German-Am. Nat. Bank v. Kelley

• Decision Date: 02 April 1918
• Docket Number: No. 30660.,30660.
• Citation: 166 N.W. 1053,183 Iowa 269
• Parties: GERMAN-AMERICAN NAT. BANK v. KELLEY ET AL.
• Court: Iowa Supreme Court

183 Iowa 269

166 N.W. 1053

GERMAN-AMERICAN NAT. BANK

v.KELLEY ET AL.

No. 30660.

Supreme Court of Iowa.

April 2, 1918.

Appeal from Superior Court of Cedar Rapids; C. B. Robbins, Judge.

Action to recover judgment on a promissory note. The defense was that there was fraud in its inception, and that plaintiff acquired it subject to such infirmity. The issues were submitted to the jury, and verdict returned for defendants on which judgment was entered. The plaintiff appeals. Affirmed.

Salinger, J., dissenting.

Blake & Porter, of Cedar Rapids, for appellant.

Barnes, Chamberlain & Randall, of Cedar Rapids, for appellees.

LADD, J.

On August 4, 1913, the defendants, O. L. Kelley and C. O. Sprague, executed their promissory note for $2,000 to the Western Implement & Motor Company. Thereafter the payee therein transferred said note to the Diamond Ironworks and the latter to the German-American Bank, plaintiff herein, all prior to the maturity of said note. The consideration for the execution of the note was $2,000 par value in preferred stock and $1,000 par value in common stock of the Western Implement & Motor Company. The record leaves little or no doubt but that the sale and the execution of the note was induced by fraud. At any rate, that issue was for the jury.

[1][2] Assuming then that the promissory note sued on was procured by fraud, title thereto was defective within the meaning of section 3060a56, Code Supp. 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.”

A holder in due course would hold the instrument free from such defect, and in the hands of any other it would be subject to the same defenses as though nonnegotiable. A holder, deriving his title through a holder in due course, not tainted with the fraud or illegality alleged, also is a holder in due course. Section 3060a58, Code Supp. 1913. “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 person under whom he claims acquired the title as a holder in due course.” Section 3060a59.

No evidence bearing on the issue as to whether the Diamond Ironworks acquired notice of the defect in the payee's title when or prior to obtaining the note was adduced, and the sole question here presented is whether the evidence showed conclusively that the plaintiff bank was without actual knowledge of the infirmity or defect or of such facts that its action in taking over the note might not have amounted to bad faith. To ascertain this the evidence must be resorted to. One Stegner testified that he, as cashier of the bank, purchased the note October 13, 1913, in the usual course of business, and caused to be entered to the credit of the Diamond Ironworks the face value of the note, together with accrued interest; that the same was subsequently checked out; that the note was thereupon entered in the bank's register of discounts and notes; that the bank had a president, two vice presidents, and an assistant cashier, besides himself as cashier, that there were 14 directors, and the entire number composed the discount committee; that the bank had no “subcommittee to take care of discounts, no creditman other than the officers”; that “he had no conversation with any of the officers of the bank with reference to this note before it was discounted; that he knew nothing of it until presented by the Diamond Ironworks; and that what he had stated was all that occurred that day; that the Diamond Ironworks had been a customer of the bank for eight or ten years and permitted to overdraw their accounts, “from time to time without interest”; that the makers of the note were not customers of the bank; that he had not met either of them; “did not know where they lived, but felt they lived at Cedar Rapids, Iowa”; that he made no inquiry with reference to them further than this:

“In taking a note for discount we always made inquiry regarding the responsibility of the makers, and while I have no recollection of any figure being given me as to their responsibility, nevertheless the Diamond Ironworks gave me to understand that both Kelley and Sprague were very responsible.”

He testified further that he had some conversation with an officer of the Diamond Ironworks when the note was presented, and could not say who presented the note, and made no further inquiry with reference thereto; that the bank did “not make a practice of buying the paper of a man living several hundred miles away without inquiry”; that he made no inquiry about the Western Implement & Motor Company; and that the Diamond Ironworks had a specific line of credit at the bank, and “I relied on their indorsement.”

One Bleecker testified to having been a director and attorney of the bank for many years; that he was familiar with the duties of the several officers; that the cashier had charge--

“of all discounts coming from customers, and the president devoted time more particularly to the purchase of commercial paper outside of the bank's customers, as the bank always had more funds on hand than its customers required, and over a million dollars are kept invested in outside paper which is bought of brokers and others, and the president gives his attention to real estate mortgage loans largely. Q. Then Mr. Gross, as president, is not superintendent of the discounting of the notes such as this Kelley and Sprague note? A. No; such customer as the Diamond Ironworks and their trade paper that comes in the customers' trade goes to Mr. Stegner, who makes those loans and accepts those discounts.”

He testified further:

That the discount committee goes over the notes once a month at the directors' monthly meeting. “Q. Then the custom of the bank was that these matters should be left wholly to the cashier of the bank, Mr. Stegner? A. Yes, sir.”

On cross-examination the witness testified that the president was in daily attendance at the bank, that both he and the cashier were accessible to customers, and that the Diamond Ironworks “could have had access to him,” and that the president performed duties stated and was the superior officer to the cashier and assistant cashier. In the absence of the president and cashier, especially during the noon hour, the assistant cashier was in charge of the bank, though not authorized to pass on discounts or purchase papers.

Such was the evidence, and it is first to be observed that the cashier was in no manner corroborated in what he testified in relation to want of knowledge concerning the infirmity inhering in the note.

[3] It is equally clear that such knowledge might have reached the bank through the president or the assistant cashier, both of whom were dealing actively with the public in behalf of the bank, and no evidence negativing the possession of such knowledge by these officers was adduced. No consideration is to be accorded Stegner's assertion that the bank was without notice, for in the nature of things that was a mere opinion. Bennett v. Schloesser, 101 Iowa, 571, 70 N. W. 705.

[4] The cashier was unable to state from whom he obtained the note, otherwise than that he was a representative of the Diamond Ironworks and was without acquaintance with defendants, who resided in a city in another state, as did the payee and indorser.Moreover, the bank did not follow its practice of not dealing in paper, the makers of which lived a long ways off, save upon making inquiries. Is such a showing so conclusive that fair-minded men could have drawn no other inference than that the plaintiff bank acquired the promissory note without knowledge of the fraud practiced on defendants and also without knowledge of such facts as that if taken as true it must have acted in bad faith? It must have been so in order to have warranted the court in directing a verdict for plaintiff.

The rule which obtains in such a case is well stated in Arnd v. Aylesworth, 145 Iowa, 185, 123 N. W. 1000, 29 L. R. A. (N. S.) 638:

“Whether plaintiff has sufficiently satisfied the burden resting upon him and made good his claim to be an innocent purchaser is therefore a question for the jury, save in those instances where the testimony is not only consistent with the good faith of such purchase, but is such that no fair-minded person can draw any other inference therefrom. A categorical denial of notice or of knowledge is something which in many, if not in most, instances cannot be opposed by direct proof; and the credibility of the witnesses, their interest in the case, the reasonableness or unreasonableness of their statements, the time, place, and manner of the transaction, its conformity to or its departure from the ordinary methods of business, and all other facts and circumstances which, though of slight moment in themselves, yet, when taken together, give character and color to the purchase, * * *...