Link v. Jackson

139 S.W. 588, 158 Mo. App. 63, 1911 Mo. App. LEXIS 452

• Court: Missouri Court of Appeals
• Decided: June 12, 1911
• Status: Published

Opinion

NIXON, P. J.

The evidence in this case was such that no denial is made by the plaintiff that the note was fraudulent in its inception and procured by a scheme pregnant with dishonesty and chicanery. Bnt the issue is presented whether such original fraudulent taint was communicated to the purchaser, the plaintiff in this ease, through actual knowledge or notice. Questions affecting commercial paper, involving the rights of parties claiming to be bona fide holders for value, are always of great importance and often fraught with difficulty, involving, as they do, a system of jurisprudence entering largely into the commercial transactions of the world.

The appellant assigns as error that the instructions given at the trial failed to properly present the law as to what knowledge should be brought home to the purchaser of negotiable paper, and that to defeat a holder of such paper purchased for value before maturity, actual knowledge should be shown. The rule as to what knowledge will charge the purchaser of negotiable paper with knowledge of equities existing between the original parties has undergone radical changes in this state. The old rule was that to let in equitable defenses, constructive notice was sufficient if a person was put on inquiry; that facts and circumstances which would naturally put a person of ordinary prudence in the same situation on inquiry, reasonably leading to a knowledge of the truth, would be sufficient for a court to infer and find such knowledge. [Hamilton v. Marks and Black, 52 Mo. 78.] But in the year 1876, in the case of Hamilton v. Marks, 63 Mo. 167, the question of notice as applied to negotiable paper was brought under consideration on a second trial of the case, and Judge Warner, speaking for the Supreme Court, after an exhaustive examination, overruled the law of constructive notice previously declared by the same court in Hamilton v. Marks and Black, 52 Mo. 78, and declared the law of commercial paper in Missouri according to the modern rule and in conformity to the decisions of England, and of the. Supreme Court of the United States in the case of Goodman v. Simonds, 20 How. 343, in substance, as follows: Suspicion, on the part of the taker of negotiable paper, of defective title in the prior holder, or knowledge on his part of circumstances which would excite suspicion thereof in the mind of á prudent man, or gross negligence on the part of such taker at the time of his transfer, will not defeat his title. That result can be produced only by bad faith on- his part. The rule that a purchaser is not an innocent holder if there are circumstances connected with the transfer sufficient to put an ordinarily prudent man on inquiry, is uncertain and devoid of uniformity, and no longer the prevailing law of the state.

Section Í0026, Revised Statutes 1909, of the negotiable instruments law, now adopted by many states, provides: “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.” [See also, Sees. 9999, 10022, 10024, 10025, R. S. 1909.] These provisions simply put in statutory form the rule of the common law as previously interpreted by many state courts and which was first authoritavely announced as the law of this state in the case of Hamilton v. Marks, 63 Mo. 167. Under the rules as now adopted defining the duties and obligations of a party t.o whose negotiable paper is presented for discount, such party is not bound at his peril to be on the alert for circumstances which might possibly excite the suspicion of a wary and prudent man. He does not owe the person who has set the paper afloat the duty, of active inquiry to escape the imputation of bad faith. The rights of the holder by such purchase are to be determined by the simple test of honesty and good faith and not by a speculative issue as to his diligence or negligence. Such holder’s rights can not be defeated without proof of actual notice or knowledge of defect in the title or bad faith on his part evidenced by circumstances. Though he may have been negligent in taking' thé paper, or omitted precautions which a prudent man would have taken and thereby been put on inquiry, nevertheless, unless he acted in bad faith, his title is unimpeached according to the well-settled doctrines in this state. [Hamilton v. Marks, 63 Mo. 167; Jennings v. Todd, 118 Mo. 296, 24 S. W. 140; Borgess Inv. Co. v. Vetto, 142 Mo. 560, 44 S. W. 754; Leavitt v. Taylor, 163 Mo. 158, 63 S. W. 385; Goodman v. Simonds, 20 How. 343; Atlas Nat. Bank v. Holm, 71 Fed. 489; King v. Doane, 139 U. S. 166.]

