Hess v. Iowa Bankers' Mortgage Co.

• Decision Date: 11 December 1924
• Docket Number: 36054
• Citation: Hess v. Iowa Bankers' Mortgage Co., 198 Iowa 1365, 201 N.W. 91 (Iowa 1924)
• Parties: LOUIE R. HESS et al., Appellants, v. IOWA BANKERS MORTGAGE COMPANY et al., Appellees
• Court: Iowa Supreme Court

201 N.W. 91

198 Iowa 1365

LOUIE R. HESS et al., Appellants, v. IOWA BANKERS MORTGAGE COMPANY et al., Appellees

No. 36054

Supreme Court of Iowa, Des Moines

December 11, 1924

Appeal from Linn District Court.--ATHERTON B. CLARK, Judge.

PLAINTIFFS appeal from separate judgments against them on a counterclaim in favor of the Ulch Brothers State Bank upon certain promissory notes. The issues were tried in equity, and the case is triable de novo on this appeal. The nature of the proceedings and the material facts will be fully stated in the opinion.

Affirmed.

North & Pollock and Hugh J. Wade, for appellants.

Frank C. Byers and Johnson, Donnelly & Lynch, for Ulch Brothers State Bank, appellees.

STEVENS J. ARTHUR, C. J., and EVANS and VERMILION, JJ., concur.

OPINION

STEVENS, J.

The Iowa Bankers Mortgage Company, a corporation having its principal place of business at Cedar Rapids, Linn County, was organized sometime prior to November, 1919. During that month, appellants separately subscribed for stock in the above corporation, in the aggregate amount of $ 63,000. $ 4,125 was paid in cash, and Louie R. Hess gave his notes to the corporation for $ 56,150, and Vernon, his son, for $ 2,625. In March, 1920, appellants commenced an action in equity in the district court of Linn County, to rescind and cancel the subscription contracts and the notes executed to the corporation, upon the ground that their execution was induced by fraud. Later, an amendment to the petition, asking the appointment of a receiver for the corporation, was filed and on April 10, 1920, a receiver was appointed by the court. A few days later, the corporation appeared and filed answer to appellants' petition. A further hearing was had upon the issues joined; and, on April 15, 1920, the appointment of a receiver was confirmed. and E. M. Scott qualified as such receiver. The Ulch Brothers State Bank of Solon, Iowa, was joined as defendant in the original petition.

Hearings previous to the one in question were had before different judges upon various issues joined between other parties than Ulch Brothers State Bank; and on February 16, 1923, the issues from which this appeal was taken, were tried in equity before Judge Clark, one of the district judges of Linn County. On or about December 10, 1919, Ulch Brothers State Bank, hereinafter referred to as the appellee, acquired from the Iowa Bankers Mortgage Company one of the notes executed to it by the appellant Louie R. Hess for $ 6,738.16, and on November 14th, acquired all of the notes executed by the appellant Vernon L. Hess thereto, for stock aggregating $ 2,691.74. On June 7, 1920, appellee filed answer to appellants' petition, setting up, by way of counterclaim, its causes of action upon the notes referred to, and demanded judgment thereon. Appellants, for answer to the counterclaims, alleged fraud in the inception of the notes, and that appellee, at the time they were acquired knew thereof, and had knowledge of such facts and circumstances concerning the organization and methods of business of the payee as made the purchase of the notes an act of bad faith.

The inclusion in the record by appellants of much testimony introduced upon the previous hearings which was not offered upon the trial of the issues involved upon this appeal, has added materially to the difficulties of the court in ascertaining the facts proper to be reviewed upon this appeal. Transcripts of the evidence in the previous hearing before different judges of the district court were filed in this court; but, of course, these transcripts cannot be considered. Numerous exhibits which appear to have been identified and offered in evidence are not incorporated in the abstract. The certification of exhibits by the clerk of the district court does not make them a part of the record; and unless they are set out in the abstract, they cannot be considered by this court.

The allegations of the original petition and of the answers to the counterclaims of appellee that the agent of the bonding company who obtained the subscriptions of appellants for stock falsely represented to them that the par value thereof was $ 150 per share; that the corporation was in partnership with the United States government; that it was a Federal land stock bank; that it was making profits at the rate of 30 per cent per annum, for which dividends had been paid; and that the corporation had a large surplus in its treasury, are fairly sustained by the evidence. Appellant Louie R. Hess further testified that the agent represented and stated to him that the corporation desired to place a farmer upon its board of directors, and that, if he would subscribe for stock, he would later be elected to that position, and that the corporation would loan him large sums of money at low rates of interest. Appellant was not elected a director, and it is not disclosed by the record that any money was loaned him.

Under the Negotiable Instruments Law:

"A holder in due course is a holder who has taken the instrument under the following conditions:

"1. That the instrument is complete and regular upon its face.

"2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact.

"3. That he took it in good faith and for value.

"4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." Section 9512, Code of 1924.

"The title of a person who negotiates an instrument is defective within the meaning of this chapter when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud." Section 9515, Code of 1924.

"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." Section 9516, Code of 1924.

Fraud in the inception of the notes sued upon having been established, the title of the original holder was defective, and the burden was, therefore, upon appellee, to prove that the notes were acquired in due course. Section 9519, Code of 1924; Arnd v. Aylesworth, 145 Iowa 185, 123 N.W. 1000; Connelly v. Greenfield Sav. Bank, 192 Iowa 876, 185 N.W. 887; German American Nat. Bank v. Kelley, 183 Iowa 269, 166 N.W. 1053; Central St. Bank v. Peoples Sav. Bank, 196 Iowa 43, 194 N.W. 233.

The record discloses no facts or circumstances from which actual knowledge on the part of the officers of appellee bank of the fraud charged may be inferred. This being true, the issues reduce themselves to one proposition: that is, does the record show knowledge on the part of the officers of appellee of such facts or circumstances as made the purchase of the notes an act of bad faith? Actual knowledge of just what facts and circumstances will render the purchase of a negotiable instrument an act of bad faith, is not susceptible of precise designation. The term "bad faith," as used in the statute, is the direct opposite of good faith, and means actual knowledge of such facts and circumstances as would charge a reasonably prudent business man with bad faith and dishonest motives in purchasing the paper. Vaughn v. Johnson, 20 Idaho 669 (119 P. 879); Shultz v. Crewdson, 95 Wash. 266 (163 P. 734); Marion Nat. Bank v. Harden, 83 W.Va. 119 (97 S.E. 600); Everding & Farrell v. Toft, 82 Ore. 1 (160 P. 1160); Burnham Loan & Inv. Co. v. Sethman, 64 Colo. 189 (171 P. 884); Gigoux v. Moore, 105 Kan. 361 (184 P. 637); Link v. Jackson, 158 Mo.App. 63 (139 S.W. 588); Morris v. Muir, 111 Misc. 739 (181 N.Y.S. 913).

The cases are uniform in their holding that mere negligence knowledge of suspicious facts and circumstances, or failure to inquire into the consideration, is insufficient to charge a holder of negotiable paper with bad faith in its procurement. Arnd v. Aylesworth, supra; McNight v. Parsons, 136 Iowa 390, 113 N.W....