#### Kinney vs. Kruse and another.

PROMISSORY Note : (1, 2) *What fraud in putting note into circulation constitutes a defense.*(3) *Bights of Iona fide holder of note as a security. Bights of one taking undw him.*

1. Tlie fact that one who held possession of a note for the payee put it in circulation in fraud of his rights, is no defense in a suit by the holder against the maker; nor does it change the burden of proof, so as to require the plaintiff to show in the first instance that he is a *lona fide*holder for value.

2. The fraud in putting the note into circulation which will operate as a defense, or change the burden of proof, in such an action, must be a fraud against the defendant.

3. The president of a railroad company, who was authorized by a vote of the directors to enter into any contract or agreement with any person which he might think best for the interest of the company, transferred to one of its creditors, as security for a debt then due, notes belonging to the company, including the one in suit; and subsequently assented to a transfer thereof by W. to C. as security for a loan from the latter to the former. Afterwards the note, by successive transfers for value, came into plaintiff’s possession. *Held,*

*184(1.)" That plaintiff had the same right which 0. would have had' upon the note: to wit, a right to enforce payment thereof to the full amount of W.’s indebtedness to C. not otherwise paid, or realized from the other securities; and this without reference to any defense which the maker might have to the note as against the railroad company.

(2.) That plaintiff’s rights derived from 0. were not affected by his knowledge, when he took the note, of defendant’s equities against the company, or by the knowledge of any of the transferees between himself and C.

APPEAL from the Circuit Court for *Washington*County.

Foreclosure of a .mortgage executed in 1857, by *Henry Kruse and wife*to the Milwaukee and Fond du Lac Air Line Railroad Company, to secure the note o£ said *Henry*Kruse, of tbe same date, running to said company or order for $2,400, payable in ten years, with, interest payable annually. Tbe defendants contested tbe action on tbe grounds, first, of a want of of power in tbe railroad company to receive tbe mortgages ; secondly, of a judgment avoiding tbe note and mortgage, rendered in a prior suit against tbe railroad company “ and persons un known and thirdly, that tbe company bad procured tbe instruments to be executed by fraudulent representations, and that tbe plaintiff bad purchased or obtained the supposed note and mortage long after due, without paying any good or valuable consideration therefor, and with notice of the equities between the parties.

On tbe trial, there was evidence tending to prove, and tbe court found, *inter alia,*the following facts: At tbe date of tbe giving of tbe mortgage, said railroad company was a subsisting corporation, under chapter 323, Private and Local Laws of 1854, and chapter 78, Private and Local Laws of 1857. Tbe company attached the note and mortgage in suit to its own bond for tbe same amount, made and executed in due form, by a clause in which said note and mortgage were assigned to the bearer of tbe bond as security for its payment. About the 1st of July, 1857, tbe company delivered the three instruments thus attached together, to one Julius White, as security for a joint indebtedness from said company and the Milwaukee and Superior Railroad *185Company to said White for $8,000. White, on the 12th of May, 1857, borrowed of one Carver $6,000, on his own private account and for his individual benefit, and gave Carver Ms note therefor, and as collateral security delivered to Carver $10,000 of securities of the Milwaukee and Superior Eailroad Company, and afterwards, in July, 1857, by request of one Alton who was the president of both companies, agreed with Carver to exchange, and did exchange, the securities last above mentioned, for a like amount of the securities of the Milwaukee and Eond du Lac Eailroad Company, commonly called farm mortgage bonds, among wMch was the note and mortgage here in suit. Carver had no notice or knowledge of any misapplication of said securities or any defense against them. Said indebtedness to WMte from said two railroad companies, had none of it been paid, unless by the transfer of said securities. Prior to 1866, White’s note of $6,000 and said collaterals had been separated, in some way not appearing from the testimony, and said note had come umndorsed into the hands of one Clapp, of Chicago,' Ill. In or about the year 1866, White compromised his said note with Clapp, by paying him $1,000 therefor, and took up the note, the collaterals not being in Clapp’s hands. WMte never sold said securities, but they were in some way and by some one (the testimony not showing how or by whom) put upon the market, and prior to or in the fall of 1868, came, *Iona fide*and for full value paid, into the posses sionof one Waite, who, in the fall of 1863 or winter of 1864, sold and transferred said $10,000 worth of Milwaukee and Eond du Lac Air Line Eoad securities, including the note and mortgage in suit, to one Walker, of CMcago, Ill., for $2,500 then paid by Walker, wMch was all the securities were then worth. Said purchase was made in the usual course of business; and Walker had no notice or knowledge of any misapplication oí said note and mortgage or of any defense thereto.

