Opinion ID: 1962979
Heading Depth: 1
Heading Rank: 2

Heading: Effect of Fraud

Text: The finding of fraud, amply supported by the evidence, means that as between the Williams' and the original mortgagee, the mortgage was an absolute nullity. It can have no greater value in the hands of the appellant-assignee even if the assignee be deemed a bona fide purchaser for value. Hunter v. Chase, 144 Md. 13, 123 Atl. 393 (1923). The appellant, as an assignee of the mortgage, is in Maryland subject to the equities and defenses of the mortgagor against the original mortgagee. LeBrun v. Prosise, 197 Md. 466, 475, 79 A.2d 543 (1951), and many cases therein cited. The question remains of the appellant's rights as assignee of the note. It has been suggested that under Code, 1957, Article 66, section 26, a promissory note, secured by a mortgage, is non-negotiable. See Page, Latent Equities in Maryland, 1 Md. L. Rev. 1, 26 (1936), but see, Sapero v. Neiswender, 23 F.2d 403 (4 Cir.1928). If such notes are nonnegotiable, an assignee similarly takes the instrument subject to all equities and defenses which the maker had against the original payee. The point has never been expressly decided by this Court, however, and we do not reach it in the present case. We assume, arguendo, that the note in question qualifies as a negotiable instrument and apply the relevant sections of the Negotiable Instruments Law, (NIL) Code, 1957, Article 13, sections 15-211, which were applicable to the transaction. [3] The lower court concluded that the appellant was a holder in due course of the note within the meaning of the NIL., Article 13, section 73. Essential to this conclusion was the court's finding that the appellant obtained the note in good faith and for value and without actual or constructive notice of the original fraud. Good faith is a condition precedent to status as a holder in due course. Upon a showing that the title of the original assignor, Reynolds Engineering, was defective, the burden of proving good faith shifted to the appellant-assignee. Article 13, section 80. LeBrun v. Marcey, 199 Md. 223, 86 A.2d 512 (1952); Home Credit Co. v. Fouch, 155 Md. 384, 394, 142 Atl. 515 (1928); Griffith v. Shipley, 74 Md. 591, 22 Atl. 1107 (1891). We believe the appellant failed in its burden of proof, and the finding of the lower court to the contrary is clearly erroneous. Bad faith under the Negotiable Instruments Law is not mere carelessness or negligence. A purchaser lacks the good faith requisite for attaining holder in due course status only if he has actual knowledge of fraud or other defect in the instrument or if he consciously ignores facts which would lead him to discover the defect. The test is said to be subjective, [4] for a purchaser may be a holder in due course if he purchases with a white heart but an empty head. Hawkland, Bills and Notes, 194-97 (1956). Simply put, we can not believe from the evidence in the record that the appellant had a white heart. The note and mortgage in question were purchased, as part of a package of approximately 480 such instruments, at an extraordinary discount of over 80%. The size of the discount, while alone insufficient to show bad faith conclusively, has been held enough to support a finding of bad faith by the trier of fact. Home Credit Co. v. Fouch, supra; Williams v. Huntington, 68 Md. 590, 13 Atl. 336 (1888). There are other circumstances in the case, however, necessitating the finding of bad faith. The appellant did not buy the instruments blindly, but on two separate occasions prior to purchase, had them audited by reputable firms of lawyers and accountants. The appellant's President, Groves, admitted that after his company had acquired the instruments, it was known that a great percentage of them had been originally obtained by Reynolds Engineering. It is inconceivable to us that the appellant, having twice reviewed the instruments before purchase, did not know Reynolds Engineering was the original assignor, and there was no testimony to show the appellant's lack of knowledge on the point. The woeful history of Reynolds Engineering and of the conspiracy to defraud and cheat homeowners practiced by its officers, directors and salesmen has been previously documented by this Court. Pearlman v. State, 232 Md. 251, 192 A.2d 767 (1963). The appellant's witness, Burkhardt, testified that at the time the appellant obtained the instruments, every Marylander knew from the newspapers about Reynolds Engineering's fraudulent activities. Although Burkhardt's company agreed to finance the appellant's purchase of the notes and mortgages, Burkhardt stated he did not know at the time of sale that most of the instruments came from Reynolds Engineering. We think that, absent any contrary proof by the appellant, it must be found to have known that notes and other paper originally obtained by Reynolds Engineering were likely to be tainted with a badge of fraud. The appellant could not consciously ignore the plain facts surrounding the transaction and still maintain that it purchased the instruments in good faith. The suspiciously large discount together with the appellant's knowledge of Reynolds Engineering's relationship to the instruments require us to hold that the trial court's finding of good faith was clearly erroneous. The appellant was not a holder in due course. In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. Code (1957), Article 13, section 79. The appellees are entitled in equity to have the fraudulent note, and mortgage, declared void and to recover the amounts paid under them, up to the value of anything the appellees received as part of the transaction and until the fraud was discovered by the appellees. Restatement of Restitution, sec. 28, comment c and sec. 65; C.J.S. Bills and Notes, sec. 467 d; C.J.S., Payment, sec. 155; Am.Jur.2d, Bills and Notes, secs. 994, 1009-10; Dairyman's State Bank v. Tessman, 16 Wis.2d 314, 114 N.W.2d 460 (1962); Firestone Tire & Rubber Co. v. Central Nat. Bank of Cleveland, 159 Ohio St. 423, 112 N.E.2d 636 (1953). The rule casts the burden of loss on the assignee who lacks good faith, rather than on the innocent victim of fraud who pays without knowledge that he has been defrauded. The theory of restitution entitles the appellees to recover the sum of $1013.07, representing the difference between the total amount paid on the fraudulent instruments ($4213.07) before the appellees discovered the fraud and the original contract price ($3200).