Funding Consultants, Inc. v. Aetna Cas. and Sur. Co.

• Decision Date: 27 July 1982
• Citation: 187 Conn. 637,447 A.2d 1163
• Court: Connecticut Supreme Court
• Parties: , 34 UCC Rep.Serv. 591 FUNDING CONSULTANTS, INC. v. AETNA CASUALTY AND SURETY COMPANY et al.

Page 1163

447 A.2d 1163

187 Conn. 637, 34 UCC Rep.Serv. 591

FUNDING CONSULTANTS, INC. v. AETNA CASUALTY AND SURETY COMPANY et al.

Supreme Court of Connecticut.

Argued May 11, 1982.

Decided July 27, 1982.

David J. Heinlein, Hartford, with whom, on brief, was Robert L. Hirtle, Jr., Hartford, for appellant (defendant Benjamin C. Preisner).

Paul M. Sabetta, New Haven, for appellee (plaintiff).

Before SPEZIALE, C. J., and PETERS, HEALEY, GRILLO and COVELLO, JJ.

PETERS, Associate Justice.

In this suit on a promissory note, the dispositive issue is whether a maker of a note may introduce expert testimony to challenge the good faith of a person seeking to enforce the note as a holder in due course. The plaintiff, Funding Consultants, Inc., brought an action, initially only against the defendant Aetna Casualty and Surety Co., Inc., but ultimately also against the defendant Benjamin C. Preisner, ¹ as co-makers of a promissory note in the amount of $68,000. Aetna Casualty, in the interim, had impleaded Preisner by a third party complaint alleging that Aetna Casualty as surety was entitled to indemnification from Preisner if Aetna Casualty were held liable to Funding Consultants. See General Statutes § 52-102a; Practice Book § 117. After a trial to a jury, judgments were rendered in favor of the plaintiff against both defendants, and in favor of the third party plaintiff against the third party defendant. Only the appeal of Preisner as defendant and third party defendant is being pursued in this court. ²

The present action is a suit on a promissory note which was given to Paul King, Jr. in connection with the 1974 sale of the Paul King, Jr. Insurance Company to the defendant Preisner. On this note, hereinafter the Preisner note, Preisner and Aetna Casualty were co-makers, although Aetna Casualty's status was that of an accommodation party for Preisner. The Preisner note was a $68,000 noninterest bearing negotiable instrument calling for four equal instalments to be paid annually beginning on November 1, 1975, and ending on November 1, 1978.

King sold the Preisner note to the plaintiff Funding Consultants, Inc. on January 18, 1975, for $5000 cash and a promissory note. This note, hereinafter the Funding note, was a $35,000 noninterest bearing negotiable instrument calling for four equal instalments to be paid at bi-monthly intervals beginning on March 20, 1975, and ending on September 20, 1975.

The defendant Preisner, after formal demand, refused to make any payments on the Preisner note because, he alleged, the execution of the note had been induced by fraudulent misrepresentations about the financial condition of the Paul King, Jr. Insurance Company. The plaintiff Funding Consultants thereupon, on December 1, 1975, in reliance upon an acceleration clause contained in the Preisner note, declared the whole amount of that note to be then due and payable. This litigation ensued. ³

At the trial, the plaintiff sought to recover on the Preisner note as a holder in due course. Only a holder in due course may enforce a negotiable instrument without regard to the maker's assertion of a personal defense such as fraud in the inducement. General Statutes § 42a-3-305(2); cf. Land Finance Corporation v. Menzies, 114 Conn. 694, 699, 160 A. 168 (1932) (under pre-Uniform Commercial Code law); see E. Peters, A Negotiable Instruments Primer (2d Ed. 1974) § I, pp. 33-34; White & Summers, Uniform Commercial Code (2d Ed. 1980) § 14-9. Evidence of the existence of a personal defense does, however, shift to the holder of the instrument the burden of proving his due course status. General Statutes § 42a-3-307(3); cf. Hartford National Bank & Trust Co. v. Credenza, 119 Conn. 368, 370, 177 A. 132 (1935) (under pre-Uniform Commercial Code law); see Peters, op. cit., § J, p. 34. That burden requires the holder to prove his taking of the instrument "(a) for value; and (b) in good faith; and (c) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person." General Statutes § 42a-3-302; cf. Parsons v. Utica Cement Mfg. Co., 82 Conn. 333, 339, 73 A. 785 (1909) (under pre-Uniform Commercial Code law); see Peters, loc. cit.; White & Summers, op. cit., § 14-6.

In order to establish its due course status, the plaintiff relied on the testimony of its president, Richard R. Splain. When the good faith of the plaintiff's purchase was put into issue, Splain testified that he had little knowledge about or experience in the purchase of negotiable instruments. ⁴ The defendant sought to counter this testimony by offering, as an expert witness, Michael Schaeffer of the Connecticut Bank & Trust Company to testify that the plaintiff had given inadequate consideration for its purchase of the Preisner note. Such testimony would furnish some evidence, according to the defendant, that Splain had testified untruthfully about the good faith of the plaintiff's purchase. The plaintiff objected to admission of the testimony as irrelevant and prejudicial. After a hearing, the trial court sustained the plaintiff's objection on the ground of prejudice.

