Case Name: May Lundean, Appellee, v. W. S. Hamilton et al., Appellants
Court: Iowa Supreme Court
Jurisdiction: Iowa
Decision Date: 1918-10-29
Citations: 184 Iowa 907
Docket Number: 
Parties: May Lundean, Appellee, v. W. S. Hamilton et al., Appellants.
Judges: Preston, C. J., Weaver, Evans, and Gaynor, JJ., concur.
Reporter: Iowa Reports
Volume: 184
Pages: 907–931

Head Matter:
May Lundean, Appellee, v. W. S. Hamilton et al., Appellants.
CANCELLATION OF INSTRUMENTS: Burden of Proof. The bur-1 den of proof that rests upon the transferee of a fraudulent negotiable instrument, to prove, when he is a plaintiff at law on the instrument, that he is a holder in due course, equally rests upon such transferee when he is a defendant in an action in equity to cancel such-instrument by reason of the fraud.
Salinger, J., dissents.
BILLS AND NOTES: Evidence Bearing on Good-Faith Holdership. 2 On the issue whether a holder of a note is a holder in due course, material inquiries are:
1. Whether the holder had knowledge, and if so, what knowledge, of the original execution of the note.
2. Whether the holder took the note from, the payee in part payment of a claim of doubtful collectibility.
3. Whether the holder’s name had been forged as a witness to the security.
4. Whether the note was in excess of the security, the note b'eing a loan.
5. Whether the holder made inquiry concerning the security.
6. Whether the holder wilfully omitted to make inquiry concerning the validity of the note.
Salinger, J., dissents as to the application made.
Appeal from Pottawattamie District Court. — J. B. Rockabellow, Judge.
October 29, 1918.
Suit to cancel note and mortgage resulted in decree as prayed. Defendants appeal.
Affirmed.
H. L. Robertson and L. W. Schneider, for appellants.
Tinley, Mitchell & Pryor, for appellee.

Opinion:
Ladd, J.
The plaintiff owned the east 40 feet of Lot 18 of Block 15, Mill Addition to the city of Council Bluffs. On December 12, 1912, she signed a mortgage thereon, securing the payment of a promissory note for $3 600, of even date, and payable three years thereafter. The name of W. S. Hamilton, as payee in the note and mortgage, may have been inserted later. The mortgage purported to be witnessed by Hamilton and C. E. Price, defendant, before whom, as notary public, it' was acknowledged, January 14, 1913. It was recorded on the same day. About that time, Hamilton applied to the defendant bank for a loan; and, on January 30th following, executed his note to the bank for $2,800, payable 4 months after date, and deposited the note and mortgage heretofore mentioned as collateral security, and in consideration thereof, the bank surrendered a note of his to it of $500 and accrued interest, and entered to his credit $2,286, which Hamilton subsequently checked out. In this suit, plaintiff prays that this note and mortgage be cancelled and surrendered to her; for that, as is alleged, these were procured by Hamilton through the perpetration of fraud; that Price participated therein; and that the bank is not an innocent purchaser; and that the note is not negotiable.
The last-named contention is disposed of by Des Moines Sav. Bank v. Arthur, 163 Iowa 205, 211, and no further attention need be given to it. The other two issues may be considered together. The record leaves no doubt that Hamilton procured the note and mortgage without parting with any consideration, and with the fraudulent purpose of depriving the plaintiff of said note and mortgage and appropriating the same to his own use, though inducing the plaintiff to rely on what he did in handling the note and mortgage as in her interest, and with the design of turning over the money to her. This is clearly within the allegation of the petition, though it alleged that Price and Hamilton entered into a fraudulent combination to accomplish this, and so did. The evidence did not warrant the inference of such combination with fraudulent purpose, but did justify the inference that Hamilton had fraudulently procured and appropriated the note and mortgage.
Mrs. Lundean had been engaged in dressmaking, first for herself and later as an employee of John Beno Company, since the death of her husband, some 15 years ago, except about 3 years, a part of which- time she was trying to regain her health in Colorado, and the rest, was engaged in office work. She had supported herself and son, 18 years of age, at the time of the trial, and paid off a $1,000 mortgage on the premises heretofore described. She met Hamilton late in 1911, through his wife, whom she had known prior to their marriage. Her mother, in California, had been urging her to sell her home and take up her residence at Berkeley in that state, in order to continue the education of her son and make a home for her mother. ' She testified that Hamilton, upon hearing this, proposed selling the place, which she authorized; but instead, submitted opportunities for exchange, and, when these did not meet with her approval, suggested that she put a loan on the place and rent it, and said that she would receive as much in that way as by selling. This did not meet her approval at first; but, upon receiving another letter from her mother, his proposition that she make a $3,500 loan, and suggesting that, "if the worst should come to worst, Mrs. Lundean, if they take the place, I would not feel I had cheated them out or they had cheated me out," was acceded to; and he led her to believe that he was making loans through a Kansas City, Missouri, house. She testifies, further, that later, he reported that her "loan is coming through, and the money will come to you through the bank, the Commercial National Bank;" that he repeated this several times; that, one day, Hamilton telephoned her to come to the Commercial National Bank, and she did so; that Hamilton and Price were there; that the former said:
"I know' your time is very limited, and all we will ask you to do is to sign this paper. You will have to sign this paper before your money can come, and it will come through the bank."
