OF VALUE. In an action on a negotiable note prosecuted by an indorsee, where the maker alleges and shows the instrument to have been fraudulently obtained by the payee, it devolves upon the indorsee to show that he is a bona fide holder for value, and that he obtained the note before the maturity in due course, and without knowledge of the infirmity. [Ed. Note.-For other cases, see Bills and Notes, Cent. Dig. §§ 1675-1687; Dec. Dig. § 497.*] 8. BILLS AND NOTES (§ 339*)-BONA FIDE PURCHASER CONSTRUCTIVE NOTICE KNOWLEDGE OF DEFENSES. A mere suspicion of an infirmity does not put an indorsee of a negotiable note upon such a duty to make inquiry that a failure to investigate or inquire will defeat his title as a holder without notice. [Ed. Note. For other cases, see Bills and Notes, Cent. Dig. §§ 821-823; Dec. Dig. § 339.*] 9. BILLS AND NOTES (§ 497*)-ACTIONS-BurDEN OF PROOF-MALA FIDES. In an action by an indorsee of a negotiable note, where plaintiff has shown by undisputed evidence that he was a bona fide holder for value, without any circumstances suggesting bad faith, it then devolves on defendant to show that plaintiff was guilty of mala fides. [Ed. Note. For other cases, see Bills and Notes, Cent. Dig. §§ 1675-1687; Dec. Dig. § 497.*] Dunbar, C. J., dissenting. Department 2. Appeal from Superior Court, King County; C. H. Neal, Judge. Action by the Scandinavian American Bank against E. W. Johnston. Judgment for defendant, and plaintiff appeals. versed and remanded, with instructions to enter judgment for plaintiff. Re Roberts, Battle, Hulbert & Tennant, for appellant. Hart, Prigmore & Evans, for respondent. CROW, J. [1] The controlling assignment is that the trial judge erred in refusing to withdraw the case from the jury and enter judgment in appellant's favor. The following facts appear from undisputed evidence: Some time in January, 1909, the respondent, E. W. Johnston, subscribed $5,000 par value of the capital stock of the Electric Transportation Company, a corporation, organized to operate a line of sightseeing automobiles on the streets of Seattle, and motor boats on Lake Union, during the A.-Y.-P. Exposition. In part payment respondent executed his note for $2,000 to the transportation company, which, being sold to a bona fide holder for value, was paid at maturity. On May 7, 1909, certain supplies consigned to the transportation company had reached Seattle, upon which a large amount of freight and other charges were due. The transportation company was a customer of the appellant bank, where it then had on deposit a balance of about $2,000, but it needed $5,000 more to meet the freight and other charges. It then applied for a loan of $5,000; whereupon appellant refused to accept its note without security, but agreed to make the loan on its note indorsed by five or six wealthy business men of Seattle, its stockholders, of whom respondent was one. $5,000 note of the transportation company, dated May 7, 1909, running to the bank as payee, due in 90 days, indorsed by several of the transportation company stockholders, was executed. Respondent refused to indorse this note, but on the same day did execute his $3,000 note to the transportation company, also due in 90 days, which he then and there delivered to it in payment of the remainder of his stock subscription. He testified that he then told the payee he did not I want it to be sold or negotiated. This statement, although denied by other stockholders, we accept as true. A On the same day, May 7, 1909, the transportation company delivered to the bank the principal note for $5,000, indorsed by a portion of its stockholders, and as further and collateral security therefor, at the same time and as a part of the same transaction, also delivered to it respondent's $3,000 note, and two other notes of $1,000 each, previously executed and delivered to the transportation company by one Appleton, in payment of his stock subscription. The bank accepted the principal and collateral notes, made the loan, and immediately placed $5,000 to the credit of the transportation company, which on the same day checked it out in payment of the freight and other charges. The transportation company passed into the hands of a receiver some time in the latter part of June, 1909. None of the notes have been paid, and the appellant bank commenced this action against the respondent, Johnston, on the $3,000 collateral note executed by him, and also another action against Appleton on the two notes executed by him. We on this date file a separate opinion in the Appleton Case (115 Pac. 109), which is also in this court on appeal. The respondent, Johnston, in his answer, admitted the execution of his note, but alleged that his subscription to the capital stock had been procured by misrepresentation and fraud; that his $3,000 note thereafter given in payment of such subscription For other cases see same topic and section NUMBER in Dec. Dig. & Am. Dig. Key No. Series & Rep'r Indexes originated in fraud; that it was without | so I could get my notes back. Q. What did consideration; that the appellant bank took it with knowledge of the facts constituting such fraud, and that it was not a bona fide holder. The jury by their verdict in respondent's favor necessarily found that the stock subscription, the consideration for the note, was obtained by fraud, and the only question we will consider is whether the appellant was entitled to a directed