Fenner v. American Surety Co. of New York

• Decision Date: 06 November 1941
• Docket Number: No. 2332.,2332.
• Citation: 156 S.W.2d 279
• Parties: FENNER et al. v. AMERICAN SURETY CO. OF NEW YORK.
• Court: Texas Court of Appeals

Page 279

156 S.W.2d 279

FENNER et al. v. AMERICAN SURETY CO. OF NEW YORK.

No. 2332.

Court of Civil Appeals of Texas. Waco.

November 6, 1941.

Rehearing Denied December 4, 1941.

COPYRIGHT MATERIAL OMITTED

Appeal from District Court, Dallas County, One Hundred First District; Claude M. McCallum, Judge.

Suit by the American Surety Company of New York against Charles E. Fenner and others to recover certain sums of money. Judgment for plaintiff, and defendants appeal.

Affirmed.

Smithdeal & Lefkowitz and Shook & Shook, all of Dallas, for appellants.

Malone, Lipscomb, White & Seay, O. D. Montgomery, and F. W. Bartlett, Sr., all of Dallas, for appellee.

RICE, Chief Justice.

This suit was instituted in one of the district courts of Dallas county by the American Surety Company of New York, as plaintiff, against Fenner & Beane, a partnership, and numerous others as members of the partnership, as defendants, seeking recovery of certain sums of money which it was alleged Carl A. Lundelius, an employee of the American National Bank of Austin, Texas, unlawfully abstracted from said bank and paid to Fenner & Beane, and which sums of money the defendants were alleged to have received in bad faith. The claim of plaintiff was based upon the fact that it had executed to the American National Bank a fidelity bond which rendered it liable to the bank for the money so abstracted by Lundelius; that it had discharged its obligation to the bank and was subrogated to the latter's legal rights in the premises.

This case has been twice tried in the district court of Dallas county. In the first trial, resulting in a judgment for the plaintiff, the cause was submitted to the jury on the theory of negligence; that is, that there was evidence to support the view that the defendant partnership's agents in charge of its Austin branch were in possession of such facts and circumstances as would put a person of reasonable prudence upon inquiry as to whether Lundelius wrongfully abstracted from the bank the funds with which he operated, and that such inquiry, diligently pursued, would have disclosed that he had done so. On appeal (opinion reported in 97 S.W.2d 741) the Dallas Court of Civil Appeals reversed and remanded the cause, holding that it was tried upon an erroneous theory, pointing out that under the Negotiable Instruments Act (§ 56, Article 5935, Vernon's Ann.Civ.Stats.) the test in negotiable instruments cases is good faith, and not diligence or negligence. The Supreme Court (133 Tex. 37, 125 S.W.2d 258) affirmed the judgment of the Dallas Court of Civil Appeals and directed that upon another trial the issue of bad faith should be submitted to the jury, if warranted by the pleadings and the evidence.

The pleadings of the parties having been amended, this case was again tried; the evidence on the second trial, we infer, being substantially the same as that developed on the first trial. The issues submitted to the jury on the theory of bad faith were warranted by the pleadings and the evidence, and, being answered favorably to the plaintiff, judgment was rendered against the defendants in favor of plaintiff for the amount of money unlawfully abstracted from the bank by Lundelius and paid to Fenner & Beane, less certain credits, the amount of the judgment, including interest, being $43,544.35. From this judgment an appeal was perfected to the Dallas Court of Civil Appeals, and this case was thereafter, by order of the Supreme Court, transferred to this court.

The material facts relevant to this appeal, together with the general rules of law applicable thereto, have been so clearly and so succinctly set forth in the opinion of the Dallas Court of Civil Appeals, and also in the opinion of the Supreme Court, that it is deemed unnecessary to do more than refer to these opinions.

In its charge the trial court defined the term "bad faith" as follows: "You are instructed that the term `bad faith', as used in this charge, means that the person taking the instrument must have had knowledge of such substantial facts and circumstances as to create in his mind a suspicion that there was something wrong with the title of the person from whom he takes it, to the instrument itself, or to the money represented by such instrument, combined with an intentional disregard of and refusal on the part of the taker of the instrument to learn the facts from the means of knowledge which he knows are at hand."

By numerous assignments of error, on which are predicated twenty-four propositions of law, appellants attack the correctness of the foregoing definition. In our opinion, this definition is not subject to the criticisms made, and we therefore overrule these assignments of error.

Article 5935, Section 56, provides: "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."

