McKnight v. Parsons

• Citation: 113 N.W. 858,136 Iowa 390
• Parties: MCKNIGHT v. PARSONS.
• Decision Date: 19 November 1907
• Court: United States State Supreme Court of Iowa

136 Iowa 390

113 N.W. 858

MCKNIGHT

v.PARSONS.

Supreme Court of Iowa.

Nov. 19, 1907.

Appeal from District Court, Iowa County; O. A. Byington, Judge.

Action at law upon a promissory note. From a judgment for plaintiff on a directed verdict, the defendant appeals. Reversed.McElroy & Cox, E. J. Salmon, and J. B. Murphy, for appellant.

Popham & Havner, for appellee.

WEAVER, C. J.

The note in suit, which is negotiable in form, was made and delivered to C. C. Bigler & Sons, who transferred the same by indorsement to the Farmers' Bank of Victor, Iowa, which, in turn, indorsed and transferred it to the plaintiff. The answer of the defendant is, in substance, that the note was given by him to Bigler & Sons for the purchase price of a certain thoroughbred cow upon a warranty and representations that the animal was a breeder, and upon a further agreement of Bigler & Sons that they would retain possession of her for several months, breed her to a certain named bull, and deliver her when with calf to the defendant. He further alleges that said warranty and representations were untrue, that the cow when delivered to him was not with calf, and was not a breeder, and therefore comparatively worthless. He also pleads that he delivered the note to Bigler & Sons under an agreement that said instrument would not be negotiated by them, but retained in their possession until it was ascertained whether the cow was with calf, and, in case she failed so to be, the note was to be void and of no effect, and returned to the defendant. Defendant also denies that plaintiff is a holder of the note in good faith and without notice of his defense thereto. The fact that the note was given for a cow that was warranted to be a breeder, and that it was thereafter to be bred and delivered, in calf, to the defendant and that this warranty was broken and the agreement was not performed, is shown without substantial controversy. The one question presented by this record is whether the plaintiff is a good-faith holder of the paper against whom the defense is not available. As this question may involve both the first indorsement to the Farmers' Bank and the subsequent indorsement to the plaintiff, we will consider them in their order.

1. The evidence tends to show that the Farmers' Bank, which was the first indorsee, had notice of the consideration of the note and of the warranty or representation made by Bigler & Sons, breach of which is pleaded in the answer, and this knowledge the appellant insists was such notice as puts the indorsee upon inquiry, and deprives him of the character of a bona fide holder. The proposition here contended for is opposed to the decided current of authority. The courts quite universally hold that knowledge that a note was given in consideration of the executory agreement or contract of the payee which has not been performed will not deprive the indorsee of the character of a bona fide holder, unless he also has notice of the breach of that agreement or contract. See 1 Edwards, Bills & Notes, § 519; 1 Daniel, Neg. Inst. 740-748; Rublee v. Davis, 33 Neb. 783, 51 N. W. 135, 29 Am. St. Rep. 509;Miller v. Finley, 26 Mich. 249, 12 Am. Rep. 306;Porter v. Steel Co., 122 U. S. 267, 7 Sup. Ct. 1206, 30 L. Ed. 1210; 2 Randolph's Commercial Paper, §§ 1018-1019. The case made by the defendant lacks in this respect the element of notice to the indorsee of the breach of the warranty or failure of consideration, and the bank must be held to have received the note in good faith, unless its position be found vulnerable to some of the other objections made.

2. The good faith of the indorsement of the bank is also challenged, on the ground that it does not appear to have become an indorsee or purchaser in due course of business. This objection is grounded on the fact that the cashier, while testifying that the bank purchased and paid for the note, says that the so-called payment therefor was effected by giving Bigler & Sons credit on the books of the bank. He further says that, to the best of his recollection, the account of Bigler & Sons was not then or at any time thereafter overdrawn, and there is no showing or suggestion that such credit was ever canceled by withdrawals or applied by the bank to the payment of claims in its hands against Bigler & Sons. In this condition of the record, it is very clear that such transaction did not constitute the bank an innocent holder in due course of business, unless its claim is strengthened or improved by another fact about to be stated. Bank v. Green, 130 Iowa, 384, 106 N. W. 942;Bank v. Huver, 114 Pa. 216, 6 Atl. 141;Bank v. Newell, 71 Wis. 309, 37 N. W. 420;Mann v. Bank, 30 Kan. 412, 1 Pac. 579;Bank v. Blue, 110 Mich. 31, 67 N. W. 1105, 64 Am. St. Rep. 327; Bank v. Valentine, 18 Hun (N. Y.) 417; Thompson v. Bank, 150 U. S. 231, 14 Sup. Ct. 94, 37 L. Ed. 1063;Bank v. Nelson, 105 Ala. 180, 16 South. 707;Scott v. Bank, 23 N. Y. 289. The doctrine of these cases is that the transfer of negotiable paper to a bank in consideration of credit upon its books, which credit is not absorbed by an antecedent indebtedness or exhausted by subsequent withdrawals, is not a purchase in the ordinary sense of the term. To avoid the application of this rule in the case at bar, reliance is had on the conceded fact that after this transaction, and before the beginning of this suit, Bigler & Sons were adjudged bankrupts, and it is said we must therefore presume that the credit of said firm on the books of the bank was exhausted, and the bank's status as a purchaser in due course thus perfected. Whether this presumption obtains is a question upon which, if necessary to the disposition of the appeal, the members of this court might not be fully agreed, but, for reasons hereinafter shown, we need not now undertake to pass upon it.