The word “notice,” therefore, must be understood when used in this connection as being used in the sense of actual knowledge; and, indeed, this is one of its usual and appropriate significations. [Goodman v. Simonds, 20 How. 343.] The notice required by the negotiable instruments law means actual knowl-ede as distinguished from implied or constructive notice which arises when a person is put on inquiry and knowledge is presumed. If it can be collected by a jury from circumstances fairly warranting' such an inference that plaintiff knew or believed or thought the bill or note was tainted with illegality or fraud, such a general or implied notice will equally destroy the title. [Henry v. Sneed, 99 Mo. 407, 12 S. W. 663.] According to many authorities, it is ordinarily to b.e expected that the purchaser will testify in his own behalf that he had no actual notice of the circumstances attending the inception of the note, and the defendant will necessarily have to rely upon circumstances to impeach his title to the note. Hence, while the notice or knowledge of the purchaser in cases of fraud must be actual, it is not essential that the knowlede of plaintiff should be established by direct testimony, but, like any other fact, such knowledge may be established by circumstances and inferences. [Edwards v. Thomas, 66 Mo. 469; Brown v. Hoffelmeyer, 74 Mo. App. 385, 391; Hoffman v. Leibzarth (Iowa) 2 N. W. 516; Myers v. Bealer (Neb.) 46 N. W. 479; Sullivan v. Langley, 120 Mass. 437; Shirk v. Heible (Ind.) 59 N. E. 281; Peirson v. McNeal (Mich.) 100 N. W. 465; Anton v. Gruner, 90 Ill. 300; Johnson v. Way, 27 Ohio St. 380.]

While neither negligence, nor knowledge of suspicious circumstances, nor failure to inquire into the consideration, will in and of itself be bad faith, such facts when proven may be considered by a jury in arriving at the ultimate fact of good or bad faith of the plaintiff. It is not a question of negligence but of good or bad faith. Gross negligence' may be evidence of bad faith, but it is not the same thing. [Goodman v. Harvey, 4 Adol. & E. 870.] “Everyone must conduct himself honestly in respect to antecedent parties, when he takes negotiable paper, in order to acquire a title which will shield him against prior equities. While he is not oblig’ed to make inquiries, he must not willfully shut his eyes to the means of knowledge which he knows are at hand, for the reason that such conduct, whether equivalent to notice or not, would be plenary evidence of bad faith.” [Goodman v. Simonds, supra; Atlas Nat. Bank v. Holm, 71 Fed. 489, and eases cited.]

Appellant assigns as error in this case that the trial court erred in failing to properly instruct the jury as to actual knowledge. The law undoubtedly is, as already stated, that to defeat recovery- on commercial paper purchased for value before maturity, actual knowledge of the facts which, impeach the validity of the paper must be shown. The ultimate fact to be shown is bad faith, which implies guilty knowledge or willful ignorance. The court gave the following instructions on this question:,

“The court instructs the jury that if you shall find and believe from the evidence in this case and the circumstances surrounding the execution and sale of the note sued upon, that they had been procured from the defendant through fraud, and that the plaintiff at the time he-purchased the note, had actual knowledge of such fraud or had knowledge of such facts that his action, in taking such notes, amounted to bad faith, then you will find the issues for the defendant.”

“The court instructs the jury that the note sued on is a negotiable promissory note and that the plaintiff is entitled to recovery if you believe from the evidence that plaintiff purchased said note before maturity in good faith, for value, without notice, all of which is presumed to be the case, unless the contrary is made to appear by the evidence.”

Plaintiff requested and the court refused to give the following instruction:

“The court instructs the jury that although the plaintiff may have known when he bought the note facts that would put a prudent man upon his inquiry and enable him by investigation to learn the truth, and although he may have known of facts and circumstances that would excite suspicion in the mind of a reasonable and prudent person that the note was tainted with fraud or that there was a failure of consideration, yet these facts are not sufficient to defeat a recovery by plaintiff. If the plaintiff bought the note before maturity, before you would be warranted in finding the issues for the defendant you must find that the plaintiff had actual knowledge either of the fraud or of the failure of consideration before you can find the issues for the defendants.”

