Reliance Equipment Co. v. Sherman , 216 Ala. 214 ( 1927 )

The suit is on a negotiable promissory note by an indorsee against the maker. The question of merit in the case is whether the plaintiff is a holder in due course. The note was, without dispute in the evidence, negotiated and indorsed by the payee before maturity for credit on an account due from the payee to the indorsee.

A pre-existing debt constitutes value and supports an assignment of commercial paper as in due course. Code, § 9053; Walden v. Warren, 215 Ala. 94, 109 So. 749.

Plea No. 4 proceeds on the theory that the purchase of the note for credit on account due from payee to indorsee was not such value, and that for this reason the note was subject to the defense of failure of consideration. There was error in overruling demurrer to this plea. The case turns on whether the indorsee had notice of any infirmity in the note affecting his standing as a holder in due course, under the law of negotiable instruments. "Every holder is deemed prima facie to be a holder in due course." Code, § 9085.

The note being negotiated for value before maturity, the burden was on the defendant to prove notice. Somerall v. Citizens' Bank, 211 Ala. 630, 101 So. 429. The only evidence going to this question was that of Mr. Zelnicker, president of plaintiff company, touching conversation with Mr. Beard, the payee, at the time the note was negotiated, as follows:

"I asked Mr. Beard if there was any consideration for the note, and he answered by saying that he had a contract with Mr. B. R. Sherman (the maker) to build him a house and then sell him the house and lot, and that note was given in part payment of the contract price."

This was notice of no more than that the consideration of the note was executory and made in connection with an executory agreement.

To constitute notice of an infirmity, the indorsee must have "knowledge of such facts that his action in taking the instrument amounted to bad faith." Code, § 9082. Knowledge that the note is founded on a promise of future service, or otherwise executory, is not such notice as will alter the indorsee's status as a holder in due course.

When the maker issues his negotiable promissory note, the law writes into the contract an unconditional promise to pay the same to any holder by indorsement in good faith for value and before maturity, whatever may happen as between the original parties to the transaction.

Unless the purchaser has notice of facts which should arouse suspicion in the mind of one of ordinary business prudence that the consideration has failed, or is so likely to fail that he becomes a participant in a fraud on the maker, he is protected. The maker takes the risk of a future failure of consideration, and cannot pass it on to the indorsee who has taken it on the faith of the unconditional promise shown upon the face of the note. Spires v. Jones, 212 Ala. 117, 101 So. 754; Somerall v. Citizens' Bank, 211 Ala. 630, 101 So. 429; Strand Amusement Co. v. Fox, 205 Ala. 183, 87 So. 332, 14 A.L.R. 1121.

True, if the note was given to the payee to be used solely in the purchase of a lot for the maker from a third person, the payee becoming a trustee and agent in the use of the note for a special purpose, his conversion of the note to the payment of his own debt was a fraud on the maker, and if the purchaser had notice of such facts he would not be a holder in due course. But the evidence discloses no such notice to plaintiff, but, to the contrary, the notice proved showed the consideration to be service and property passing from the payee to the maker.

Appellee, and it seems the trial court, confuses this case with the line of cases involving the inquiry whether the note is negotiable or not; as where there is inserted in the note such reference to a related contract as to show the obligation to pay is subject to the terms of such contract; where the promise itself is made conditional by incorporating the contract in the note by sufficient reference, and not a mere recital identifying the transaction out of which the note arose. Code, § 9031, subd. 2; Verner v. White (Ala. Sup.) 108 So. 369;¹ Strand Amusement Co. v. Fox, 205 Ala. 183, 87 So. 332, 14 A.L.R. 1121.

But for plea 4, upon which plaintiff was forced to take issue, the affirmative charge was due plaintiff as requested.

Reversed and remanded.

ANDERSON, C. J., and SAYRE and GARDNER, JJ., concur.

¹ 214 Ala. 550.