Overseas Credit Corporation, Plaintiff, v. Cal-Tech Systems, Inc., et al., Defendants, and Morris A. Hirsch et al., Impleaded Defendants. (Action No. 1.); Trade Development Bank, Respondent, v. Cal-Tech Systems, Inc., et al., Defendants and Third-Party Plaintiffs, Appellants. Robert A. Martin et al., Third-Party Defendants. (Action No. 2.), 20 A.D.2d 355

Breitel, J. Plaintiff, holder of two promissory negotiable notes for $25,000 each, was granted

summary judgment against the corporate maker and an individual indorser under rule 113 of the Rules of Civil Practice (now CPLR 3212). Maker appeals urging that there are issues of fact whether plaintiff was a bona fide holder in due course and, particularly, whether the . signatory on behalf of the corporate maker, who is the defendant indorser, was authorized by the corporation to execute the notes.

Defendant indorser, Ezrine, appeals urging that there are issues of fact whether plaintiff holder was a bona fide holder in due course, but insisting that he, as signatory, was authorized to act on behalf of the corporate maker. Plaintiff holder is a Swiss corporation which engages in financing transactions arid has done business over a period of time with Tracon Corporation, the negotiator of the notes in suit. Tracon does a financing business in this city. It took the notes, as indorsee, for value, from one Robert A. Martin, the payee. It, in turn, indorsed and discounted the notes with plaintiff holder.

Martin is a stockbroker who arranged with Ezrine, then secretary, chairman of. the board of directors and one of the largest stockholders of the corporate maker, to obtain financing on the corporate notes for the purpose of buying the corporation’s own shares on the over-the-counter market. Ezrine says that Martin diverted the notes, applied the proceeds to reducing Martin’s own indebtedness for the unauthorized purchases of the corporation’s shares on the jnarket.

Indeed, when Tracon, to whom Martin had transferred the entire series of six notes, of which the two in suit are a part, was sued on the first two notes (in the consolidated action first captioned above), two of the defendants in that suit, namely, the corporate maker and Ezrine, defended on the ground that the notes had been diverted, the proceeds converted, and that Tracon had acted in conspiratorial knowledge with the broker Martin.

It was while that action was pending and while the corporate maker was preparing to apply for an injunction to restrain further negotiation of the notes that Tracon negotiated the two notes in suit to plaintiff holder. This was done by cable and confirmatory letter. Plaintiff, since it did not know the maker or Ezrine, insisted on the indorsement of Tracon and its individual principal, Hirsch. It exacted a 9% discount. This was a flat 9% discount, not an annual rate, and the notes were to mature in two and three months respectively.

Shortly after the negotiation of the notes, Tracon asked for and received transfer of its credits on plaintiff’s books to banks in Mew York City, for the account of Tracon. When the notes were presented the corporate maker and the indorser Ezrine refused to pay on the ground that plaintiff was not a holder in due course. The holder sued only them, in the second action captioned above, and not the other indorsers, Tracon and Hirsch, who had discounted the notes with plaintiff. At this point the procedural status of the appeals is relevant.

Immediately after joinder of issue, on February 11, 1963, plaintiff moved for

summary judgment. Thus, at this time defendants had had no opportunity to obtain any pretrial discovery, essential if they were to establish that the Swiss corporation, a stranger to them, was not a holder in due course. However, the motion was not actually decided until April 3, 1963. Up until that time defendants made no attempt to obtain any pretrial discovery and Special Term commented on this omission. It also held that no creditable proof had been submitted to raise any issue of fact, namely, addressed to what plaintiff holder knew or should have known. Until then, and even through the entry of the order for

summary judgment on May 8, 1963 and the denial of a subsequent motion for reargument, the corporate maker and Ezrine were represented by the same law firm of Avhich Ezrine is a member. In late June, 1963 the corporate maker broke aAvay from Ezrine, and retained new and independent counsel, who made a motion for a rehearing. This motion was denied by Special Term on the ground that it did not rest on neAvly discovered evidence, and that the corporate maker knew as early as November, 1962 that the notes had been issued.

It is on this motion, for the first time, that the corporation asserted as a defense that Ezrine was not authorized to make the notes on behalf of the corporation, in addition to the other defenses attacking plaintiff’s status as a holder in due course. Because of the procedure it is necessary to consider the record in the two separate stages in Avhich it Avas developed. On the first motion, the corporate maker and the indorser joined in their defenses which depended exclusively upon showing that plaintiff was not a holder in due course.

