CLAYTON v. BANK OF EAST CHATTANOOGA.

(Supreme Court of Alabama, 1920. 204 Ala. 64, 85 South. 271.) Assumpsit by the Bank of East Chattanooga against O. W. Clayton. Judgment for plaintiff, and defendant appeals. Reversed and remanded.16

SOMERVILLE, J. * * * To defendant's pleas of fraud and want of consideration plaintiff pleaded only a special replication that it was a bona fide purchaser for value in due course. There being no general denial of the pleas, they were confessed by the replication, and proof of them by defendant could not be required. Ger.-Am. National Bank v. Lewis, 9 Ala. App. 352, 63 South. 741. It was therefore incumbent upon plaintiff to establish its replication, viz. that it purchased the note for value.

The trial judge instructed the jury that if plaintiff, under the circumstances shown in evidence, "bought the note by giving Hudson or his company [the first holder and transferor] credit for it, then * * * this note will have to be paid." This part of the oral charge was duly excepted to by defendant, and is assigned for error.

The only evidence as to plaintiff's payment of value for the note is found in the testimony of its' cashier, Poole, that he bought the note for $980 from Hudson, by giving to him "a certificate of deposit for the note." It does not appear whether it was certificate of present deposit, or a time certificate, or whether it was negotiable, or whether the fund represented, or any part of it, has ever been paid out by the plaintiff bank. The trial court interpreted this testimony as meaning (as it may well have meant) that plaintiff bank gave Hudson a credit on account for $980, and this interpretation was apparently acquiesced in by both parties. The instruction was erroneous and prejudicial, and must work a reversal of the judgment. Sherrill v. Merchants' Bank, 195 Ala. 175, 70 South. 723; Ala. Grocery Co. v. First National Bank, 158 Ala. 143, 48 South. 340, 132 Am. St. Rep. 18; Armstrong v. Walker, 200 Ala. 364, 76 South. 280. In the last-cited case it was said:, "According to the evidence, the German Bank gave * * * certificate of deposit for the notes of the defendant. It does not appear from the evidence that this certificate of deposit was ever paid. If no part of the deposit attested by the certificate has ever been paid, then the bank did not part with value so as to constitute it a bona fide holder."

Counsel for appellee rely upon the cases of Elmore Bank v. Avant, 189 Ala. 418, 66 South. 509, and Neill v Central National Bank, 201 Ala. 297, 78 South. 73. In the former case it appeared that the certificate of deposit was an interest-bearing time certificate, negotiable in form, and that it was promptly negotiated by the holder, and afterwards

16 Part of the opinion is omitted.

paid by the bank. In the latter case it also appeared that the certificate was an interest-bearing time certificate, and an examination of the original record shows that it was negotiable in form, and was actually paid by the bank. The instant case, therefore, does not come within the principle of those decisions.

A certificate of deposit is not ipso facto a negotiable instrument. Renfro Bros. v. M. & N. Bank, 83 Ala. 425, 3 South. 776; 7 Corp. Jur. 648, § 340. To be such it must be payable to order or bearer, as prescribed by the statute. Code, § 5131. In order for the issuance of a certificate of deposit by a discounting bank for the purchase of a note to be effectual as value paid, it must appear either that the certificate has been paid in whole or in part (Armstrong v. Walker, 200 Ala. 364, 76 South. 280), or else that it was a negotiable instrument and still outstanding as a liability upon the bank. See 8 Corp. Jur. 481, § 699, and cases cited in note 73. Under the authorities noted, we are constrained to hold that the evidence did not show that the plaintiff bank paid value for the note in question, and that the trial court was in error in its holding to the contrary.

