Bancredit, Inc. v. Bethea

• Decision Date: 02 June 1961
• Docket Number: No. A--575,A--575
• Citation: 172 A.2d 10,68 N.J.Super. 62
• Parties: BANCREDIT, INC., a corporation of New Jersey, Plaintiff-Respondent, v. Lynn BETHEA and Tony Bethea, Defendants-Appellants. . Rehearing
• Court: New Jersey Superior Court — Appellate Division

Page 62

68 N.J.Super. 62

172 A.2d 10

BANCREDIT, INC., a corporation of New Jersey, Plaintiff-Respondent, v. Lynn BETHEA and Tony Bethea, Defendants-Appellants.

No. A--575.

Superior Court of New Jersey, Appellate Division.

Rehearing Argued May 2, 1961.

Decided June 2, 1961.

John M. Blume, Newark, for plaintiff-respondent (Blume & Blume, Newark, attorneys).

Joseph Butt, Elizabeth, for defendants-appellants.

Before Judges CONFORD, FREUND and KILKENNY.

The opinion of the court was delivered by

FREUND, J.A.D.

This appeal from judgment entered in plaintiff's favor on a promissory note was originally resolved by us in favor of affirmance as to the adult maker of the note, Tony Bethea, and reversal and remand for factual determinations regarding the asserted defense of infancy of his co-maker, Lynn Bethea. Bancredit, Inc. v. Bethea, 65 N.J.Super. 538, 168 A.2d 250 (App.Div.1961). The instant rehearing is limited solely to discussion of th issue of fraud in the Factum, as it relates to the scope of Tony Bethea's knowledge of the nature of the instrument he was signing and his negligence in so inscribing it.

Defendant brings to our attention that portion of his testimony (65 N.J.Super., supra, at p. 544, 168 A.2d, at p. 253) in which he states that he 'signed a paper to get $500 from Beneficial Loan.' Bethea urges that the court misconceived the import of this testimony and mistakenly assumed that Bancredit and Beneficial Loan were one and the same concern. In fact, we are now told by his attorney, Bethea was not aware of the character of the instrument he signed, but rather thought he was signing an application for a loan in the amount of $500 from Beneficial Finance Company, a separate and distinct organization from plaintiff. We are asked to characterize the latter form of deception as so essential to the making of the contract as to amount to fraud in the execution thereof.

We are satisfied, after review of the record as settled by the trial judge, R.R. 1:6--3, and consideration of the points raised in the briefs and at oral argument of the rehearing, that reasonable fact-finders could not differ as Tony Bethea's knowledge that the instrument he was signing was a negotiable promissory note. Not only is there Bethea's own testimony that he 'sign(ed) papers to borrow $500,' and that he '(knew) I signed it for (a) loan'; there is also the undisputed proof that he and Lynn, shortly after they had affixed their signatures, were given a coupon book with a schedule of payments, From which they made three monthly payments before defaulting. It is thus incontrovertible that Bethea was aware of the general form of the obligation he had undertaken, at least insofar as it bound him to make monetary repayments at fixed intervals.

The question is raised, however, as to the possible legal effect, on the defense of fraud in the Factum, of Bethea's alleged misunderstanding of the identity of the payee of the instrument (he believed it to be Beneficial Loan when it was in fact Chippy's, and, by express assignment, Bancredit), as well as his professed deception as to the amount of the note. This question recommends to us a re-examination of the pertinent principles shaping the defense of fraud in the Factum, with particular attention to our statement in New Jersey Mortgage and Investment Co. v. Dorsey, 60 N.J.Super. 299, 302, 158 A.2d 712, 714 (App.Div.), affirmed 33 N.J. 448, 165 A.2d 297 (1960), defining the defense as 'such fraud in the procurement of the execution of a note or bill as results in the signer's being ignorant of the Nature of the instrument he is signing.' (Emphasis added). We will consider particularly, in light of our factual determination hereinabove, whether the maker's knowledge merely of the Negotiable character of a note conclusively establishes awareness of its 'nature' and thus precludes assertion of fraud in the Factum.

The defense of fraud in the Factum presents in theory a somewhat confused intermingling of tort and contract principles. At the heart of the assertion of Non est factum is the absence of that degree of mutual assent prerequisite to formation of a binding contract; absent the proverbial 'meeting of the minds,' one cannot be said to have obligated himself in law and the purported transaction is regarded as void. This is basic contract doctrine. New Jersey Mortgage and Investment Co. v. Dorsey, supra (60 N.J.Super. at pp. 303--304, 158 A.2d at pp. 714--715); C.I.T. Corp. v. Panac, 25 Cal.2d 547, 154 P.2d 710, 160 A.L.R. 1285 (Sup.Ct.1944); 1 Williston, Contracts (3d ed. 1957), § 95A, p. 350; 5 Williston, Contracts (Rev. ed. 1937), § 1488, p. 4154; Restatement, Contracts, (1932), § 475. See Note, 7 Rutgers L.Rev. 405, 409 (1952). Thus, where the signer of the instrument has been led to believe and does believe that he is signing something of a different character from the note he actually does inscribe, he has not in fact assented to the obligation represented by the paper.

