Tradesmen’s National Bank v. Curtis, 167 N.Y. 194 (1901)

A holder in due course can enforce a draft accepted in exchange for a promise of future performance, even if the holder knows of the underlying executory contract, unless the holder also knows of a breach of that contract at the time of purchase.

Summary

The Tradesmen’s National Bank discounted drafts accepted by Curtis & Blaisdell in exchange for the Natalie Anthracite Coal Company’s promise to deliver coal. Curtis & Blaisdell argued the drafts were unenforceable because the coal was never delivered, and the bank knew of this condition. The Court of Appeals held that the bank, as a holder in due course, could enforce the drafts because, at the time of the discount, there was no known breach of the coal delivery agreement. Knowledge of the underlying executory contract alone is insufficient to defeat holder in due course status; knowledge of a breach is required.

Facts

The Natalie Anthracite Coal Company arranged with Curtis & Blaisdell to deliver coal over four months. Curtis & Blaisdell accepted drafts drawn by the Coal Company, payable in four months. The Coal Company then sold these drafts to Tradesmen’s National Bank for value, before the drafts were overdue and before any dishonor. The Coal Company failed to deliver the coal. Curtis & Blaisdell refused to pay the drafts upon maturity, arguing a failure of consideration and the bank’s knowledge of the conditional agreement.

Procedural History

The Tradesmen’s National Bank sued Curtis & Blaisdell to enforce the accepted drafts. The lower court ruled in favor of Curtis & Blaisdell. The Appellate Division affirmed the lower court decision. The New York Court of Appeals reversed, holding the bank was a holder in due course and could enforce the drafts.

Issue(s)

1. Whether knowledge that a draft was accepted in consideration for an executory contract, without knowledge of a breach of that contract, prevents a purchaser of the draft from becoming a holder in due course?
2. Whether a bank cashier’s knowledge, gained while acting as a director of the company that sold the drafts, can be imputed to the bank itself?

Holding

1. No, because knowledge of the underlying executory contract, without knowledge of its breach, does not defeat holder in due course status.
2. The court assumed, without deciding, that the cashier’s knowledge was imputed to the bank for the sake of argument.

Court’s Reasoning

The Court reasoned that the drafts were facially valid and the bank took them for value before maturity and without notice of dishonor. The key legal principle is that “it would be no defense to these acceptances that they were given upon an executory contract for the sale of merchandise, even if the plaintiff knew that an agreement existed between the makers and the acceptors that the drafts were not to be enforced until the merchandise was delivered, unless the acceptances were discounted with knowledge of the breach.” The court emphasized that at the time of the discount, the Coal Company had not breached its promise to deliver coal. The promise to deliver coal was sufficient consideration for the acceptance of the drafts. The dissenting opinion in the Appellate Division was noted, but the Court of Appeals focused on the broader principle that knowledge of the executory contract alone is insufficient to defeat the bank’s claim as a holder in due course. The court found no evidence that the bank, through its cashier, agreed not to enforce the drafts if the coal was not delivered. The testimony suggested the Coal Company would take care of the drafts if the coal wasn’t delivered, not the bank. The Court directly quoted from the testimony: “If the coal is not delivered, the acceptance will be taken up.” This quote indicates the Coal Company’s responsibility, not the bank’s. Therefore, the bank was entitled to enforce the drafts against Curtis & Blaisdell.