State Bank of Morton v. Adams

• Decision Date: 21 February 1919
• Docket Number: No. 20904.,20904.
• Citation: 170 N.W. 925,142 Minn. 63
• Court: Minnesota Supreme Court
• Parties: STATE BANK OF MORTON v. ADAMS et al.

142 Minn. 63

170 N.W. 925

STATE BANK OF MORTON

v.ADAMS et al.

No. 20904.

Supreme Court of Minnesota.

Feb. 21, 1919.

Appeal from District Court, Kandiyohi County; G. E. Qvale, Judge.

Suit by State Bank of Morton against Frank E. Adams and others. Directed verdict for plaintiff, and defendants appeal. Order reversed.

Syllabus by the Court

A bank is chargeable with knowledge of facts known to an officer transacting its business, even though the officer is himself interested if he is the sole representative of the bank in the transaction.

Notice to an indorsee of the infirmity of a note must be actual and not constructive.

A bank is chargeable with knowledge acquired by its active officer, even though acquired in another transaction, if it appears that the knowledge is actually present in his mind while he is acting for the bank.

In this case the president of an indorsee bank had knowledge of such facts that a jury should be permitted to determine whether he was chargeable with notice of fraud in the inception of the note.

To constitute notice of an infirmity in the instrument, the indorsee must have had actual knowledge of the infirmity or knowledge of such facts that his action in taking the instrument amounted to bad faith. Willful ignorance or gross negligence are evidence of bad faith. The question of what is bad faith is usually a question for the jury. R. B. Brower, of St. Cloud, and R. W. Stanford, of Willmar, for appellants.

John A. Dalzell, of Morton, for respondent.

HALLAM, J.

November 20, 1913, defendants, farmers near New London, Minn, gave their note for $2,100 payable 90 days after date to the Sterling Securities Corporation. On December 18, 1913, the Securities Corporation indorsed and delivered the note to plaintiff. Plaintiff sued and defendants defendant on the ground that the note was fraudulent in its inception and that plaintiff was chargeable with notice of that fact. On the trial defendants offered to prove that the note was procured by D. R. Morrow an agent of the Securities Corporation, that Morrow represented that the Securities Corporation was organizing a bank at New London, that the transaction was a subscription by defendants for stock in the bank, and that defendants would receive bank stock to the amount of their note, that the organization of the bank was practically complete, that the Securities Corporation had previously organized fourteen banks in Minnesota and North Dakota and that they were going concerns, that defendants were induced by these representations to give this note, that the representations were altogether untrue, and that the Securities Corporation and by the same fraudulent representations obtained money or notes or property from persons residing in New London and vicinity amounting in all to more than $50,000.

The court rejected this proof on the ground that the evidence conclusively showed that plaintiff was a bona fide holder for value and without notice of the fraud and directed a verdict for plaintiff. The propriety of this ruling is the question presented on this appeal.

There is no claim that the bank or any of its officers had actual knowledge of the alleged fraud, but it is contended that plaintiff's president had knowledge of facts sufficient to put plaintiff on inquiry and that slight inquiry would have disclosed the fraud. We are of the opinion that the question whether plaintiff was chargeable with notice of the fraudulent character of the note should have been submitted to the jury.

The essential facts relied on to charge plaintiff with notice are as follows: The Sterling Securities Corporation was a holding corporation doing business at Minneapolis, Minn. It was a thoroughly corrupt and irresponsible ‘promoting concern’ and ‘stock selling concern.’ Its stock was sold largely by an agent who received a commission of 40 per cent. It promoted and fostered a chemical company, a furniture company, and a laundry. It proposed to found and operate a string of country banks, itself to own 51 per cent. of the stock, and its agents to sell the balance of the stock, but no bank was ever organized. Business was not done on business principles and the concern was soon hopelessly bankrupt.

F. W. Orth, president of plaintiff bank, became a stockholder in the Securities Corporation in 1911. At that time he bought $100 of stock. July 24, 1912, he bought $150 more. July 31, 1912, $100 of stock was issued and given to him to compensate him for acting on the so-called ‘advisory board’ of the corporation and he served on this board. The functions of this ‘advisory board’ do not clearly appear but it held meetings in Minneapolis. M. Orth attended one meeting in April, 1913, and he also speaks of a ‘next meeting.’ Either at one of these meetings or ‘in February’ the plan of organizing country banks was discussed and it was talked that there was an opening for a bank at New London, and one at Echo, Minn.

On July 15, 1913, Mr. Orth bought $500 of stock through D. R. Morrow, the corporation's selling agent, and at the time received back this agreement in writing:

‘This is to certify that I hereby agree to resell 500 shares of the Sterling Securities Corporation stock at $1.50 per share from Nov. 1st, 1913, to Jan. 1st, 1914. Sterling Securities Corp., per D. R. Morrow, Exec. agent.’

On November 15, 1913, Mr. Orth wrote Morrow:

‘Wish you would sell the 500 shares of your stock that I subscribed for at $1.50 per share according to your agreement of July 15th, 1913.’

Some correspondence followed and on December 16, 1913, Mr. Orth wrote the ‘Sterling Securities Corporation’:

‘I have deferred answering your letter in the hopes that something would turn my way so I could keep the stock I subscribed for but I can't see my way clear so please let your Mr. Morrow sell it according to the agreement.’

On the following day there was a telephone conversation between Mr. Orth and James J. Wise, president Sterling Securities Corporation, negotiating for the sale to plaintiff bank of the note here sued on and a note of A. M. Anderson and it was arranged that if plaintiff bought the notes, Mr. Orth ‘was to keep out the $750’ guaranteed to him by his contract of July 15. On the same day the Securities Corporation wrote ‘F. W. Orth, president of the State Bank of Morton,’ a letter ‘confirming’ the telephone conversation, inclosing the notes, stating that defendants' note was given for stock in the Securities Corporation, stating that defendants were of New London, Minn., and that Anderson was ‘a prosperous farmer living near Hawick,’ a small village in the vicinity of New London, offering discount so, as to make the paper net 10 per cent. interest, and authorizing a deduction from the purchase price of the notes of ‘$750 the amount Mr. Morrow agreed to secure * * * for the sale of the stock.’ On the same day a second letter was written by the Securities Corporation to ‘Mr. F. W. Orth, Morton, Minnesota,’ stating;

‘It seems impossible to get any money just at present. We never make a practice of indorsing paper * * * yet in this case, if you will favor us, we will guarantee the payment of these notes, and in turn will favor you by relieving you of the 500 shares of stock. In case there is any reason why you cannot adjust the matter in this way kindly call us by phone, as early to-morrow as possible, as we need the money to pay the contractor who is finding the bank building at Echo, Minnesota.’

On receipt of these letters and of the notes, Mr. Orth directed the cashier of plaintiff bank to find out if the notes were good. The cashier called a New London Bank by phone, found that the makers were good, so reported to Mr. Orth and Mr. Orth closed the transaction. He drew the bank's draft payable to the Securities Corporation for the amount of the notes less the agreed discount and less the amount of his $750 claim. He wrote a letter to the Securities Corporation, in the name of the bank, containing a statement of the transaction and returned the stock assigned in blank. He made out a deposit slip depsoting the $750 to his credit in plaintiff bank.

On November 13, 1913, nine suits had been commenced against the Sterling Securities Corporation to recover about $10,000, though no papers were filed until some months later. It was two days after these suits were commenced that Mr. Orth started the correspondence looking towards the redemption or resale of his stock. Orth said he did not know of these suits at this time and there is no evidence that he did but when asked if he had then heard of the trouble that Sterling Securities Corporation was...