To do this they established the alleged conspiracy between Traeon and Martin, pointed to the peculiarity of the negotiation of the two notes after the defenses had been exposed in the lawsuit on two prior notes, the negotiation to a Savíss corporation, the high rate of discount, the prior relationship between Traeon and the Savíss corporation, and the early maturity of the notes negotiated at such cost over such a great distance.

They also stressed that plaintiff had insisted on the indorsements of Traeon and Hirsch, Plaintiff in making the motion had disclosed the cables and confirmatory letter correspondence arranging for the negotiation of the notes and, also, the transfer of credits to show the parting with value for the notes. It disclaimed all knowledge of the transactions among Ezrine, Martin and Traeon. On this basis defendant established no more than suspicious circumstances as distinguished from facts that brought home to plaintiff either knowledge or a duty to make further inquiry.

Suspicious circumstances alone do not constitute notice of an infirmity or defect in the instrument sufficient to constitute bad faith and destroy the status of holder in due course (Negotiable Instruments Law, § 95). In Hall v. Bank of Blasdell (306 N. Y. 336, 340-341) Judge Euld for the Court of Appeals stated the rule as follows: “ the existence of merely suspicions circumstances does not, without more, amount to notice of an infirmity or defect.

To constitute such notice, the person to whom the instrument is negotiated 1 must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith’ (Negotiable Instruments Law, § 95). As the statute itself makes evident, its requirement 1 is good faith, and bad faith is not mere carelessness.

It is nothing less than guilty knowledge or willful ignorance. * * * One who purchases commercial paper for full value * * * is not bound at his peril to be upon the alert for circumstances which might possibly excite the suspicions of wary vigilance. He does not owe to the party who puts negotiable paper afloat the duty of active inquiry, to avert the imputation of bad faith. The rights of the holder are to be determined by the simple test of honesty and good faith, and not by speculations in regard to the purchaser’s diligence or negligence ’. (Manufacturers & Traders Trust Co. v. Sapowitch, 296 N.

Y. 226, 229-230; see, also, Cheever v. Pittsburgh, Chenango & Lake Erie R.R. Co., 150 N. Y. 59; Chapman v. Rose, 56 N. Y. 137, 140; Goodman v. Simonds, 20 How. [U. S.] 343; Goodman v. Harvey, 4 Ad. & El. 870.) ” The discount, though large, was not so great under the circumstances to support an inference that plaintiff holder knew the notes had been dishonestly or improperly acquired. It has often been held with regard to sizable discounts that judgment should nevertheless be entered or a verdict directed for plaintiff holder (e.g,, Second Nat. Bank v.

Weston, 172 N, Y. 250 [discount to rate of 8% per annum]; Credit Alliance Corp. v. Buffalo Linen S. Co., 238 App. Div. 18 [approximately 17% flat discount on installment debt payable over-two years plus interest, if any]; Coopersmith v. Maunz, 237 App. Div. 795 [10% flat discount on paper payable in two months]). Even when the discount is much greater and combined with other unusual circumstances, it has been held that the question is one for the jury, and no verdict may be directed for the defendant maker (e.g., Canajoharie Nat. Bank v. Diefendorf, 123 N.

Y. 191 [discount which insured 15% to 18% profit—unusual circumstances, including knowledge that maker of substantial note was only an ordinary farmer and seller of note was a total stranger]; Vosburgh v. Diefendorf, 119 N. Y. 357 [note purchased for half its face value from known parties to original transaction]; Becker v. Hart, 135 App.

Div. 785 [flat discount of over 45% on unquestionably good note having less than six weeks to run, under unusual circumstances, including release of parties responsible for debt by lack of protest, and concealment of the purchase of the note until after the death of the only person who could successfully challenge its validity]; cf. Manufacturers & Traders Trust Co. v. Sapowitch, 296 N. Y. 226, 229-230; American Exchange Nat. Bank v. New York Belting & Packing Co., 148 N. Y. 698, 705-706).

