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in taking the instrument, or by his omission to and motor boats on Lake Union, during the take precautions which a prudent man would A.-Y.-P. Exposition. In part payment rehave taken, without proof of actual notice of a defect in title, or a showing of bad faith.

spondent executed his note for $2,000 to the [Ed. Note.--For other cases, see Bills and transportation company, which, being sold to Notes, Cent. Dig. $S 821-823; Dec. Dig. $ 339.*] a bona fide holder for value, was paid at 6. BILLS AND NOTES ($ 373*) — BONA FIDE maturity. On May 7, 1909, certain supplies

PURCHASER-DEFENSES — FRAUD IN INCEP- consigned to the transportation company had TION.

reached Seattle, upon which a large amount Fraud in the inception of a negotiable in: of freight and other charges were due. The strument will not invalidate it in the hands of an innocent holder in due course.

transportation company was a customer of [Ed. Note.-For other cases, see Bills and the appellant bank, where it then had on Notes, Cent. Dig. $$ 966–970; Dec. Dig. 8 deposit a balance of about $2,000, but it 373.*]

needed $5,000 more to meet the freight and 7. BILLS AND NOTES (8 497*)-ACTIONS--BUR- other charges. It then applied for a loan of

DEN OF PROOF-Good FAITH AND PAYMENT $5,000; whereupon appellant refused to acOF VALUE.

In an action on a negotiable note prosecut- cept its note without security, but agreed to ed by an indorsee, where the maker alleges and make the loan on its note indorsed by five or shows the instrument to have been fraudulently six wealthy business men of Seattle, its stockobtained by the payee, it devolves upon the indorsee to show that he is a bona fide holder for holders, of whom respondent was one. A value, and that he obtained the note before the $5,000 note of the transportation company, maturity in due course, and without knowledge dated May 7, 1909, running to the bank as of the infirmity.

payee, due in 90 days, indorsed by several [Ed. Note. For other cases, see Bills and of the transportation company stockholders, Notes, Cent. Dig. $$ 1675–1687; Dec. Dig. $ 497.*]

was executed. Respondent refused to in8. BILLS AND NOTES (8 339*)—BONA FIDE dorse this note, but on the same day did ex. PURCHASER CONSTRUCTIVE NOTICE

ecute his $3,000 note to the transportation KNOWLEDGE OF DEFENSES.

company, also due in 90 days, which he then A mere suspicion of an infirmity does not and there delivered to it in payment of the put an indorsee of a negotiable note upon such remainder of his stock subscription. He tesa duty to make inquiry that a failure to investigate or inquire will defeat his title as a holder tified that he then told the payee he did not without notice.

want it to be sold or negotiated. This state[Ed. Note.-For other cases, see Bills and ment, although denied by other stockholders, Notes, Cent. Dig. $$ 821–823; Dec. Dig. $ 339.*] we accept as true. 9. BILLS AND NOTES ($ 497*)-ACTIONS_BURDEN OF PROOF-MALA FIDES.

On the same day, May 7, 1909, the transIn an action by an indorsee of a negotiable portation company delivered to the bank the note, where plaintiff has shown by undisputed principal note for $5,000, indorsed by a porevidence that he was a bona fide holder for val- tion of its stockholders, and as further and ue, without any circumstances suggesting bad faith, it then devolves on defendant to show collateral security therefor, at the same time that plaintiff was guilty of mala fides.

and as a part of the same transaction, also [Ed. Note.--For other cases, see Bills and delivered to it respondent's $3,000 note, and Notes, Cent. Dig. $8 1675-1687; Dec. Dig. S two other notes of $1,000 each, previously 497.*]

executed and delivered to the transportation Dunbar, C. J., dissenting.

company by one Appleton, in payment of his Department 2. Appeal from Superior stock subscription. The bank accepted the Court, King County; C. H. Neal, Judge.

principal and collateral notes, made the loan, Action by the Scandinavian American and immediately placed $3,000 to the credit Bank against E. W. Johnston. Judgment of the transportation company, which on the for defendant, and plaintiff appeals. Re- same day checked it out in payment of the versed and remanded, with instructions to freight and other charges. The transportaenter judgment for plaintiff.