The failure to give the last instruction is a special ground for complaint. This instruction was properly refused on the ground that, by implication at least, it cast the burden of proof on the defendants to establish the plaintiff’s bad faith when the law places on the plaintiff the burden of showing that he was a pur-' chaser in good faith. We think plaintiff would be entitled to a proper instruction as to actual notice or knowledge to the effect that although the plaintiff may have known when he purchased the note facts and circumstances which would have put a prudent person upon inquiry and enabled him to investigate the truth, and although plaintiff may have known facts at the time of his purchase that would excite suspicions in the mind of a reasonably prudent person that the note was tainted with fraud, yet these facts are insufficient in and of themselves to defeat plaintiff’s recovery, provided the plaintiff has shown by the greater weight of the testimony that at the time he purchased the note he had no actual notice or knowledge of its fraudulent inception, and provided further, that any notice or knowledge by defendant of such facts and circumstances, if any has been shown, may be taken into consideration with all the other facts and circumstances in evidence in determining the question as to whether the plaintiff had actual notice at the time of his purchase that the note was tainted with fraud.

The plaintiff further assigns as' error that the court failed to properly instruct the jury as to the burden of proof, and he asserts with.much earnestness that the true rule in cases like the present -is that when the note has been shown to have had its inception in fraud, the burden shifts to the plaintiff to show a purchase for value before maturity in good- faith, and when he introduced sufficient evidence to make a prima facie case as to these facts the burden again shifts to the defendant’s to show plaintiff’s actual notice of the existence of such facts as will warrant a jury in finding that plaintiff took the note in bad faith.

Section 10029, Revised Statutes 1909, is, in part, as follows: “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 as holder in due course.”

The question is therefore raised as to what the term, “burden of proof,” means as used in this section of the negotiable instruments law. Unfortunately, this term is used by judges and text-writers in two distinct senses, either as “burden of proof,” correctly speaking, or as the “burden of evidence,” and the failure to discriminate in which sense the term is applied in each case has been the cause of much confusion in legal literature. The “burden of proof” is the burden of producing a preponderance of evidence, while the “burden of evidence” means the burden that rests upon a party to meet a prima facie case. These burdens are often on the same party, but this is not necessarily or always the case; nor is it safe-to infer because a party has the burden of meeting a prima facie case therefore he must have a preponderance of evidence. It may be sufficient for him to produce just enough evidence to counter-balance that produced against him by his adversary. [Scott v. Wood (Cal.), 22 Pac. 871; Atlas Nat. Bank v. Holm, supra.] Justice Bigelow of the Supreme Court of Massachusetts in the case of Bridge Corp. v. Butler, 3 Gray, 132, stated the distinction as follows: “The burden of proof and the weight of evidence are two very different things. The former remains on the party affirming a fact in support of his case, and does not' change in any aspect of the cause; the latter shifts from side to side in the progress of a trial, according to the nature and strength of the proofs offered in support or denial of the main fact to be established.” The distinction was also well stated by Church, C. J., in Heinemann v. Heard, 62 N. Y. 455, in the following language: “During the progress of a trial, it often happens that a party gives evidence tending to establish his allegations, — sufficient, it may be, to establish it prima facie; and it is sometimes said the burden of proof is then shifted. All that is meant by this is that there is a necessity of evidence to answer the prima facie case, or it will prevail; but the burden of maintaining the affirmative of the issue involved in the action is upon the party alleging the fact which constitutes the issue, and this burden remains throughout the trial.”