Reversed and remanded.17

17 "It is claimed on the part of the defendants that because there was a balance to the credit of the Delanceys at the plaintiff bank of more than the amount of the note in suit on the respective dates-June 28, 1904, June 29, 1904, April 20, 1905, and May 1, 1905-as found by the trial court, therefore the plaintiff did not purchase and pay for the note June 28, 1904. In other words, that the amount of the note stood to the credit of the Delanceys at the bank without being drawn out by them. But it is undisputed that such balances were subject to check, and simply stated the balances on Delanceys' account at the respective dates mentioned, and had nothing to do with the note in suit, and that such balances varied from time to time and were at times overdrawn. The facts stated make it certain, not only that the plaintiff purchased the note and placed the amount thereof to the credit of the Delanceys in their bank account, less the discount, June 28, 1904, but also that the Delanceys drew out of the bank to their own use the whole of the amount so placed to their credit prior to the time when the plaintiff first learned that the defendants claimed to have a defense to the note. Such being the facts, there can be no question but what the plaintiff became the owner and holder of the note in due course and in good faith and for value before maturity, and hence is entitled to the protection of the law merchant, even if the defendants might have successfully defended against the vendors of the stallion." Northfield Bank v. Arndt, 132 Wis. 383, 112 N. W. 451, 453, 12 L. R. A. (N. S.) 82 (1907).

"The evidence showed that the amount of the note was placed to the credit of Haas in the appellant bank, and that soon thereafter, and on the strength of the credit, the bank obligated itself to honor a check drawn on Haas for $1,000. Notwithstanding this last transaction, it is claimed by the appellee that appellant paid nothing for the note until after it had notice of its infirmities. The giving of credit alone would create the relation of debtor and creditor between the bank and Haas, and nothing more, and the bank would not thereby become a bona fide holder within the meaning of the law. City Deposit Bank v. Green, 130 Iowa, 384, 106 N. W. 942. But, if it was true that the bank had assumed a legal obligation to another on the faith of the deposit or credit, it became thereby a purchaser for value. Leach v. Hill, 106 Iowa, 171, 76 N. W. 667." Montrose v. Claussen, 137 Iowa, 73, 76, 114 N. W. 547, 548 (1908).

SECTION 2.-NOTICE

BROWN v. DAVIES.

(Court of King's Bench, 1789. 3 Term R. 80.)

This was an action by the indorsee of a promissory note against the maker.

The plaintiff, at the trial before Lord Kenyon at the last sittings at Guildhall, rested his case upon the proof of the maker's and payee's handwriting. The note appeared upon the face of it to have been drawn on the 6th of October 1788, payable to Sandal or order, and to have become due on the 13th of November. It had Sandal's indorsement upon it, and had been noted for nonpayment. Whereupon the defendant's counsel offered to prove these facts: That Sandal, having indorsed it in blank, delivered it to Taddy, by whom it had been noted for nonpayment. That on the 6th of December Sandal, having been paid by the defendant, the maker of the note, took it up from Taddy. and afterwards, without the knowledge or consent of the defendant, negotiated it to the plaintiff. But his Lordship being of opinion that, unless knowledge was brought home to this plaintiff, it would make no difference between these parties, rejected the evidence, and the plaintiff had a verdict.

Le Mesurier moved in this term for a rule to show cause why there should not be a new trial, in order to let the defendant into proof of the above facts, and cited a case of Banks v. Colwell of Launceston Spring Assizes, 1788, before Mr. Justice Buller. That was an action by the indorsee of a promissory note, payable on demand, against the maker. The defendant there was admitted to give evidence that the note had been indorsed to the plaintiff a year and a half afterwards, and to impeach the consideration by showing that it had originally been given for smuggled goods, and that payments had been made upon it at several times. But though no privity was brought home to the plaintiff, Mr. Justice Buller was clearly of opinion that he ought to be nonsuited; for he said it had been repeatedly ruled at Guildhall that wherever it appears that a bill or note has been indorsed over some time after it is due, which is out of the usual course of trade, that circumstance throws such a suspicion upon it that the indorsee must take it upon the credit of the indorser, and must stand in the situation of the person to whom it was payable, and here it appeared that the consideration was illegal. Therefore he nonsuited the plaintiff. The principle of that case cannot be distinguished from the present, according to which the plaintiff must stand in the situation of Sandal with respect to the defendant, and consequently was not entitled to recover.

Erskine now showed cause, contending that there was no evidence offered to show that the plaintiff knew the note to have been satis

fied; neither was there any circumstance attending it, which might reasonably lead a prudent man to suspect that it had; one or other of which was essentially necessary to disqualify the plaintiff from maintaining his action. For he had paid a valuable consideration for the note to the original payee in whose hands it might properly be supposed to be. And this objection does not lie in the defendant's mouth, whose negligence, in not taking up the bill, when he satisfied Sandal, had left it in the power of the latter to deceive an innocent third person.18

Lord KENYON, C. J. I think this matter ought to be further inquired into. It did not strike me at the trial that there was this suspicious circumstance on the face of the note; for, if it appeared to have been noted for nonpayment at the time the plaintiff received it, that ought to have awakened his suspicion, and led him to make further inquiries into the goodness of the note.

