47 dorsee, it has been decided that, in an action by the former on the renewal note, fraud is a good defense. The maker of a renewal note is estopped to urge the defense of fraud in the procurement of the original note, in an action on the renewal note, where he voluntarily executed the renewal note with knowledge of such fraud.18 Again, it is held that making of a renewal note is not a waiver of the defense of fraud in the procurement of the original note, unless so intended; but is merely a circumstance tending to show affirmation of the original note.49 The title to a negotiable instrument procured by fraud or negotiated in breach of faith, is defective as to the negotiator of the instrument, in view of certain statutory provisions. § 227. Fraud in sale or shares in horse. It occurs rather frequently that a number of persons join in the purchase of a stallion, each taking a certain interest. In such cases, if fraud or deceit is practiced on a purchaser or on purchasers of interests by the seller and one or more purchasers of interests, whereby others are induced to take interests in the stallion and execute their notes therefor, the victims of the fraud can set it up in defense to an action on their notes by one not a bona fide holder in due course. Thus, where the seller of a stallion agreed with certain. persons to give them shares in the horse, for which they executed checks to the seller for exhibition to others to induce them to purchase shares, the checks to be returned to them or destroyed and others were induced thereby to purchase interests and give their 47 Sawyer v. Wiswell, 91 Mass. (9 Allen) 39; Adams v. Ashman, 203 Pa. 536, 53 Atl. 375. 48 Padgett v. Lewis, 54 Fla. 177, 45 So. 29; Muschelwicz v. Tidrick, 40 S. Dak. 435, 167 N. W. 499; Harfst v. State Bank, 56 Tex. Civ. App. 31, 119 S. W. 694; Hitchner Wall Paper & Paint Co. v. Shoemaker, 75 Pa. Super. Ct. 520. Fraud in the procurement of an original note is waived by the making of a renewal note with knowledge of such fraud, and the maker is precluded from subsequently setting up such fraud as a defense. McGinnis v. McCormick, 28 Ga. App. 144, 110 S. 49 First Nat. Bank v. Navins, 70 Colo. 491, 202 Pac. 702. 50 German American Nat. Bank v. Kelley, 183 Iowa 269, 166 N. W. 1053; Lundean v. Hamilton, 184 Iowa 907, 169 N. W. 208; Southwest Nat. Bank v. Lindsley, 29 Idaho 343, 158 Pac. 1082. The burden is on the purchaser of a note which was procured by the payee's fraud, to show good faith. Albrecht v. Rathai, 150 Minn. 256, 185 N. W. 259. notes therefor, the deceit was a good defense to such notes.51 So, where the seller induced one to execute his note for an interest in a stallion, under agreement that he should not become liable thereon, such note to be used by the seller to induce others to execute their notes for shares in the horse, it was held to amount to fraud on subsequent sharetakers, and a good defense to actions on their notes.52 And where several purchased interests in a horse. all joining in the execution of a purchase-money note, and the seller induced some to purchase by making false representations to them, the defense of fraud inures to the benefit of all, as it goes to the merits or substance of the contract.53 § 228. Rule of defense as to certified checks.-The certification of a check on application of the drawer does not operate to discharge him from liability thereon, and so long as he remains undischarged, the defense of fraud is open, both to him and the bank. But where certification is made at the request of a holder, the effect is different, and discharges the drawer from further liability on the check, and substitutes a new contract between the holder and the bank, by which the money called for by the check is transferred from the account of the drawer to the account of the holder; so that in contemplation of law, the obligation of the bank to the holder, in such case is the same as if the funds had been actually paid out by the bank to him, by him redeposited to his own credit and a certificate of deposit issued to him therefor.54 $229. Certified check-Effect of fraud-Bona fide holder.The fact that false representations were made by the drawer of a check as to his solvency to a bank in order to induce it to certify such check, which it does in consequence of such representations. will be no defense to an action thereon by one who has purchased the same for value before dishonor, and without any notice of such 51 Ozark Motor Co. v. Horton (Mo. App.), 196 S. W. 395. 52 Cox v. Cline, 147 Iowa 353, 126 N. W. 330. See also, Elgin City Banking Co. v. Hall, 119 Tenn. 548, 108 S. W. 1068. 53 City Nat. Bank v. Jordan, 139 Iowa 499, 117 N. W. 758. See also, Union Nat. Bank v. Mailloux, 27 S. Dak. 543, 132 N. W. 168. 54 Times Square Automobile Co. v. Rutherford Nat. Bank, 77 N. J. L. 649, 73 Atl. 479. fraudulent conduct.55 And where a bank certified a check and the drawer, finding he had been defrauded, requested the bank not to pay the same and when it was presented for payment the bank wrote on it "payment stopped" and returned it to the holder, who subsequently erased these words so that it was not noticeable, affixed a revenue stamp over the erasure, and transferred it to a bona fide holder, the title of the latter was held good. 56 Where, however, it is apparent upon the face of a certified check that the acceptance was a fraud, a holder takes it with notice of such fraud and he can not be said to be a bona fide holder. In such a case, therefore, he can not recover thereon from the bank.57 § 230. Application of general rules.-These general rules have been applied in the case of a false representation that accommodation paper was business paper;58 and where a note was given in satisfaction of an injury sustained by the payee and the nature and extent of the injury was fraudulently exaggerated.59 And, where the plaintiff had a joint interest with the payee of the note in the contract with the maker in connection with which the note was given, it was held that the defense of fraud was available 55 See Justh v. National Bank of Commonwealth, 56 N. Y. 478. 56 Nassau Bank v. Broadway Bank, 54 Barb. (N. Y.) 236; Bank of the Republic v. Baxter, 31 Vt. 101. 