Afterwards, in 1865 or 1866, and before this suit was commenced, Walker hypothecated or pledged said securities to the *186plaintiff to secure a loan of money made at tbe time by plaintiff to Walker, and plaintiff 'received tbe samé in tbe usual course of business and in good faitb, and tbe debt for wbicb they were pledged bas not been paid. Tbe note and mortgage were delivered to tbe railroad company in payment for twenty-four shares of tbe capital stock of tbe company, wbicb stock was delivered to *Henry Kruse*about July 1, 1857, and is now retained by bim, and never offered tó be returned to said company. At tbe same time a contract in writing was entered into between *Kruse*and tbe company, wbicb is set out in tbe finding, and tbe substance of wbicb was, that tbe company, for a certain consideration, undertook to pay the interest on tbe note, and save *Kruse*harmless therefrom. Tbe court further found that tbe allegations of fraud in tbe answer were not proven.

As conclusions of law, tbe court held that tbe railroad company was legally empowered to receive and transfer said note and mortgage; that tbe receipt and transfer thereof, as shown, were legal transactions, and tbe note was legally indorsed by tbe company ; that thé nóte and mortgage were valid; that no defense against them bad been shown, even as between the original parties ; that Walker was a *Iona fide*purchaser for full value, before maturity; 'and that tbe plaintiff was an endorsee of tbe note, in good faith, for value paid, béfore maturity, and entitled to maintain this action and to recover tbe full amount secured by said bote and mortgage.

Judgment in accordance with tbe prayer of tbe complaint • and defendants filed exceptions tó tbe findings and conclusions of the court, and appealed.

Finches, *Lynde &*Miller, for appellants,

contended, among other things, 1. That defendant bad á good defense as against tbe railroad company at least to tbe amount of tbe *interest*on thé noté, which tbe company bad bound itself to pay. 2. That a good defense, as against the company, for the whole anidunt t>f tbe note, bad also been shown, upon thé ground that it bad been obtained by fraudulent representations; 3. That the note *187and mortgage were fraudulently put in (¿relation; that Alton, as president of the company, bad no right to pledge them to "White for the purpose shown by the evidence, and White was, therefore, not a *bond fide*holder as against the company; that the subsequent disposal of them, while held in pledge, without demand oh White or notice to him, was also fraudulent; and that neither Walker nor the plaintiff could be regarded, upon the evidence, as purchasers in good faith, in the usual course of business. To protect the purchaser of negotiable paper, it must have been purchased in the usual course of business, before maturity; the purchase must be free from such suspicion as would put a reasonable man on inquiry; a good fair price must be paid; the greater the discount at which the paper is purchased, the more necessity there is for extreme care in the purchase; when the paper has been fraudulently put into circulation, the burden of proof is upon the holder to show that he paid *full*value; and circumstances *calculated to excite suspicion*are enough to impeach the title, in the absence of proof of good faith. 5 Sandf., 157; 48 Me., 163; 13 Iowa 589; 1 Curtis, 390; 8 Cohn., 336; 32 Yt, 135 ; 1 E. D. Smith, 154; 12 Pick., 545; 8 Cray, 254; 10 Eng. C. L., 154; 32 id., 339 ; ,11^ id., 425; 28 N. Y, 600; 1 Wis., 471. When the inadequacy of price is very gross and manifest, the court will infer fraud or imposition from that fact álone.*2 Yerg., 294; 4 Dessaus., 652; 2 Litt., 118; 4 IfedeÜ Eq., Í71; £5 Humph, 520; 9 Ala., 692; 6 Johns. Ch.¡ 222; 15 How. (U. S.), 60.