ASHHURST, J. I think the rule laid down by my Brother Buller, in the case in Cornwall, is à very safe and proper one: That, where a note is overdue, that alone is such a suspicious circumstance as makes it incumbent on the party receiving it to satisfy himself that it is a good one; otherwise much mischief might arise.

BULLER, J. There is this distinction between bills indorsed before and after they become due. If a note indorsed be not due at the time, it carries no suspicion whatever on the face of it, and the party receives it on its own intrinsic credit. But if it is overdue, though I do not say that by law it is not negotiable, yet certainly it is out of the common course of dealing, and does give rise to suspicion. Still stronger ought that suspicion to be when it appears on the face of the note to have been noted for nonpayment, which was the case here. But generally, when a note is due, the party receiving it takes it on the credit of the person who gives it to him. Upon this ground it was that, in the case in Cornwall, I held that the defendant, who was the maker, was entitled to set up the same defense that he might have done against the original payee; and the same doctrine has been often ruled. at Guildhall. A fair indorsee can never be injured by this rule; for, if the transaction be a fair one, he will still be entitled to recover. But it may be a useful rule to detect fraud whenever that has been practised. [Upon Lord KENYON's appearing to dissent from the generality of the doctrine held by Mr. Justice BULLER, he proceeded to observe:] My Lord thinks I have gone rather too far in something that I have said, but it is to be observed that I am speaking of cases where the note has been indorsed after it became due, when I consider it as a note newly drawn by the person indorsing it.

Lord KENYON, C. J. I agree with that, with the addition of this circumstance: That it appears on the face of the note to have been dishonored, or if knowledge can be brought home to the indorsee that

18 Part of the argument is omitted.

it have been so. But I should think otherwise if no notice can be fixed on the party; at least I am not prepared to go that length at present. GROSE, J. If collusion should be proved between the defendant and Sandal, then the former will not be entitled to set up this objection. But at present I am of opinion that a new trial ought to be granted. Rule absolute.

BAROUGH v. WHITE.

(Court of King's Bench, 1825. 4 Barn. & C. 325.)

19

Assumpsit by the plaintiff as indorsee of a promissory note made by the defendant for £300. with interest payable to one J. Arnitt, or his order, on demand. At the trial before Abbott, C. J., at the London sittings, after Easter term, the plaintiff proved the handwriting of the drawer and indorser of the note, and also that he had bought and paid. for goods for Arnitt to a considerable amount before the note was indorsed, but did not give any direct evidence of the consideration given by him for the note. For the defendant evidence was tendered of declarations made by Arnitt when he was the holder of the note, showing that he gave no value for it to the maker; and the case of Banks v. Colwell, cited in Brown v. Davis, 3 T. R. 80, was relied on. The Lord Chief Justice rejected the evidence, because it could not be shown that the plaintiff when he took the note knew that the payee gave no consideration for it. Arnitt was in court, but was not called as a witness. The plaintiff having obtained a verdict, Cross, Serjt., now moved for a rule nisi for a new trial.1 BAYLEY, J. I am of opinion that the declarations made by Arnitt were not admissible in evidence. The defendant did not identify Arnitt with the plaintiff. Had it been shown that the latter took the note without giving a consideration for it, or after it became due, the case would have been very different. Although there was no direct evidence of the consideration given by the plaintiff to Arnitt, yet dealings between them were proved, whence the existence of a valuable consideration might be fairly presumed. Neither does it appear to me that this note could be considered as overdue. It is said that in Banks v. Colwell, Buller, J., treated a note payable on demand as a note taken by an indorsee after it was due. We are not, however, acquainted with all the circumstances of that case. Payment might have been demanded before the indorsement, and indeed it is stated that several payments had been made on account. In this case no demand was proved, and the note being made payable with interest to Arnitt or order makes it probable that the parties contemplated that the note would be negotiated for some time. For these reasons I think that the evidence was properly rejected, and that the verdict ought not to be disturbed.

10 The arguments of counsel, and the opinions of Abbott, C. J., and Ho royd and Littledale, JJ., are omitted.