tion company passed into the hands of a

receiver some time in the latter part of June, Roberts, Battle, Hulbert & Tennant, for 1909. None of the notes have been paid, and appellant. Hart, Prigmore & Evans, for re- the appellant bank commenced this action spondent.

against the respondent, Johnston, on the

$3,000 collateral note executed by him, and CROW, J. [1] The controlling assignment also another action against Appleton on the is that the trial judge erred in refusing to two notes executed by him. We on this date withdraw the case from the jury and enter file a separate opinion in the Appleton Case judgment in appellant's favor.

(115 Pac. 109), which is also in this court on The following facts appear from undisput-appeal. ed evidence: Some time in January, 1909, The respondent, Johnston, in his answer, the respondent, E. W. Johnston, subscribed admitted the execution of his note, but al$5,000 par value of the capital stock of leged that his subscription to the capital the Electric Transportation Company, a cor- stock had been procured by misrepresentaporation, organized to operate a line of sight- tion and fraud; that his $3,000 note thereseeing automobiles on the streets of Seattle, I after given in payment of such subscription *For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key No. Series & Rep'r Indexes

originated in fraud; that it was without , so I could get my notes back. Q. What did consideration; that the appellant bank took you tell him, if anything, about the company it with knowledge of the facts constituting having secured them from you by misrepresuch fraud, and that it was not a bona fide sentation? A. I told Mr. Lane they had misholder. The jury by their verdict in re- represented the facts to me to get those notes; spondent's favor necessarily found that the and he stated he could not very well arrange stock subscription, the consideration for the to get the notes back, because they did not note, was obtained by fraud, and the only have a very large balance there; and he question we will consider is whether the ap- stated that they bought this note on the pellant was entitled to a directed verdict up- strength of my name being there and being on the theory that it was a bona fide holder perfectly good, but he did not know the facts for value, having purchased the note before about the purchase, and Mr. Woolfolk, I its maturity in due course.

think, he referred me to as knowing the parThe following facts indisputably appear ticulars of the purchase; I think, however, from the evidence, and, as we understand that Mr. Lane told me that Mr. Chilberg had are not challenged by respondent: That re- passed on them. Some one else; he hadn't spondent executed and delivered his note to passed on it, as I remember-on the pur. the transportation company in payment of his chase of the note. Q. Now, when was it stock subscription; that it was on the same you were in the bank and made the protest day delivered as collateral security to the about the notes, and had the conversation bank, which then and there made a loan of with Mr. Lane? A. Well, it was somewhere $5,000 in cash to the transportation company about-well, four or five days after the dates on the principal note; that the bank at that on them. Q. You think it was four or five time had no knowledge of any misrepresenta- days after the dates on them? A. Yes, sir. tions made to Johnston, or that his note had Q. That would be in the vicinity of Februbeen fraudulently procured without consid- ary 1, 1909? A. February 1st; and I think eration; that Johnston himself did not then this note was due February 9th. (Cross-exknow he had been defrauded, and that he amination.) Q. So you told Mr. Lane they did not learn the actual facts until the ap- had misrepresented the matter to you by pointment of the receiver. The jury by its agreeing that they would not negotiate your verdict must have found the appellant was notes? A. I told them they had misreprenot a holder in good faith, and the only pos- sented matters to me, and also had agreed not sible circumstance upon which it could have to negotiate my paper; and he said they had predicated such a finding was that, about already purchased these two notes; and he January 25, 1909, one C. H. Lilly, a prom- sent me back to talk to Mr. Woolfolk, and I inent and wealthy business man of Seattle, actually saw the notes in their possession also subscribed for capital stock of the trans- there in the hands of the man at the note portation company, and in part payment counter; I forget that gentleman's name. therefor executed and delivered to it his five A. I went to see Mr. Lane to use a little perpromissory notes of $1,000 each; that two sonal influence, and get him to help me get of these notes were forthwith sold to the my notes, and if they had a fat bank account appellant bank at par for value, it then be there I thought he could easily arrange it." coming an unquestionable holder of them in It further appears that, shortly thereafter, due course and good faith; that about Feb- Lilly, without participation of the bank, efruary 1, 1909, Lilly, claiming his notes had fected some satisfactory arrangement with been procured by the misrepresentations of the transportation company, in pursuance of an employé of the transportation company, which it agreed to pay, and did pay, the two engaged to sell its stock, surrendered his notes when they became due, and returned stock to the company, and demanded a re-them to him. The only possible notice the turn of his notes, none of which had yet ma bank had that these payments were made by tured; that three were returned to him, but the transportation company must be predthat he was advised by the company the oth-icated upon the fact that one of them was er two had been sold to the bank. He then paid by the company check drawn upon the called upon the bank, and all notice or knowl-appellant bank. It is apparent that appel. edge it obtained from him is shown by his lant has many employés and transacts an extestimony, which we accept as true, and which tensive banking business. Nothing further he gave as follows (examination in chief): occurred between Lilly and the bank. Both

