Winter v. Nobs

AILSHIE, J.

— The appellant is the indorsee of the note sued upon. The note was executed by the respondents in favor of McLaughlin Bros, in part payment for an imported stallion. The sale was made at Coeur d’Alene City through one V. E. Woods, as agent for the McLaughlin Bros. At the time the sale was made and the promissory note was executed, Woods, acting as agent for the vendors of the horse, executed and delivered to the vendees, who are the makers of the note, a certificate of warranty and guaranty as to the utility and general condition of the animal sold. The note came due on the 29th day of March, 1908, but prior thereto • and on the 6th day of February, 1908, the payees, the McLaughlin Bros., sold, assigned and transferred the note to the appellant herein. At the time of the sale of the note to appellant, the respondents were in default of the payment of the annual interest due thereon. Defendants refused to pay the note on the ground of failure of consideration and fraud in the inception thereof, and the holder of the note thereupon commenced this action.

The defendants set up as a defense that the note was procured through fraud and deception, and pleaded the guaranty which was given with the animal at the time of the execution of the note, and further alleged a breach of the guaranty and warranties, and alleged that the plaintiff was not a tona fide holder of the note in due course. The evidence was submitted to the jury and they returned a verdict in favor of the defendants from which plaintiff appealed.

The evidence in the record is abundant to establish the first proposition, namely, that there was fraud in the inception of the contract; in other words, that the note was procured through fraudulent misrepresentations. It was shown by competent evidence that the horse was not what he was represented to be, and this defect was of such character that it must have been known to the vendors at the time the sale was made, and the facts and circumstances all point to that conclusion. The respondents gave notice to the agent or agents of the McLaughlin Bros, at Spokane as soon as they discovered the defects and condition of the horse, which was within a very short time after the purchase. It is claimed, however, in the briefs that it was impossible for the unsound condition of the horse and his defects to be discovered in so short a period of time. . That might be true under some circumstances, but the condition in which he was at the time and his defects as to loss of vital energy were of such a character that they could as well be discovered and their effect foretold at the time and in the manner the discovery was made as could have been done months later. We conclude without any hesitation that the first proposition was sufficiently established to go to the jury and to justify a verdict that there was fraud in the inception of the contract.

The second proposition involves the construction of our statute. It is contended by respondent that under the provisions of see. 3516, Rev. Codes, the moment the defendants proved that McLaughlin Bros. ’ title to the note was defective and subject to defenses, the burden was at once shifted from the defendants to the plaintiff of showing that he was a bona fide holder of the note in due course. Sec. 3516, Rev. Codes, provides as follows:

“Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.”

Sec. 3509, Rev. Codes, defines a holder in due course as follows:

“A holder in due course, is a holder who has taken the instrument under the following conditions: First, that the instrument is complete and regular upon its face; Second, that he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; Third, that he took it in good faith and for value; Fourth, that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.”

The foregoing sections of the statute are parts of what is commonly designated as the uniform negotiable instrument law which has been adopted in this state, and which is now in force in most of the states in the Union. We are therefore not without judicial expression and construction on these provisions of the statute. This same statute is in force in the state of Washington, sec. 3516 of our statute corresponding to sec. 59 of the negotiable instrument law of Washington, while sec. 3509 of our statute corresponds to sec. 52 of the Washington statute.

In Cedar Rapids Nat. Bank v. Myhre Bros., 57 Wash. 596, 107 Pac. 518, the supreme court of Washington had occasion to consider these two sections of the statute. The question before them was whether the plaintiff was a bona fide holder of a promissory note that had been given for some worthless jewelry. The court first observed: “The testimony is overwhelming that the jewelry was worthless and that the note was obtained by misrepresentation and fraud.” After citing and quoting the above-mentioned sections of the statute, the court concluded: “So it appears that the burden was upon the plaintiff in this case to show’ that it was a holder in good faith, and the question of whether or not that burden was successfully met was one which was submitted to the jury, and by its verdict it has decided that question against the appellant. On both questions involved there was sufficient testimony for the legal consideration of the jury, and their verdict will, therefore, not be disturbed.”

