Source: http://supreme.nolo.com/us/139/166/case.html
Timestamp: 2019-04-25 15:45:58+00:00

Document:
The mere renewal of a negotiable promissory note does not, as between the original parties, affect the essential nature of the transaction represented by it.
If, in an action by an endorsee against the maker of a negotiable promissory note, the note is shown to have been obtained by fraud, the presumption, arising merely from the possession of the instrument, that the holder in good faith paid value, is so far overcome that he cannot have judgment unless it appears affirmatively from all the evidence, whether produced by the one side or the other, that he in fact purchased for value.
The rule which protects a bono fide holder for value of commercial paper against defenses or equities that might be good as between the original parties does not require that the holder shall have paid full value, but if the amount paid is greatly disproportioned to the real value, the security may be regarded as having been obtained without paying anything for it.
King agreed to take $10,000, par value, of the capital stock of a corporation being organized, and to pay $6,666.66 for it. He executed his promissory note for the latter amount that it might be discounted and the proceeds applied on his subscription, his stock to be held as security until the note should be paid. Doane, who had already subscribed and paid his subscription, surrendered 100 shares to the company, which were allotted to King, and a certificate issued to him therefor, which certificate, being endorsed by him in blank, was given, with the note, to Doane as security for the payment of it in consideration of his surrender of the 100 shares. At maturity, the note not being paid, a note of $7,115.50 was given in renewal. King, being sued on the renewal note, set up that he had been induced to make the subscription by false and fraudulent representation on the part of an agent of the company, and that Doane had not paid full value for the note. Held that Doane had purchased the original note for value, and without knowledge or notice of any fraud or bad faith in the transaction, and could recover.
This action was brought to recover the amount due on a promissory note executed November 10, 1884, by King, for the sum of $7,118.50, and made payable to the plaintiff, Doane, or his order, one year after date, with interest at the rate of seven percent per annum from date until paid. By direction of the court the jury returned a verdict in favor of the plaintiff for the full amount of the note, with interest. A new trial having been refused, judgment was entered in conformity with the verdict. 30 F. 106.
The defense is that the note sued on had no other consideration than the surrender and cancellation of a previous note alleged to have been obtained, with the knowledge and aid of Doane, by fraud and false representations; that the endorsement and transfer of the original note to him was wholly without consideration, and that the renewal note was executed by King in ignorance of the fraud perpetrated on him, and because of the false statement by Doane, through his agent, that he was the bona fide holder of the first note.
"If convenient, please remit one-half amount of subscription to stock, amounting to $3,333.33. Any time before the 15th will answer. We are progressing finely, and everything looks very flattering, having had applications from three companies to start other works at different places. I am confident we have the best thing in the country, and the outcome will make us happy. Will see you about the 25th, and advise you of progress and the decision of directors as to starting other companies, either in stock or royalty."
"Yours of the 7th at hand. I have a deal on hand which ought, and I believe will, pan out before the 15th, and I will respond as soon as it does. I expect to be in Chicago very soon -- next week possibly, and certainly not later than the week following. Will it answer if I make the payment then? You have no idea how d_____d tight money is up here, and I sometimes feel like getting tight myself; but I think I am sure of being easy in a few days. Glad to know of the promising outlook. Let me hear from you."
course, but must fix a time which will render it certain that I shall not disappoint you or be disappointed myself. I trust that you can arrange matters on this basis, and, if so, will close it up at once."
"Yours of the 22d at hand, and I herewith return the note, duly signed. Please return a receipt which will cover the transaction, and show that you hold my $10,000 of full-paid stock as security for the payment of said note, so that in case either of us should be snuffed out meanwhile, our administrators might have an easy job. Am delighted to know of the brilliant prospects of the company, and trust it will pan even larger than you anticipate. Our electric light business is climbing."
Felt, as treasurer, delivered to King a receipt, dated March 1, 1884, showing that when the above note was paid, "full-paid stock is to be issued" to him "for $10,000 in the Pullman Iron and Steel Company."
"Please endorse in blank on back of the same. Mr. Doane advanced the money on it, and this is to be held by him until note is paid, when stock will be returned to you. This should have been done when note was made, but just made our issue of stock, and now do this to close up the books. We are running in good shape. The leading iron man of the country, after looking over our works last night, said he thought the stock would double in a year, and double again, and pay good interest on the same. We are having large demand. Please sign and return at once."
of the Pullman Iron and Steel Company in my name, is just received, and, as requested by you, I herewith return it, endorsed in blank, to be held by Mr. Doane until my note of January 5, 1884, for $6,666.66, due October 1, 1884, is paid, when said certificate is to be returned to me. Am delighted to hear of the flattering prospects of the company. The value of the stock can't double too often to suit."
"I, as an officer of the company, received it [the note] from Mr. King. Soon after the receipt of this note, it became necessary for the company to have funds, and it was assumed that I, as one of the interested parties to [in] this company, should provide a certain amount of money by the sale of stock, and Mr. Doane, claiming that I had not provided the full amount, offered to discount my own note, and take this note of Thomas S. King as a collateral against the same. Soon after the execution of my note to J. W. Doane, he asked me if I wished to hold this note of King's and dispose of my own stock, I having raised the money necessary to cover the amount of this subscription; if not, he would take the note and assign to Thomas S. King one hundred shares of his stock. This was before the company had commenced operations, and it looked as if it would be a very profitable institution, and I told him that I did not care to dispose of any of my stock. So, on April 19, 1884, J. W. Doane transferred 100 shares of his stock. The same was assigned to T. S. King, and held as collateral by J. W. Doane against the note given by King. The note I gave to J. W. Doane, upon which the money was advanced, has been paid by me."
was agreed that fifteen hundred shares of the stock should be sold at a certain price, one-half of said stock being taken by the two subscribers. Upon my coming to Chicago, I found that it was understood that Mr. Perkins and myself were to place the other one-half of the stock."
