Story Case

The American Box Company was a holding company with many subsidiaries, one of them being the Nan-tasket Paper Mills. To relieve a very pressing need of the American Box Company, the directors of the Nan-tasket Paper Mills directed the execution of several notes of that company, for $1,000 each, payable to the order of the American Box Company. These notes were discounted with the Bank of Providence, and the proceeds used by the box company. Suit was brought by the bank against the paper mills company. It pleaded that the notes were for accommodation only and were therefore beyond its corporate powers. The bank defended that it had no information or reason to suspect that there had not been full consideration paid for these notes by the American Box Company, and that it was, therefore not barred by the defense of accommodation. But upon the trial, there was considerable evidence to the effect that the officials of the bank knew all the circumstances surrounding the transaction and discounted the notes with full information as to the absence of consideration. What should be the decision of the court?

Ruling Court Case. National Bank Of Republic Of New York Vs. Young. Volume 5, Cent. New Jersey Reports, Page 115

The Dixon Crucible Company was incorporated under the laws of New Jersey. The company was engaged in the business of manufacturing, buying, selling, and dealing in crucibles, pencils, stove polish, and similar articles. The firm of Fowler, Crampton and Company were importers of black lead, clay, and other articles used by the crucible company in its business. There were many business transactions between them, in which the crucible company made and delivered negotiable paper to the Fowler and Crampton Company. In addition to this, the crucible company signed numerous notes for the accommodation of the other company. The Crampton company carried this accommodation paper to the National Bank of the Republic, and it was discounted there. The crucible company and the Fowler, Crampton and Company both failed. Young was appointed receiver of the crucible company. The National Bank now asks that it be permitted to present these notes as claims against the insolvent corporation. It was contended by the receiver, Young, that the crucible company was without power to sign accommodation paper, and that, therefore, these notes should not be admitted as claims.

Mr. Justice Depue said: "The crucible company, as a corporation engaged in business, has implied power to make negotiable paper for use within the scope of its business, but it had no power, express or implied, to become a party to bills or notes for accommodation of others, and such paper is valid and enforceable only in the hands of a holder taking the same before maturity, bona fide, and without notice."

It was held that the National Bank of the Republic was such a holder in good faith, without notice, and entitled to assert its claims against the insolvent corporation.

Ruling Law. Story Case Answer

Corporations, under certain circumstances, have power to bind themselves by negotiable instruments. But authority is never implied, by virtue of which a corporation may bind itself on accommodation paper for others. Such authority must be expressly conferred, or it does not exist. This principle applies, however, only to those who know of the fact that a given instrument was made by the corporation for the accommodation of another. If a person buys a negotiable instrument, in good faith, and without notice that the corporation signed as an accommodation party, the corporation is liable as in any other case.

If accommodation paper is made by an individual, he is not saved from liability in any case, because of knowledge on the part of purchasers of the paper that his name was given for accommodation merely. There is no necessity for secrecy in selling accommodation paper, but the whole transaction may be open and disclosed and the purchaser does not lose his recourse against the accommodation party thereby. But in the case of corporations, it is not the lack of consideration which is the defense, but the lack of authority. The argument is that there is no corporate power to incur a liability for the benefit of another - no authority to make a gift of the company's credit. It is evident that the ordinary corporation does not have this power. But if there is no reason to suspect such a transaction, as where the corporation is one of the regular parties to the instrument and not an anomalous indorser, the buyer of an instrument regular on its face is not obliged to show that the corporation had power to act in this particular transaction, if it does have power to execute such instruments in its ordinary business. Thus, in the Story Case, as the evidence indicates that the Bank of Providence knew of the relations between the two companies and of the absence of the consideration for these notes, the bank is therefore not entitled to protection against the lack of power of the Nan-tasket Paper Mills to give an obligation without consideration, and can not recover. Judgment should be given for the defendant, the paper mills. But, in the Ruling Court Case, the National Bank of the Republic had no knowledge of the accommodation and was protected in its reliance on the validity of the instrument.