Court Opinion

ID: 9572030
Source: CourtListenerOpinion
Date Created: 2023-08-21 20:37:41.549496+00
Date Added: 2024-06-11T12:31:24.631354
License: Public Domain

TRAYNOR, J.
I dissent.
In my opinion it is unnecessary to remand this case to the trial court for a finding on the question of notice, since the findings and the evidence show that plaintiffs took the notes without notice that the first installments had not been paid. Moreover, I do not understand by what reasoning my associates reach the conclusion that despite a finding that the transferee of an installment note acted in good faith and the fact that an inquiry would have revealed no defenses he cannot as a matter of law be a holder in due course if he acquires the note with notice of the nonpayment of a past due installment.
The first question to determine is whether the first installments were due and unpaid at the time the notes were pledged. There is confusion in the findings as to whether under the marketing agreement, payment was made upon defendants’ delivering fruit of enough value to meet each installment as it became due or upon the payee’s deducting the amount of each installment from the proceeds from the sale of the fruit. The trial court found that the payee had in its possession on the due date of the first installments, money and property or credits of defendants “sufficient in value or amount to pay, satisfy and discharge the amount of said First installment payment of each of said respective promissory notes in full. ’ ’ The money, property, or credits referred to consisted of fruit as well as proceeds from the sale thereof. There was evidence that the proceeds alone would not cover the first installments on the due date thereof. It may be assumed for the purpose *256of this opinion, therefore, that the first installments were unpaid when the notes were pledged. The question then arises whether plaintiffs are holders in due course.
A holder in due course is defined in section 3133 of the Civil Code (N.I.L., § 52) as follows:
“A holder in due course is a holder who has taken the instrument under the following conditions:
“ (1) That it is complete and regular upon its face;
“(2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;
“ (3) That he took it in good faith and for value;
“ (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.”
No question is raised with respect to subdivisions (1) and (3). Any conclusion that plaintiffs are not holders in due course must therefore be based on subdivision (2) or (4).
The first major issue presented under these subdivisions is whether plaintiffs were precluded from being holders in due course merely because the maturity date of the first installments had passed before they acquired the notes.
Subdivision (2) specifies two conditions: The holder must have taken the instrument (a) before it was overdue and (b) without notice that it had been “previously dishonored, if such was the fact.”
Is an installment note overdue in its entirety when it is transferred after the due date of an installment? An installment note is of course overdue as to installments due before the date of transfer, and, under subdivision (2), a transferee thereof cannot be a holder in due course as to such installments. In the absence of the operation of an acceleration clause, however, the fact that the maturity date of one or more installments has passed cannot make the instrument overdue as to installments payable in the future. The instrument is in part overdue and in part not. Is it overdue within the meaning of subdivision (2) ? An instrument is not overdue until the specified maturity of the principal obligation. An installment note, however, has several maturities, and if the maturity of each installment is regarded as the maturity of the instrument, then the instrument would be overdue after the maturity of the first installment. (See 40 Harv.L.Rev. 634, 636.) This interpretation would make the instrument *257all black or white. The more realistic interpretation, and the one in accord with the expressed intention of the Uniform Negotiable Instruments Act to make installment notes negotiable (Civ. Code, § 3083, N.I.L., § 2), would be that the instrument, like the principal obligation, is overdue only as to matured installments, but not as to installments payable in the future. A contrary holding would render installment notes nonnegotiable after the due date of the first installment. Even if a transferee could thereafter be a holder in due course if that or subsequent installments were paid, he would still have to ascertain at his peril whether the previous installments had been paid. Thus the privilege of a holder of a negotiable instrument to be free from a duty to inquire into the relations between previous parties to the instrument would be denied the holder of an instrument payable in installments.
