Critcher v. . Ballard

Hoke, J. It is recognized in the better considered decisions on*the subject that the mere statement of an executory contract on the part of the payee, growing out of the transaction in which a promissory note is given, will not, of itself, and without more, destroy or impair the negotiability of the note when it otherwise complies with the requirements’of that class of paper. The question was presented to this Court in Bank v. Hatcher, 151 N. C., 359, where defendant, the promissor, sought to set up a claim for damages for breach of contract in the sale of goods by sample, and it was shown that the bank that held the notes by endorsement and for value before maturity was aware of the stipulations of the executory contract out of which defendant’s claim arose, but not of any breach of the same, and it was held that the counterclaim was not available as against the bank. After referring to several decided -eases in support of the position, the Court cites, as controlling on the subject in this jurisdiction, the section of the negotiable instrument act more directly applicable, to the effect that a definite promise to pay is not rendered conditional so as to impair negotiability by a statement of the “transaction which gives rise to the instrument.” As said in Mayers v. Mc *114 Rimmons, 140 N. C., 640-642: “This statute, enacted in 1899 with, a view of introducing some uniformity in this important feature of the law-merchant, is in the main only a compendium of established custom concerning negotiable instruments as construed and applied in the best considered decisions of the Courts,” and the clause in question here, sec. 2153, and the cases it embodies and interprets, is in full support of his Honor’s ruling that the negotiability of the note was not destroyed or sensibly impaired by reason of containing á statement of a warranty on the part of Ames, the original payee. Bank v. Hatcher, supra, and cases cited; McKnight v. Parsons, 136 Iowa, 390; Hakes v. Thayer, 165 Mich., 476; Black v. Bank, 96 Md., 399; Buchanan v. Wren, 10 Texas Civ. App., 560; Jennings v. Todd, 118 Mo., 296; Cooper & Co. v. Chicago Trust Co., 131 Ill., 569; Calvert’s'Daniels on Negotiable Instruments, sec. 795-b. It was earnestly insisted for defendant, in support of his position, that the appearance of the warranty on the face of the note was sufficient to put a prudent man on inquiry, and that he-should be charged with knowledge of all the pertinent facts that such inquiry* would have disclosed, but where a commercial paper has been properly negotiated, this principle of putting a prudent man upon notice is not the rule by which the rights of one claiming to be a holder in due course shall be determined. In Smathers v. Hotel Co., 162 N. C., 346, in which section 2205 of the negotiable instrument act was construed and applied, the Court held: “That to constitute notice of infirmity of % negotiable instrument, the holder or transferee for value before maturity must have had actual knowledge thereof, or of such facts that his action in taking it amounted to bad faith and notice that would put a reasonably prudent man upon inquiry is insufficient.” While we approve his Honor’s charge in the respects suggested, we are of opinion that there was error in withdrawing the question of the breach of warranty from the consideration of the jury, on the ground that on careful perusal of the record it appears that the note has not been properly negotiated, in that same has never been endorsed by the payee, or by any one for him, and, therefore, the plaintiffs, Gilliam & Dunstan, cannot maintain the position of holders in due course. In various sections of the negotiable instruments act, Rev., ch. 54, and authoritative decisions construing the same, it is contemplated and clearly provided that in order to a proper negotiation of a commercial instrument, payable to order, so as to shut off equities and defenses, as between the original parties, it must be endorsed by the payee, or by some one for him, duly authorized, and this endorsement must be made by writing the name of the payee on the instrument itself (usually on the back of same), or on some paper physically attached thereto at the time of *115 endorsement made. Rev., ch. 54, secs. 2178, 2198, 2206, 2212; Midgette v. Basnight, 173 N. C., 18; Banking Co. v. McEachern et al., 163 N. C., 333; Mayers v. McRimmon, 140 N. C., 640; Tyson v. Joyner, 139 N. C., 69. In section 2178 it is expressly provided: “That an instrument is-negotiated wben it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is transferred by delivery; if payable to order, it is negotiated by the endorsement of the holder, and completed by delivery.” And in section 2198: “Where the holder of an instrument payable to his order transfers it for value without endorsing it, the transfer vests in the transferee such title as the transferer had therein, and the transferee acquires, in addition, the right to have the endorsement of the transferer. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the endorsement is actually made.” Without such endorsement, the cases uniformly hold that the holder only acquires the equitable title, and his claim is subject, as stated, to the equities and defenses existent between the original or prior parties. Bank v. McEachern, supra; Jenkins v. Wilkinson, 113 N. C., 532. In section 1 of the complaint, which purports to set out the note and all entries thereon in ipsissimis verbis, the alleged endorsement is given as follows: “Endorsements: Pay to J. B. Gilliam and E. M. Dunstan without recourse on me.” And the allegations of section 2 are as follows : “That plaintiff, Gilliam & Dunstan, are purchasers for value of said note without notice of equities,” etc. It thus appears that the signature of the payee has never been placed on the instrument by the payee or by any one for him, and that plaintiffs being only the holders of the equitable title, the defense set up in the counterclaim should be considered and determined. For the error indicated, there must be a new trial of the cause, and it is so ordered. New trial.