"Q. Did you see Mr. Lane, the cashier of of the Lilly notes were paid before the colthe Scandinavian American Bank? A. I did. lateral $3,000 note was executed by the reQ. What did you tell him about those notes? spondent, Johnston. The sole question beA. I told Mr. Lane I wished to find out if fore us is whether any such notice of the they were holding certain notes of mine, and, Lilly transaction came to the bank as to deif they were holding them, I wanted to ar-mand an inquiry in regard to the origin of range to have the Electric Transportation respondent's note, and whether the bank has Company take them up; that they had been guilty of any such neglect in failing to agreed not to cash them, and, inasmuch as prosecute an inquiry as will deprive it of they had an account there, as I understood, the position and rights of a bona fide holder

and other employés of the bank denied Lilly's , in this regard as conclusive proof, and there statements, we, as above stated, accept them was no other upon that question." as true. Respondent (citing section 3443, In this case there is no dispute as to the Rem. & Bal. Code, defining a holder in due time the bank acquired the note, the considcourse; section 3446, defining defective title; eration paid, nor any other fact tending to section 3447, defining notice of defective ti- show that it became a holder before maturity tle; and section 3450, relating to defenses and for value. The only question is its bona against the claim of a holder in due course; fides or mala fides in acquiring title. Our and also citing Ireland v. Scharpenberg, 54 holding in the Scharpenberg Case, that the Wash. 558, 103 Pac. 801, and other cases up question of the bona fides of the plaintiffs on which he relies) contends that the ques. and their credibility was for the jury, was tion whether the appellant was a bona fide predicated upon the evidence then before the holder in due course was for the exclusive jury and mentioned in the opinion. In makconsideration of the jury; that the cashier ing our conclusion we cited Canajoharie Nawas an interested witness, and that his cred- tional Bank v. Diefendorf, 123 N. Y. 191, 25 ibility was also for the jury.

