Jarvis v. Parnell

Campbell, J.

The only question presented for determination is: “Did the trial judge err in overruling the plaintiff’s demurrer to the further answer and defense of the defendant?” We think that this question should be answered in the negative.

It is not the plaintiff’s contention that the defendant failed to properly plead fraud. It is his contention that,- regardless of whether it was properly pleaded, fraud is not a valid defense and should, therefore, be eliminated from the pleadings. He argues that the fraud pleaded by the defendant was fraud in the treaty practiced by Sun, a third party which is not a party to this action, and that there is no allegation of the plaintiff’s participation in or knowledge of such fraud. In support of his contention, the plaintiff cites Furst v. Merritt, 190 N.C. 397, 130 S.E. 40, where fraud in the treaty and fraud in the factum were discussed and their differences pointed out. Since the evidence there was sufficient to establish either fraud in the treaty or fraud in the factum and since the issues submitted to the jury did not point out the differences between the two types of fraud, a new trial was ordered. The Supreme Court specifically held that fraud in the treaty, even if established, would not be available as a defense against the plaintiff because the plaintiff was an innocent third party and because fraud in the treaty would only make the instrument voidable. However, fraud in the factum, if established, would make the instrument completely void and this would be a defense against such an innocent third party.

The defendant asserts that by virtue of the fraud practiced upon her by Sun in the procurement of the power of attorney to Crumpler, such power of attorney was voidable. However, the plaintiff is suing upon Note III, which was allegedly executed by the defendant’s express agent and duly constituted attorney at law (sic), Crumpler. The power of attorney is not the subject matter of this action. The defendant also asserts that she had never authorized or approved the execution on her behalf of Note III by Crumpler while acting as her agent. Under these circumstances, the plaintiff has the burden of establishing Crumpler’s power and authority as the defendant’s express agent and duly constituted attorney at law (sic). Because of this requirement, the plaintiff does not stand in the shoes of an innocent third party holding a note of a maker who had been induced to execute same by fraud.

Note’ III, which was payable to the order of Sun and which was issued by Crumpler at attorney in fact for the defendant, recited:

“This note cannot be sold, assigned, transferred or negotiated to any person until after notice has been given to the maker hereof in accordance with an agreement of even date herewith, and is subject to the terms of an agreement of even date herewith between Cepco Distributing Company et al.”

Since Note III showed that it was executed by Crumpler as attorney in fact, anyone acquiring it was on notice that it had been issued by an agent. Therefore, the plaintiff would be under an obligation to acquaint himself with the agent’s authority, even if the plaintiff was an innocent third party purchaser of the note for value and without notice.

“This is true because a special agent can only contract for his principal within the limits of his authority, and a third person dealing with such an agent must acquaint himself with the strict extent of the agent’s authority and deal with the agent accordingly.” Iselin & Co. v. Saunders, 231 N.C. 642, 58 S.E. 2d 614.

“Where the asserted power of an agent to indorse or otherwise deal with commercial paper is grounded upon a letter or power of attorney, such writing is to be strictly construed upon the question of whether and how far it bestows authority as to such matters upon the agent.” 2 C.J.S., Agency, § 112, p. 1305.

Note III was not issued to the plaintiff. It was issued to Sun as collateral security for Note I.

Neither the complaint nor the amended complaint reveal the circumstances under which the plaintiff became the owner of and entitled to Note III or indicate that the plaintiff is an innocent third party purchaser for value and without notice. On the contrary, the complaint and amended complaint are much more susceptible of the interpretation that the plaintiff is the subrogee of the rights of Sun in and to Note III. If the latter is true, the plaintiff would stand in the position of Sun and the defendant would be entitled to raise any defenses which she might have against Sun, including fraud. We do not think it unreasonable to assume that the plaintiff, as the president of Cepco, knew of all negotiations, and the consent judgment (Exhibit “F”) showed that Sun still retained some claims against the defendant.

The plaintiff concedes that the defendant was entitled to, and has in fact, set up the defense of fraud against Sun. Nevertheless, the plaintiff attempts to avoid any connection between himself and Sun for the purposes of this action. However, this attempt has not succeeded. Frust v. Merritt, supra, the only case relied upon by him, is completely distinguishable.

We are of the opinion and so hold that Judge Hobgood was correct in overruling the demurrer.

Affirmed.

Moeris and Parrer, JJ., concur