verdict upon the theory that it was a bona fide holder for value, having purchased the note before its maturity in due course. you tell him, if anything, about the company having secured them from you by misrepresentation? A. I told Mr. Lane they had misrepresented the facts to me to get those notes; and he stated he could not very well arrange to get the notes back, because they did not have a very large balance there; and he stated that they bought this note on the strength of my name being there and being perfectly good, but he did not know the facts about the purchase, and Mr. Woolfolk, I think, he referred me to as knowing the particulars of the purchase; I think, however, that Mr. Lane told me that Mr. Chilberg had passed on them. Some one else; he hadn't passed on it, as I remember on the purchase of the note. Q. Now, when was it you were in the bank and made the protest about the notes, and had the conversation with Mr. Lane? A. Well, it was somewhere about-well, four or five days after the dates on them. Q. You think it was four or five days after the dates on them? A. Yes, sir. Q. That would be in the vicinity of Febru ary 1, 1909? A. February 1st; and I think this note was due February 9th. (Cross-examination.) Q. So you told Mr. Lane they had misrepresented the matter to you by agreeing that they would not negotiate your notes? A. I told them they had misrepresented matters to me, and also had agreed not to negotiate my paper; and he said they had already purchased these two notes; and he sent me back to talk to Mr. Woolfolk, and I actually saw the notes in their possession there in the hands of the man at the note counter; I forget that gentleman's name. A. I went to see Mr. Lane to use a little personal influence, and get him to help me get my notes, and if they had a fat bank account there I thought he could easily arrange it." The following facts indisputably appear from the evidence, and, as we understand, are not challenged by respondent: That respondent executed and delivered his note to the transportation company in payment of his stock subscription; that it was on the same day delivered as collateral security to the bank, which then and there made a loan of $5,000 in cash to the transportation company on the principal note; that the bank at that time had no knowledge of any misrepresentations made to Johnston, or that his note had been fraudulently procured without consideration; that Johnston himself did not then know he had been defrauded, and that he did not learn the actual facts until the appointment of the receiver. The jury by its verdict must have found the appellant was not a holder in good faith, and the only possible circumstance upon which it could have predicated such a finding was that, about January 25, 1909, one C. H. Lilly, a prominent and wealthy business man of Seattle, also subscribed for capital stock of the transportation company, and in part payment therefor executed and delivered to it his five promissory notes of $1,000 each; that two of these notes were forthwith sold to the appellant bank at par for value, it then becoming an unquestionable holder of them in It further appears that, shortly thereafter, due course and good faith; that about Feb- Lilly, without participation of the bank, efruary 1, 1909, Lilly, claiming his notes had fected some satisfactory arrangement with been procured by the misrepresentations of the transportation company, in pursuance of an employé of the transportation company, which it agreed to pay, and did pay, the two engaged to sell its stock, surrendered his notes when they became due, and returned stock to the company, and demanded a re- them to him. The only possible notice the turn of his notes, none of which had yet ma- bank had that these payments were made by tured; that three were returned to him, but the transportation company must be predthat he was advised by the company the oth-icated upon the fact that one of them was er two had been sold to the bank. He then called upon the bank, and all notice or knowledge it obtained from him is shown by his testimony, which we accept as true, and which he gave as follows (examination in chief): "Q. Did you see Mr. Lane, the cashier of the Scandinavian American Bank? A. I did. Q. What did you tell him about those notes? A. I told Mr. Lane I wished to find out if they were holding certain notes of mine, and, if they were holding them, I wanted to arrange to have the Electric Transportation Company take them up; that they had agreed not to cash them, and, inasmuch as they had an account there, as I understood, paid by the company check drawn upon the appellant bank. It is apparent that appellant has many employés and transacts an extensive banking business. Nothing further occurred between Lilly and the bank. Both of the Lilly notes were paid before the collateral $3,000 note was executed by the respondent, Johnston. The sole question before us is whether any such notice of the Lilly transaction came to the bank as to demand an inquiry in regard to the origin of respondent's note, and whether the bank has been guilty of any such neglect in failing to prosecute an inquiry as will deprive it of the position and rights of a bona fide holder and other employés of the bank denied Lilly's statements, we, as above stated, accept them as true. Respondent (citing section 3443, Rem. & Bal. Code, defining a holder in due course; section 3446, defining