57 Claflin V. Farmers & Citizens Bank, 25 N. Y. 293, 24 How Prac. 1, 2 Am. L. Reg. (N. S.) 92. The court said in this case: "A bona fide holder of commercial paper must receive the same in the usual course of business. for value, and without any notice of facts tending to impeach the character or validity of the paper as between the original parties. The plaintiffs can not claim the protection of this rule. They had distinct notice, by the face of the certificate and the signature thereto, that the acceptance was improper and irregularly made. It was patent on the face of the paper, that the acceptance was a fraud; that the president of the defendant's bank, in accepting such checks, was violating his duty, and using his official character for his personal benefit, and thereby perpetrating an act of dishonesty in palpable violation of his trust. No business man of common intelligence could take these checks in good faith, and without suspicion or notice of this fraud. Upon this distinct fact I would hold that the plaintiffs are not bona fide holders of these checks, and are not entitled to recover the same of the defendant." 58 Webb v. Odell, 49 N. Y. 583. See Trask v. Wingate, 63 N. H. 474, 3 Atl. 926, holding that in an action by an indorsee it is no defense that the note was for the accommodation of the payee and that there was no consideration. 59 Thompson v. Hinds, 67 Maine 177. 60 against him. So, where a note was procured to be executed for a subscription to an irrigation project, by a misrepresentation as to the number of acres of the maker's land that would be irrigated, recovery on the note could be defeated by the defense of fraud.61 And recovery on a note may be defeated by the defense of fraud, unless the suit is by an innocent purchaser for value before maturity, where the payee procured the note by a promise going to its consideration, which he does not intend to carry out. 62 Again, the defense of fraud in an action on a note was held good, where plaintiff and defendant organized a corporation, each agreeing to take a certain amount of stock and each indorsed the corporation's note for a loan; and plaintiff, when called upon by defendant to pay his subscription falsely informed defendant that he was insolvent and could not pay it; and defendant, believing such false statement, assumed the corporation's indebtedness, and executed to plaintiff the note in suit for a loan which plaintiff had made to the corporation as guardian; and because of such false representation, the corporation was rendered insolvent and defendant was compelled thereby to pay out large sums of money.63 And, so such defense will defeat recovery on a note which an illiterate person is induced to execute for his own debt and that of another by the false statement that "it will be the same with you if you sign one note as if there were two."64 If an accommodated party attempts to enforce the accommodation note contrary to an agreement between the maker and the payee, the maker can defeat the action by the defense of fraud.65 So the acceptor of a draft can defend on the ground of fraud as against the payee or one who took the draft with knowledge of the fraudulent practice, where his acceptance was induced by an agreement between him and the payee that the draft should not be negotiated and should be used for a certain purpose, which the payee violated. 66 A note is subject to cancelation, when executed to a bank by procurement of the cashier and 60 Kelly v. Pember, 35 Vt. 183. 61 Kingman Colony Irr. Co. V. Payne, 78 Ore. 238, 152 Pac. 891. 62 Walters v. Rock, 18 N. Dak. 45, 115 N. W. 511. 63 Helms v. Halton, 152 N. Car. 587, 67 S. E. 1061. 64 Hunter v. Sherron, 176 N. Car. 226, 97 S. E. 5. 65 Williams v. Hasshagen, 166 Cal. 386, 137 Pac. 9. 66 McChesney v. Guernsey, 61 Pa. Super. Ct. 490. the maker's grandson for a debt of the latter to the bank, where the cashier falsely represented that he had signed it; that it was for an amount about half of that promised to be paid, and that he would stand between the maker and all danger; and she executed it with the understanding that she was not to pay, being at the time seventy years old, uneducated and practically unable to read and write. 67 Where the agent of the seller of machinery, who was receiving a commission from the seller, also included a commission in the notes given by the purchaser without knowledge of such fact by the purchaser, such commission or bonus note is voidable at the option of the maker either on the ground of fraud, or because the agent was the agent of the seller by whom a commission was payable.68 And, although the recorded assignment of a note gives the maker constructive notice that the assignee has become the owner of the note, it does not serve in any way to cut off the maker's right to impeach the note on the ground that it was secured by fraud. But the defendant can not defeat recovery on a note executed by her as one of the creditors in a bankruptcy proceeding, whereby she agreed to pay sixty per cent. of the costs accumulated in such proceeding, by the defense that plaintiff fraudulently conspired with others of the creditors in accumulating the costs in much greater amount than she is equitably liable to pay, as she can not thus attack the validity of the judgment of the bankruptcy 69 § 231. What constitutes a misrepresentation which is a defensc. A person can not avail himself as a defense to an action on a bill or note, of a misrepresentation in reference to a matter which is wholly disconnected with the instrument. In order to render a false representation available as a defense, it must be material, that is, of something constituting an inducement or motive to the contract and must have Leen made by the payee or some one 71 67 Lockney State Bank v. Damson (Tex. Civ. App.), 179 S. W. 552. 68 Shelton Implement Co. v. Schieck, 81 Nebr. 826, 116 N. W. 951. 69 Buhler v. Loftus, 53 Mont. 546 165 Pac. 601. 70 Thompson v. Sunrise Coal Co., 181 Ky. 158, 204 S. W. 89. 71 Ingram v. Jordan, 55 Ga. 356; Dahlman v. Antes (Iowa 1906), 109 N. W. 784; Hodges v. Torrey, 28 Mo. 99; Jackson v. Stockbridge, 29 Tex. 394, 94 Am. Dec. 290 |