically absent, regardless of residence or domicile, and he “ returns ” at the moment when he comes openly into the State or country though he does not take up his residence therein. (See Faw v. Roberdeau’s Executor, supra; Little v. Blunt, 16 Pickering [Mass.], 359; Gibson v. Simmons, 77 Kansas, 461; Strithorst v. Graeme, 3 Wils. 145; Lafond v. Ruddock, 13 C. B. 813.)

In this State the first clause of the statute stood alone until 1830. It had received the judicial construction that physical presence and not residence was the test. In Fowler v. Hunt (10 Johnson, 464) the court rejected the contention that the limitation of the period in which an action might be commenced against a party, who resided abroad, began to run only from the time when the party returns with intent to reside within the State. The court held that it was sufficient if the coming from abroad was not clandestine, and with an intent to defraud the creditor by setting the statute in opération and then departing. It must be so public, and under such circumstances, as to give the creditor an opportunity, by the use of ordinary diligence and due means, of arresting the debtor.”

In 1830 a new clause was added to the Revised Statute. ■ It provided that if after the cause shall have accrued the debtor shall depart from and reside out of this State, the time of his absence shall not be deemed or taken as any part of the time ” (2 R. S. § 100) limited for the commencement of the action. In construing the new clause, the court in Burroughs v. Bloomer (5 Denio, 532) said: There is nothing said, as in the former statute, in respect to the return into the State as the condition on which the time limited for bringing the action begins to run. It simply excludes the time of the absence from the computation. The expressions and reside out of the State/ and the time of his absence/ have the same meaning: they are correlative expressions. So that while the defendant in this case resided out of, he was absent from the State,- and accordingly, until he again became a resident of the State, the suspension of the operation of the statute continued.” What the court said of course referred only to the new clause of the statute, which provided for the suspension of the running of the period limited for the bringing of the action. It had no reference to the earlier clause, which provided for the commencement of that period. The court, indeed, took pains to point out: The rule in that case, that on the first return to the State the time commenced running * * * is familiar to all.”

That rule was so familiar to all that it is difficult to find a case thereafter where it has been questioned. In all the cases which have been cited to us, the courts seem to have considered only the construction and effect of the clause of the statute providing for a suspension of the time within which an action may be begun after that time had begun to run. As long as the statute provided that each departure of the debtor coupled with residence out of the State suspended the continued running of the statutory period, it was of little or no practical importance that the statute might have begun to run against a nonresident for the short period or periods in which he was physically within the State. Since each departure by a non-resident after occasional visits here, or after a daily visit to a place of business here, would suspend the running of the time limited by the statute, the limitation seldom, if ever, created a bar to the bringing of an action against a non-resident. So the court held in Connecticut Trust & Safe Deposit Co. v. Wead (172 N. Y. 497) and neither that case nor the cases cited therein are authority for any rule of law more general in its scope.

In that case the court construed the second clause of the statute as amended in 1888: If, after a cause of action has accrued against a person, he departs from and resides without the State, and remains continuously absent therefrom for the space of one year or more, the time of his absence is not a part of the time limited for the commencement of the action.” Prior to that amendment the Legislature had made departure from the State, coupled either with non-residence or continuous absence from the State for one year, ground for the suspension of the running of the statute. By the amendment the Legislature required both conditions to concur. In Hart v. Kip (148 N. Y. 306) this court had held that departure and continuous absence from the State for more than a year by a debtor who maintained a residence in this State did not create a suspension of the running of the time limited for the bringing of an action. Conversely, the Appellate Division had held in Costello v. Downer (19 App. Div. 434) that there was no suspension of the running of the limitation where the debtor departed and resided without the State but attended openly and notoriously to his business during business hours each day at an office in this State, which he maintained for that purpose. In the one case it was held that there was continuous absence without non-residence; in the other there was continuous non-residence but not continuous absence.

In Connecticut Trust & Safe Deposit Co. v. Wead (supra) the debtor departed from and resided without the State continuously, but visited the State occasionally. The court did not attempt to overrule the decision in Costello v. Downer (supra) but stated: “ Whether the statute runs in favor of a non-resident defendant with a place of business in this State and daily present there during business hours it is unnecessary to determine, but we hold that the casual temporary visits of a non-resident to this State do not break the continuity of his absence under the section of the Code so as to entitle him to the benefit of the statute.”

If the statute had remained unchanged since 1888 we should now be called upon to determine the question which the court left unanswered, but the amendment to the statute in 1896 has eliminated that question. Since then, under both clauses of the statute, presence within the State, not residence, is made the test of whether the period of statutory limitation runs against a debtor. An unbroken tradition of judicial construction of the language of the first clause has made certain the meaning of that clause, and the elimination from the second clause by the Legislature of residence without the State as a premise for the suspension of the running of the statutory period of limitation patently bars its inclusion by judicial construction.

The period of time in which the action against the defendant-might be brought began to run at the time the cause of action accrued, or if the defendant was at that time without the State, then under the first clause of the statute at the time of his first “ return ” thereafter to this State openly and notoriously to attend at his office. It was never interrupted thereafter under the provisions of the second clause, for the defendant was never continuously absent from the State for the space of a year.

The judgment should be affirmed, with costs.

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

Judgment affirmed.