Is a transferee who has acquired the note after an installment has matured, without notice of its nonpayment, a purchaser with notice that the note has been previously dishonored? Even if it is assumed that the nonpayment of one or more installments is tantamount to dishonor of the whole instrument, the holder has no notice of dishonor unless he has notice of nonpayment. Circulation of the instrument after the due date of an installment except the last cannot serve as notice that the installment has not been paid, for the instrument was designed to circulate until the maturity date of the last installment. A transferee has no reason to conclude from the mere fact that the note circulates after the due date of one or more installments that such installments were not paid: He may assume that the ordinary course of business has been followed and that the installments have been paid. (Code Civ. Proc., § 1963(20).) Nor need the transferee of such an instrument find a dated receipt on the note for each installment paid. The Uniform Negotiable Instruments Act does not provide for such notations, and in any event they could be placed on the instrument by the transferor even though the installment had not in fact been paid.
Does subdivision (4) of section 3133 preclude a transferee’s being a holder in due course when he has no notice of the fact that an installment was not paid when due? Since the transferee may assume that the matured installments have been paid, and since he has no notice from the note itself of the nonpayment of past installments merely because the note is *258transferred after the due date thereof, a fortiori he has no notice from that fact alone of any infirmity in the instrument or defect in the title of the person negotiating it. “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.” (Civ. Code, §3137; N.I.L., §56.) It follows that neither subdivision (2) nor subdivision (4) precludes a purchaser of an installment note from being a holder in due course merely because he purchased the same after the due date of one or more installments.
We turn, therefore, to the second major issue in this case, namely, whether a purchaser can be a holder in due course as to unmatured installments if he has taken the note with knowledge that one or more installments were not paid when due. The majority opinion concludes that such a purchaser cannot be a holder in due course but does not explain upon what provision of the Uniform Negotiable Instruments Act its conclusion is based. It is necessary therefore to reexamine the pertinent provisions of that act to determine whether they afford any justification for that conclusion..
Does notice of the fact that an installment note is transferred after an installment has matured and is unpaid make the whole note overdue within the meaning of subdivision (2) of section 3133 of the Civil Code (N.I.L., § 52)? The act makes no provision for notice that a note is overdue. It provides merely that a holder in due course must acquire the note “before it was overdue.” When the instrument provides the date of maturity on its face, notice from other sources is irrelevant. (See Britton, Bills and Notes, 498.) It has already been observed that a holder cannot be a holder in due course as to installments that were overdue when he acquired the note, but that he can be a holder in due course as to future installments, which are not overdue unless their maturity dates have been accelerated. There is nothing in the statute providing as a matter of law for the acceleration of an installment note on the nonpayment of any installment. The only provision of subdivision (2) that depends on notice for its operation is the requirement that the transferee, to be a holder in due course, must acquire the note “without notice that it had been previously dishonored, if such'was the fact.”
*259Does notice of the nonpayment of an installment constitute notice of dishonor of the entire note? Section 3164 of the Civil Code (N.I.L., § 83) provides: “The instrument is dishonored by nonpayment when—(1) It is duly presented for payment and payment is refused or cannot be obtained; or (2) Presentment is excused and the instrument is overdue and unpaid. ’ ’ Presentment was waived on the notes involved in this ease and therefore the instruments were dishonored as to the first installments if they were overdue and unpaid. It does not follow, however, that the instruments were dishonored in their entirety. Since an installment note can be overdue and unpaid as to certain installments, but not overdue and unpaid as to others, it can likewise be dishonored by nonpayment as to certain installments, but still not be dishonored as to others.
If dishonor by nonpayment of an installment when due is tantamount to dishonor of the instrument as to future installments, it would follow that even if that installment were subsequently paid, the whole note would be regarded as “previously dishonored.” Consequently, knowledge of a transferee that one installment was paid late would preclude his being a holder in due course as to future installments, for he would have notice that the instrument was “previously dishonored.” It is settled, however, under the provisions of the Uniform Negotiable Instruments Act with respect to notice of dishonor to persons secondarily liable, that dishonor of an installment does not constitute dishonor of the note as to other installments. Section 3170 of the Civil Code (N.I.L., § 89) provides that “when a negotiable instrument has been dishonored by nonacceptance or nonpayment, notice of dishonor must be given to the drawer and to each endorser, and any drawer and endorser to whom such notice is not given is discharged.” If dishonor of the instrument as to one installment constituted dishonor of the instrument as to all installments, failure of the holder to give notice of dishonor within the period prescribed as to one installment would deprive him of the right to recover from the persons secondarily liable, when subsequent installments were dishonored. It is established, however, that even though the holder has failed to give proper notice of dishonor as to an installment, he is not prevented from giving such notice as to subsequent installments that are not paid at their maturity dates. (Berkowitz v. Kasparewicz, 121 Conn. 140, 145 [183 *260A. 693, 104 A.L.R. 1326]; Warneke v. Preissner, 103 Conn. 503, 507 [131 A. 25]; Roberts v. International Bank, 25 F.2d 214, 216; Chamberlain v. Cobb, 129 Wash. 549, 551 [225 P. 414]; see 10 C.J.S. 896; Uniform Laws Annotated, Negotiable Instruments, n. 13 to § 89.)