Nevertheless, where the circumstances demonstrate the basic ingredient of voluntary, physical inscription, there has been at least an outward manifestation of assent on the part of the signer, thereby bringing into play--as against a holder in due course--additional considerations grounded in equity but phrased in terms of negligence. The signer must in such a situation exercise the caution of a reasonably prudent man to determine the character of the paper upon which he has purposefully placed his signature. The rationale of such a requirement may be found in the desirability of preserving general confidence in commercial paper, as well as in the equitable principle that where one of two innocent persons must suffer by the wrongful act of a third party, he who enabled the third party to perpetrate the wrong must sustain the loss. See Alexander v. Brogley, 63 N.J.L. 307, 308--309, 43 A. 888 (E. & A.1899). In fact, not a few courts have articulated the maker's negligence in terms of estoppel to assert the defense of fraud in the Factum. Briggs v. Ewart, 51 Mo. 245 (Sup.Ct.1873); Citizens' National Bank v. Smith, 55 N.H. 593 (Sup.Ct.1875); Amato v. Fullington, 213 Or. 71, 322 P.2d 309, 315 (Sup.Ct.1958).

Britton, in his landmark discussion, 'Fraud in the Inception of Bills and Notes,' 9 Cornell L.Q. 138, 153--55 (1924), attempted to reconcile the apparent conceptual dilemma of how an instrument void in its inception could subsequently be enforced according to its terms. He interpreted the 'negligence' holdings to say merely that 'proof that the signer was so situated that by the exercise of reasonable care he could have acquired this knowledge (of those facts essential to formation of a contract), shall have the same operative effect as his actual knowledge.' He then suggested the following as a unifying resolution of this problem:

'The signer always possesses affirmative knowledge of some kind, even if it be nothing more than that he is conscious that he is signing his name. If, therefore, the cases in which the signer is held liable because of his negligence be critically examined with a view to discovering therein what mental elements were common in all cases, these new factors could be assembled in a statement which would assert that their existence operated as an indispensable condition precedent to the existence of the negotiable contract. Such knowledge would constitute an irreducible minimum. The negligence aspect would then disappear, but the cases would be decided just as they are now decided.'

The cases on this subject have nonetheless continued to speak in terms of the basic knowledge of the signer and the reasonableness of his failure to obtain additional information as to the nature and terms of the paper obligation. See Annotation, 'Deception as to Character of Paper Signed as Defense as Against Bona Fide Holder of Negotiable Paper,' 160 A.L.R. 1295 (1946). See Uniform Commercial Code (1958), § 3--305, providing that:

'To the extent that a holder is a holder in due course he takes the instrument free from '(2) all defenses of any party to the instrument with whom the holder has not dealt except

'(c) such misrepresentation as has induced the party to sign the instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms; * * *'

The theoretical distinction is not entirely academic, viewing the question from a different angle. Considerations of negligence aside, one may only raise the defense of fraud in the Factum if one has in fact been defrauded, and the answer to this question entails an inquiry into the precise manner and mode in which the maker was deceived--which in turn requires illumination of his actual knowledge at the time of signing.

Further, with respect to the question of negligence, it is clear that the standard of care imposed on the signer may vary in degree according to the extent of his actual awareness of the nature of the instrument he is in fact signing. As stated in National Exchange Bank of Auburn v. Veneman, 43 Hun 241, 245 (Sup.Ct.1887), 'The nature and character of the paper intended to be executed must always be considered in determining the question of the defendant's negligence.' Thus, where the signer does not intend to evidence a legal obligation, he is under a lesser duty of care than where he does mean to undertake a legal duty of some kind; and where he fully intends to bind himself on a commercial promissory instrument, he is under a duty to exercise the highest degree of care. United States v. Tholen, 186 F.Supp. 346, 362--364 (D.C.N.D.Iowa 1960). See Britton, Bills and Notes, (1943), § 130, p. 576; 1 Williston, supra, § 95A, pp. 351--52.

The view has been widely expressed that knowledge of the signer that he is inscribing a negotiable document will deprive him of a claim of ignorance of the 'essential character' of the instrument and thereby of the defense of fraud in the Factum, in spite...