The case was submitted to the jury with one special interrogatory. In response to that interrogatory, the jury found the plaintiff to be a holder in due course with respect to the Preisner note. The defendant's appeal has assigned the exclusion of the expert testimony as error. ⁵

The disagreement of the parties on this appeal is a narrow one. On the one hand, the defendant concedes that the standard of good faith under the Uniform Commercial Code is, as it was under the prior Negotiable Instruments Law, a subjective standard. "Good faith," as used in General Statutes § 42a-3-302(1)(b), is defined in General Statutes § 42a-1-201(19) as "honesty in fact in the conduct or transaction concerned." Both the language of other sections of the Code ⁶ and the Code's drafting history ⁷ incontrovertibly demonstrate that this standard is one that imposes no duty of due care on the holder. The test is honesty in fact rather than negligence. See, e.g., Industrial National Bank of Rhode Island v. Leo's Used Car Exchange, Inc., 362 Mass. 797, 801, 291 N.E.2d 603 (1973); Breslin v. New Jersey Investors, Inc., 70 N.J. 466, 471, 361 A.2d 1 (1976); Chemical Bank of Rochester v. Haskell, 51 N.Y.2d 85, 91-92, 411 N.E.2d 1339, 432 N.Y.S.2d 478 (1980); Community Bank v. Ell, 278 Or. 417, 427-28, 564 P.2d 685 (1977). On the other hand, the plaintiff does not dispute that application of this test calls for the factfinder to determine the inferences appropriately to be drawn from all of the evidence, including testimony "regarding the relationship between the plaintiff and the [transferor of the negotiable instrument], and the circumstances surrounding the purchase of this paper ...." Williams & Co. v. Wiltz, 106 Conn. 147, 152, 137 A. 759 (1927). A defendant who wishes to overcome the plaintiff's own testimony in support of its good faith perforce must introduce evidence to contradict the plaintiff's assertions of honesty in fact. See Favors v. Yaffe, 605 S.W.2d 342, 345 (Tex.Civ.App.1980).

The issue that does divide the parties, here as in the trial court, is what evidence is admissible to test the holder's subjective good faith. In order to decide whether a holder of an instrument acted in good faith, the trier of fact must determine the intent or state of mind of the party concerned. Breslin v. New Jersey Investors, Inc., supra; Community Bank v. Ell, supra. As in other determinations concerning intent, the trier is entitled to consider not only the testimony of the interested party but also evidence of surrounding circumstances that inferentially illuminate his honesty in fact in view of his actual knowledge. "Although mere negligence or failure to make the inquiries which a reasonably prudent person would make does not of itself amount to bad faith, if a party fails to make an inquiry for the purpose of remaining ignorant of facts which he believes or fears would disclose a defect in the transaction, he may be found to have acted in bad faith." Community Bank v. Ell, supra, 278 Or. 428, 564 P.2d 685; Hollywood National Bank v. International Business Machines Corporation, 38 Cal.App.3d 607, 614-15, 113 Cal.Rptr. 494 (1974); Mid-Continent National Bank v. Bank of Independence, 523 S.W.2d 569, 574-75 (Mo.App.1975); General Investment Corporation v. Angelini, 58 N.J. 396, 403-404, 278 A.2d 193 (1971). Similarly, if a party pays for an instrument an amount far less than its face value, such evidence is a factor that a trier may reasonably consider in weighing whether a purchase was made in good faith. The sale of an instrument at a substantial discount may in fact have alerted a prospective purchaser to a possible defense to which he may not wilfully close his eyes. See United States Finance Co. v. Jones, 285 Ala. 185, 229 So.2d 495, 498 (1969); Stewart v. Thornton, 116 Ariz. 107, 109, 568 P.2d 414 (1977); Security Central National Bank v. Williams, 52 Ohio App.2d 175, 179, 368 N.E.2d 1264 (1976); Williams & Co. v. Wiltz, 106 Conn. 147, 150, 137 A. 759 (1927) (under pre-Uniform Commercial Code law); 2 F. Hart & W. Willier, Commercial Paper under the Uniform Commercial Code § 11.04, pp. 11-21 through 11-22 (1982). We therefore hold that the defendant was entitled to introduce evidence in this case to show that there was such inadequacy of consideration that this factor, among others, should have been weighed by the jury in its determination of the plaintiff's good faith. ⁸

Even if evidence of inadequacy of consideration is generally admissible, the question still remains whether the particular evidence offered by this defendant was sufficiently probative so that it should not have been excluded. The plaintiff had bought a $68,000 noninterest bearing note. The expert testimony was offered by the defendant to show what a commercial bank would have paid for the...