Spires v. Jones

In Strand v. Fox, 205 Ala. 183, 185, 87 So. 332, 335 (14 A.L.R. 1121), it was observed that —

"The authorities are numerous and practically harmonious to the proposition that the mere knowledge by an indorsee of negotiable paper that it was founded upon an executory contract, the breach of which may avoid the obligation as between the original parties, is not notice of an infirmity which will alter his status as a holder in due course."

The complainants do not deny this principle of law, but ground their impeachment of the bona fides of Hayden's holding of the notes upon two matters of fact: (1) He paid only $261.50 for notes of the face value of $646.50; and (2) under the circumstances shown Hayden was charged with knowledge of Spires' intention to default on his building contract with complainants, and to defraud them by converting the notes into cash — to which action Hayden was therefore a conscious party.

"The mere fact that a note is purchased for an amount less than its face, or that an unusually large discount is accepted, is never of itself sufficient to charge the purchaser with notice of existing equities, unless the consideration is merely nominal. However, inadequacy is always a fact to be considered by the jury as evidence of bad faith, and may, with suspicious circumstances, authorize a finding of bad faith, especially if the consideration is grossly inadequate." 8 Corp. Jur. 508, § 717. This is, of course, a corollary to the general rule that negotiable paper may be bought and sold like any other chattel at its real or supposed value, and the transfer of such an instrument at a discount greater than the legal rate of interest does not deprive the transferee of the protection of a bona fide purchaser for value. Woodall v. People's Bank,153 Ala. 576, 45 So. 194; King v. People's Bank, 127 Ala. 266,28 So. 658; 8 Corp. Jur. 486, § 701.

The consideration promised to be paid by Hayden to Spires for the purchase and transfer of the notes in question was $546.50, and the face of the notes was $646.50, payable in 26 monthly installments of $25 each. Of this amount $200 was paid to Spires on the day of the transfer, April 18, 1921, and $61.50 was paid to him two days later; the agreement being, according to Hayden, that the balance should be paid as Spires needed it in the progress of his work for complainants. Spires bought a load of lumber (on credit) on April 19, and had it hauled to complainants' premises, and abandoned his contract and disappeared from Birmingham apparently about April 21. Hayden made no further payments to Spires, but charged against the amount of the purchase money due him the sum of $75 due from Spires to Hayden on account of money advanced to Spires on a former occasion, and for which Spires had given him a check which was dishonored by the drawee bank.

Under these circumstances, the comparatively modest discount of $100 on the face of the notes is a factor of little or no weight in determining the good faith vel non of Hayden in his purchase of the notes. The burden of proof was on complainants to show actual bad faith on the part of Hayden at the time of his purchase, or at least at the time he made the payments to Spires. Elmore County Bank v. Avant, 189 Ala. 418, 66 So. 509; Sample v. Tennessee Bank, 200 Ala. 578, 76 So. 936; Bruce v. Citizens' Nat. Bank, 185 Ala. 221, 64 So. 82.

The argument for complainants is that Hayden's knowledge that Spires was impecunious, and unable to finance his building operations without aid, and especially his knowledge that Spires' check for $75 had been formerly refused payment by the drawee bank, sufficiently informed Hayden of a fraudulent intention on the part of Spires to get the money due him from complainants and then abandon his contract. It is suggested also, as an aggravating circumstance, that Hayden entertained the design of salvaging out of the transaction the amount of the dishonored check still due to him from Spires.

But, however great the hardship inflicted on these complainants by the knavish conduct of Spires, we are unable to reach a satisfactory conclusion from the evidence that Hayden was guilty of bad faith when he bought the notes. There was at that time nothing to affect their validity, nor would any sort or degree of inquiry have discovered anything, so far as the evidence shows. The only alternative finding that could meet the requirements of complainants' case would be, either that Hayden was an aider and abettor of Spires' fraudulent design, if it existed; or else that he was bound to know, from the conditions stated, that such a design was entertained, and that his purchase of the notes would promote its execution. But circumstances which might merely arouse the suspicions of a prudent and discerning man are not enough to justify an inference of bad faith if they are disregarded — at least where the suspicion relates only to a fraudulent but invisible state of mind to become operative in the future.

Our conclusion is that complainants are entitled to relief against Hayden only to the extent of the excess face value of the notes over and above the amount actually paid by Hayden to Spires; and that Hayden is entitled to collect on these notes that amount, viz., $261.50, with interest from the date of payment. Code 1923, § 9080; Code 1907, § 5009.

The decree of the circuit court will be reversed, and the cause will be remanded for further proceedings in accordance herewith.

Reversed and remanded.

ANDERSON, C. J., and THOMAS and BOULDIN, JJ., concur.