The rule on discounts is well stated as follows by an authoritative commentator: ‘1 Anyone who has given but casual attention to the effects of an economic depression upon the prices of public and private securities and upon the notes of private. individuals knows that the purchase of an instrument at a discount, be the discount small or large, is no evidence of purchase in bad faith. The great bulk of commercial paper in circulation at any given time represents enforceable obligations. It is only in the exceptional case that a defense or equity does arise.

The study of the law of bills and notes throws out of focus one’s perspective of the percentage of honest payees as against those who are dishonest or of obligors who default in their promises. Commercial paper has a value in the market the same as land and chattels. The value of such paper is determined by the present and prospective means of payment of the obligor thereon.

Actual and potential insolvency of the issuer has much more to do with the price of commercial paper than does the possibility that it was obtained by the first holder subject to a defense or that it had been obtained by a subsequent holder subject to an equity of ownership in a former holder. Therefore, the purchase of an instrument at a discount, of whatever amount, is not, of itself, evidence of purchase in bad faith.” (Britton, Bills and Notes [2d ed.], § 109, p. 273.) In this case the holder dealt with a known customer but concerning an obligation of an unknown maker.

The transaction did not arise out of prime paper issued in a sales transaction between industrial corporations of general reputation. Traeon like the holder is a secondary financier who is not a bank which, when occasion requires, can rediscount paper with a correspondent or central bank. Consequently, Special Term properly granted

summary judgment and properly denied the subsequent motion for reargument. The motion for a rehearing made by the corporate maker introduced an entirely new factor. Insofar as it raised the issue of the authority of Ezrine to make the notes on behalf of the corporate maker it raised an issue of fact. This is because the holder always has the burden of showing the authority of the signatory of negotiable paper or conduct by the principal which precludes assertion of the lack of authority, before it may invoke the other presumptions in its favor (Negotiable Instruments Law, §§ 38, 42; Standard S.S. Co. v.

Corn Exchange Bank, 220 N. Y. 478, 481. Cf. Uniform Commercial Code, §§ 3-403, subd. [1]; 3-404. On apparent authority see Restatement, Agency 2d, § 27; 2 N. Y. Jur., Agency, §§ 25, 88, 89). Nor does it wholly offset the raising of the issue that Ezrine promptly made affidavit against his codefendant asserting that he had authority to make the notes, although still contending that he and his corporation had been cheated and that plaintiff was not a holder in due course. But such contradiction between defendants assuredly does not lend strength to the belated assertion of a new defense after the others had failed.

This improbable imbroglio issued from the fact of intracorporate struggle and factionalism with a shift of control. While raising an issue, it is also obvious that factional dispute and the shift of control account too well for the opposite positions taken by the now-ins and former-ins who are now out. To that extent the level of credibility plummets sharply. Since the motion for rehearing was addressed to the court’s discretion, it was not required to credit these belated, untimely assertions, or give them the credit they must receive on a motion proper for

summary judgment (see Circle Floor Co. v. Totonelly Sons, 282 App. Div. 179, 182; Ecco High Frequency Corp. v. Amtorg Trading Corp., 81 N. Y. S. 2d 897, affd. 274 App. Div. 982, mot. for lv. to app. den. 274 App. Div. 1056).

As to the other issues, it now appeared on the motion for rehearing that plaintiff Overseas in the consolidated action, first captioned above, had examined Hirsch of Tracon before trial, and the result was not productive of evidence to support the defenses, especially in any possible relation to plaintiff holder in the second of the consolidated actions, except only to show that Tracon and plaintiff holder had had a running account between them over a period of time, a fact previously asserted by plaintiff.

Consequently, it cannot be said that Special Term exercised erroneously or abused its discretion in denying the motion for a rehearing. Accordingly, the order granting

summary judgment to plaintiff and the order denying defendants’ motion for a rehearing should be affirmed, with costs to plaintiff-respondent against defendants-appellants. Actually, the wrongdoing attributed to Martin was that he bought the stock before first procuring the loan as directed; that thereafter, when the market dropped, he used the notes to pay oft the obligations for the stock; and that he permitted Tracon to hold the notes and the purchased stock as collateral for the advances. What this had to do with the internecine corporate struggle discussed later, if anything, is not disclosed by the record.

As to this being the giving of value, see Britton, Bills and Notes (2d ed.), § 97, and cases cited. Defendants do not question in the record plaintiff’s status as holder for value. Cf. Uniform Commercial Code, § 3-404, eff. Sept. 2?, 1964.