Lawton v. Walker, 822146

• Decision Date: 25 April 1986
• Docket Number: No. 822146,822146
• Citation: 343 S.E.2d 335,231 Va. 247
• Parties: , 1 UCC Rep.Serv.2d 474 Charles LAWTON v. Emily WALKER. Record
• Court: Virginia Supreme Court

Page 335

343 S.E.2d 335

231 Va. 247, 1 UCC Rep.Serv.2d 474

Charles LAWTON v. Emily WALKER.

Record No. 822146.

Supreme Court of Virginia.

April 25, 1986.

Joseph A. Pennington (Connor & Pennington, Norfolk, on brief), for appellant.

T. Jeffrey Salb (Breeden, MacMillan & Green, Norfolk, on brief), for appellee.

Present: All the Justices.

COMPTON, Justice.

In this appeal of a commercial law case, the main issue is whether the purchaser of a promissory note was a holder in due course.

In December 1981, appellant Charles Lawton sued appellee Emily Walker for $4,950 on a bearer note made by Walker in 1976 and held by Lawton, who claimed to be a holder in due course. Following a bench trial, the court below entered judgment for the defendant. We awarded the plaintiff this appeal.

Lawton, a retired welder, purchased the note in question on April 15, 1980 from Martin Swersky, an acquaintance who had been in the aluminum siding business. The note consisted of blank spaces on a printed form completed with pen and ink as follows:

                "$ 12,000.00/xx               Jan 1 19 76
                   -------------              -----------
                   120 payment of $100.00/xx  after date I
                ----------------------------            ---
                promise to pay to the order of Bearer
                                               -------
                  Twelve Thousand and ------------00/xx Dollars
                ---------------------------------------
                at _______________________________________________
                Value received
                 No. ___ Due 10th of Month /s/ Emily V. Walker
                              ------------- -------------------
                

Witness: /s/ Stephen Allen Miller"

Lawton paid Swersky approximately $5,000 for the note which, at the time of Lawton's purchase, had a balance due of $7,050. As part of the transaction, Lawton received from Swersky a title certificate issued to "Emily V. Walker" for a 1976 Ford automobile and a payment book in Walker's name with the notation, "Terms: $100 for 120 months. Amount of Note $12,000.00 (car)." Lawton testified he "bought other things" from Swersky at the time as a "package deal." The "other things" were "mortgages" on two houses owned by Walker. Responding on cross-examination, Lawton answered affirmatively to the question, "You purchased it in bulk, you purchased everything at one time?"

Lawton further testified he was unaware of any "problems" with the note when he acquired it. He said he knew that the note was for purchase of an automobile from Swersky by Walker. He stated that the transaction between Swersky and Walker was "a straight cash sale" without interest in which Swersky "allowed her to pay over the period of ten years." Lawton did not know the actual cost of the vehicle when Swersky sold it to Walker.

According to the evidence, Walker made regular monthly payments to Swersky from February 1, 1976 to the date of the Swersky-Lawton deal and thereafter to Lawton. Walker ceased paying in October 1981, leaving a balance due of $4,950.

Over plaintiff's objection, Walker was permitted to testify concerning many details of the underlying transaction with Swersky. According to defendant, in 1976 she bought a used 1976 Ford automobile from Swersky, agreeing to pay him $7,200 for the vehicle over a period of five years. She produced at trial the original new-car invoice for the vehicle which showed the price to be $5,671. She denied agreeing at any time to pay Swersky the sum of $12,000.

Walker admitted that her signature appeared on the note in question but denied signing the document. She testified, "I haven't signed anything." Walker claimed that she had paid a total of $7,250 through October 1981, thus fulfilling her original bargain with Swersky. Neither Swersky nor Miller, the purported witness to Walker's signature on the note, testified.

In remarks from the bench following the trial, the court below ruled that Lawton was not a holder in due course. The basis for the ruling is not clear. At several points during his comments, the judge seemed to decide that Lawton was not a holder in due course because a bulk transaction was involved. The court concluded that because Lawton was not a holder in due course, he was "subject to the defenses." Accordingly, the court determined that Walker had "satisfied" her contract with Swersky. The judgment order subsequently entered in favor of the defendant does not assign a reason for the decision.

Pertinent to our decision are the following italicized portions of Code § 8.3-302, a part of the Uniform Commercial Code (UCC):

" § 8.3-302. Holder in due course.--(1) A holder in due course is a holder who takes 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.

(2) A payee may be a holder in due course.

(3) A holder does not become a holder in due course of an instrument:

(a) by purchase of it at judicial sale or by taking it under legal process; or

(b) by acquiring it in taking over an estate; or

(c) by purchasing it as part of a bulk transaction not in regular course of business of the transferor.

(4) A purchaser of a limited interest can be a holder in due course only to the extent of the interest purchased."

On appeal, the parties do not dispute that the document in question is an "instrument," meaning a "negotiable instrument," § 8.3-102(e), nor do they dispute that Lawton took the instrument for "value." However, the plaintiff insists he also took the note "in good faith" and "without notice."

The defendant asserts the plaintiff did not act in good faith and had notice of certain defenses to the payment of the note. The defendant also argues that the trial court "did not err in finding that the plaintiff purchased the note in question as part of a bulk transaction not in the regular course of business of the transferor."

Additionally, defendant contends that even if the plaintiff was a holder in due course, he took the note subject to the "real" defense of fraud in the factum outlined in § 8.3-305(2)(c). That section provides, in part:

"To the extent that a holder is a holder in due course he takes the instrument free from

....

(2) all defenses of any party to the instrument with whom the holder has not dealt except

....

(c) such misrepresentation as has induced the party to sign the instrument with neither knowledge nor reasonable opportunity to obtain knowledge of its character or its essential terms...."

The difficulty with this contention is that the trial court did not find fraud in the factum. Indeed, the court would have erred in so finding because there was insufficient evidence to sustain that defense. Thus, we reject this contention and, for the reasons that follow, reject defendant's arguments with respect to good faith, notice of defenses, and bulk transaction.

On the subject of good faith, the UCC provides that the term "means honesty in fact in the conduct or transaction concerned." § 8.1-201(19). Good faith does not encompass a concept of negligence; the test is a subjective one. An act is deemed to be done in good faith, within the meaning of the UCC, if it is done honestly, whether or not it is performed negligently. Moore v. Potomac Savings Bank, 160 Va. 597, 606-07, 169 S.E. 922, 925 (1933) (pre-UCC case in accord with UCC definition, Virginia Comment, Code § 8.3-3-304). Under this test, good faith is determined by looking to the mind of the particular holder who asserts that he is a holder in due course, and not by focusing on what the state of mind of a reasonably prudent person should have been. Breslin v. New Jersey Investors, Inc., 70 N.J. 466, 471, 361 A.2d 1, 3-4 (1976).

In the present case, the evidence dealing with the circumstances of the Lawton-Walker transaction is insufficient to raise an inference of lack of good faith on Lawton's part. He testified that the instant transaction was his "first try" at the business of purchasing commercial paper. He stated he was unaware of any "problems" with the note. Lawton thought the Swersky-Walker transaction was "a straight cash sale," without interest, in which Swersky allowed Walker to pay for the automobile over a period of ten...