Case Name: Harlow S. Johnson v. Solomon Way
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1875-12
Citations: 27 Ohio St. 374
Docket Number: 
Parties: Harlow S. Johnson v. Solomon Way.
Judges: 'Scott, Chief Judge, Wright, Johnson, and Ashburn, JJ., -concurred.
Reporter: Ohio State Reports, New Service
Volume: 27
Pages: 374–383

Head Matter:
Harlow S. Johnson v. Solomon Way.
1. A holder of negotiable paper, who takes it before maturity, for a valuable-consideration, in the usual course of trade, without knowledge of facts-which impeach its validity between antecedent parties, holds it by a. good title.
2. To defeat his recovery thereon, it is not sufficient to show that he took it under circumstances which ought to excite suspicion in the mind of a prudent man.
3. To have that effect, it must be shown that he took tho paper under circumstances showing bad faith or want of honesty on his part.
4. Circumstances tending to show bad faith or fraud in’ taking such paper, are admissible in evidence, and the establishment of such bad faith or-fraud, whether by direct or circumstantial evidence, subjects the holder of paper so taken to defenses existing between antecedent parties:
Error to the District Court of Portage county.
The plaintiff brought suit in the Court of Common Pleas' of Portage county to recover of the defendant the amount of two promissory notes of seventy-five dollars each, of which the following is a copy:
“ POSTOEEICE ADDRESS, SUEEIELD, COUNTY OE PORTAGE,
State oe Ohio, July 29,1869.
“ Three months after date, I promise to pay to the order of L. A. Wilder seventy-five dollars, for value received, with use.
[Stamp.] “ Solomon Way.”
“ Indorsed: I hereby certify that I am worth $8,000, consisting of personal property to the amount of $1,000 and one hundred and seventeen acres of land. I make this-statement for the purpose of obtaining credit.
“ Solomon Way.”
“ Indorsed, without recourse, to L. A. Wilder.”
The second note is like the first, except due in four months after date.
On the trial the plaintiff admitted that the notes were given for a worthless patent right metallic roofing cement, and were without consideration, as between the original parties.
The proof shows that one Lewis D. Joy bought the notes before maturity; that Joy paid $100 cash for each $150 of notes, and received them indorsed “ without recourse;” that the plaintiff’ bought the notes of Joy before maturity, and paid the face thereof in coal stock of the Trumbull Coal Company (an incorporated mining company), at fifty cents on the dollar of its par value; that the coal stock was delivered to Joy and the notes to Johnson before they matured, and without any actual notice of any defense.
On the trial the plaintiff asked the court to charge the jury as follows:
“ 1. Suspicion of defect of title, or fraudulent inception, or the knowledge of circumstances which would excite such suspicion in the mind of a prudent man, or gross negligence on the part of the taker at the time of the transfer, will not defeat his title ; that result can be produced only by bad faith on his part; mere want of caution and care is-not enough.
“ 2. In brief, did the plaintiff or Joy buy the notes in good faith and without fraud, for value, before due ? If so, and without notice of any defect, plaintiff' is entitled to recover. It is a question of good faith and fraud, and not of carelessness or negligence on the part of plaintiff or Joy, unless it amounts to fraud or want of good faith.
“ 8. That the law presumes prima facie in favor of every holder of negotiable paper, that, lsf. He is the owner of it; 2d. That he took it for value; 3d. Before due; 4th. In the regular course of trade; and plaintiff' is entitled to recover, unless these presumptions of law are overcome by proof in the case.”
The court refused to charge as requested, but charged the jury upon the point in question as follows:
“ If the proof shows that both Johnson and Joy took these notes with notice of their infirmities, then plaintiff ought not to recover, and upon this proposition the burden of proof rests upon the defendant.
