First Nat. Bank of Le Sueur v. Bailey

• Decision Date: 07 August 1926
• Docket Number: No. 4976.,4976.
• Citation: 210 N.W. 26,54 N.D. 534
• Parties: FIRST NAT. BANK OF LE SUEUR v. BAILEY et al.
• Court: North Dakota Supreme Court

54 N.D. 534

210 N.W. 26

FIRST NAT. BANK OF LE SUEUR

v.BAILEY et al.

No. 4976.

Supreme Court of North Dakota.

Aug. 7, 1926.

Syllabus by the Court.

When the holder of a negotiable instrument has shown that the instrument was purchased before maturity, and for a valuable consideration, it is presumed that he is a holder in due course.

When the president and active manager of a brokerage corporation, acting for said corporation, sells a negotiable note to a bank, of which he is also president, the cashier of said bank acting for the bank in the purchase of the note, knowledge of the president of any defect in the title of the corporation to said note can not be imputed to the bank.

Appeal from District Court, Burleigh County; Fred Jansonius, Judge.

Action by the First National Bank of Le Sueur against E. E. Bailey and another. After a verdict for defendants, plaintiff appeals from an order denying a motion for a new trial or judgment non obstante. Reversed.

Zuger & Tillotson, of Bismarck (Thomas Hessian, of Le Sueur, Minn., of counsel), for appellant.

W. H. Stutsman, of Mandan, for respondents.

BURKE, J.

The plaintiff, a national bank at Le Sueur, Minn., claims to have purchased the negotiable note in suit, “in due course.” The defendants were operating an elevator at Mooreton, N. D., at the time the note was executed, and they alleged in their answer that the payee E. L. Welch & Co. was a corporation of large financial standing engaged in handling grain on commission in Minneapolis and Duluth; that it was a custom of commission merchants to keep an open account with country shippers, and credit thereon the proceeds of such shipments, and to charge to such account all drafts drawn by said shippers on E. L. Welch & Co.; that at the time of the execution of said note there was an oral agreement that E. L. Welch & Co. would not negotiate said note, but would keep it in the files in the office in Minneapolis, to show to the banks with which it transacted its business; that said note was given as collateral to said open account, but was not to be negotiated; that said note was negotiated in breach of faith and under circumstances amounting to fraud; that at the time of the execution of the note defendants were not indebted to E. L. Welch & Co., and there was no consideration for the note; that E. L. Welch & Co. failed in March, 1922, and was indebted to defendants at the time of such failure. There is evidence of an agreement in 1920, but no affirmative evidence of such an agreement in 1921.

At the close of defendant's testimony, plaintiff moved the court for a directed verdict, claiming that there was no evidence to support defendant's defense, and that the evidence showed plaintiff to be a holder in due course. Motion denied, and at the close of all the testimony the motion was renewed, again denied, the jury returning a verdict for the defendants. Plaintiff moves for judgment notwithstanding the verdict or for a new trial. The trial court denied the motion, and plaintiff appeals from the judgment and from the order denying plaintiff's motion.

We will assume for the purpose of this opinion only that the note in suit was delivered to E. L. Welch & Co. to be shown to the banks with which E. L. Welch & Co. was doing business and not to be negotiated, and that E. L. Welch, president of E. L. Welch & Co., and president of the plaintiff bank, in breach of the agreement, sold the note to the plaintiff bank. The plaintiff bank claims to be a holder in due course and, if there was a defect in the title of the payee, such defect was unknown to the managers and active officers of the bank. It is conceded that the plaintiff bank purchased the note for full value and within a reasonable time after its execution. If there was a defect in the payee's title, notice of such defect must exist at the time the holder purchased the instrument. Knowledge of a defect acquired after the purchase for valuable consideration is not notice.

Under section 56 of the Negotiable Instruments Act (section 6941, C. L. 1913):

“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.” Gibson v. Richmond First Nat. Bank, 196 Ky. 119, 244 S. W. 290;Madison Trust Co. v. Stahlman, 134 Tenn. 402, 183 S. W. 1012;Payne v. Zell, 98 Va. 294, 36 S. E. 379.

Under section 59 of the Uniform Negotiable Instruments Act (section 6944, C. L. 1913):

“Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some other person under whom he claims acquired the title as a holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.”

[1] It is the settled law in this state that, when a holder has shown that he purchased the note before maturity and for a valuable consideration, it is then presumed that he is a holder in due course. First National Bank of St. Thomas v. Flath, 10 N. D. 281, 86 N. W. 867;American National Bank v. Lundy, 21 N. D. 167, 129 N. W. 99;Walters v. Rock, 18 N. D. 45, 115 N. W. 511.

“Where a purchaser of a negotiable note which was obtained by fraud paid value for it, he will be entitled to recover in an action upon it against the maker, unless it is proved that he purchased with actual notice of defect in the title, or in bad faith, implying guilty knowledge or willful ignorance.” King v. Doane, 139 U. S. 166, 11 S. Ct. 465, 35 L. Ed. 84.

[2] In the case at bar, the cashier, Mr. Weiss, had sole charge of and acted for the bank in the purchase of the note in suit. Mr. Weiss testifies on cross-examination under the statute that he purchased the note in suit in good faith for full value and the draft for full amount is in evidence as an exhibit; that the plaintiff bank was organized in 1894 with E. L. Welch as president, and out of 250 shares of stock, Welch owned 70 shares. He was president of two other banks. During the grain season, E. L. Welch & Co. borrowed all that it could at the plaintiff bank, and then sold notes outright to the bank, and, on account of having borrowed to the limit the notes were sold to the bank without recourse. During all the years from the organization of the plaintiff bank in 1894 there never was any trouble or loss on any of the notes purchased by the...