Smith v. Word

BEADY, J. Appellant, Mrs. M. A. Smith, joined by her husband, filed this suit against appellees, Dee Word, S. W. O’Connor, and T. D. Word, upon a promissory note for $1,000, dated March 4, 1918, payable to the order of Alf Smith, and due six months after date. She alleged that before the maturity of the note she purchased the same from Alf Smith for a valuable consideration, and in good faith, and that it was delivered and indorsed to her by Alf Smith. She further pleaded that she purchased the note without notice of any of the defenses urged by defendants, and that she was entitled to the protection of an innocent purchaser for value. The defendants pleaded that shortly before the execution of the note Alf Smith was the owner of a garage and automobile accessories business in the town of Mertzon; that Smith negotiated a sale of the lots, building, stock, and fixtures to the defendants Dee Word and S. W. O’Connor, representing that all goods had been paid for, and that he owed no indebtedness except a small amount to the Eirst National Bank of Mert-zon; that these defendants agreed to pay Smith $2,570 for the property, and to assume the debt owing to the Mertzon bank; that they relied upon his representations that there were no debts and liens against the property, and therefore did not require him to comply with thé provisions of the Bulk Sales Eaw governing such sales; that, relying upon Smith’s representations, the said defendants purchased the property, and paid therefor by transferring a flock of goats to Smith, by assuming and paying the indebtedness to the Mertzon bank, and by executing the note in controversy, which the defendant T. D. Word signed as a surety. It was further alleged that it shortly developed that the representations were false and fraudulent, and that Alf Smith owed an indebtedness to two business concerns, aggregating more than the amount of the note in question, which were reduced to judgments, and which defendants were compelled to pay by reason of the liability created by the Bulk Sales Daw of Texas, and that thereby the consideration for the note had wholly failed. It was further answered under oath that Mrs. Smith, the plaintiff, had not paid a valuable consideration for the note, and that she did not purchase it in good faith, but that the alleged transfer and indorsement was made for the purpose of defeating the defenses urged by defendants, and was taken by the plaintiff with knowledge of the defects. Defendants also sought by cross-action a recovery against Alf Smith for any judgment which the plaintiffs might recover against them. The case was submitted to the jury upon special issues as follows: “1. Did the plaintiff, Mrs. M. A. Smith," purchase the note sued upon, in good faith, and for a valuable consideration? If you answer ‘No’ to the foregoing question, you need not answer the following question, but will return your answer into court as your verdict; otherwise you will answer the following question: “2. Did plaintiffs at or prior to the time they acquired said note have knowledge or notice of the defendants’ defense to said note? In connection with the foregoing question, and as a part thereof, you are charged that whatever is notice enough to excite attention and put a party on his guard and call for inquiry is notice of everything to which it is after-wards found that such inquiry might have led, although all was unknown for want of investigation. “The burden is upon plaintiffs to prove the affirmative of the first issue and the negative of the second issue by a preponderance of the evidence.” In several assignments of error it is urged that the trial court erred in permitting the defendants Dee Word and T. D. Word and Erank Emerick, the sheriff, to testify, over the objection of the plaintiffs, to conversations had with Alf Smith, and to statements made by Smith to such witnesses in relation to the representations made by Smith at the time of the sale, and also to statements subsequently made by Alf Smith bearing upon his purpose in transferring the note to plaintiff. The testimony in question was objected to as being immaterial and irrelevant, and not binding on the plaintiff Mrs. Smith, because it was not shown that she was present at the time of the conversations, nor that she had knowledge of [736] the same or of the false and fraudulent representations admitted by Alf Smith before or at the time of her purchase of the note. These and similar objections were renewed after all the testimony was in, and plaintiffs moved the court to strike out the testimony, and to direct the jury not to consider the same. Much of the testimony objected to was a statement of the representations made by Alf Smith at the time of the sale in reference to the indebtedness against the business. These statements, in our opinion, were clearly admissible to shbw fraud in the inception of the note, which was specifically pleaded by the defendants, and as a predicate for casting the burden upon plaintiffs to show that Mrs. Smith purchased for value and in good faith. This holding applies to the testimony both of Dee Word and T. D. Word in respect to the representations made by Alf Smith. Prouty v. Musquiz, 94 Tex. 87, 58 S. W. 721, 990. We think a different rule must be applied to the testimony of Dee Word relating to the conversation with Alf Smith made just before the alleged transfer and sale of the note, and also as to the testimony of the sheriff when he sought to collect a judgment from Alf Smith on an execution. It was admittedi by these witnesses that Mrs. Smith was not present at any of the times when the conversations took place, and it was not shown that she knew of such conversation’s before or at the time she acquired the note. In these circumstances we are of the opinion that the statements and admissions of Alf Smith were not admissible' against nor binding upon Mrs. Smith. The testimony of Dee Word as to this phase of the matter was to the effect that a Mr. Campbell was trying to get a settlement out