Under section 10029, Revised Sttatutes 1909, “burden of proof,” as therein provided is used in the strict sense of “burden of proof,” and not in the sense of “burden of evidence.” [Hamilton v. Marks, 63 Mo. l. c. 100.] After the note has been shown to have had a fraudulent inception, the reason for requiring the plaintiff to prove his good faith is stated in the case of Hamilton v. Marks, 63 Mo. l. c. 180, to be “obviously salutary, for the presumption is natural that an .instrument so issued would be quickly transferred to another, and unless he gave value, which could be easily proven if given, it would perpetrate great injustice and reward fraud, to permit him to recover. The reasoning by which the foregoing rule is supported is, I think, unanswerable, and commends itself for its manifest justice. Where an instrument is procured by fraud, or is affected with illegality, the payee would undoubtedly be eager to transfer it, so that suit would be brought in the name of another, in order to prevent any valid defense if possible. In such a case, it is justice to the defendant, and it is no hardship to the plaintiff, to require him to show, that in acquiring the note he acted honestly and in good faith, and that he gave value for it.” The language of the statute— “every holder is deemed prima facie to be a holder in dne course” — imports that the possessor of the note is the proper owner and in lawful possession, and such possession of itself clothes the note with the presumption that the plaintiff became the owner of the note at its date in the usual course of business without any,notice that would impeach Ms title. But when fraud in the procurement of the note is shown, the inquiry then becomes one of fact without any presumption, and is to be determined, like' any other fact, by the preponderance of the evidence — unsupported by legal presumption one way or the other. “The reason the burden of proof is cast contrary to the rule of pleading, upon the indorsee, is, as we suppose, because, if he was a good-faith purchaser, he has' peculiar, if not exclusive, knowledge of the fact, and to find evidence of the contrary,, if true, would be difficult and often impossible for the defendant in the action.” [Atlas Nat. Bank v. Holm, supra, l. c. 493.] Under these authorities, the defect or infirmity in the title of Willard, the original payee, having been shown, the burden of proof was on the plaintiff to show that he was a purchaser in due course without actual knowledge of the defective title of the note.

In this connection it is further contended by the appellant that when defendants made a prima facie case of fraud in the inception of the note and the plaintiff showed that he received the note before maturity in good faith and for a valuable consideration,, that the burden shifted and it devolved upon the makers to prove that the plaintiff had actual notice of the specific facts which constituted the fraud, and that a failure to so instruct by the trial court impeaches its judgment and entitles the plaintiff to a new trial. Under the authorities already cited in this opinion, it is obvious that plaintiff is using the term “burden of proof” in the sense of “burden of ■ evidence.” Although the duty of making a prima facie case may shift from time to time, the burden of proof, correctly understood — that is, the duty which rests upon the party who asserts the affirmative of an issue of establishing it by a preponderance of the evidence — • never shifts in the progress of the trial but remains with him to the end. [5 Am. and Eng. Ency.'Law, 30.] And the cases cited by appellant in support of his contention as to the.shifting of the burden will on examination be found to refer to the burden of evidence and not the burden of proof. As we have stated, section 10029, Eevised Statutes 1909, refers to the burden of proof; and when the note is shown to have had its origin in fraud, the plaintiff must affirmatively show his good faith by a preponderance or greater weight of the evidence introduced in the ease bearing on that question, whether such evidence is introduced by the plaintiff or the defendant. [J. D. Marshall Livery Co. v. McKelvy, 55 Mo. App. 240; Bunker v. Hibler, 49 Mo. App. 536; Long v. Long, 44 Mo. 141; 16 Cyc. 926; Heinemann v. Heard, 62 N. Y. 455; Hamilton v. Marks, 63 Mo. 167.] Nor is the contention of the plaintiff maintainable that in order to charge the holder with actual knowledge constituting bad faith it is necessary that the plaintiff should, have specific knowledge of the infirmity in the note. [Wright Inv. Co. v. Fillingham, 85 Mo. App. l. c. 542; Studebaker Mfg. Co. v. Dickson, 70 Mo. 272; Whaley v. Neill, 44 Mo. App. 316; Brown v. Hoffelmeyer, 74 Mo. App. 385; Henry v. Sneed, 99 Mo. 423, 12 S. W. 663.] .