*JEJ. Mariner*(with *Demid 8. Ordway,*of counsel), for respondent,

contended, upon the evidence, that no fraudulent representations had been shown which would avoid the note and mortgage even as against the railroad company; that it was *188therefore a matter with wbicb defendant had no concern, what the company did with the instruments *(Kennedy v. Knight,*21 Wis., 845 ; *City Banlc v. Perkins,*29 N. Y., 554); that even if the .paper had been put in circulation fraudulently, this would be no defense against the plaintiff, if he showed himself to be a *bona fide*holder for value (Edwards on Bills, 2d ed., § 691); that it must have been put in circulation fraudulently *as to the*defendant, or the burden of proof is not changed *(Ross v. Bedell,*5 Duer, 467); that Carver, being a *bona fide*holder, to secure payment of $600 with interest, had a right either to pledge or sell the note and mortgage in suit; that plaintiff, standing in Carver’s shoes, may recover on them; and that there was nothing in the purchase of such securities at 25 per cent, on their face to show that the purchase by Walker was in bad faith.

*

*Mr.*Walker testified that lie bought the $10,000 of securities (bonds of the Milwaukee and Fond du Lac R. R. Co., with farm mortgages and notes attached) for $2,500; Sind that he supposed he was able to get them at this price, “because they were securities not well known in market, and the interest was not paid, and a party obliged to realize Woitld have to take wkat hé cóúld get;”

DixoN. C. J.

The fraudulent putting in circulation of a negotiable instrument which operates to change the burden of proof and call upon the plaintiff to prove his title as a *bona fide*holder, is where this is done fraudulently *as to the defendant or*maker, and not where it is so done as to the payee or some intermediate holder or party to the paper. If, therefore, Alton, as president of the railroad company, fraudulently put the note and mortgage in circulation *as to the company,*it is not perceived how that circumstance is available to the defendants as a distinct ground of defense, or for the purpose of changing the burden of proof. The case of *Ganard v. Pittsburg and Connelsville Railroad Company,*29 Pa. St., 154, cited and relied upon by counsel for the defendants on this point, is entirely unlike. That was an action of trover by the railroad company, to recover damages for the conversion of a negotiable security belonging to it, which had been fraudulently and without authority put in circulation by its president. The defendant claimed to hold the instrument, a negotiable bond, in payment of, or as collateral security, for a private debt due him from the president of the company. The court found that it was neither taken in payment nor as collat*189eral security by tbe defendarrt (plaintiff in error), and tbat be bad notice of tbe want of authority and fraudulent intent of tbe president. If tbe railroad company bere bad brought suit for tbe conversion of tbe note and mortgage, against White,' to whom Alton transferred them, and it bad appeared tbat tbe transfer was upon or in security for tbe private or individual debt of Alton, who acted without authority, tbe case referred to would have been apposite, and tbe decision in point. But this case differs altogether. Alton, tbe president, bad tbe fullest authority, by resolution of tbe board of directors, to enter into tbe negotiation and make tbe transfers and exchanges which be did.

Tbe resolution was in these words: “ *Resolved,*Tbat C. R. Alton, president of tbe Air Line Railroad Company, be, and be is hereby, authorized and empowered to enter into any contract or agreement with any corporation, company or individual, which be, in bis judgment, may think best for tbe interest of this company, and any contract or agreement or thing done by him as president of tbe company, is hereby fully ratified and confirmed.” And tbe transactions bere were in tbe proper business and affairs of tbe company. White was a creditor of tbe company in tbe sum of $3,000, and wanted bis pay, and applied to Alton to obtain it, and tbe note and mortgage in suit, with others, were transferred to him by Alton as security *for the debt of the company.*Subsequently White, with tbe knowledge and consent' of Alton, deposited tbe notes and mortgages with Carver as collateral security on a loan of $6,000 made by White of Carver. Under these circumstances it is difficult to perceive why White, and after him Carver, were not each of them *bona fide*holders for value of tbe note and mortgage, and entitled to enforce payment of tbe same to tbe extent of their interest as against tbe defendants, discharged of any equities or matters of defense existing between tbe defendants and tbe railroad company. This. would seem to be so within tbe very principles laid down in tbe case above cited, and per-*190tainly as tbey have always been understood and applied by tbis court. White did not pay bis note given on tbe loan from Carver, but years afterwards took it up on payment of $1,000, and let tbe securities go. It does not appear when, where, or to whom, or upon what consideration, Carver transferred tbe securities. Tbey subsequently came to tbe bands of one Waite, who claimed to own them, and sold them to tbe witness Walker for $2,500. Walker, as be testifies, transferred them to tbe plaintiff as collateral security for about fifty cents on tbe dollar. Tbe notes and mortgages which have been thus transferred and sold amounted to $10;000, without tbe interest.

