Lerch Hardware Co. v. First National Bank

Mr. Justice Trunkey delivered the opinion of the court, It is not denied that the holder of negotiable paper, who obtained it in good faith, before its maturity, for value, has a good title. In the absence of rebutting proof, the law presumes that he is a bona fide holder for a consideration, without notice, and it is incumbent ,on the defendant to establish the contrary by satisfactory proof, thereby overcoming the prima facie title of the plaintiff, before the latter need do anything more to establish his case than to adduce the bill or note. To support an action by the indorsee of negotiable paper, against the maker, in the first instance it is only necessary for the plaintiff to put the paper in evidence. Then, if the defendant proves that the paper was put in circulation by fraud or undue means his defence will prevail, unless the plaintiff establishes that he acted fairly and paid value. This was decided more than seventy years ago in Holme v. Karsper, 5 Binn., 469, and has continued an accepted rule. In Phelan v. Moss, 67 Pa. St., 59, in an elaborate collation of cases respecting the rights of holders of negotiable paper, resulting in an advance in their favor, the doctrine of Holme v. Karsper was recognized thus: “ It has been held in several cases, and is undoubted law, that the indorsee in a suit by him against the maker of a promissory note, cannot be called on to prove consideration, until the defendant has shown it was obtained or put into circulation by fraud or undue means : Knight v. Pugh, 4 W. & S., 445; Brown v. Street, 6 Id., 221; Hutchinson v. Boggs, 4 Casey, 294; Gray’s Adm’rs v. Bank of Kentucky, 5 Casey, 365.” The latest decisions have set strongly in favor of the principle that nothing but clear evidence of knowledge or notice, fraud or mala fides, can impeach the prima facie title of a holder of negotiable paper taken before maturity : Moorehead v. Gilmore, 77 Pa. St., 118. But either with respect to this principle, or to the earlier principle “ that if an indorsee takes a note heedlessly, and under circumstances which ought to have excited the suspicions of a prudent and [245] careful man, the maker or indorser may he let into his defence,” the rule remains unshaken that if the defendant proves that the note was obtained or put into circulation by fraud or undue means, the plaintiff will be put to proof that he obtained it before maturity, in good faith, and for value. “ A man who has lost, or been robbed, or defrauded, is to be considered in the light of an unfortunate rather than an imprudent man, and therefore has a claim to protection against mala fide holders. These are the grounds upon which the rule is placed.” Facts that overcome the plaintiff’s prima facie title, and which are sufficient to put him upon rebutting proof, when properly averred hr an affidavit of defence, entitle the defendant to a trial by jury. Where the affidavit set out that the bill in suit was drawn by one partner in the name of the firm and taken by the drawee for his individual debt, and accepted by the same partner, residing at St. Louis, in the name of the firm located at Philadelphia, on which it was drawn, it was held that the indorsee was not entitled to judgment for want of a sufficient affidavit of defence; he must at least prove that be gave value: Dickson v. Primrose, 2 Miles, 366. An affidavit which set forth facts showing that the payee of the note obtained it by false pretences, but omitting averments as to when or how the holder procured it, was held sufficient “to call upon the plaintiff to show that he is the holder of the note by purchase, for value, before maturity, without notice of the fraud:” Hutchinson v. Boggs & Kirk, 28 Pa. St., 294. The same principle was reiterated in other cases, among which are Hoffman v. Foster, 43 Id., 138, and Smith v. Popular B. & L. Association, 93 Id., 19. If anything can be settled by a long and unbroken current of decisions, it is settled that an affidavit of defence setting forth that the note or bill in suit was obtained or put into circulation by fraud or undue means, is sufficient. The defendant in error has cited numerous authorities proving that it is equally well settled that mere want or failure of consideration, or a fraudulent misappropriation of the proceeds of the paper, where the paper was untainted by fraud at its inception and issue, will not be sufficient to put the holder of negotiable paper to proof that he obtained it in good faith, before maturity, for value; nor will an affidavit of defence, merely setting forth such matter, be sufficient: Knight v. Pugh, 4 W. & S., 445; Brown v. Street, 6 Id., 221; Gray’s Adm’rs v. The Bank, 29 Pa. St., .365; Sloan v. Union Banking Co., 67 Id., 470. In the latter case the distinction between paper tainted with fraud at its inception, and paper where there was a fraudulent misappropriation of the proceeds, or a [246] want or failure of consideration, was shown by Sharswood, J., with his usual clearness. Bardsley v. Delp, 88 Id., 420, is ruled on an affidavit which showed that the plaintiff was the holder for value of an accommodation note given by the defendant to the payee who promised to use it for a certain purpose, and violated his promise by using it for another. The case of Potter and Jones v. Price, 3 Pitts., 136, was between the makers and payee of the note — Jones as partner could give the note for money borrowed for the firm, and it was not averred that the lender knew the money was for Jones’ individual use — the affidavit was insufficient. That case followed the rule that the affidavit must set forth every fact necessary to constitute a defence. The statute which authorizes the organization of limited partnerships, makes it unlawful for any such association to loan its credit to any person or association without the consent in writing of a majority in number and value of interest. This affidavit sets forth that the note in suit was not made and delivered in the course of business of the Lerch Hardware Company, Limited, nor for any purpose for which said company was organized, and that the making thereof was unauthorized ; that said note was delivered to the payee by D. D. Lerch, without the knowledge and consent of any of the other members of the company, for the purpose of loaning the credit of -the company to said payee. It is clear that proof of such facts would prevent recovery, were the pajme plaintiff in the action, because of the fraud upon the company. This action is by the indorsee, and proof of the facts at the trial would overcome the plaintiff’s prima facie title, and prevent recovery, unless the plaintiff establish that he purchased the note in good faith, before maturity; for the fraud was perpetrated at the instant the note was put into circulation. Judgment reversed, and procedendo awarded.