Plaintiff cites authorities to the effect that the law presumes honesty and not dishonesty, good faith and not bad faith, and argues that by casting the burden of proof of good faith on the plaintiff he is required to prove his honesty and good faith contrary to the presumption generally prevailing. While it is. true that the law generally presumes honesty and not dishonesty, gopd faith and not bad faith, and that to hold otherwise would seemingly require the plaintiff to prove a negative, contrary to the usual rules of law. yet, in cases like the one under consideration, the burden is cast upon the plaintiff for the reason, heretofore stated, that he has peculiarly within his knowledge the circumstances surrounding the purchase of the note and what notice or knowledge he had at the time of its purchase as to its fraudulent origin. The objection of appellant that he is required to prove a negative in such case is not well taken. When the proof of fraud in the inception of the note is made, proof of his purchase without actual notice or knowledge becomes an essential fact of plaintiff’s case, and when the plaintiff’s affirmative case requires proof of a negative fact or facts, he must carry that burden. [State to use v. Cchar, 50 Mo. l. c. 394.] This is especially true in cases like the present where the facts concerning notice or knowledge are peculiarly within the breast of the plaintiff. [Winhart v. Railway Co., 207 Mo. l. c. 434, 105 S. W. 1043.]

Plaintiff further assigns as error the failure of the court to give the following instruction:

‘ ‘ The court instructs the jury that under the pleading and the evidence the execution of the note sued on is admitted by the defendants, and there is no evidence to authorize the jury in finding that the plaintiff, at the time he purchased said note, had knowledge of any fraud in the inception of said note or of any failure of consideration, and you will therefore find the issues for the plaintiff.”

The basis of this claim is the plaintiff’s testimony as to his good faith was unimpeached and uncontra-dicted and in no wise discredited, and that the jury and trial court arbitrarily and capriciously disregarded the samé and that he was consequently entitled to á directed verdict.

There is a distinction between a demurrer to the plaintiff’s evidence and a directed verdict by the court in plaintiff’s favor. In order to sustain a demurrer to plaintiff’s evidence for failure to make out a prima facie case it is not necessary for the conrt to pass on the credibility of plaintiff’s witnesses; their credibility is not only assumed, but the probative facts are given every reasonable intendment in order to ascertain the plaintiff’s right of recovery. But a verdict for the plaintiff, peremptorily directed by the court upon evidence mainly oral in cases where the burden of proof is on the plaintiff, occupies an entirely different relation to the established principles of law. It has often been held that uncontradicted oral evidence of a party holding the burden of proof is not sufficient to command a directed verdict where the inferences to be drawn from all the circumstances are open to different conclusions by reasonable men. “It is not often, where the party has the burden of proving a fact by the testimony of witnesses, that the jury can be required by the court to say that the fact is proved. They may disbelieve the witness. If the conclusion is to be reached by drawing inferences from other facts, ordinarily the jury alone can draw these inferences.” [Anthony v. Association, 162 Mass. 354.] Our own court, however, has taken more advanced ground on this question than. many other courts. When the allegations of the plaintiff’s petition are denied by answer, and the plaintiff has the burden of proof, and the evidence introduced by the plaintiff to sustain the issues on his part is oral and by which plaintiff has made, a prima facie case, the defendant is nevertheless entitled to have the issue'of fact submitted to the jury though the plaintiff’s evidence is un-contradicted and unimpeached and even though defendant introduces no evidence, because uncontra-dicted testimony cannot be treated as conceded facts. The jury must determine the credibility of the witnesses and the weight to be given to their testimony. The court has no right to tell the jury that they shall believe the witnesses, and when it undertakes to pass upon their credibility it usurps the functions of the jury. [Wear v. Hickman, 4 Mo. 106; Vaulx v. Campbell, 8 Mo. 224; McAfee v. Ryan, 11 Mo. 364; Gregory v. Chambers, 78 Mo. 294; Wolff v. Campbell, 110 Mo. 114, 19 S. W. 622; Cleveland & A. M. L. Co. v. Rose, 135 Mo. 101, 36 S. W. 216; Schroeder v. Railroad Co., 100 Mo. 322, 18 S. W. 1094; Huston v. Tyler, 140 Mo. 252, 36 S. W. 654, 41 S. W. 795; Ford v. Dyer, 148 Mo. 529, 49 S. W. 1091; Cannon v. Laclede Gaslight Co., 145 Mo. 502, 46 S. W. 968, 47 S. W. 907. And since the decision of our Supreme Court in the case of Dalton v. City of Poplar Bluff, 173 Mo. 39, 72 S. W. 1058, the law on this subject has never been questioned by that court and has been recognized by the courts of appeals. [Bank v. Hammond, 124 Mo. App. l. c. 181, 101 S. W. 677; McCrosky v. Murray, 142 Mo. App. 133, 125 S. W. 226.] The right of trial by jury in such cases is established by these authorities and placed beyond' the intervention of courts. This rule may be stated as follows: In cases where the allegations of plaintiff’s petition are denied by answer, although the plaintiff has the burden of proof, yet when he has made out a prima facie case by oral testimony, the court has no authority to sustain defendant’s demurrer to plaintiff’s evidence, but the plaintiff has the right to go to the jury and have them pass upon the credibility of the witnesses. And under the same conditions, although the plaintiff’s witnesses are uncontradicted and unimpeached, and the defendant offers no evidence at all, the court has no right to command a verdict for the plaintiff, but it is the defendant’s right to go to the jury and have them pass upon the credibility of the witnesses. The power of the court in such case, where the verdict is not supported by the evidence, is prescribed by the statute which restricts the court to the granting of one new trial. Section 1994, Bevised Statutes 1909.