If, as we have assumed, Carver was a *bona fide*bolder to tbe extent of bis interest (for tbe title or interest of White became merged or lost in that of Carver), then it follows that tbe plaintiff, as tbe successor of Carver, may bold and enforce payment tbe same as Carver could have done, and that notwithstanding tbe plaintiff may have bad notice of tbe invalidity, or fraud, or want of consideration, at tbe time be purchased or received tbe note and mortgage, or may not have paid value for tbe same. Tbe transferee or purchaser of a note voidable for want of consideration or other cause as against tbe maker, from an innocent indorsee or bolder for value without notice, is entitled to recover, though be took tbe note with full knowledge of such want of consideration or other voidable defect. *Smith v. Hiscock,*14 Maine, 449; *Hascall v.*Whitmore, 19 Maine, 102; *Masters v.*Ibberson, 8 Man., Gran. & Scott [65 E. C. L.], 100; Byles on Bills, [*110]; Bayley on Bills, 350; Edwards on Bills and Promissory Notes, 312. Tbe principle is, that tbe promise being good to tbe prior indorsee or bolder, free from objection on tbe ground of fraudulent or illegal consideration, be has tbe power of transferring it to others, with tbe same immunity, as an incident to tbe legal right which be bad acquired in tbe instrument. It is no defense, therefore, that a plaintiff, being a transferee of a bill or note, bad notice of a fraudulent or illegal considera*191tion, if be can deduce title from a prior party not shown to baye bad any sncb 'notice.

Tbe plaintiff deduces title from Carver, wbo was clearly an innocent bolder for value. If Carver bad brought suit, what would have been bis rights ? His title would have been none tbe less valid because be held tbe note and mortgage as collateral security. As respected tbe legal title, there could have been no distinction between tbe advance made by him and tbe case of an actual purchaser. *Gibson v. Stevens,*8 How. (U. S.), 400; *Harrington v.*Smith, 8 Pick., 419; *Adams v.*Wheeler, 10 Pick., 199; *Mitchell v.*Black, 6 Gray, 105. And bis title would have been tbe same even if be bad so held them upon an advance less than their nominal value. He held them upon a loan of twice or three times their nominal value, and which, beyond tbe sum afterwards repaid by "White to get up bis own note, considerably exceeded tbe nominal value of any two of tbe notes and mortgages deposited, though- short of tbe nominal value of all of them. If Carver bad brought suit, judgment must have gone in bis favor for tbe full amount due on tbe note and mortgage. That would have been bis right as a *Iona fide*bolder for value, at least until tbe defendants bad shown that bis demand was reduced below such amount by payments or moneys realized from tbe other securities deposited. Carver could have sued upon and proceeded to enforce payment of any and all tbe notes and mortgages, until tbe debt due him, with interest, was fully paid and satisfied. And there are some authorities which would seem to bold that in actions at law bis right of recovery would not have stopped here, but that be might have compelled payment of tbe entire sums secured by all tbe notes and mortgages, although bis own demand was less. *Smith v.*Hiscock, *supra; Bosanquet v. Dudman,*1 Starkie R., 1. But see Story on Promissory Notes, § 195, and cases cited; and especially see authorities referred to in *Bange v. Flint,*25 Wis., 550, in which a different rule was held. As tbe representative and person standing in tbe place of Carver, wbo was an inno*192cent bolder for value, tbe plaintiff was, therefore, entitled to recover; and it becomes unnecessary to inquire whether Waite must be presumed to have been an innocent holder, or whether Walker’s purchase made him such, or into the relations existing between the plaintiff and Walker. And it is also unnecessary to examine or discuss the question of fraud in the procurement of the note and mortgage „by the railroad company, as all inquiry into that question is cut off by the *bona fide*relation in which the plaintiff, as the successor of Qarver, stands to the paper. The judgment must be affirmed.'

*By the Court.*— Judgment affirmed.