Cheney R. Prouty v. Rafael Musquiz, 94 Tex. 87

GAINES, Chief Justice. This case comes to us upon a certificate showing the following statement and question: “A negotiable promissory note executed by Cheney R. Prouty to James Riddle, payable to the latter’s order, was transferred by the payee before maturity for valuable consideration to Sarah E. Eager, by delivery only,—that is to say by parol delivery without indorsement. Mrs. Eager assigned it to Rafael Musquiz. The above is a theory of fact presented by the record material to the case. “In such case, is the burden of proof upon Musquiz, the holder of the note, to show that Mrs.

Eager had no notice of the maker’s defenses, discounts, or set-offs, against the note, or was the burden upon Prouty, the maker, to, show that she had such notice when she acquired the note?”

Article 307 of our Revised Statutes is as follows: “Any person to whom any of the said negotiable instruments may have been assigned, may maintain any action in his own name which the original obligee or payee might have brought; but he shall not only allow all just discounts against himself, but, if he obtained the same after it became due, he shall also allow all just discounts against the assignor before notice of the assignment was given to the defendant; but should he obtain such instrument before its maturity, by giving for it a valuable consideration, and without notice of any discount or defense against it, then he shall be compelled to allow only the just' discounts against himself.” This statute was construed by this court in the case of Word v.

Ellwood, 90 Texas, 130, and it was there held that “the form of the transfer, whether written or verbal, is immaterial,” and that “the statute extends its protection to all assignees coming within its terms, though they may not have acquired their instruments in accordance with the technical rules regulating transfers under the law merchant'.” The holder of a negotiable instrument by an assignment not in writing being placed upon the same footing as an indorsee at common law, it follows that the rule of the commercial law must determine the question unless it should be held that there is something in the language of the statute to indicate a purpose to change that rule.

In Wright v. Hardie, 88 Texas, 653, construing

article 314 in reference to the burden of proof in case of a plea of a want or failure of consideration, we held that the language made it plain that the intent of the Legislature was that when the plaintiff showed that he had paid value, the onus was upon the defendant to show notice on his part. So in Tillman v. Heller, 78 Texas, 597, it was held that the statute in relation to the transfer of property in fraud of creditors indicated the order in which the burden of proof should shift in a case between the creditor and one claiming to be an innocent purchaser for value. But in McAlpin v. Finch, 18 Texas, 831, the court, in construing

article 2521 of Hartley’s Digest, which is the same as

article 307 of the Revised Statutes quoted above, say: “But we do not understand the statute as affecting or as intended,to affect the question of the burden of proof.” The court in that case further hold that it is only in case of fraud or illegality in the inception of the note that the burden is upon the plaintiff to show that he or some one under whom he claims had paid value for the paper before maturity. Again, in Blum v. Loggins, 53 Texas, 121, Chief Justice Moore, quoting with approval the doctrine announced in Daniels on negotiable Instruments,

section 814, says “that ‘mere possession of a negotiable instrument produced in evidence by the indorsee or assignee when no indorsement is necessary imports prima facie that he acquired it bona fide for full value in the usual course of business before maturity, and without notice of any circumstance impeaching its validity,’ and that he, as the' owner, is entitled to recover against the maker, notwithstanding there might be a good defense to the instrument against the payee.

To let in a defense by the maker against the assignee, the maker must first prove that there was fraud or illegality in the inception of the instrument, or show circumstances which raise a strong suspicion of fraud or illegality.

When this is done, it will devolve upon the holder to show that he ‘acquired the instrument bona fi.de for value in the usual course of business, while current, and under circumstances which create no presumption that he knew the facts which impeach its validity.’ ” It is the policy of the law merchant to promote the negotiability of commercial paper, and, for this reason, it is held that as to defenses not involving fraud in the execution or uttering of such paper, the burden, as a rule, is upon the defendant to show that the plaintiff acquired the paper either without paying value or that he had notice of the defense.

But for the suppression of fraud, it is held in cases involving that element in the inception of the instrument, and sound policy dictates, that in order to avoid the defense, the plaintiff, when the fraud is shown, should prove that he obtained the paper before maturity in good faith and for a valuable consideration. But as to the question how far the plaintiff is to go in order to show good faith, the authorities seem not to be in full accord.

The weight of authority as we think is, however, that when he has shown that he has paid value in the usual course of business and the circumstances attending the transfer cast no suspicion upon the fairness of his intent, he need go no further, and it then devolves upon the defendant to show notice to him in order to defeat a recovery. This seems to be based upon the theory that proof by the plaintiff that he has paid value under, such circumstances raises a presumption of good faith which the defendant is called upon to rebut.

Such we understand to be the doctrine laid down by the text-writer previously mentioned (1 Daniel, Negotiable Instruments,

section 819); and is the doctrine which, in our opinion, is supported by the prevailing weight of authority. Bank v. Dawson, 78 Ala., 67; Battles v. Laudenslager, 84 Pa. St., 446; Johnson v. McMurry, 72 Mo., 278; Davis v. Bartlett, 12 Ohio St., 541; Smith v. Livingston, 111 Mass., 342; Bank v. Diefendorf, 25 N. E. Rep. (N. Y.), 405. See also Byles on Bills, 124. The brief of appellee indicates that the facts alleged in bar of a recovery arose after the execution of the note, and that the defense was not on account of fraud in its inception.

If the certificate had so shown, an answer would not have been difficult.' But the statement and question, as shown by the certificate, are very general, and to them we are confined. We therefore answer hypothetically. If the note was procured by fraud, and if the plaintiff proved that Mrs. Eager paid value for the note before its maturity, and if there were no facts in evidence tending to show bad faith in the transaction upon her part, or if the defense arose after the execution of the note, then, in either event, the burden was upon the plaintiff to show that she had notice of the defense. CORRECTED opinion.

GAINES, Chief Justice. Our attention has been called to the fact that in our opinion filed in this case a mistake was made in the answer to the question certified.

In course of that opinion, we say: “The weight of authority as we think is, however, that when he has shown that he has paid value in the usual course of business and the circumstances attending the transfer east no suspicion upon the fairness of his intent, he need go no further, and it then devolves upon the defendant to show notice to him in order to defeat a recovery.” There is nothing said by us in the discussion to indicate that we intended to hold contrary to the weight of authority, and it is therefore evident that our purpose was to answer that the burden was upon the defendant to show notice when the plaintiff had proved that he procured the paper for value before maturity and under circumstances creating no suspicion of bad faith on his part.

The mistake was the mistake of the writer, and it was not discovered by his associates when the opinion was read to them for approval. It is proper that the mistake should be rectified, and therefore, of our own motion, we order that the specific answer given in our former opinion be set aside, and that in lieu thereof the following answer be certified to the Court of Civil Appeals’for the Fourth Supreme Judicial District for their observance: “If the note was procured by fraud, and if the plaintiff proved that Mrs.

Eager paid value for the note before its maturity, and if there were no facts in evidence tending to show bad faith in the transaction upon her part, or if the defense arose after the execution of the note, then, in either event, the burden was upon the defendant to show that she had notice of the defense.” Filed November 12, 1900.