In Tredick v. Walters, 81 Kan. 828, 106 Pac. 1067, the supreme court of Kansas, in considering the effect of a certain contract which was executed in connection with the promissory note sued upon and the burden of proving the good faith of the indorsee of the note, said:

“This admission was not that the appellant knew of these contracts at the time he purchased the notes, but it stood in lieu of proof of the contracts at the time of the trial. We think that the contracts afforded sufficient evidence of illegality to shift the burden of proof which usually rests upon the defendant to prove the plaintiff’s knowledge of the illegality at the time of purchasing the notes, and to place the burden upon the appellant to prove that he bought the notes before maturity, in due course of business, for value, and without any notice of the illegality of the consideration between the maker and the original payee, his grantor.”

In Schultheis v. Sellers, 223 Pa. 513, 72 Atl. 887, 22 L. R. A., N. S., 1210, the supreme court of Pennsylvania, in considering the burden of proof as to the good faith or lack of good faith of the indorsee of the promissory note, said:

“Almost a century ago, in Holme v. Karsper, 5 Binn. (Pa.) 469, it was held, in an action on a promissory note, that the holder was required to show the consideration he paid for it and how it came into his hands, where the defendant proved that it was put into circulation fraudulently. This rule has been recognized and enforced in subsequent decisions. In Lerch Hdw. Co. v. First National Bank, 109 Pa. 240, it is said in the opinion of the court (page 244) : ‘To support an action by the indorsee of negotiable paper, against the maker, in the first instance it is only necessary for the plaintiff to put the paper in evidence. Then, if the defendant proves that the paper was put in circulation by fraud or undue means, his defense will prevail, unless the plaintiff establishes that he acted fairly and paid value.’ ”

The court then adds, “This is now the statutory declaration of the law,” and proceeds to quote sec. 59 of the negotiable instrument law of that state which corresponds exactly with sec. 3516 of our Revised Codes. So it seems to have been the general rule of the law-merchant long previous to the adoption of the uniform negotiable instrument law that in an action by the indorsee of a negotiable instrument against the maker, the indorsee might introduce the paper and then rest upon the prima facie presumption that he was a bona fide purchaser in due course, but that as soon as this presumption was overcome by proof tending to show that the paper was put into circulation by fraud or procured through fraudulent representations, the burden at once shifted to the indorsee to prove his good faith and that he had no notice of the fraud or defects in the instrument. Whatever the rule may have been, however, the statute, sec. 3516, supra, settles the question in this state.

It is contended by appellant that mere suspicious circumstances are not sufficient to put a purchaser of a note on inquiry, and that it is necessary in order to defeat his right of recovery to either show actual notice of the fraud or notice of such facts and circumstances as would charge him with actual bad faith in taking the paper without investigating the circumstances under which it was issued. In support of this position counsel rely on sec. 3513, Rev. Codes, which reads as follows:

“To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.”

We readily agree with this contention. We think it is only actual knowledge of the defect or infirmity or notice of such facts and circumstances as would put a man on inquiry, and would charge him with bad faith or the imputation of dishonest dealing that was intended by the statute to defeat a recovery. This view is abundantly supported by the authorities.

Mr. Justice Weaver, speaking for the supreme court of Iowa in Arnd v. Aylsworth, 145 Iowa, 185, 123 N. W. 1001, said:

“In some of the states it seems to have been held that one who takes a transfer of negotiable paper under circumstances to put a reasonable person on inquiry as to defenses against it is considered as having notice of the facts which such inquiry would develop; but the more general trend of the decisions from an early day has been to the effect that mere ground of suspicion as to possible defects in the title of the negotiator or of the existence of defenses to the instrument negotiated is not the equivalent of notice to the transferee, and, to be regarded as an innocent purchaser, he need not as a matter of law be diligent to investigate the circumstances of the origin of the paper, though, if the negligence be of a marked or gross character, it may be competent to establish the mala fides of the purchase. That which will charge the paper in his hands with prior equities and defenses is actual or direct notice of the facts, or, in the absence of such notice or knowledge, the existence to his notice of such facts or circumstances that his action in taking the paper amounts to bad faith. Of this class of eases an illustrative example is Goodman v. Simonds, 61 U. S. 343, 15 L. ed. 934, which is a leading case upon the subject.....

“Whether plaintiff has sufficiently satisfied the burden resting upon him and made good his claim to be an innocent purchaser is therefore a question for the jury, save in those instances where the testimony is not only consistent with the good faith of such purchase, but is such that no fair-minded person can draw any other inference therefrom. A categorical denial of notice or knowledge is something which in many, if not in most, instances cannot be opposed by direct proof and the credibility of the witnesses, their interest in the case, the reasonableness or unreasonableness of their statements, the time, place, and manner of the transaction, its conformity to, or its departure from, the ordinary methods of business, and all the other facts and circumstances which, though of slight moment in themselves, yet, when taken together, give character and color to the purchase under inquiry, constitute a showing which the court cannot properly pass upon as a matter of law. Observing this principle it has frequently been held that a denial of notice by the purchaser, though he be uncontradicted by any other witness, is not sufficient to justify a directed verdict in his favor.”