In the first appeal of this case, 133 Tex. 37, 125 S.W.2d 258, 260, the Supreme Court says: "The controlling principle applicable in the present case is stated in West v. First Baptist Church of Taft, 123 Tex. 388, 71 S.W.2d 1090, 1097, as follows: `The consummation of the purchase of a negotiable instrument with knowledge of suspicious circumstances sufficient only to put an ordinarily prudent person upon inquiry would convict the purchaser of negligence, not of dishonesty. To serve as evidence to support a finding of bad faith, the unheeded suspicious circumstances must be of a substantial character and so strong that bad faith rather than merely negligence can reasonably be inferred from them.'"

The Supreme Court further said: "There is substantial testimony in the present record from which it may be inferred reasonably in the light of surrounding circumstances that the purchaser of the paper acted in dishonest disregard of the rights of the bank."

The term "bad faith", as used in Section 56, Article 5935, Vernon's Ann. Civ.Stats., has not been defined by statute; "but left as a question of fact under the peculiar circumstances of each case; bad faith, like fraud, not being capable of exact definition." Joyce Defenses to Commercial Paper, 2nd Ed., par. 695, p. 980.

It appears to have been decided by the great weight of authority that wilful ignorance is the equivalent of bad faith; and that bad faith may be shown by a wilful disregard of and refusal to learn the facts when available and at hand. Joyce Defenses to Commercial Paper, 2nd Ed., § 694, p. 976; In re Hopper-Morgan Co., D.C., 156 F. 525, and authorities cited on page 530.

In the case of Murray v. Lardner, 2 Wall. 110, 121, 17 L.Ed. 857, the Supreme Court of the United States said: "The rule may perhaps be said to resolve itself into a question of honesty or dishonesty, for guilty knowledge and wilful ignorance alike involve the result of bad faith. They are the same in effect. Where there is no fraud there can be no question. The circumstances mentioned, and others of a kindred character, while inconclusive in themselves, are admissible in evidence, and fraud established, whether by direct or circumstantial evidence, is fatal to the title of the holder." See, also, West v. First Baptist Church of Taft, 123 Tex. 388, 71 S.W.2d 1090; Daniel v. Spaeth, Tex.Civ. App., 168 S.W. 509; Hotchkiss v. National Shoe & Leather Bank, 21 Wall. 354, 22 L.Ed. 645, 649; First Nat. Bank v. Stover, 21 N.M. 453, 155 P. 905, L.R.A.1916D, 1280, Ann.Cas.1918B, 145; 1 Daniel Nego. Inst., 6th Ed., § 776; Jones v. Gordon, L.R. 2 App.Cas. 627; Kentucky Rock Asphalt Co. v. Mazza's Adm'r, 264 Ky. 158, 94 S.W.2d 316, 317; Merchants' & Miners' Bank v. Gaujot, 102 W.Va. 643, 136 S.E. 199; Clark v. Roberts, 206 Mass. 235, 92 N.E. 461; 8 C.J. 505; 10 C.J.S., Bills and Notes, § 324, p. 820.

Construing the court's definition of the term "bad faith" as a whole, and we understand it to be our duty so to do (24 T.J. § 59, p. 527), we are of the opinion that it is a substantially correct definition of the term as applied to the facts of this case; and imposes no greater burden on appellants than that imposed by law. We are further of the opinion that the words "suspicion" and "something wrong," as used in said definition, are words of ordinary, commonly accepted meaning, and are not legal or technical terms requiring definition by the court. The context of the court's definition clearly discloses the meaning and effect of each of said terms. It occurs to us that the ordinary juror, drawn from the rank and file of men, could not fail to realize and fully comprehend that one in whose mind there has been created a suspicion, based upon his knowledge of substantial facts and circumstances, that there is something wrong with the title to a negotiable instrument, or the money represented thereby, and who, in spite of such suspicion, intentionally disregards and refuses to learn the facts by means of knowledge which he knows are at hand, is guilty not only of wilful ignorance but also of dishonest disregard of the rights of others and necessarily of bad faith. As we understand section 56 of Art. 5935, supra, notice of an infirmity in a negotiable instrument or defect in the title of the person negotiating same, which vitiates the transactions, must fall in one of two distinct classifications: (1) the person to whom it is negotiated must have actual knowledge of the infirmity or defect; or (2) knowledge of such facts that his action in taking the instrument amounts to bad faith. Under the first classification actual knowledge of the infirmity or defect makes the taker a party to the fraud and convicts him of outright dishonesty; under the second classification knowledge of such facts on the part of the taker convicts him of bad faith when the unheeded suspicious circumstances in his mind are of such a substantial...