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Queensboro Nat. Bank of City of New York v. Kelly.

April 6, 1931


Appeal from the District Court of the United States for the Eastern District of New York.

Author: Mack

Before L. HAND, CHASE, and MACK, Circuit Judges.

MACK, Circuit Judge.

In an action against the maker by the payee of a promissory note for $14,432.63, defendant answered that the consideration therefor was an assignment by plaintiff to him of certain bills of exchange aggregating $16,164.15; that the note was to be effective on condition that the bills were delivered to defendant, but that no delivery had been made; that, on the contrary, when at maturity defendant had tendered the amount of the note with interest, plaintiff had informed him that it was unable to deliver the drafts; that all or a greater number of the drafts had been paid prior to the assignment to defendant.

Of even date with the note, but whether before or after its execution is in controversy, a writing was signed by both parties (copied in the margin).*fn1

It was stipulated at the trial that prior to the execution of the note some of the drafts had been paid by the drawees thereof to a Porto Rican bank, plaintiff's correspondent; that the moneys received had been remitted by it, $9,189.21 thereof to the drawer, Soamer Distributing Company, which deposited the checks with plaintiff, in its general account, and the balance, $1,067.51, directly to plaintiff.

The drafts had been issued in sets of two. This, however, is about all that on this record can be stated in respect to them. In other words, it is not clearly apparent (a) who the payee was, whether the drawer or plaintiff or the Porto Rican Bank; (b) whether they were delivered by the drawer to the plaintiff, and, if so, for what purpose; or (c) whether they were sent either by drawer or plaintiff to the Porto Rican bank, and, if so, whether the whole or only part of either the firsts or the seconds of exchange or both were so sent; (d) whether such drafts as were in plaintiff's possession at the time of the assignment were firsts or seconds or both, and whether they were originally payable to plaintiff or had theretofore been indorsed to it by the drawer or the Porto Rican bank as payee, or had been delivered to it without indorsement, and, if indorsed, what the nature of the indorsement was.

We deem it essential to point out this lack of clarity in the testimony in order that on another trial it may be corrected and the entire situation presented.

Inasmuch as at the conclusion of the trial both parties moved for a directed verdict and submitted the cause to the court on a stipulation that neither would ask to go to the jury but that the court might direct a verdict, all doubts in respect to the testimony must for the purposes of the present appeal be resolved against the appellant. Some time after the submission, the trial judge rendered an opinion stating that a verdict would be directed in favor of the defendant, but he made no special findings of fact. The judgment from which the appeal was taken, after reciting the stipulation and the granting of defendant's motion for a directed verdict, dismisses the complaint and awards costs to defendant. No exceptions were taken other than to the exclusion of evidence. In this situation, on this appeal, only errors of law in that respect may be considered. Beuttell v. Magone, 157 U.S. 154, 15 S. Ct. 566, 39 L. Ed. 654; Sena v. Am. Turquoise Co., 220 U.S. 497, 31 S. Ct. 488, 55 L. Ed. 559.

The question thus presented for review is whether or not the court erred in refusing to admit parol evidence that defendant knew the drafts to be worthless pieces of paper at the time of the execution of the assignment and that the actual or main consideration for the note was an agreement between defendant, for a long time president and thereafter chairman of plaintiff's board of directors, and his codirectors, to make good, in proportion to their stock holdings, certain of the bank loans, pursuant to the National Bank Examiner's direction that they be replaced because deemed by him unsafe. The relevancy of the rejected testimony is its tendency to negative the implication of any warranty by plaintiff as transferor of the drafts.

Although the drafts were drawn on Porto Ricans, as their assignment by plaintiff to defendant under the written document and their delivery either actual or constructive under the terms of that document or by the delivery of a paper listing them were completed in New York, the law of that state controls; if statutory, this court accepts the state court's interpretation, but, if not statutory, the federal court is not bound by the state court's decisions on the common law or the law merchant as applied to such a commercial transaction.

We are dealing with negotiable instruments; as heretofore stated, on the record before us, it is uncertain whether at the time of the transfer the drafts were order or bearer paper. This can be cleared up on the new trial. If it shall then appear that in plaintiff's hands they were bearer paper, the transfer is clearly within the provisions of the New York Negotiable Instruments Law (Consol. Laws, c. 38); they were "negotiated" within section 60 of that act. The implied warranties, if any, arising out of the transaction, will be those specified in section 115. If, however, it shall appear that they were then order paper, inasmuch as they were not indorsed by plaintiff, they were not in the strict sense of the term negotiated. The question then arises whether in these circumstances the Negotiable Instruments Law covers the transaction so that section 115 determines the implied warranties, or whether the transfer is to be dealt with as an assignment at common law. The importance of the matter is due to the conflict between Meyer v. Richards, 163 U.S. 385, 16 S. Ct. 1148, 41 L. Ed. 199, holding that the transferor warrants the instrument to be valid, and Littauer v. Goldman, 72 N.Y. 506, 28 Am.Rep. 171, holding that the transferor warrants only that he has no knowledge of any invalidity.

Section 79 of the New York Negotiable Instruments Law expressly governs the case of delivery, without indorsement, of order paper. Whatever the situation at common law, such a transfer vests the title of the transferor in the transferee, and the latter "acquires, in addition, the right to have the indorsement of the transferrer." This section further provides "but for the purpose of determining whether the transferree is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made." While, therefore, for the one specified purpose, actual indorsement is essential to complete the "negotiation," the apparent legislative intent was to make the negotiation effective for other purposes as soon as the right to have the indorsement placed thereon was acquired.

Section 115 uses a similar word, "negotiating." Narrowly interpreted, the applicability of this section might thereby be limited to order paper on which the qualified indorsement had actually been made. In our judgment, however, the legislative intent, evidenced by the provision of section 79, will be effectuated only by a more liberal interpretation,*fn2 so as to cover the transfer of order paper before as well as after actual indorsement. As between the immediate parties to the transaction and in respect to the warranties, if any, that the transferor gives to his immediate transferee, no question of holder in due course is involved. Whether the assignment be before or after maturity, for value or as a gift, title to the paper and the right to demand the indorsement vest in the transferee at once. ...

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