She then described how they were sitting, — Price at his desk and Hamilton across the aisle in a small room; that, as she sat down at the desk, Price stood, remarking, "Sign your name on this line, Mrs. Lundean" (pointing to the line) ; that Hamilton requested that she sign her name "Mary," as it appeared that way in the abstract; that, after so signing, she inquired if there was anything further, in response to which she was told that the paper could be finished after she left. On further inquiry, she repeated that Hamilton told her, in Price's hearing, that the money was coming through the bank, and that he said "Commercial National Bank;" and she swore that she had no recollection concerning the signing of the note, and heard nothing further of the transaction until May, 1913, when Mrs. Hamilton informed her of the transfer of the note and mortgage to the bank. The evidence further shows that she trusted Hamilton implicitly; that she had no recollection of signing the note; that there was never any conversation between her and Hamilton concerning a loan for $3,600; that their conversation was concerning a $3,500 loan; that at no time had a loan from Hamilton or in his name been mentioned: and the witness testified that she supposed it was an application for a loan, and not a mortgage*, which she acknowledged before Price. The record leaves no doubt that Hamilton procured the signing and acknowledgment of the papers with the design of defrauding the plaintiff.
In the first place, he pretended to be obtaining the loan through a Kansas City firm, when, in fact, he prepared the papers with his own name inserted as payee and mortgagee, without so informing her, or drew them in blank, and after-wards inserted his name. ' Of course, she could read; but he so planned the signing and acknowledgment of the papers that she would not be likely to read, and did not. In this way he procured the papers to be drawn to himself and to be left in his custody, in order to obtain and appropriate the proceeds of the loan, rather than to obtain a loan for the plaintiff. That such a transaction is fraudulent re quires no argument to prove. The papers were not only procured by fraud, but were utterly without consideration. Hamilton's title, such as he had, then, was defective. Section 3060-a55, Code Supplement, 1913.
Having so shown, the plaintiff was entitled to a decree as prayed, unless defendant should be able to establish, by a preponderance of evidence, that the defendant bank acquired the papers without notice of such defect. Had suit been brought on the note, and fraud as here proven been interposed as a defense, this would have been the result. Keegan v. Rock, 128 Iowa 39; McNight v. Parsons, 136 Iowa 390; Arnd v. Aylesworth, 145 Iowa 185; Farmers & Merch. St. Bank v. Shaffer, 172 Iowa 173; German Am. Nat. Bank v. Kelley, 183 Iowa 269. The proof was such that, had the action been on the note, the petition must have been dismissed. If the proof would have been sufficient to establish a complete defense in an action on the note, certainly it was sufficient to justify a court of equity in cancelling such a note, with the mortgage securing its payment. Section 3060-a59 declares that:
"Every-holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title."
The negotiable instrument statutes are not concerned with forms of action, nor the forums in which pending, but lay down general rules governing the rights of the respective parties thereto. Although every holder is deemed, prima facie, a holder in due course, this presumption is overcome by proof that the title of the person negotiating to him was defective. The instrument is then subject to the same defenses as though non-negotiable (Section 3060-a58, Code Supplement, 1913) ; and if these defenses are complete, dismissal of the petition necessarily follows, in, an action at law or decree of cancellation or other appropriate relief in a court of equity. The burden, then, was on defendants to prove that the bank was a holder in due course. The evidence that full consideration was paid to Hamilton by the bank is not disputed. Did the bank acquire these papers without notice?
"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." Section 3060-a56, Code Supplement, 1913.