In considering the same question, Mr. Chief Justice Rudkin, speaking for the supreme court of Washington in Gray v. Boyle, 55 Wash. 578, 133 Am. St. 1042, 104 Pac. 829, quoted with approval the following extract from Crawford’s Annotated Negotiable Instrument Law, p. 68: “The holder is not bound at his peril to be on the alert for circumstances which might possibly excite the suspicion of wary vigilance. He does not owe to the party who puts the paper afloat the duty of active inquiry in order to avert the imputation of bad faith. The rights of the holder are to be determined by the simple test of honesty and good faith, and not by a speculative issue as to his diligence or negligence. The holder’s right cannot be defeated without proof of actual notice of the defect in title or bad faith on his part evidenced by circumstances. Though he may have been negligent in taking the paper, and omitted precautions which a prudent man would have taken, nevertheless, unless he acted mala fide, his title, according to settled doctrines, will prevail.”

We are in full accord with this construction of the law. In the ease at bar the plaintiff did not offer any evidence as to his lack of knowledge of the fraud and misrepresentations practiced by McLaughlin Bros, in procuring this note. He simply rested by showing that the note was sent to him through the mail for discount prior to maturity and that he paid the holders of the note its face value. It appears, also, that the defendants resided in Kootenai county, Idaho, and that plaintiff resides at Minneapolis. The record fails to show whether the plaintiff was previously acquainted with any of the defendants or with the McLaughlin Bros. It stands to reason, however, that the plaintiff must have had some information, either as to the financial standing of some one or all of the defendants or of the McLaughlin Bros., or else he would not have invested the sum of $1,125 in this note. Of course, if he knew the McLaughlin Bros, and knew them to be financially responsible, then he could safely purchase the note on their indorsement. If, however, he did know them, judging from the reported cases in which they have figured, he must have known that they were engaged in just the kind of business that is disclosed by this record. The following eases reported from courts of last resort show that this is not the first transaction of the kind in which they have been engaged: Union Investment Co. v. Wells, 39 Can. 625, 11 A. & E. Ann. Cas. 33; Union National Bank v. Winsor, 101 Minn. 470, 118 Am. St. 641, 112 N. W. 999, 11 Ann. Cas. 204. The plaintiff, Union Investment Co., in the former of the above cases seems to have been the company of which appellant herein is secretary and treasurer. If, on the other hand, he did not know the McLaughlin Bros., he must have had some information as to the financial standing of some one or all of the defendants, and that information might have given him some intimation as to the nature or character of the transaction out of which the notes arose. Whatever the circumstances may have been, it still remains true that the question of the good faith of the purchaser of the note was one of fact instead of law, and the jury had a right to determine it in the light of all the facts and circumstances presented in the case.

It has been contended by the respondent that the fact that there was one or more instalments of interest overdue on this note was of itself evidence that the appellant did not purchase the note in due course. Upon this question the authorities- seem to be divided, but we are inclined to think that the better reason is with the holding that a mere failure to pay a periodical instalment of interest does not amount to a dishonor of a negotiable instrument, and will not charge the purchaser with notice of any fraud or misrepresentation in the contract or in the issuance and circulation of the note. This question is very exhaustively treated in Union Investment Co. v. Wells, 39 Can. 625, 11 A. & E. Ann. Cas. 33. In a note to that ease, the editors say, “There is a conflict in the decisions as to whether a negotiable instrument becomes overdue upon the failure to pay a periodical instalment of interest, where the principal itself is not yet due. The weight of authority supports the rule that a mere failure to pay a periodical instalment of interest will not amount to a dishonor of a negotiable instrument and will not render the instrument overdue.” The authorities cited in the note will disclose, however, that it has been frequently held that knowledge on the part of a purchaser of overdue instalments of interest constitutes a circumstance which may be considered by the jury along with other facts and circumstances in determining the good faith of the purchaser of the note.

From what has been said it follows that the judgment in this case should be affirmed, and it is so ordered. Costs awarded in favor of respondents.

Sullivan, C. J., concurs.