An analogy is presented by the cases involving nonpayment of one of a series of notes. According to the cases decided under the Uniform Negotiable Instruments Act, knowledge of the dishonor of one of the notes does not constitute notice that all of the notes of the series are dishonored. (Hobart M. Cable Co. v. Bruce, 135 Okla. 170, 171 [274 P. 665, 64 A.L.R. 451]; Morgan v. Farmington Coal & Coke Co., 97 W.Va. 83, 99 [124 S.E. 591]; Brannan, Negotiable Instruments 566; cf., however, 64 A.L.R. 457, 458 (collection of cases decided under common law principles).)
The conclusion seems inescapable therefore that if knowledge of nonpayment of a past due installment precludes a purchaser from being a holder in due course as to unmatured installments, it is not because of the provisions of subdivision (2) of Civil Code section 3133 (N.I.L., § 52(2).) It remains only to determine whether such a result is justified by the provisions of subdivision (4).
Is notice of the nonpayment of an installment, as a matter of law, notice of “any infirmity in the instrument or defect in the title of the person negotiating” the note within the meaning of subdivision (d) of Civil Code section 3133 (N.I.L., § 52(d))? Section 3137 of the Civil Code (N.I.L., § 56) provides, “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.” Knowledge that an installment has not been paid when due is clearly not actual knowledge of an infirmity in the instrument itself or of a defect in the title of the person negotiating it. To prevent the transferee from becoming a holder in due course, such knowledge must therefore be knowledge of such facts that his action in taking the instrument amounted to bad faith.
Under subdivision (4) of Civil Code, section 3133 (N.I.L., § 52(4)), therefore, if an installment is not paid when due, notice of that fact does not, as a matter of law, preclude the transferee from being a holder in due course. Such notice is *261at most evidence of bad faith to be weighed by the trier of facts with the other facts to determine whether the transferee took the note in question in good faith. Even if it be assumed that such knowledge would be sufficient to put a prudent man on inquiry to determine if the note was subject to defenses, the transferee is not thereby deemed to have acquired the note in bad faith, for negligence is not a bar to recovery on a negotiable instrument. Civil Code, section 3137 (N.I.L., § 56) clearly makes the good or bad faith of the transferee the only test. In construing this provision, this court has followed the general rule “that mere knowledge of facts sufficient to put a prudent man on inquiry, without actual knowledge, or mere suspicion of an infirmity or defect of title, does not preclude the transferee from occupying the position of a holder in due course, unless the circumstances or suspicions are so cogent and obvious that to remain passive would amount to bad faith.” (Popp v. Exchange Bank, 189 Cal. 296, 303 [208 P. 113] ; Goodale v. Thorn, 199 Cal. 307, 314 [249 P. 11] ; Merced Security Sav. Bank v. Bent Bros., 207 Cal. 652, 656 [279 P. 765]; Nuckolls v. Bank of Calif., 10 Cal.2d 278, 284 [74 P.2d 271] ; Barthelmess v. Cavalier, 2 Cal.App.2d 477, 487 [38 P.2d 484]; Imperial Gypsum & Oil Co. v. Chaplin, 4 Cal.App.2d 109, 113 [40 P.2d 596] ; see 5 Uniform Laws Annotated, Negotiable Instruments, n. 31-136 to § 56; Brannan, Negotiable Instruments, 6th ed., 636-641; Rightmire, Bad Faith in Negotiable Paper, 18 Mich.L.Rev. 355, 367-368; Britton, Bills and Notes, 411-415; 81 U. of Pa.L.Rev. 617.) “Under the statute, section 56, . . . a purchaser is not chargeable with notice of an infirmity or defect in the instrument unless he had ‘actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.’ The statute by its terms excludes constructive notice.” (Allen v. Cooling, 161 Minn. 10, 15 [200 N.W. 849].)