“ To constitute a sufficient notice, it is not essential that the party should have had actual positive notice of the defects of the notes, but if the circumstances and facts connected with, and surrounding the transfer, whether they appeared upon the notes themselves, or outside of them, were of such strong and pointed character as to put the purchaser on inquiry, then the law presumes that he did make those inquiries, or that if he did not he should beau the responsibility in the same manner as if he had made them, and they had led him to a full knowledge of the whole truth connected with giving the notes. The purchaser was not bound to make inquiries, unless there was something in the circumstances of the case that would have put an ordinarily careful and prudent man upon investigation. But while the purchaser was not bound to make inquiries from motives of mere curiosity and suspicion, yet he was not at liberty to shut his eyes to facts and circumstances that presented themselves to him, if those facts and circumstances would have attracted the attention of a man of common prudence. It was not enough if the facts and circumstances were merely sufficient to suggest inquiry by the most cautious; nor does the law require circumstances so startling as to awaken investigation on the part of the most dull and stolid. But if the defendant has shown you by testimony, to your satisfaction, tha.t Joy and Johnson had actual notice of the time of the purchase of the notes of their defects and infirmities, or if they had such knowledge of facts and circumstances as to put a reasonable and prudent man upon inquiry, then the plaintiff can not recover.”
To the refusal of the court to charge as requested, and to the charge as given, the plaintiff excepted. Judgment was rendered for the defendant, and on petition in error the judgment of the Common Pleas was affirmed by the District Court. It is now sought to reverse the judgments of the courts below for error in the charge given to the jury on the trial in the Court of Common Pleas.
M. Stewart, for plaintiff' in error :
The court erred in its charge, which was, in substance, that tl the plaintiff, having admitted that the notes were without consideration between the original parties, he is not entitled to recover, unless he proves (independent of any presumption of law) that he bought them before due, and paid value in,the regular course of trade.” 1 Parsons on Notes and Bills, 185; Swift v. Tyson, 16 Pet. 16; Nixon v. De Wolf, 10 Gray, 348; Dumont v. Williamson, 18 Ohio St. 115; Davis v. Bartlett, 12 Ib. 544. And as to notice, Goodman v. Simons, 20 How. 365; Andrews v. Pond, 13 Pet. 65; Fowler v. Brantly, 14 Ib. 318; Bank of Pittsburg v. Neal, 22 How. 108; 2 Parsons on Con. 3, 4.
The indorsement furnished no evidence or ground of suspicion to put plaintiff on inquiry. Russell v. Ball, 2 Johns. 50; Goddard v. Lyman, 14 Pick. 268; Bisbing v. Graham, 14 P. S. 14; Epler v. Funk, 8 Barr, 468.
The purchaser of commercial paper, before due, in good faith, for value, in the regular course of trade, holds it discharged of all prior equities. Circumstances of suspicion that would attract the attention of a man of common prudence, or even carlessness or gross negligence on his part, at the time of the purchase, will not defeat his title. That can only be effected by actual notice, or fraud on his part. Murray v. Lardner, 2 Wall. 121; Goodman v. Harvey, 4 Adol. & Ellis. 470.
The rule in England originally for a long period protected the holder against the fraud of antecedent parties, unless he was shown to have had actual notice, or was guilty of bad faith. It was first announced by Lord Mansfield in 1758, in Miller v. Race, 1 Bur. King’s Bench Rep. 452, and was reaffirmed by the same judge in Grant v. Vaughn, 3 Bur. 15, 16. In 1764, and through all the long period following it, not only in that, but the various other courts of that country, it remained the unquestionable law of the land down to 1824, when Gill v. Cubit, 3 Barn. & Cress. 466, changed the rule, and made the holder chargeable with knowledge, if the circumstances were such as ought to have excited the suspicions of a person of reasonable care and prudence. In 1834, in Crooks v. Jadis, 5 Barn. & Ad. 909, the Court of King’s Bench again changed the law, and held that the owner should be protected unless guilty of gross negligence in the purchase. But in 1836, the law having been found not only unsatisfactory to commerce, but to the courts themselves as being too variant and changeable, and depending upon the intelligence and capacity not only of the purchaser, but even of the jury who might try the question, that same court, in Goodman v. Harvey, rising above the erroneous precedents of the cases, commencing with Gill v. Cubit, and seeming to appreciate the increased and constantly increasing requirements of the business interests of the country and of trade, brushed away the uncertainty and changeableness attendant on the application of the rule as held in Gill v. Cubit and Crooks v. Jadis, and returned to the original doctrine of Miller v. Race, which has ever since been the settled law of that country, affirmed by numerous decisions since then, so repeatedly and decidedly that no late jurist or elementary writer is found to dispute the proposition, “ that nothing short of actual notice, or bad faith (fraud) will defeat the title of the holder.” Raphael v. Bank of England, 84 English Com. Law, 161; Carlon v. Ireland, 85 Com. Law, 765.
