First Department, June, 1920.

[Vol. 192. finally agreed to it; that Horowitz asked about the interest, and that he replied by asking what Horowitz would do with reference to the notes if he were going to be away, and that Horowitz answered that he would give instructions to Mr. Pond, the treasurer of the payee, to exchange the existing notes for the renewal notes on the first of November; that Horowitz again asked with respect to the interest, to which he replied that it would be practically impossible to pay the interest because "the amount that is to be payable on these notes is not ascertained" and that the amounts could not be fixed until the "adjustment is reached," and that, therefore, there could be no interest paid "at this time," and that he offered to give a note for the interest payable on demand which could be adjusted at the same time the principal was taken up for final adjustment. The defendant also testified that the defenses which he referred to in his testimony consisted of the investigation and adjustment of the amount to be paid by him. Horowitz testified that the first reference to the renewal of the notes falling due on November 1, 1912, was at this interview and that, when the defendant requested a renewal for a year, he objected, saying that the investigation would not require a year and did not involve the whole amount, and that the defendant agreed that he would take up the notes sooner if the investigation was finished, but that he wanted the investigation completed.

There was evidence of negligence on the part of the payee's superintendent with respect to the work, and of his incompetency, which, however, was not known to the payee at the time; and the evidence shows dishonesty on the part of the payee's cashier on the job, through which several items, relatively small, however, were included in the vouchers which were not properly chargeable to the work, but this was not known to the payee until long after the work was completed. The learned trial court held that the evidence tending to impeach the vouchers upon which the original notes were given was sufficient to require the plaintiff to bear the burden of showing to what extent the vouchers were correct. The plaintiff failed to bear that burden, and the court determined the amount to be deducted from the notes in suit by determining what the work should have cost if it had been skillfully and

App. Div.]

First Department, June, 1920.

honestly performed. The learned counsel for the appellant contends that the nature and extent of the evidence tending to impeach the vouchers was not sufficient to constitute a prima facie impeachment of all the vouchers, and that it did not warrant the ruling to that effect made by the trial court; but in the view I take of the case, it is unnecessary to consider or to decide whether that ruling was right, or whether the theory on which that issue was decided was correct, for I deem it an immaterial issue herein.

The plaintiff was the principal but not the sole banker of the payee of the notes, and since March 9, 1903, it has been represented on the board of directors of the payee by Mr. Kelsey, its president, and Mr. Stanley, its second vicepresident, treasurer and the manager of its banking department, and by three others, forming a majority of the board. Kelsey was also chairman of the payee's finance committee, which had general charge of the contracts to be taken by the payee and of its finances. Stanley was also a member of the finance committee and was one of the two members of the auditing committee of the payee. It is unnecessary at this point further to consider the relations between the plaintiff and the payee of the notes, for the trial court properly found that they remained separate and distinct corporations and that the payee was not a subsidiary of the plaintiff.

The latter part of October, 1912, Pond, the treasurer of the payee, informed Kelsey, the chairman of its finance committee, that he had notes of the defendant about to fall due and that Horowitz had agreed to take renewal notes for a year therefor. Kelsey informed him that, since Horowitz was absent, the only thing to do was to take the renewal notes. Thereupon the renewal notes, which had been made by the defendant and left with his secretary for delivery, were procured and delivered to the treasurer of the payee. A few days thereafter a demand note of the defendant for the interest on the notes due November first was likewise received from him by the payee. That note was paid by him on May 2, 1913, by check inclosed with a letter stating that it was without prejudice or waiver of any rights or claims the maker had against the notes then held by the payee, and that any such rights or claims "on any account in connection with the contract for the con

First Department, June, 1920.

[Vol. 192. struction work were expressly reserved. The defendant's notes due November 1, 1912, in so far as they had been discounted by the plaintiff, were taken up by the payee's check given that day to the plaintiff for $63,406.38. They were retained by the payee for a few days and returned to the defendant on receiving from him, as already stated, the notes in suit. The payee was not in need of funds at the time it received from the defendant the notes in suit, but early in December thereafter it became necessary for it to discount some paper. The treasurer of the payee spoke to Mr. Stanley of having these notes and of the necessity for discounting some paper within a few days, and said he intended to speak to Horowitz about it, and Mr. Stanley approved. The treasurer then spoke to Horowitz, who directed that he have the notes discounted. A few days later and on December 7, 1912, the treasurer of the payee took the notes to the plaintiff and there informed Stanley, its treasurer, that they were the notes he had spoken to him a few days before about having discounted, and Stanley answered "all right" and directed him to the discount clerk, and he informed the discount clerk that Stanley authorized their discount, and they were thereupon accepted and discounted. The testimony of the treasurer of the payee tends to show that he informed Stanley on the first occasion either of the amount of the notes or about the amount that was needed, but that nothing was said as to whose notes they were, and that Stanley on neither occasion examined them. When they became due, no adjustment had been made between the defendant and the payee. The defendant refused to pay them, and the payee likewise refused to pay them and suggested to the plaintiff that it bring an action thereon, which it did.