N. E. 402, 10 L. R. A. 676, and other author[2] There is no question but that, upon an ities which follow that case. In the New issue of act, conflicting evidence must be sub- York case the conduct of the cashier was mitted to the jury for its consideration. Nor shown to be such as to indicate a deliberate can it be disputed that the credibility of the intention upon his part to studiously avoid bank cashier, an interested witness, would knowledge, which he manifestly anticipated be for the jury, were his evidence unsupport- would disclose the defective title of the payee. ed, improbable, and necessary to sustain a The facts are stated in the opinion. This finding of bona fides. In this case the cash- New York case has on similar evidence been ier's evidence could be entirely eliminated, repeatedly followed by this and other courts, and yet, under our interpretation of the law, but the Court of Appeals of New York itself it would appear indisputably from the evi- distinguished it, in American Exchange Nadence before us that the bank was in fact a tional Bank v. N. Y. Belting Co., 148 N. Y. bona fide holder for value in due course. In 698, 43 N. E. 168, a case similar to this, in the Scharpenberg Case the only evidence re- which it held that judgment should be directlied upon to show the title and good faith. ed against a maker in favor of a plaintifr of the plaintiffs as indorsees was oral testi- indorsee as a bona fide holder in due course. mony of themselves, given without the cor [3] In the Canajoharie Bank Case the court roboration of records of their business or said: "The payment of value for negotiable other circumstances. Speaking of their state- paper is a circumstance to be taken into acments, we said: “There was no evidence as count with other facts in determining the to the manner, consideration, or time of pur- question of the bona fides of the transaction, chase of the note by the respondents, save and, when full value is paid, is entitled to that given by themselves. Frank N, Ireland great weight. But that fact is never contestified as to the amount paid for the note, clusive, except in the absence of evidence and that it was purchased of Robert Burgess tending to show notice or bad faith." & Son, August 1, 1907, without any notice [4, 5] Although subdivision 3 of section of there being any defense thereto. It will 3443, Rem. & Bal. Code, in defining a holder be noticed that this was after interest was in due course, provides that he shall have some three months in default, but before ma- taken the instrument in good faith, and secturity of the first installment. Charles Ire- tion 3450 provides, when it is shown that the land testified to substantially the same ef- title of the person who has negotiated the fect, but he admitted upon cross-examination instrument is defective, the burden is on the that the knowledge he had in this respect holder to prove that he, or some person unwas gained from their records, and it was der whom he claims, acquired the title as from them he was testifying. No record was holder in due course; and, although under produced, so we have no competent evidence section 3446 the title of the transportation of the purchase, or time of purchase, of this company to this instrument must be regardnote, save that of Frank N. Ireland, who, of ed as defective, these sections, being each and course, is a witness directly interested in the all in our negotiable instruments act, must result of the cause. His testimony in this be considered in connection with section 3447, regard was not contradicted by any direct Rem. & Bal. Code, of the same act, which evidence. There was, however, the circum- reads as follows: "To constitute notice of stance of the interest being in default some an infirmity in the instrument or defect in three months, as well as other minor circum- the title of the person negotiating the same, stances which the jury would have been war- the person to whom it is negotiated must ranted in taking into consideration in weigh- have had actual knowledge of the infirmity ing the testimony of Frank N. Ireland, even or defect, or knowledge of such facts that though not directly contradicted, had the his action in taking the instrument amountcause been submitted to them. In other ed to bad faith.” In other words, if an words, the jury would not have been requirindorsee for value before maturity did not ed to take the testimony of Frank N. Ireland have actual knowledge of the infirmity or

defect, or knowledge of such facts that his , his title thereto is unimpeachable; but that action in taking the instrument amounted to it is still the rule that willful ignorance and bad faith, he would, so far as that question guilty knowledge alike involve the result of is concerned, be held a holder in good faith; bad faith. This, however, does not mean no mala' fides being shown.