The transaction in behalf of the bank was through Price, then president thereof. He had known Hamilton for about two years, though not intimately, with the understanding that he was engaged in the real estate and loan business in Council Bluffs. He had had no personal transactions with him, nor for the bank, prior to this time, but seems to have been sufficiently familiar with Hamilton's personality to enable him to make a fair estimate of his character; for, according to the testimony of Mrs. Lundean, undisputed, Price remarked to her, shortly after she had been informed of the hypothecation of the note and mortgage with the defendant bank, that he "always knew he was a scoundrel and a rascal." Hamilton had borrowed $500 of the bank through the.cashier, Konigmaeker, about three months previous, with the names of his wife and one Solomon as sureties. The cashier testified that the bank had considered Solomon good security, but was unable to assign any reason for so thinking; and, when Hamilton applied for an additional loan on the same security, he promptly rejected the proffer. But when Hamilton inquired, "Will you loan more money if I bring you good real estate mortgage?" the cashier responded, "Sure, sure, if you increase the security collateral, we will loan you the money." And Hamilton said he would bring the papers. The prior loan is of no little significance in this case, in view of the doubtful prospect of collecting it, and the security the tender of the note and mortgage as collateral afforded. With such a prospect before them, the cashier and president may readily be excused for many things, but hardly for overlooking the fact that Hamilton had forged Price's name as a witness to the execution of the mortgage, his name so appearing thereon, apparently, in Hamilton's handwriting, unauthorized by Price.
Nor could the fact that the face of the note was $100 in excess of the value of the property covered by the mortgage securing its payment well have escaped their attention; and it did not. Schnoor, called by defendant, estimated the value of the property at $3,500, though saying it might be worth as much as $3,800; and there was no other evidence on the subject; and Price wás so informed by him before the loan was made to Hamilton. This situation quite naturally would excite inquiry as to how the loan came to be so large, as compared with the security, and whether the maker of the note was otherwise responsible. Nor would such paper ordinarily be regarded as sufficient for a loan of $2,800, save to accomplish some ulterior object, such as collecting a doubtful debt. But no inquiries such as are suggested were made, nor as to whether the premises were occupied, or constituted a homestead, or were productive in rentals. Again, if the plaintiff is to be believed, Price was aware that she signed the mortgage without reading it, and that she was advised, by what Hamilton said at the time, that the proceeds of the loan were to come to her through the defendant bank. She testified that the mortgage was lying on Price's table, when she came to the bank to acknowledge it;' he, that she brought it. with her, and that it had been signed previously;. she, that Hamilton was present; he, that he was not; she, that Price pointed Avliere to sign, and that Hamilton told her to sign her full name, and that she left the paper for them to finish, at Hamilton's suggestion; he, that she took the mortgage away AArith her; she, that Hamilton remarked, in Price's presence, that she would "have to sign this paper before the money can come, and it will come through the Commercial National Bank;" and .he, in effect, denied this, in saying that Hamilton was not present. Neither is corroborated. Nothing in the record indicates that one is more credible as a Avitness than the other; though the circumstances of what happened Avould be likely to be more strongly impressed on the mind of Mrs. Lundean, because of seldom occurring with her, and happening frequently with him. She would be likely to remember how she came to go to the bank, — as that Hamilton telephoned her, — and whether she took the papers over, and whether she signed them then, better than one continuously engaged in such matters.
We are inclined to accept her version of the transaction,- — especially as this is in harmony with the finding of the district court, who heard the witnesses, — to the extent that she came to the bank at the instance of Hamilton, and There signed and acknowledged the mortgage, and left it Avith them, as she testified. Possibly Hamilton made the statement as to the money's coming through the bank; but, if so, the expression may not have been of a matter concerning which Price was then interested; and if not, what was said was hardly specific enough to advise him that the proceeds were to go directly to Mrs. Lundean. It is not to be overlooked, hoivever, that the application of Hamilton for an increased loan, and his promise to bring in mortgage security for collateral, the signing and acknowl edging of this mortgage, and the submission of said mortgage by Hamilton to Price for acceptance as collateral security, occurred at about the same time. Konigmacker does not give the date of his conversation with Hamilton when the promise to furnish such collateral was broached; and for all that appears, this occurred before the acknowledgment of the mortgage, and was the immediate occasion therefor. According to Price, Hamilton had said nothing to him concerning the loan prior to the acknowledgment; but he does not say that the cashier had not told Mm about it, nor that he was not aware that the mortgage, when acknowledged, was the one of which Hamilton had spoken to Konigmacker. This evidence was available- to the defendant, and was not produced at the hearing. If aware that the mortgage was acknowledged after being tendered as security, Price's suspicions must have been aroused by the circumstance of Mrs. Lundean's executing a mortgage to be hypothecated as security for a loan to Hamilton.