Accepting the testimony of the defendant, as did the trial court, I am of opinion that the fair inference to be drawn therefrom, and the effect thereof, is only that the amount payable on the notes was subject to deduction according to any adjustment arrived at between the parties with respect to the defendant's claim that the charges for the cost of the work, and for which he gave the notes originally, were excessive. It is perfectly clear, I think, that the notes were unconditionally delivered, and the evidence of the defendant with respect thereto only shows a condition subsequent, which, being

App. Div.]

First Department, June, 1920.

inconsistent with and contradictory of the terms of the notes, could not be proved by parol evidence and did not constitute a defense thereto. (Jamestown Business College Assn. v. Allen, 172 N. Y. 291; Smith v. Dotterweich, 200 id. 299; Grannis v. Stevens, 157 App. Div. 561; affd., 216 N. Y. 583; Nash v. Weidenfeld, 41 App. Div. 511; affd., 166 N. Y. 612; Copans v. Dougan, 217 id. 695, reversing 158 App. Div. 896, on the dissenting opinion of BURR, J.; Pratt & Whitney Co. v. Pneumatic Tool Co., 50 App. Div. 369; affd., on opinion below, 166 N. Y. 588; Smith v. Hedges, 89 Misc. Rep. 183; affd., 170 App. Div. 349; affd., 222 N. Y. 701; Rice v. Grange, 131 id. 149; Tradesmen's Nat. Bank v. Curtis, 167 id. 194.)

In Copans v. Dougan (supra) the action was on a note against the indorser, and the answer admitted the making and the indorsement of the note and alleged that it was made to secure the defendant Cronk for $200, on account of the purchase price of a house and lot which he had sold to the maker, who had purchased goods for him and guaranteed the account, and it was verbally agreed by all parties to the instrument that Cronk should hold the note and that when it fell due, if he was still liable on his guaranty, the amount of such liability should be deducted from the note. The plaintiff was present when the agreement was made and was fully informed with respect thereto and, therefore, was not a bona fide holder in due course. When the note became due, Cronk owed on account of the purchases guaranteed by the maker more than the amount of the note. Mr. Justice BURR, on whose dissenting opinion the decision of the Appellate Division was reversed, wrote, and Mr. Justice THOMAS concurred with him, holding that by the pleadings, which were in precisely the same condition, so far as this point is concerned, as those in the case at bar, the absolute making and delivery of the note were admitted and that, if that were doubtful, the defendant pleaded and attempted to prove that, if at the maturity of the note the payee was indebted to the maker, such indebtedness should be offset against the note, which could not be done even between the original parties.

In Pratt & Whitney Co. v. Pneumatic Tool Co. (supra) it was pointedly held that only conditions attaching to the delivery of a note which go to its existence as a contract may

First Department, June, 1920.

[Vol. 192. be shown by parol, and that no conditions which concede the existence of the contract and tend to vary its terms may be shown in defense unless properly pleaded as a counterclaim where a counterclaim is available. There, as here, the making and the delivery of the note were admitted, and the defendant pleaded, as a defense only, that it was given for work and material, and that it was agreed that the giving of the note should be without prejudice to the right of the defendant to have the proper deductions made in the amount of the bills theretofore rendered, and that the defendant should not be compelled to pay until such adjustment was made, and then only so much of the note as represented the actual amount of the cost to the plaintiff for work and material. Evidence of these facts was given in the defense of the action, but it was held that neither the defense pleaded nor the evidence given thereunder showed that the note was delivered conditionally and was not to become a contract, or a failure of consideration, but at most showed an offset which could only be availed of by counterclaim.

In Smith v. Hedges (supra), on the facts as stated in the Court of Appeals memorandum of affirmance, it was held that in an action on a note brought by an assignee after maturity, an answer to the action on the note given in part payment for construction work pleading a failure of consideration, in that the work for which the note was given was not performed, was properly stricken out as pleading no defense, as was also a defense that the maker stated when he gave the note that it was for the accommodation of the payee only and that he did not admit that any amount was due or owing to the payee, and that if the work was not completed at the maturity of the note he would not pay it, as was also a defense that he made the note relying on the false and fraudulent representations of the payee that it could and would complete the work within ten days.

In the case at bar there was ample consideration for the giving of the original notes, in that the giving thereof was required by the contract, and the renewal notes rested on the same consideration, for they were given in payment of the former notes which were surrendered, and on the further consideration of the extension of the time of the payment of the