For the law as declared in.this country : Swift v. Tyson, 16 Pet. 15; Goodman v. Simons, 20 How. 343; Bank of Pittsburg v. Neal, 22 Ib. 108; Murray v. Lardner, 2 Wall. 110; Edwards on Bills and Notes, 318; Uther v. Rich, 10 Adol. & Ellis, 784; Steinbacker v. Boker, 34 Barb. 436; Magee v. Badger, 34 N. Y. 247; Belmont Bank v. Hodge, 35 Ib. 65; Brush v. Scribner, 11 Conn. 388; 10 Cush. 488; 4 Ga. 287; 13 Ala. 390.
S. P. Woolcott, for defendant in error.

Opinion:
Bay, J.
The questions made in the ease relate to the rights of indorsees of negotiable paper, and arise upon the charge of the court to the jury. Though other questions are made in argument, we do not deem it important to notice here but oue of the grounds of exception.
The court charged the jury, that, as the notes were conceded to be invalid as between the original parties, the-plaintiff, though an indorsee of the notes for value before-due, could not recover, if he had such knowledge of facts and circumstances as to put an ordinarily careful and prudent man upon inquiry as to the infirmities of the notes.. The question, then, is, whether this rule is to be applied to-a holder of negotiable paper, to whom it is indorsed in the usual course of trade, for value before due.
It was early the settled law in England, in regard to-paper drawn in a form to pass from hand to hand in the course of business and trade, that the holder, who came by it fairly and honestly, before due, for a valuable consideration, had a good title. Salk. 126 ; Miller v. Race, 1 Bur. 452; Peacock v. Rhodes, Doug. 633; Lawson v. Weston, 4 Esp. 26; Gorgier v. Mieville, 3 Barn. & Cres. 45.
In 1824, in Gill v. Cubit, 3 Barn. & Cres. 466, the Court of King's Bench added a new limitation to the title of the-holder of negotiable paper, and held that he acquires no title, as against the equities of antecedent parties, if he-takes it under circumstances which would excite the suspicions of a prudent and careful man. This rale was followed for a number of years in England, and by many of the courts of this country.
But in 1834, in Crook v. Jadis, 5 Barn. & Ad. 909, this-rule was so far shaken, that an indorsee of a bill of exchange was permitted to recover against the drawer unless he proved that the indorsee was guilty of gross negligence in taking the bill; and two years later, in Goodman v. Harvey, 4 Ad. & El. 870, it was decided that gross negligence-is not alone enough to destroy the title of a holder for value, but that a case of bad faith in taking the security must be made against him, in order to defeat his claim.
Since 1836, the rule established in Goodman v. Harvey. has been followed by the British courts, and may now be regarded as the settled law of that country. Raphael v. The Bank of England, 17 C. B. (84 E. C. L.) 161.
Although the rule declared in Gill v. Cubit has been followed by many of the courts of this country, it has been so generally repudiated by the more modern decisions, and that of Goodman v. Harvey, approved, that the doctrine of this case may now be regarded to be the American as well as English law upon the subject. Worcester County Bank v. Dorchester and Milton Bank, 10 Cush. 488; Smith v. Livingston, 111 Mass. 342; Matthews v. Poythress, 4 Geo. 287; Miller v. Finley, 26 Mich. 249; Phelan v. Moss, 67 Penn. St. 59; Magee v. Badger, 34 N. Y. 247; Belmont Bank v. Hoge, 35 N. Y. 65; Goodman v. Simonds, 20 How. 343; Murray v. Lardner, 2 Wall. 110; Hotchkiss v. National Bank, 21 Wall. 354; 1 Smith's Lead. Cas. (7 Am. ed.) 825; Redfield & Bigelow's Lead. Cas. on Bills and Notes, 257.
In the case of the Belmont Bank v. Hoge, supra, the view of the New York Court of Appeals upon the question is stated as follows: " One who, for full value, obtains from the apparent owner a transfer of negotiable paper before it matures, and who has no notice of any equities between the original parties, or of any defects in the title of the presumptive owner, is to be deemed a bona fide holder. He does not owe to the party who puts such paper in circulation the duty of active inquiry, 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 mere speculation as to his probable diligence or negligence."