defective title; section 3447, defining notice of defective title; and section 3450, relating to defenses against the claim of a holder in due course; and also citing Ireland v. Scharpenberg, 54 Wash. 558, 103 Pac. 801, and other cases upon which he relies) contends that the ques tion whether the appellant was a bona fide holder in due course was for the exclusive consideration of the jury; that the cashier was an interested witness, and that his credibility was also for the jury. [2] There is no question but that, upon an issue of act, conflicting evidence must be submitted to the jury for its consideration. Nor can it be disputed that the credibility of the bank cashier, an interested witness, would be for the jury, were his evidence unsupported, improbable, and necessary to sustain a finding of bona fides. In this case the cashier's evidence could be entirely eliminated, and yet, under our interpretation of the law, it would appear indisputably from the evidence before us that the bank was in fact a bona fide holder for value in due course. In the Scharpenberg Case the only evidence relied upon to show the title and good faith of the plaintiffs as indorsees was oral testlmony of themselves, given without the corroboration of records of their business or other circumstances. Speaking of their statements, we said: "There was no evidence as to the manner, consideration, or time of purchase of the note by the respondents, save that given by themselves. Frank N. Ireland testified as to the amount paid for the note, and that it was purchased of Robert Burgess & Son, August 1, 1907, without any notice of there being any defense thereto. It will be noticed that this was after interest was some three months in default, but before maturity of the first installment. Charles Ireland testified to substantially the same effect, but he admitted upon cross-examination that the knowledge he had in this respect was gained from their records, and it was from them he was testifying. No record was produced, so we have no competent evidence of the purchase, or time of purchase, of this note, save that of Frank N. Ireland, who, of course, is a witness directly interested in the result of the cause. His testimony in this regard was not contradicted by any direct evidence. There was, however, the circumstance of the interest being in default some three months, as well as other minor circumstances which the jury would have been warranted in taking into consideration in weighing the testimony of Frank N. Ireland, even though not directly contradicted, had the cause been submitted to them. In other words, the jury would not have been required to take the testimony of Frank N. Ireland in this regard as conclusive proof, and there was no other upon that question." In this case there is no dispute as to the time the bank acquired the note, the consideration paid, nor any other fact tending to show that it became a holder before maturity and for value. The only question is its bona fides or mala fides in acquiring title. Our holding in the Scharpenberg Case, that the question of the bona fides of the plaintiffs and their credibility was for the jury, was predicated upon the evidence then before the jury and mentioned in the opinion. In making our conclusion we cited Canajoharie National Bank v. Diefendorf, 123 N. Y. 191, 25 N. E. 402, 10 L. R. A. 676, and other authorities which follow that case. In the New York case the conduct of the cashier was shown to be such as to indicate a deliberate intention upon his part to studiously avoid knowledge, which he manifestly anticipated would disclose the defective title of the payee. The facts are stated in the opinion. This New York case has on similar evidence been repeatedly followed by this and other courts, but the Court of Appeals of New York itself distinguished it, in American Exchange National Bank v. N. Y. Belting Co., 148 N. Y. 698, 43 N. E. 168, a case similar to this, in which it held that judgment should be directed against a maker in favor of a plaintiff indorsee as a bona fide holder in due course. [3] In the Canajoharie Bank Case the court said: "The payment of value for negotiable paper is a circumstance to be taken into account with other facts in determining the question of the bona fides of the transaction, and, when full value is paid, is entitled to great weight. But that fact is never conclusive, except in the absence of evidence tending to show notice or bad faith." [4, 5] Although subdivision 3 of section 3443, Rem. & Bal. Code, in defining a holder in due course, provides that he shall have taken the instrument in good faith, and section 3450 provides, when it is shown that the title of the person who has negotiated the instrument is 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; and, although under section 3446 the title of the transportation company to this instrument must be regarded as defective, these sections, being each and all in our negotiable instruments act, must be considered in connection with section 3447, Rem. & Bal. Code, of the same act, which reads as follows: "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." In other words, if an indorsee for value before maturity did not have actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith, he would, so far as that question is concerned, be held a holder in good faith; no mala fides being shown. his title thereto is unimpeachable; but