Price testified that Hamilton first spoke to him about the note and mortgage "about the time that I took the acknowledgment to the mortgage — I say about the time, but it may have been a day or two later, — I don't know. It was within a few days after that;" and that Hamilton brought the papers in; and also that he talked matters over with the cashier. The inference that the talk concerning the new loan between Hamilton and the cashier was prior to the date of acknowledgment is strengthened by the circumstance that the mortgage and note wer^ dated about a month earlier; and this fact certainly must have been known to the cashier when he counseled with Price concerning the propriety of making the loan, whether before or after the mortgage was acknowledged. At any rate, all these matters happened so near the same time that the bank cannot avoid being charged with knowledge of what its officers ascertained, or responsibility for Avhatever they did in its behalf; though appellant contends to the contrary. Watt v. German Sav. Bank, 183 Iowa 346.
That Price was not content further appears from the circumstance that, after Hamilton had submitted the note and mortgage, Price called on Mrs. Lundean at the Beno Company's establishment, and asked her if she was Mrs. Lundean; and, on being informed by her that she was, either remarked that he wished to be sure he knew who she was, and walked away, as she testified, or asked her if she was the person who signed or acknowledged the mortgage or instrument, and left, as he testified; though he was unable to say whether he used the word "signed" or "acknowledged," or "mortgage" or "instrument." But he was certain that he had the mortgage in his hand and did not show it to her, and does not deny that he had known her by sight a long time, and that he had learned her name when he took her acknowledgment as "Mary Lundean," and that he knew that the paper Hamilton brought in was the one acknowledged by her before him. Why he did not exhibit the mortgage to' her, and directly inquire whether she.was the person whose name was attached, and who had acknowledged it, is not explained; nor does he give an intelligent explanation of this call on her. Asked how he happened to do so, he responded: "Oh, just in a general way, — taking all precautions possible." A more plausible response would have been that he went up to inquire about the mortgage, in connection with the matters heretofore mentioned. This was the natural thing for him to have done when talking to her; and, as he had the mortgage in his hand, why did he not do so? There is only one reasonable response, and that is that he feared he might learn of infirmities inhering in the paper. Counsel say that he made no other inquiries, for that to do so would not have been "good banking." This may have been true, as to the propriety of making any inquiry whatever of' the maker of the note and mortgage, in the absence of suspicions circumstances. But, in view of the facts to which we have adverted, then within his knowledge, the banking which would omit to obtain information from a source sought out by him, and with no other apparent purpose than to acquire it, is to be denounced as untrustworthy; and the only reasonable inference therefrom is that such omission was in the fear that, upon inquiries, he would ascertain the truth concerning the note and mortgage up to that time. Had he exhibited the mortgage, she would have discovered that it was drawn to Hamilton as mortgagee; and this would undoubtedly have led to his discovery that Hamilton had no such title as would enable him to hypothecate it as collateral security, and the opportunity to collect the $500 note would have gone glimmering. This is not a case of mere carelessness about making inquiry, or lack of prudence in not giving heed to matters which might put an ordinary person on inquiry, but of a wilful omission or neglect to make inquiries, for fear of ascertaining facts which would prevent him from assuming the attitude of an innocent purchaser, should he acquire the note and mortgage as collateral security, or as holder. One may not, with knowledge of facts which cast doubt on the holder's title, and which excite suspicion to such an extent that he fears to investigate, lest a defense be disclosed, cautiously close his eyes, and act in the dark in taking over negotiable paper, and thereby become a purchaser in good faith. Knowlton v. Schultz, 6 N. D. 417 (71 N. W. 550); Schmueckle v. Waters, 125 Ind. 265 (25 N. E. 281); Bowman v. Metzger, 27 Ore. 23 (39 Pac. 3); Tourtelot v. Reed, 62 Minn. 384 (64 N. W. 928).
It is not enough that the purchaser be put on inquiry merely. The facts within his knowledge must be of such a character as to warrant the conclusion that he either actually knows of the infirmity, or, if he does not know, that his abstinence from making inquiry arises from a belief or suspicion that inquiry would disclose such infirmity or vice in the instrument. See Lehman v. Press, 106 Iowa 389. This last was the situation in the case at bar.
With reference to the pleas of estoppel interposed, it is enough to say, as to the first, that, as we have assumed that plaintiff signed the note and mortgage, the plea based on the theory that plaintiff supposed she was signing an application for a loan, instead of these instruments, requires no attention; and, as to the second, that, if defendants obtained the instruments in bad faith, she would owe them no duty either of discovering their wrong or of saving them harmless. Even had she been as vigilant as it is claimed she should have been, the record warrants the conclusion that nothing could have been saved, through recovery from Hamilton, for either party. We are content with the decree of the trial court, and it is — Affirmed.
Preston, C. J., Weaver, Evans, and Gaynor, JJ., concur.