that the holder's title is to be overthrown by In Gray v. Boyle, 55 Wash, 578, 104 Pac. slight circumstances. He does not owe to 828, 133 Am. St. Rep. 1042, commenting on the party who puts the paper afloat the duty this section and quoting with approval from of active inquiry in order to avert the impuCrawford's Annotated Negotiable Instru- tation of bad faith. His rights are to be dements Law, we said:' "The respondent pur- termined by the simple test of honesty and chased the note for value before maturity, good faith, not by a speculative inquiry into and at the time of his purchase had no no- diligence or negligence. Although he may tice of any defect or infirmity in the instru- have been negligent in taking the paper, and ment. The chief circumstance upon which omitted precautions which a prudent man the appellant relies to establish mala fides is would have taken, nevertheless, unless he the fact that the respondent knew that Be- acted mala fide, his title will prevail." han was an insurance agent, and that the [6] In Jamieson & MeFarland v. Heim, 43 note was given in whole or in part in pay. Wash. 153, 86 Pac. 165, we held that fraud ment for an insurance premium. The rule in the inception of a negotiable instrument by which the good faith of a holder of ne- will not invalidate it in the hands of an ingotiable paper is to be determined is thus nocent holder in due course. The question stated in Crawford's Annotated Negotiable arises, What knowledge did the appellant Instruments Law (3d Ed.) p. 68: "The hold- have of any infirmity in the title of the transer is not bound at his peril to be on the alert portation company to the respondent's $3,000 for circumstances which might possibly ex- note? We do not understand any claim is cite the suspicion of wary vigilance; he does made that it had actual notice. The respondnot owe to the party who puts the paper ent himself testified as follows: "Q. Captain afloat the duty of active inquiry in order to Johnston, I understood you to say that at avert the imputation of bad faith. The rights the time you signed this $3,000 note, on May of the holder are to be determined by the 7, 1909, that you had no knowledge of any simple test of honesty and good faith, and fraudulent transactions upon the part of the not by a speculative issue as to his diligence company. A. No, sir; I did not. Q. Now, or negligence. The holder's right cannot be will you kindly tell the jury then, Captain, defeated without proof of actual notice of as near as you can, the date when you first the defect in title or bad faith on his part discovered any fraudulent transactions? A. evidenced by circumstances. Though he may Why, I cannot tell; it was some time, I think, have been negligent in taking the paper, and in there; some time in June, or the latter omitted precautions which a prudent man part of May, that Mr. Zintheo came to my would have taken, nevertheless, unless he house and wanted me to buy some more stock. acted mala fide, his title, according to settled Q. So that you had no information or notice doctrines, will prevail.' This rule is fully that these fraudulent schemes were made unsupported by the authorities, and, measured til after that time—in June--early in June by it, the title and good faith of the respond-, or late in May? A. No, sir; I don't think ent were not impeached."

that I did." In McNamara v. Jose, 28 Wash. 461, 68 If respondent was ignorant of the alleged Pac. 903, on issues of fact similar to those misrepresentations and fraud, which he now now before us, we sustained the action of the claims vitiated the title of the transportatrial judge in withdrawing the case from the tion company, and his ignorance continued jury at the close of all the evidence, and until after appellant had acquired the note, directing a judgment for the plaintiff. In how could the appellant be presumed to have our opinion, citing and commenting on sec- obtained actual knowledge as to the origin of tions 56 and 57 of the negotiable instruments this particular note before obtaining title? act (Laws 1899, c. 149), now sections 3447 There is not a syllable of evidence that apand 3448, Rem. & Bal., we said: "But, not- pellant did. Lilly's statement as disclosed withstanding this act positively provides that, by his evidence did not give the bank noto constitute notice of an infirmity in a ne tice or knowledge of such facts as to show gotiable instrument, the purchaser must have its bad faith in taking the note. It is conknowledge of such facts that his action in ceded that the bank had in good faith, withtaking the instrument amounted to bad faith, out notice, in due course and for value, purwe cannot think that the Legislature meant chased the Lilly notes before his interview to say that a purchaser of a negotiable in- with the bank. The bank then had good strument can shut his eyes to the surround title to the Lilly notes. There was no ocing circumstances, remain in willful ignor-casion demanding an investigation of those ance of facts which would have made known notes, nor an investigation of his dealings to him the infirmities of the instrument he with the transportation company. Assumpurchases, and then claim, because he had ing that the bank had then prosecuted an in

questionable in the dealings between John-i ing a section identical with section 3447, ston and the transportation company. The Rem. & Bal., supra, in a case similar to this, Johnston note was not then in existence, nor held, on the evidence offered, the trial court was it executed for more than three months erred in refusing to peremptorily instruct thereafter. The Lilly notes were paid be- the jury to find for the plaintiff. The court fore respondent's note was executed. So far said: "To constitute notice of an infirmity as the bank was concerned, the Lilly matter in an instrument or defect in the title of was a closed incident, satisfactorily closed, the person negotiating the same, the person and calling for no further consideration. to whom it is negotiated must have actual The transportation company and Lilly had knowledge of the infirmity or defect, or settled their differences. The Lilly transac- knowledge of such facts that his action in tion had no relation whatever to respond- taking the instrument amounts to bad faith. ent's note, executed three months later. ' Ky. St. 3720b, subsec. 56 (Russell's St. Were it conceded to have been a circum- : $. 1925). The proof in this case fails to stance sufficient to excite some suspicion as come up to either one of these requirements to the character of the dealings and acts of of the statute. There is nothing in the case the transportation company, we could not, to show that appellant had actual knowledge under the weight of modern authority, hold of the infirmity or defect, or knowledge of the appellant to have acted in bad faith, or such facts that his action in taking the inthat it was negligent in making no further struments amounted to bad faith. On the investigation than it did. In other words, 'contrary, his evidence, which is unimpeachthere is not in the entire record any sug. ed by that of any other witness or by any gestion of mala fides on appellant's part. circumstances in the case, tends to show that