The mere fact that one or more installments of an installment note are unpaid when the note is negotiated does not convey knowledge to the transferee of a defense against the note; nor does it reveal such knowledge of circumstances that it can be said that the holder of the note shut his eyes to the facts and in bad faith sought to avoid the knowledge of a defense. In that respect there is no difference between a transferee of a negotiable instrument with knowledge that one or *262more installments of interest are unpaid and a transferee with knowledge that one or more installments of principal are unpaid. Before the adoption of the Uniform Negotiable Instruments Act there was a conflict of authority with regard to the effect of the late payment of an installment of interest. Under the. Uniform Act, however, the rule is now generally recognized to be that “knowledge that interest is due and unpaid does not, of itself constitute bad faith, but such fact may be taken into consideration by the jury along with other facts on the issue of purchase in good faith.” (Britton, Bills and Notes, 456-457; City of New Port Richey v. Fidelity & Deposit Co., 105 F.2d 348, 352.)
Similarly, notice of a default in the payment of an installment of principal disconnected from other facts does not prevent the transferee from being a holder in due course. Nor does such notice alone constitute bad faith and put the holder under a duty to make an inquiry. Even if good faith would require the transferee to make an inquiry, it would not necessarily follow that he could not still be a holder in due course. The inquiry may reveal that the default is fully explained by the circumstances and that it constitutes no warning that the maker has a defense with regard to installments to mature in the future. Thus, it may appear that prompt payment has been waived and that the delay with regard to one or more past due installments does not exceed the delay in the payment of other installments that have been paid late in the past. Failure to pay a past due installment may arise from unexpected circumstances affecting the ability of a maker to pay rather than from an equitable defense. Many installment notes containing an acceleration clause provide that the holder can accelerate future installments only if one or more past installments remain unpaid for a specified period. In such eases installments are frequently paid in the interval between the maturity date of the installment and the date at which under the terms of the note the holder would be entitled to accelerate future payments. A rule would be contrary to common experience that held in each case in which a past due installment is unpaid, notice of such fact alone is notice that the maker has a defense against future installments payable under the note.
In my opinion, therefore, the rule set forth in the majority opinion that a purchaser of an installment note who has knowledge that a past due installment was unpaid when he acquired *263the note “is put on inquiry that there may be some defenses against it and . . . cannot be a holder in due course” cannot be reconciled with the provisions of the Uniform Negotiable Instruments Act. The cases cited for this proposition include only three cases decided under the Uniform Negotiable Instruments Act. Of these three cases, only one actually held that the late payment of an installment precludes a subsequent purchaser from being a holder in due course. (Hibbard v. Collins, 127 Me. 383, 386 [143 A. 600].) That case in fact held that notice was immaterial, apparently on the theory that when the first installment was overdue the whole note was overdue. (See Brannan, Negotiable Instruments, 566.) Obviously, the majority opinion in the present case is not based on the theory that the note was overdue as to all installments, for the question whether plaintiffs are holders in due course is held to turn on whether or not they had notice of the nonpayment of an installment. In City of New Port Richey v. Fidelity & Deposit Co., 105 F.2d 348, 352, there is a dictum to the effect that notice of the nonpayment of an installment prevents a subsequent purchaser from being a holder in due course. The actual holding of that case, however, is that “known non-payment of interest, though not in law notice of dishonor, is a fact to be considered with all other circumstances on the question of the bona fides of the taking.” The majority opinion places great reliance on a statement in United States v. Capen, 55 F.Supp. 81, 83, but the actual decision in that case turned on a rule adopted in some jurisdictions that where an installment note contains an automatic acceleration clause and the maker fails to pay the first installment, the whole note is automatically overdue. (Cf., however, Andrews v. Zook, 125 Cal.App. 19, 22 [13 P.2d 518] ; Sullivan v. Shannon, 25 Cal.App.2d 422, 425 [77 P.2d 498].)
