Orr v. South Amboy Terra Cotta Co. , 98 N.Y.S. 1026 ( 1906 )

Laughlin, J.:

This is an action against the maker of ¿'promissory note for $1,000. The note was duly authorized by a resolution of the board of directors of the defendant, but it was issued to one bf the directors without consideration. The note was made in the name of the defendant, a business corporation, signed by its president and secretary, and made payable to the order of E. R. Poerschke. The payee was one of the directors. He was a mason and builder and for many years had purchased material of the plaintiffs, who were dealers in granite. He owed them $1,027. They demanded payment and he turned over to them this note before maturity, for which they gave him credit on the account. There was conflicting evidence on the question a^ to whether the plaintiffs had notice of any infirmity in the note and the court submitted that issue to the jury.* There was also evidence tending to show that the plaintiffs knew that the payee was a director of the maker of the note, but that was also controverted. The court in charging the jury drew their attention to that evidence and instructed them that if they found that plaintiffs at the time they took the note- knew that the payee'was a director of the maker, they might take that fact into consideration in determining whether they were put upon inquiry as to -how he obtained possession of the note. Counsel for plaintiffs duly excepted to such instruction and said to the court: “ The. plaintiffs maintain .that the mere fact that a person is a director and not an officer of a company is not sufficient to throw discredit upon any commercial paper,” and requested that the jury be instructed “that the mere fact that Mr. Poerschke was a director, and the fact, even if it were true,” that one of the plaintiffs knew it, was' “ not sufficient to throw discredit on the note, or enough to put a bona fide holder upon inquiry.” The court declined to so charge and counsel for plaintiffs duly excepted. This was error.' The rule applicable to notes made by officers of a, corporation to their own order' and used'to pay their individual obligations has no application to notes made by the duly authorized officers and payable to a director. It is not uncommon for directors to have business- dealings with the corporation, and it is perfectly legitimate if they refrain from voting and do not use their personal influence with their fellow-directors for their own advantage at the expense of the corporation. But the officers of a- corporation individually make the contracts in behalf of the corporation and issue its obligations. They may nbt lawfully contract witli themselves or use the credit -of the corporation for their own benefit individually. There is reason, therefore, "for the rule that one taking the negotiable paper of a corporation in payment of an individual obligation of an officer is chargeable with notice and is put upon inquiry as to whether the issuance of the paper was authorized (Wilson v. Met. El. R. Co., 120 N. Y. 150 ; Hanover Bank v. American Dock & Trust Co., 148 id. 612 ; Cheever v. Pittsburgh, etc., R. R. Co., 150 id. 59 Rochester & C. T. R. Co. v. Paviour, 164 id. 281), but the reason does not exist in the case of a director, and, therefore, the rule js not applicable. The plaintiffs, therefore, were entitled to have the jury instructed as matter of law that the fact that the payee was a director of a corporation was not notice to the plaintiffs of any infirmity in the note, and did not put them upon any inquiry concerning the circumstances under which it was issued or came into the hands of the payee. Any other rule would seriously impair the negotiability of corporate securities.

It follows, therefore, that the' order of the Appellate Term and order and judgment of the City Court should be reversed and a new trial granted, with costs to appellant to abide the event.

O’Brien, P. J., Patterson, Ingraham and Clarke, JJ., concurred.

Determination, judgment and order, reversed and new* trial ordered, costs to appellant to abide event. Order filed.