Some contention is made by respondent he acquired the drafts before maturity, for to the effect that, at the time appellant made value, and without notice of any infirmity the $5,000 loan to the transportation coin-' therein or defect in the title of the American pany, it knew the company was insolvent. Jobbing Association, which indorsed, deliverThis contention is based upon the admitted ed, and sold the drafts to him.” fact that a written statement was made to ! - [7] It is well established by the overthe bank by the transportation company, whelming weight of modern authority that, showing that its liabilities, some of them not if, in an action on a negotiable note prosecutdue, exactly equaled its claimed assets, but ed by an indorsee, the maker alleges and in which no statement relative to its cap- shows the instrument to have been frauduital stock appeared. The transportation lently obtained by the payee, it will then decompany was then, and for some time had volve upon the indorsee to show that he is been, a going concern, transacting business a bona fide holder for value, and that he oband carrying on a substantial depositor's ac- tained the note before maturity in due count with appellant. The bank does not course, and without knowledge of the incontend that it made the loan on the credit firmity, or of facts sufficient to put him on of the company. On the contrary, it admits inquiry. that it refused to do so. The loan was made [8] But it is equally well established that on the credit of the indorsers of the $5,000 mere suspicion of an infirmity is insufficient note and the collateral security, including to put the indorsee upon inquiry, or show respondent's note. There was nothing sus- that he is not a holder in good faith, Mcpicious in the fact that the bank made the Namara v. Jose, 28 Wash, 461, 68 Pac, 903; loan to a going corporation on good security. Gray v. Boyle, 55 Wash. 578, 104 Pac. 828, It was immaterial, as affecting the honesty 133 Am. St. Rep. 1042; Sinkler v. Siljan, 136 and good faith of the bank, whether the Cal. 356, 68 Pac. 1024; Valley Savings Bank transportation company was worth anything, v. Mercer, 97 Md. 458, 55 Atl. 435; Wilson so long as its stockholders, most of them men v. Riddler, 92 Mo. App. 335; Bank v. Hatchof large wealth-a fact known to the bank- er, 151 N. C. 359, 66 S. E. 308, 134 Am. St. were willing to indorse for it, or had given Rep. 989; Jefferson Bank v. Chapman, 122 it their notes which it could and did use as Tenn. 415, 123 S. W. 641; First National collateral. The loan, from the standpoint Bank v. Moore, 148 Fed. 953, 78 C. C. A. of the bank, was gilt-edged, and free from 581; Reilly v. McKinnon, 159 Fed. 78, 86 C. any suspicious circumstance. If the trans- C. A. 268; Hamilton National Bank v. Upportation company was then actually insol-ton, 100 App. Div. 105, 91 N. Y. Supp. 475; vent, its stockholders, including respondent, Second National Bank v. Weston, 172 N. Y. were in a better position than appellant to 250, 64 N. E. 949; Kavanagh v. Bank of know or learn that fact, but they indorsed America, 239 Ill. 404, 88 N. E. 171; Fidler its paper, gave it their personal notes, and v. Paxton, 101 Ill. App. 107; Tescher v. permitted it to continue the transaction of Merea, 118 Ind. 586, 21 N. E. 316. its business, at the time knowing it was pro In Sinkler v. Siljan, supra, the Supreme curing this identical loan of $5,000 from ap- Court of California said: "To say that one pellant to raise funds for use in its business. who purchases a note before maturity and

In Bothwell v. Corum, 135 Ky. 766, 123 pays full value therefor, as plaintiff did in S. W. 291, the Court of Appeals, consider this case, must be prepared to defend his

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