The cases decided under common law principles, the one case deciding the question under the Uniform Negotiable Instruments Act, and the dicta in the other cases relied on in the majority opinion, are all based on the theory that the transferee was a purchaser of overdue paper or was a purchaser with notice of dishonor. (See Britton, Bills and Notes, 455.) It has already been observed that there is no support for either theory in the provisions of the Uniform Negotiable Instruments Act. The majority opinion cannot be brought within the purview of that act unless it is regarded as hold*264ing that as a matter of law anyone who purchases an installment note with knowledge that an installment is unpaid is a purchaser in bad faith. But even then it cannot be reconciled with the act, as is well illustrated by the facts of the present case.
Plaintiffs gave a loan of $5,000 to a corporation in which they had no interest and with which they had no other business connections. Even if they knew that the first installments had not been paid and good faith required an inquiry when the notes were pledged, such an inquiry could not have revealed the defense of subsequent failure of consideration now set up to bar their recovery on the notes. Plaintiffs could not learn in advance that years later the corporation would become insolvent and be unable to perform its obligations under its contract with the makers. The rule adopted by the majority of this court actually empowers the maker of an installment note to render the note nonnegotiable by refusing to pay an installment, for knowledge of that fact precludes a transferee’s being a holder in due course. Such a rule contradicts the basic principle of the statute that a transferee of a negotiable instrument is not required, except by considerations of honesty and good faith, to enter upon on inquiry with regard to transactions that have given rise to the issuance of the instrument.
If the principles set forth in the Uniform Negotiable Instruments Act are applied to this case, knowledge that the first installments were not paid would not as a matter of law prevent plaintiffs from being holders in due course. It would merely be evidence that plaintiffs might not have acquired the notes in good faith. Good faith may require a transferee to make an inquiry on the basis of such knowledge depending on the facts of the particular case. What constitutes good faith is essentially a question of fact and depends on the circumstances in each case. For example, if the purchaser knew that one or more of the installments were not paid on the due date and made a reasonable inquiry that revealed only that the payments had not been made because of some reason unconnected with any defense, he should not be barred from recovery on the note merely because of subsequent failure of consideration, a defense that could not have been known at the time. On the other hand, if the purchaser acquired the note with knowledge that several installments had not been paid, it would appear that he failed to act in good faith if he failed *265to make an inquiry, unless the surrounding circumstances showed that this failure was attributable to negligence and not to dishonesty. Such questions, however, are questions of fact for the trial court or jury and should only be considered matters of law when the facts are not in conflict and not reasonably suspectible of conflicting inferences.
Under the holding of the majority opinion, the negotiability of installment notes has been seriously impaired. After any installment has matured, it is unsafe for a purchaser, even though he acts in good faith, to acquire such a note without making certain that all past due installments have been paid. His rights as a holder in due course may be questioned at some future date by the maker’s merely asserting that an installment was unpaid at the time of the transfer and that the transferee had knowledge of that fact. In such a situation, if the maker had a defense that involves the title of the payee, the holder would have the burden of showing that either the installment was paid when due or that he had no notice of that fact. (Civ. Code, § 3140; N.I.L., § 59.) In view of the power and responsibility of the trier of facts under decisions of this court (see Estate of Bristol, 23 Cal.2d 221, 223 [143 P.2d 689]) there is always the risk that the evidence might be held susceptible of an inference that the holder had notice of the nonpayment of- a past due installment.
Even under the rule of law announced in the majority opinion, it is unnecessary to remand this case to the trial court on the question of notice.