"That was done by a certificate of transfer, under date of April 19, 1884, to Thomas S. King by J. W. Doane. Mr. Doane surrendered his certificate of 625 shares, dated April 12, 1884, and a new certificate was issued to him for 525 shares, under date of April 19, 1884, being the amount of his original certificate of shares, less the amount transferred to Thomas S. King, and a certificate of 100 shares was issued to King. The certificate of stock was signed by W. E. Barrows, vice-president, and Frank B. Felt, secretary."
Of the 2,500 shares transferred to Felt as trustee, 1,500 shares were to sold at 66 2/3 cents on the dollar, the proceeds of the same being used to erect a manufacturing plant. The remaining 1,000 shares were intended to be held and sold at par for an operating capital. Doane took 375 shares, paying in cash therefore the sum of $25,000. A like amount at the same price was taken by Pullman and paid for by him or through the Pullman Palace Car Company.
accounted for by the interest being added. Additional security was demanded of me, and I gave, in addition to the Pullman Iron and Steel Company stock held by Doane, $8,500 of stock in the Brush Electric Company. There was no new consideration for the last note. It was simply a renewal and extension of time."
Giving the defendant the benefit of every reasonable inference from the evidence, did the court below err in directing a verdict for the plaintiff? It was proven beyond question that the defendant agreed to take $10,000, par value, of the capital stock of the Pullman Steel and Iron Company, and pay for it the sum of $6,666.66; that he executed the note of January 5, 1884, for the latter amount that it might be discounted, and the proceeds applied on his subscription, the stock subscribed to be held as security until the note was paid, and a certificate of stock, full paid, to be issued to King upon such payment's being made; that a certificate for 100 shares, surrendered by Doane, was issued to King, by whom it was assigned in blank to Doane, to be held by the latter as collateral security for the note of January 5, 1884; that the note was endorsed and delivered to Doane in consideration of his having surrendered to the company the above 100 shares of his full-paid stock, and that subsequently the note sued on, for $7,118.50, was given in renewal of the note for $6,666.66.
Co., 101 U. S. 622, 101 U. S. 630; Sawyer v. Wiswell, 9 Allen 39, 42; Holden v. Cosgrove, 12 Gray 216, 217. If the subscription and original note were obtained by fraud, these principles would determine this case adversely to Doane, unless he gave value for the original note, without notice of the alleged fraud. Whether he did or did not give value, without such notice, is the vital question in the case, and that question must be considered with reference to the established rule that if, in an action by an endorsee against the maker, a negotiable note is shown to have been obtained by fraud, the presumption, arising merely from the possession, of the instrument, that the holder in good faith paid value is so far overcome that he cannot have judgment unless it appears affirmatively from all the evidence, whether produced by the one side or the other, that he in fact purchased for value. Smith v. Sac County, 11 Wall. 139, 78 U. S. 148; Commissioners v. Clark, 94 U. S. 278, 94 U. S. 285; Stewart v. Lansing, 104 U. S. 505, 104 U. S. 509; Pana v. Bowler, 107 U. S. 529, 107 U. S. 542. In the case supposed, he must show that he paid value. That fact being established, he will be entitled to recover unless it is proved that he purchased with actual notice of defect in the title, or in bad faith, implying guilty knowledge or willful ignorance. Goodman v. Simonds, 20 How. 343, 61 U. S. 367; Murray v. Lardner, 2 Wall. 110, 69 U. S. 121; Hotchkiss v. National Bank, 21 Wall. 354, 88 U. S. 359; New Orleans v. Montgomery, 95 U. S. 18; Swift v. Smith, 102 U. S. 442, 102 U. S. 444.
"when a parting with value is proved, the amount of the consideration is not otherwise important than as bearing on the question of actual or constructive notice."
surrendered by him to be issued to King was his individual property, and was deemed by him of equal value with the note, for he had taken and paid for 375 shares at the same rate per share that King was to pay for the stock subscribed by him. The question of value is to be determined by the situation as it was, and as it was reasonably regarded at the time Doane purchased the note. King had subscribed for $10,000 par value of the stock, and had given his note that it might be discounted and the proceeds applied on his subscription, and he expected that it would be discounted by Doane. Of these facts Doane was informed when he surrendered 100 shares of his full-paid stock that it might be issued to King, for these matters appeared on the face of the transaction. And the evidence entirely fails to show that Doane had knowledge of any fraudulent representations by Felt or of any fact that would relieve King from obligation to meet his subscription or to pay the note executed by him to the company, or that Felt made any representations to King at the instance of Doane. King, so far as was known to Doane, had assumed to pay the whole amount of the original note, whatever may have been at the time the intrinsic value of the stock. The note was endorsed to Doane in consideration of his surrendering 100 shares of his stock, to be issued to King. It was precisely as if Doane had exchanged with the company (and it was competent for the parties to make such an exchange) 100 shares of his full-paid stock for King's note, in which case King could not have escaped responsibility to Doane upon the note unless it appeared that the latter did not become a bona fide holder for value.
made not simply without due care, but in actual bad faith. As such knowledge or notice was not shown and could not be reasonably inferred from the evidence, the direction to the jury to find for the plaintiff was proper.

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