that it is still the rule that willful ignorance and guilty knowledge alike involve the result of bad faith. This, however, does not mean that the holder's title is to be overthrown by slight circumstances. He does not owe to the party who puts the paper afloat the duty of active inquiry in order to avert the imputation of bad faith. His rights are to be de good faith, not by a speculative inquiry into diligence or negligence. Although he may have been negligent in taking the paper, and omitted precautions which a prudent man would have taken, nevertheless, unless he acted mala fide, his title will prevail." In Gray v. Boyle, 55 Wash, 578, 104 Pac. 828, 133 Am. St. Rep. 1042, commenting on this section and quoting with approval from Crawford's Annotated Negotiable Instruments Law, we said: "The respondent pur-termined by the simple test of honesty and chased the note for value before maturity, and at the time of his purchase had no notice of any defect or infirmity in the instrument. The chief circumstance upon which the appellant relies to establish mala fides is the fact that the respondent knew that Behan was an insurance agent, and that the note was given in whole or in part in payment for an insurance premium. The rule by which the good faith of a holder of negotiable paper is to be determined is thus stated in Crawford's Annotated Negotiable Instruments Law (3d Ed.) p. 68: "The holder is not bound at his peril to be on the alert for circumstances which might possibly excite the suspicion of wary vigilance; he does not owe to the party who puts the paper afloat the duty of active inquiry in order to avert the imputation of bad faith. The rights of the holder 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. The holder's right cannot be defeated without proof of actual notice of the defect in title or bad faith on his part evidenced by circumstances. Though he may have been negligent in taking the paper, and omitted precautions which a prudent man would have taken, nevertheless, unless he acted mala fide, his title, according to settled doctrines, will prevail.' This rule is fully supported by the authorities, and, measured by it, the title and good faith of the respondent were not impeached." [6] In Jamieson & McFarland v. Heim, 43 Wash. 153, 86 Pac. 165, we held that fraud in the inception of a negotiable instrument will not invalidate it in the hands of an innocent holder in due course. The question arises, What knowledge did the appellant have of any infirmity in the title of the transportation company to the respondent's $3,000 note? We do not understand any claim is made that it had actual notice. The respondent himself testified as follows: "Q. Captain Johnston, I understood you to say that at the time you signed this $3,000 note, on May 7, 1909, that you had no knowledge of any fraudulent transactions upon the part of the company. A. No, sir; I did not. Q. Now, will you kindly tell the jury then, Captain, as near as you can, the date when you first discovered any fraudulent transactions? A. Why, I cannot tell; it was some time, I think, in there; some time in June, or the latter part of May, that Mr. Zintheo came to my house and wanted me to buy some more stock. Q. So that you had no information or notice that these fraudulent schemes were made until after that time-in June-early in June or late in May? A. No, sir; I don't think that I did." In McNamara v. Jose, 28 Wash. 461, 68 If respondent was ignorant of the alleged Pac. 903, on issues of fact similar to those misrepresentations and fraud, which he now now before us, we sustained the action of the claims vitiated the title of the transportatrial judge in withdrawing the case from the tion company, and his ignorance continued jury at the close of all the evidence, and until after appellant had acquired the note, directing a judgment for the plaintiff. In how could the appellant be presumed to have our opinion, citing and commenting on sec- obtained actual knowledge as to the origin of tions 56 and 57 of the negotiable instruments this particular note before obtaining title? act (Laws 1899, c. 149), now sections 3447 There is not a syllable of evidence that apand 3448, Rem. & Bal., we said: "But, not- pellant did. Lilly's statement as disclosed withstanding this act positively provides that, by his evidence did not give the bank noto constitute notice of an infirmity in a ne tice or knowledge of such facts as to show gotiable instrument, the purchaser must have its bad faith in taking the note. It is conknowledge of such facts that his action in ceded that the bank had in good faith, withtaking the instrument amounted to bad faith, out notice, in due course and for value, purwe cannot think that the Legislature meant chased the Lilly notes before his interview to say that a purchaser of a negotiable in- with the bank. The bank then had good strument can shut his eyes to the surround- title to the Lilly notes. There was no ocing circumstances, remain in willful ignor-casion demanding an investigation of those ance of facts which would have made known notes, nor an investigation of his dealings to him the infirmities of the instrument he with the transportation company. Assumpurchases, and then claim, because he had ing that the bank had then prosecuted an in ing a section identical with section 3447, Rem. & Bal., supra, in a case similar to this, held, on the evidence offered, the trial