In Smith v. Livingston, 111 Mass. 345, the court disapprove the rule of Gill v. Cubit, and say: " Circumstances which might excite the suspicions of one man might not .attract the attention of another. It is a rule which business men can not act upon in the ordinary affairs of life with .any certainty that they are safe."
In Murray v. Lardner, supra, the law in regard to negotiable paper, as settled by the Supreme Court of the United States, is summarized, as follows : " The party who takes it before due for a valuable consideration, without knowledge of any defect of title, and in good faith, holds it by a title valid against all the world. Suspicion of defect of title or the knowledge of circumstances which would excite such suspicion in the mind of a prudent man, or gross negligence on the part of the taker at the time of the transfer, will not defeat his title. That result can be produced only by bad faith on his part. . . . The rule may perhaps be said to resolve itself into a question of honesty or dishonesty, for guilty knowledge and willful ignorance alike involve the result of bad faith."
It was, moreover, settled in that case, that circumstances tending to show bad faith or fraud in taking such paper,, though not conclusive in themselves, are admissible in evidence, and the establishment of bad faith or fraud, whether by direct or circumstantial evidence, is fatal to the title of the party so taking it.
The rule established in these eases neither restricts the usefulness of paper made to pass from hand to hand in commerce, nor does it relieve the party taking it from the obligations of good faith. This rule may be more readily applied than that laid down in Gill v. Cubit, for a rule based on good faith as a standard is more easily comprehended than one grounded upon speculations as to what ought to excite the suspicions of a prudent man. A prudent man, it has been well said, may be more or less suspicious under similar circumstances at one time than at another, and may also suspect where another equally prudent would not, and the standard of the jury may be higher' or lower than that of other men who are prudent in the management of their affairs.
The point in controversy has not been directly determined by the Supreme Court of this state. The rules laid down in Davis v. Bartlett, 12 Ohio St. 534, which are stated in the syllabus, are, however, in harmony with that of Goodman v. Harvey; so is the decision in Bassett v. Avery, 15 Ohio St. 299, as well as the principle upon which the case was decided. But a remark upon a hypothetical case stated in the opinion delivered in Bassett v. Avery warrants the charge to the jury complained of in this case. Speaking of what might constitute a defense against an indorsee of a negotiable note, it is said: "If such circumstances of suspicion had been shown to exist as ought to have put Barrett upon inquiry before purchasing, he would be pre•sumed to have either made the inquiry and ascertained the truth, or have been guilty of a degree of negligence equally fatal to his claim to be considered a bona fide purchaser." This statement is made upon the authority of Williamson v. Brown, 15 N. Y. 854; but that case did not relate to negotiable paper; and we have seen, moreover, that a different'rule now obtains in New York in reference to that kind of instruments.
In McKesson v. Stanbury, 3 Ohio St. 156, it was only necessary to determine upon which party the burden of proof rested, and the case, as explained, and upon the principles settled in Davis v. Bartlett, was decided right. The statement in the opinion in regard to the prudence required of an indorsee of negotiable paper was unnecessary to the decision of the case, and like that of a similar character in Bassett v. Avery, may be regarded only as a dictum. 'Without questioning the correctness of the decisive points of .these cases, we do not feel bound to follow the dicta reférred to. Although entitled to great weight as the utterances of ¡able judges, and warranted by a line of decisions, they were, however, only incidental remarks in the cases in which they were made, and are not in accordance with the rule as now settled by repeated decisions of the highest courts of England and America.
Guided by the leading authorities of both countries, we are brought to the following conclusions :
A holder of negotiable paper, who takes it before maturity, for a valuable consideration, in the usual course of .trade, without knowledge of facts which impeach its validity between antecedent parties, holds it by a good tltlel
To defeat his recovery thereon, it is not sufficient to show that he took it under circumstances which ought to excite suspicions in the mind of a prudent man.
To have that effect, it must be shown that he took the paper under circumstances showing bad faith or want of honesty on his part.
Circumstances tending to show bad faith or-fraud in taking such paper, though not conclusive in themselves, .are admissible in evidence; and the establishment of such bad faith or fraud, whether by direct or circumstantial evidence, subjects the holder of paper so taken to defenses -existing between antecedent parties.
It follows that the judgment of the District Court and that of the Common Pleas must be reversed, and that the eause must be remanded for further proceedings.
Judgment accordingly.
'Scott, Chief Judge, Wright, Johnson, and Ashburn, JJ., -concurred.