of Alf Smith for the Pierce-Fordyce Company, on a debt against the business, and that Alf told Dee Word at the garage one evening that Mr. Campbell was trying to collect this account, but Alf said, “I will turn it over to the old lady, and see that he don’t get that;” the reference being to the note in controversy. The testimony of the sheriff was, in substance, that he had a writ of execution against Alf Smith, in March, 1918, and that he was aboqt to levy on Alf Smith’s goats; that Alf did not want him to levy on the goats, and requested him to wait until morning, and that he would go to the bank and pay it off. The next morning the sheriff went to the bank to meet Alf Smith, who did not show up, and the county clerk told him that Alf Smith came in that morning, and that everything he had was transferred to Mrs. Smith; that the transfer referred to was the bill of sale "offered in evidence, and was upon some goats. The sheriff further testified that he had a conversation with Alf Smith after that, and that Alf laughed at him. The evidence in the case was conflicting. Mrs. Smith testified positively that she bought the note in good faith, and paid Alf Smith 81,000 for it. She is corroborated by the testimony of her attorney, who drew the check upon Mrs. Smith’s funds, at. her direction, in payment of the note. The testimony for defendants upon this issue is chiefly, if not wholly, circumstantial; their main reliance being upon the relationship between the parties, Alf Smith being a brother of Mrs. Smith’s husband, and the rather singular want of recollection on the part of Mrs. Smith as to the bill of sale made by Alf Smith to her conveying his goats for a recited consideration of $1,000 cash paid, and the discharge of a lien which Mrs. Smith had previously held upon the lots and building where Smith had transacted his business. These circumstances, it may be assumed, tended strongly to throw suspicion upon the alleged purchase by Mrs. Smith, and upon her good faith in the transaction. In these circumstances it may be that the controlling factor in the jury’s conclusion to discredit the testimony of Mrs. Smith was the testimony of Dee Word and the sheriff in relation to the statements made by Alf Smith and his conduct, which we have above pointed out. If the testimony was not admissible, it wa's clearly prejudicial. We are of the opinion that the testimony was incompetent and irrelevant, and was essentially in the nature of hearsay, Mrs. Smith not having been present, and it not having been shown that she knew of such statements or conduct prior to her alleged purchase. The claim of defendants against Alf Smith was for judgment over against him for any amount that the plaintiff might recover against them on the note. This claim rested primarily upon the fraudulent representations made by Alf Smith at the sale, which were undisputed, and affords no ground of admissibility for the statements and actions of Alf Smith immediately preceding the transfer of the note. For the erroneous admission of this evidence, we conclude that the judgment must be reversed. It is also insisted by appellants that it was error to submit the special issues to the jury, because the uncontradicted evidence shows that Mrs. Smith purchased for value and in good faith, and also that the court erroneously placed the burden of proof upon the plaintiffs as to both issues. We do not agree with appellants that the uneontradicted evidence showed Mrs. Smith to be a purchaser for value and in good faith. It is true that she so testified, and that her testimony finds apparent corroboration in that of her attorney, but there is in the record testimony of a circumstantial nature tending to impeach her good faith, as well as the payment of value for the note, and also tend [737] ing, although less strongly, to show notice of. the vice in the note. As to the burden of proof, it will be remembered that the defendants specially plead fraud in the inception of the note, and they denied under oath that Mrs. Smith paid value, or that she purchased in good faith. Furthermore, defendants proved facts which, if true — and they appear to be undisputed— show that the note was fraudulently acquired by Alf Smith. Having proved fraud in the inception of the note and under the pleadings, we think the rule announced in Prouty v. Musquiz, 94 Tex. 87, 58 S. W. 721, 996, is applicable here, and that the trial court properly instructed the jury that the burden of proof was upon the plaintiff to prove that she paid a valuable consideration and purchased the note in good faith. As to the second issue, however, which involved the question as to whether Mrs. Smith, prior to the time she acquired the note, had notice of the defenses urged, we are of the opinion that the court improperly placed the burden upon the plaintiff. An answer was required to the second question only in the event the plaintiff had discharged the burden of showing that she had purchased for value and in good faith. It was not incumbent upon plaintiff to show that she had no notice of the defects in the paper, but it devolved upon defendants to show such notice, unless she failed to discharge the burden of proving value and good faith in the purchase. See Prouty v. Musquiz, supra. We may add also that the rule of notice given in the charge to the jury is not the correct rule as applied to the purchase of negotiable paper. In such case, if the purchaser has paid value and has acquired the paper in good faith, it is not enough to defeat his title to show that an inquiry might have led to the knowledge of facts which were not actually known. The freedom in circulation of negotiable paper requires a mpre liberal rule for the protection of purchasers, and our courts have ever, as far as we are aware, so held. The last two conclusions are announced for the guidance of the trial court in the event of another trial. All other assignments are overruled. For the error stated, the judgment will be reversed, and the cause remanded. Reversed and remanded.