court erred in refusing to peremptorily instruct the jury to find for the plaintiff. The court said: "To constitute notice of an infirmity in an instrument or defect in the title of questionable in the dealings between Johnston and the transportation company. The Johnston note was not then in existence, nor was it executed for more than three months thereafter. The Lilly notes were paid before respondent's note was executed. So far as the bank was concerned, the Lilly matter was a closed incident, satisfactorily closed, the person negotiating the same, the person and calling for no further consideration. The transportation company and Lilly had settled their differences. The Lilly transaction had no relation whatever to respondent's note, executed three months later. Were it conceded to have been a circumstance sufficient to excite some suspicion as to the character of the dealings and acts of the transportation company, we could not, under the weight of modern authority, hold the appellant to have acted in bad faith, or that it was negligent in making no further investigation than it did. In other words, there is not in the entire record any suggestion of mala fides on appellant's part. Some contention is made by respondent to the effect that, at the time appellant made the $5,000 loan to the transportation company, it knew the company was insolvent. This contention is based upon the admitted fact that a written statement was made to the bank by the transportation company, showing that its liabilities, some of them not due, exactly equaled its claimed assets, but in which no statement relative to its capital stock appeared. The transportation company was then, and for some time had been, a going concern, transacting business and carrying on a substantial depositor's account with appellant. The bank does not contend that it made the loan on the credit of the company. On the contrary, it admits that it refused to do so. The loan was made on the credit of the indorsers of the $5,000 note and the collateral security, including respondent's note. There was nothing suspicious in the fact that the bank made the loan to a going corporation on good security. It was immaterial, as affecting the honesty and good faith of the bank, whether the transportation company was worth anything, so long as its stockholders, most of them men of large wealth-a fact known to the bankwere willing to indorse for it, or had given it their notes which it could and did use as collateral. The loan, from the standpoint of the bank, was gilt-edged, and free from any suspicious circumstance. If the transportation company was then actually insolvent, its stockholders, including respondent, were in a better position than appellant to know or learn that fact, but they indorsed its paper, gave it their personal notes, and permitted it to continue the transaction of its business, at the time knowing it was procuring this identical loan of $5,000 from appellant to raise funds for use in its business. In Bothwell v. Corum, 135 Ky. 766, 123 S. W. 291, the Court of Appeals, consider to whom it is negotiated must have actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounts to bad faith. Ky. St. § 3720b, subsec. 56 [Russell's St. § 1925]. The proof in this case fails to come up to either one of these requirements of the statute. There is nothing in the case to show that appellant had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instruments amounted to bad faith. On the contrary, his evidence, which is unimpeached by that of any other witness or by any circumstances in the case, tends to show that he acquired the drafts before maturity, for value, and without notice of any infirmity therein or defect in the title of the American Jobbing Association, which indorsed, delivered, and sold the drafts to him." [7] It is well established by the overwhelming weight of modern authority that, if, in an action on a negotiable note prosecuted by an indorsee, the maker alleges and shows the instrument to have been fraudulently obtained by the payee, it will then devolve upon the indorsee to show that he is a bona fide holder for value, and that he obtained the note before maturity in due course, and without knowledge of the infirmity, or of facts sufficient to put him on inquiry. [8] But it is equally well established that mere suspicion of an infirmity is insufficient to put the indorsee upon inquiry, or show that he is not a holder in good faith. McNamara v. Jose, 28 Wash. 461, 68 Pac. 903; Gray v. Boyle, 55 Wash. 578, 104 Pac. 828, 133 Am. St. Rep. 1042; Sinkler v. Siljan, 136 Cal. 356, 68 Pac. 1024; Valley Savings Bank v. Mercer, 97 Md. 458, 55 Atl. 435; Wilson v. Riddler, 92 Mo. App. 335; Bank v. Hatcher, 151 N. C. 359, 66 S. E. 308, 134 Am. St. Rep. 989; Jefferson Bank v. Chapman, 122 Tenn. 415, 123 S. W. 641; First National Bank v. Moore, 148 Fed. 953, 78 C. C. A. 581; Reilly v. McKinnon, 159 Fed. 78, 86 C. C. A. 268; Hamilton National Bank v. Upton, 100 App. Div. 105, 91 N. Y. Supp. 475; Second National Bank v. Weston, 172 N. Y. 250, 64 N. E. 949; Kavanagh v. Bank of America, 239 Ill. 404, 88 N. E. 171; Fidler v. Paxton, 101 Ill. App. 107; Tescher v. Merea, 118 Ind. 586, 21 N. E. 316. In Sinkler v. Siljan, supra, the Supreme Court of California said: "To say that one who purchases a note before maturity and pays full value therefor, as plaintiff did in this case, must be prepared to defend his |