3. Appellant argues that the note in suit having been delivered upon the condition that is was not to be negotiated, and to be of no effect if the payee failed to deliver the cow in calf as agreed, the act of the payee in negotiating and putting the note in circulation was such a fraud upon defendant as casts upon the plaintiff the burden of showing that he received the instrument in good faith and without notice. This point is met by the appellee with the contention that proof of the matter alleged by appellant must be excluded under the rule prohibiting the admission of parol evidence to vary the terms of a written contract. The soundness of the latter rule thus appealed to is elementary, but its application is not to be so extended as to exclude oral testimony to establish failure of consideration or a plea of fraud where the controversy is between the original parties to a note, or between the maker and one who is not a good-faith holder of the instrument. Marsh v. Chown, 104 Iowa, 556, 73 N. W. 1046;Bank v. Snyder, 79 Iowa, 191, 44 N. W. 356;Day v. Lown, 51 Iowa, 366, 1 N. W. 786;Church v. Sweny, 85 Iowa, 627, 52 N. W. 546;Mfg. Co. v. Gibson, 73 Iowa, 525, 35 N. W. 603, 5 Am. St. Rep. 697;Humbert v. Larson, 99 Iowa, 275, 68 N. W. 703. As between such parties, it is also a well-established general rule that the delivery of a written instrument which is in form a complete contract will not exclude parol evidence that such delivery was conditional, and was not to become a binding or enforceable obligation upon the maker until the performance or discharge of such condition precedent. See Cavanagh v. Beer Co., 113 N. W. 856, and Hinsdale v. McCune, 113 N. W. 478, both decided at the present term of this court; and see also Sutton v. Weber, 127 Iowa, 365, 101 N. W. 775;College v. Thomas, 40 Wis. 661;Juilliard v. Chaffee, 92 N. Y. 530; Seymour v. Cowing, *40 N. Y. 535; Burke v. Dulaney, 153 U. S. 228, 14 Sup. Ct. 816, 38 L. Ed. 698. It is also held that, if a party to whom the conditional delivery of a written obligation has been made puts it in circulation in violation of that agreement, such act is a fraud, tainting the inception of the instrument, and constitutes a good defense to an action thereon by one who is not a bona fide holder. Merchants' Bank v. Luckow, 37 Minn. 542, 35 N. W. 434. The general rule is ordinarily stated as follows: “Where negotiable paper has been lost, or stolen, or obtained by duress, or procured or put in circulation by fraud, proof of these circumstances may be given against the plaintiff, and, on such proof being given, it is incumbent on the plaintiff to show himself to be a holder bona fide and for a valuable consideration.” Cummings v. Thompson, 18 Minn. 246 (Gil. 228). The reasonof this rule is said by the English courts to be found in the presumption that the holder of paper affected in his hands by fraud or illegality would be likely to indorse it away without consideration to some confederate or agent, and it is therefore but just to require one who sues upon it to prove his bona fides. Fitch v. Jones, 5 El. & Bl. 238. This reasoning has also had the approval of the courts of this country. In Perrin v. Noyes, 39 Me. 384, 63 Am. Dec. 633, it is said that, if the note in suit has been fraudulently put in circulation, the burden is cast upon the plaintiff “to show that he came by the possession fairly in due course of business, and without any knowledge of the fraud and unattended with circumstances justly calculated to awaken suspicion.” Mr. Justice Cooley, of Michigan, applied this rule to the plaintiff in an action upon a promissory note put in circulation in violation of an agreement: That, if the representations upon which the sale was made proved to be false, the machine might be returned and the note surrendered. Conley v. Winsor, 41 Mich. 253, 2 N. W. 31. In Bank v. Morse, 163 Mass. 384, 40 N. E. 180, we have a case directly in point upon the proposition now being considered. It was there held that, where a note given under an agreement that it should not be negotiated until a certain contingency arose was negotiated in violation of...