Jordan v. Grover

Fitzgerald, J. This is an action on a promissory note for two thousand dollars made by the defendant Grover to his co-defendant, Edward H. Flemming, or order, and by the latter indorsed and delivered to the plaintiffs before maturity. The [195]answer denies “ that there was any consideration for 'the note,” and avers fraud in the procurement thereof by the payee from the maker, and notice by plaintiffs prior to the purchase. The action was dismissed by plaintiffs as to the defendant Flemming, and upon a trial of the case by a jury defendant Grover had verdict and judgment. Plaintiffs appeal from the judgment and the order denying their motion for a new trial.

As to the question of fraud in the procurement of the note by Flemming from Grover, that is a fact which must be assumed on this appeal for the reason that the evidence upon this issue is sufficient to justify the verdict. And as proof of this fact would have constituted a valid defense against Flemming, had he sought to recover on the note, it would for the same reason be equally as good a defense against the plaintiffs, whose position was no better than the payee, unless they were bona fide holders; and the rule is well settled by the weight of modern authorities, both in this country and England, that where fraud or illegality in the inception of the note is shown by the maker, the burden of proof is then cast upon the indorsee to show that he is an innocent holder. (Graham v. Larimer, 83 Cal. 173; Stewart v. Lansing, 104 U. S. 505; Vosburgh v. Diefendorf, 119 N. Y. 357; 16 Am. Am. St. Rep. 836; Smith v. Livingston, 111 Mass. 342; Kellogg v. Curtis, 69 Me. 212; 31 Am. Rep. 273.) The reason generally given for this rule is “that a presumption exists that a fraudulent payee would be likely to shield himself by placing the note in the hands of another person to sue upon it, and such presumption operates against the holder.”

The plaintiffs must therefore, in order to sustain the burden thus cast upon them, show that they purchased the note before maturity in good faith, for value in the usual course of business, and “ under circumstances which create no presumptions that they knew the facts which impeach its validity.” (1 Daniel on Negotiable Instruments, 4th ed., sec. 815.)

It appears that the note was purchased by plaintiffs before maturity for one half its face value, with knowledge upon inquiry previously made of the maker’s solvency, but without inquiry as to the consideration thereof; nor was there any reason or explanation given for the purchase of the note at a price so