The trial court found “That the first installment of each of the said notes given to plaintiff as security for the note of said California Producers were past due on its face at the time of the transfer of said notes to plaintiffs, and that plaintiffs are not holders in due course of said collateral notes; but the court also finds that said plaintiffs were purchasers and holders of said notes in good faith and for value and without notice of any equity or defense of defendants or any of them. . . .” (Italics added.) It was the position of the defendants at the trial that the notice of nonpayment of the first installments was irrelevant since the date for the payment thereof had passed before the notes were transferred to plaintiffs. Under the principles already discussed, the effect of notice of nonpayment of a prior installment is pertinent only to the question whether or not the purchaser acquired the note in good faith. Since there was no evidence that *266plaintiffs were not holders in due course, except in regard to the first installments, it is obvious that the “finding” that plaintiffs were not holders in due course is based upon defendants’ theory and is an erroneous conclusion of law.
Since the trial court found that plaintiffs were holders of the notes in question “in good faith and for value without notice of an equity or defense of defendants,” it follows that the plaintiffs are holders in due course. This finding on its face, under the foregoing principles of law, can mean only one of two things: (1) plaintiffs purchased the notes without knowledge that the first installments were unpaid, or (2) even if the' first installments were not paid when due and plaintiffs had knowledge of that fact, under the circumstances of the case, plaintiffs were none the less acting in good faith when they acquired the notes. Since either question is one of good faith, if either theory is supported by the evidence, the judgment must be affirmed, except to the extent that it allows plaintiffs to recover against defendant Winchester for the first installment of her note. This installment was either paid before the transfer of the note or was subject to defenses. Since it was overdue, plaintiffs were not holders in due course as to it.
Even if it is assumed that under the facts of the present case the trial court would not have found that plaintiffs were purchasers in good faith if it believed that the plaintiffs had notice of the nonpayment of the first installment, the reasonable construction of the finding in regard to the good faith of plaintiffs is that they acquired the notes without such notice.
A holder of a negotiable instrument is “deemed prima facie a holder in due course . . .” (Civ. Code, § 3140, N.I.L., § 59), and a person who acquires an installment note after an installment is due is entitled to rely on the presumption that the due course of business has been followed. (Code Civ. Proc., § 1963.) Since it is an established principle that all inferences and presumptions must be applied to support the judgment of the court, the trial court’s finding that the plaintiffs acquired the notes in question'as “purchasers and holders of said notes in good faith and for value and without notice of any equity or defense of defendants . . .” must be construed as a finding that the notes were acquired without notice of nonpayment of the first installments.
The remaining question is whether this construction of the finding is supported by the evidence. The principal plaintiff testified that he knew nothing of the status of the pledged *267notes and that he relied on the recommendation of a Mr. Anderson, the president of a bank that later acted as plaintiffs’ agent in delivering the notes. Plaintiff testified that Mr. Anderson told him that the notes would be secured by growers’ notes but that Mr. Anderson did not tell him of the nature of the growers’ notes.
Defendants introduced no evidence sufficient to controvert this testimony. Mr. Anderson was called as defendants’ witness but he was able to state only that he advised one of the plaintiffs that the corporation would use the money to start a cannery in Sacramento and that it would be advantageous to the city and to this plaintiff. Mr. Anderson testified that he could not recall whether at that time he knew anything about the status of the growers’ notes. The testimony of this witness was struck from the record as irrelevant. Defendants contend that the testimony was admissible to show that the witness knew of the status of the notes and that he was plaintiffs’ agent. The only agency shown, however, was that the witness’s bank was subsequently the agent for the delivery of the notes and none of the testimony struck tended to show that plaintiffs had any knowledge of the nonpayment or of any defense available to defendants at that time.
It is contended that an inference that plaintiffs had notice that the first installment was overdue could be drawn from the fact that the $5,000 note from the California Cooperative Producers contained a list of the installment notes transferred to plaintiffs as security, because this list designated.the full face amount of each of the pledged notes. It is evident on the face of the principal note, however, that the full amounts were listed for purposes of identification. It was necessary to give the full face amount of each note, since the principal note executed by the corporation, after enumerating the notes given as security, stated, “The maker hereof may, while not in default, substitute as security hereunder, in place of any of said note or notes, note or notes of its grower members, of equal amount, form and character.” Even if the trial court could have reasonably inferred from the listing of the notes with their full amounts that plaintiffs had knowledge of the nonpayment of the first installments, it was free to draw or not to draw such an inference.
Edmonds, J., concurred.