J.L. Smathers & Co. v. Toxaway Hotel Co.

• Decision Date: 13 January 1915
• Docket Number: 567.
• Citation: 84 S.E. 47,168 N.C. 69
• Parties: J. L. SMATHERS & CO. ET AL. v. TOXAWAY HOTEL CO.
• Court: North Carolina Supreme Court

84 S.E. 47

168 N.C. 69

J. L. SMATHERS & CO. ET AL. v. TOXAWAY HOTEL CO.

No. 567.

Supreme Court of North Carolina

January 13, 1915

Appeal from Superior Court, Buncombe County; Harding, Judge.

Action by J. L. Smathers & Co., against the Toxaway Hotel Company and others, in which one McMichael and Frank & Co. intervened. Decree for intervener McMichael and against intervener Frank & Co., and Frank & Co. appeal. Reversed with directions to call another jury for the trial of an issue.

See also, 83 S.E. 844.

Whether holder of a note, negotiated by one who participated in its execution in fraud of creditors, took it without notice of such fraud, held for the jury.

Bourne Parker & Morrison and T. F. Davidson, all of Asheville, for appellants.

W. R. Whitson and J. C. Martin, both of Asheville, for appellees.

WALKER J.

There are several of the exceptions in this record which are common to both this appeal and that of McMichael, which makes it necessary to discuss only the assignment of error relating to the question whether the court should have given the instruction requested by the interveners Frank & Co. that, if the jury believe the evidence, they will find that they are innocent purchasers for value and without notice of any fraud in the transaction connected therewith, or, in other words, that they are holders in due course, notwithstanding any infirmity in the instruments or any defect in the title of the person who negotiated them. There can be no doubt that Frank & Co. acquired their title to the instruments by indorsement before they were due, and that each of them was, all that time, complete and regular on its face and had not been previously dishonored, so that the only requisite to an unimpeachable title to the notes, under Revisal, c. 54, § 2201, is that, at the time they were negotiated, Frank & Co. had no notice of "any infirmity in the instruments or any defect in the title of the person who negotiated them." Revisal, § 2208, provides, in part, that 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 person, under whom he claims, acquired the title in due course. The interveners started out with prima facie evidence that they were a holder in due course; but, when it was found that the notes had been executed in fraud of creditors, the burden shifted to them, and they were bound to prove that they acquired the title as holders in due course, or from some person who held the notes as such. It has been held to be insufficient to show merely that the holder purchased the note before its maturity and paid value for it, but to entitle him to recover upon it, under Revisal, § 2206, as a holder in due course, he must go further and show that he acquired it bona fide, and without notice of any infirmity in the instrument or defect in the title of the person who negotiated it to him. In order to constitute such notice, it is further provided by Revisal, § 2205, that the holder, claiming the right of recovery upon it, "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." Norton on Bills and Notes, 334, speaking of the burden of proof when there is an infirmity in the note or a defect in the title, says:

"The burden is cast upon the plaintiff to show that he took the paper for value and in good faith. Some of the cases declare that the holder need not show that he had lack of notice, but need only show value, because the burden of showing notice is upon the party who seeks to impeach the title. But the other courts maintain, and properly, that in addition to proving value the holder should prove that he bought the note in good faith, and should show that he had no knowledge of or notice of the fraud. If value and notice are disputed as facts, they must be passed upon by the jury."

So in Tatam v. Haslar, 23 Q. B. Div. (1889) p. 345, the court says:

"When fraud is shown, the burden of proof is on the holder to prove both that value has been given and that it has been given in good faith, without notice of the fraud."

And in Vosburgh v. Diefendorf, 119 N.Y. 357, 23 N.E. 801, 16 Am. St. Rep. 836:

"Where the maker of negotiable paper shows that it has been obtained from him by fraud, a subsequent transferee must, before he is entitled to recover thereon, show that he is a bona fide purchaser, or that he derived his title from such a purchaser. It is not sufficient to show simply that he purchased before maturity and paid value; he must show that he had no knowledge or notice of the fraud."

See, also, Giberson v. Jolley, 120 Ind. 301, 22 N.E. 306; National Bank v. Diefendorf, 123 N.Y. 191, 25 N.E. 402, 10 L. R. A. 676.

The above cases are cited with approval in Bank v. Fountain, 148 N.C. 590, 62 S.E. 738, and are fairly illustrative of the prevailing doctrine. See, also, Cox v. Wall, 132 N.C. 730, 44 S.E. 635; Morgan v. Bostic, 132 N.C. 743, 44 S.E. 639; Bank v. Hollingsworth, 135 N.C. 556, 582, 47 S.E. 618; Crockett v. Bray, 151 N.C. 615, 619, 66 S.E. 666.

The question now arises whether Frank & Co. had actual knowledge of the fraud, or of any such facts as constituted bad faith in taking the notes. With respect to this feature of the case, they asked the court to instruct the jury that there was no evidence of any such knowledge or implicative facts. But it would have been error, upon the evidence as it now appears, for the judge to have so charged. There being an infirmity in the notes, and the hotel company not having a good title to them, as it participated in the fraud and was the principal offender, the burden was cast upon Frank & Co. to prove that they had acquired them without the guilty knowledge, and they were not entitled to such a peremptory instruction. It must be a very plain and conclusive case to justify such an instruction in favor of the party having the burden of proof, as the credibility of the evidence adduced in support of his claim that he is a holder in due course is for the jury to decide. If they do not believe the evidence, he has failed to discharge the burden resting upon him by the terms of the statute, and the verdict should therefore be against him, unless there is other evidence or circumstances sufficient for that purpose, and whether there is the jury at last must also decide. But the interveners Frank & Co. were entitled to the other instruction, which was based upon the credibility of the evidence, and permitted the jury to pass upon it. Even when there is an infirmity in the instrument or defect in the title thereto, if the holder makes a full and fair disclosure of the facts and in no reasonable view of the evidence does it appear that he had the guilty knowledge described in the statute, and there is no circumstance or other evidence in the case contradicting it, or from which an adverse inference might be drawn, such an instruction as that requested should be given. We so held in Bank v. Fountain, 148 N.C. 590, 62 S.E. 738, where it was said by Justice Hoke, when dealing with a like question:

"The fraud having been established or having been alleged, and evidence offered to sustain it, the circumstances and bona fides of plaintiff's purchase were the material questions in the controversy; and both the issue and the credibility of the evidence offered tending to establish the position of either party in reference to it was for the jury and not for the court"--citing State v. Hill, 141 N.C. 771, 53 S.E. 311; State v. Riley, 113 N.C. 651, 18 S.E. 168.

Again it is said:

"As heretofore stated, when fraud is proved or there is evidence tending to establish it, the burden is on the plaintiff to show he is a bona fide purchaser for value, before maturity and without notice, and the evidence must be considered as affected by that burden. If, when...