Appellant further assigns as error the giving of the following instruction:

“The court instructs the jury that if you shall find and believe from the evidence in this case and the circumstances surrounding the execution and sale of the note sued upon, that they had been procured from the defendants through fraud, and that the plaintiff at the time he purchased the note, had actual knowledge of such fraud or had knowledge of such facts that his action, in taking such notes, amounted to bad faith, then you will find the issues for the defendant.”

Appellant complains that the court by this instruction left to the jury the question as to the meaning of the term, “bad faith.” “G-ood faith” and “bad faith” are questions of law and are not generally understood outside the legal profession; but especially as applied to negotiable paper, these terms are used in a teclmical sense. In the terminology of legal science, these terms have a well-defined and fixed meaning with which courts and lawyers are familiar, but they are not generally understood by the laity. [Bowles Live Stock Com. Co. v. Hunter, 91 Mo. App. l. c. 337.] But on examination of the appellant’s instruction we find that the same error was committed, for his instructions also contain the terms, “good faith” and “bad faith,” and as appellant did not ask the court to tell the jury what constituted “good faith” and “bad faith,” he was guilty of the same error which he charges that the respondents committed and hence is in no position to complain in the appellate court. [Christian v. Conn. Mut. L. Ins. Co., 143 Mo. 460, 45 S. W. 268; Sawyer v. Walker, 204 Mo. 133, 102 S. W. 544.]

The only evidence in this case in any way tending to impeach the good faith of plaintiff in purchasing the notes was facts and circumstances offered to show that he purchased the same with actual knowledge of the original fraud. Hence instruction No. 2 for defendant should have confined the attention of the jury to such actual knowledge, and the additional clause, “or had actual knowledge of such facts that his action, in taking’ such notes, amounted to had faith,” should have been omitted from the instruction as there was no evidence of bad faith except knowledge or notice of the original fraud; and it was confusing and misleading and calculated to divert the attention of the jury from the real issues in the case; and the fact that such clause was in the language of the statute in no way relieved it of its objectionable features.

As this case is subject to retrial under the view we have taken of the law, it is unnecessary for us to comment on the probative force of the evidence offered as to plaintiff’s actual knowledge and good faith.

For the reasons herein appearing, the judgment is reversed and the cause remanded.

All concur.