(dissenting.) The defendant claimed that he indorsed the note in suit as an accommodation, and on the condition that the note, or its proceeds, should be applied on'account of a chattel mortgage for $2,000, held by a third party. The maker of the note testified that it was delivered to the'plaintiff, as the attorney of Mr. Oulton, on the same condition. Two witnesses testify to the same agreement, John Wood and Horatio C. King. The witnesses for the defendant were subjected to a long cross-examination, but they adhered in the main to their first statement. Plaintiff and Mr. Oulton denied that there was any agreement or condition as to the use of the note or its proceeds. If Mr. McLean had personally made the arrangement with Oulton, he could defend without proof of injury, because he, (McLean,) though an accommodation indorser, was a party to the agreement. Bookstaver v. Jayne, 60 N. Y. 146, 150. There is proof in this case, or offer of proof, that McLean indorsed the note on a condition, and that Oulton and Parker received the note with notice of the condition. I think that McLean, without proof of injury, could defend on the ground that Oulton had diverted the note. The law would be the same as in case a direct agreement had been made between them.
I am also of opinion that McLean could defend on the ground that the maker (Miss Everett) had been injured by the diversion of the note. She, if sued, could set up the diversion aS a defense, and not by way of recoupment or counter-claim. If the principal could succeed on such a defense, the surety had the same right. If Miss Everett has not been injured, it is incumbent upon the plaintiff so to prove. Rochester v. Taylor, 23 Barb. 18. Whether she collected her chattel mortgage for $10,500, which was subordinate to the first mortgage of $2,000, does not appear in the case, but it is shown that the $2,000 first mortgage was foreclosed. The respondent asks an affirmance oh two grounds. The first claim is that paroi testimony was inadmissible to prove the condition. There are many authorities to the contrary, and sustaining the right of the defendant so to do. Bookstaver v. Jayne, 60 N. Y. 146; Bank v. Colwell, 10 N. Y. Supp. 864; Seymour v. Cowing, *40 N. Y. 532; Steel Co. v. Buckley, 51 N. Y. Super. Ct. 342. The maker of a note can always, except as against a holder in good faith, shovv-a failure of consideration, and when a note is diverted the consideration fails.
*223The second claim of the respondent is that there was no proof of an agreement as to how the note was to be used, and that the arrangement between the parties related solely to the proceeds. The agreement no doubt related to the proceeds, and not to the note itself, but Mr. Oulton had no right to apply to Mr. Barker, or to any other person, to discount the note for the express purpose of using the proceeds contrarylto the agreement under which lie received it; and Mr. Barker knew all that had taken place when the note was received. In this case the diversion of the proceeds was a diversion of the note. In discussing the facts of the case, I have assumed the truth of the testimony of the witnesses for the defendant, for the reason that a verdict was directed in favor of the plaintiff. On the whole case, the questions of fact should have been submitted to the jury. The judgment and order denying a new trial should be reversed, and a new trial granted, costs to abide the event.