
    BANK OF VARINA v. J. L. SHERRON.
    (Filed 24 October, 1923.)
    1. Bills and Notes — Negotiable Instruments — Fraud—Burden of Proof— Statutes.
    Where the maker of a note alleges and offers evidence tending to show that it had been obtained by fraud, upon the holder, in his action to recover thereon, is cast the burden of showing that he had acquired it liona fide, for value, and without notice. C. S., sec. 3040.
    2. Same — Evidence—Appeal and Error.
    Where fraud in the procurement of a note given for shares of stock in a corporation is alleged in an action thereon, by an endorsee, claiming to be a dona fide holder in due course, etc., it is competent for the defendant to show by his evidence that the stock salesman representing the corporation had induced him to make the note by misrepresentations of the company’s solvency, and that he was solicited in violation of the “Blue-Sky Raw” (O. S., sec. 335), and the endorsee’s connection with the corporation and his evident previous knowledge of .the fraud alleged to have been perpetrated; and. also, that the stock salesman had made similar misrepresentations to other purchasers of the stock under the same conditions.'
    Stacy, J., dissenting.
    Appeal by defendant from Oranmer, J., at April Term, 1923, of "Waice.
    This is an action to recover upon an alleged promissory note of the defendant for $2,500, dated 18 November, 1919, payable to the defendant himself twelve months after date. The defendant denied he had executed said note or had endorsed it, and denied that the plaintiff had purchased it for full value before maturity and was the owner of the same. He also denied that he had made payments upon it or was indebted thereon to plaintiff as alleged. He alleged that the said paper-writing was fraudulent and void and was without consideration, and denied that the plaintiff was a bona fide owner and holder for full value and without notice. He alleged that certain agents of the Cumberland Eailway and Power Company, in November, 1919, came to his home, near Cardenas, N. C., and solicited him to purchase certain stock and bonds of said company, and, in -connection therewith, made to him many false and fraudulent representations, specifically set out in the answer, representing that said company was a strong corporation, abundantly solvent, and in prosperous financial condition, all of which was false; and that it owned certain specific properties which it did not own, and that its bonds were • extremely valuable, which was not true; that the said company was worth a million dollars, etc.; that the said agents of the Cumberland Eailway professed to read over to liim a paper utterly different from tlie alleged note, and by tbeir false representations obtained bis signature to a paper-writing totally different from tbe alleged note, and which said paper-writing they read falsely to him as not maturing until forty years after date, and being payable to the Cumberland Eailway and Power Company; that the defendant could not read or write, and relied upon the representations made to him by said agents; that the same were material, false, and calculated and intended to deceive him, and did deceive him, and that the transaction was fraudulent and void. He 'further alleged that the paper-writing or note was procured contrary to and in violation of the laws of North Carolina; that it came within the provisions of C. S., 6367, and chapter 156, Public Laws 1913, and chapter 121, Public Laws 1919, known as the “Blue-Sky Law,” and that there was no contract in writing executed containing the clause required by said statutes. He alleged that neither the name of the Cumberland Eailway and Power Company nor of the said agents appeared in the said pretended note, as required by law, and that the said writing was fraudulent and void and contrary to the laws of North Carolina, and part of an illegal and forbidden transaction. He further alleged that the plaintiff had knowledge of the fraudulent character of the transaction of the Cumberland Eail-way and Power Company, and that the defendant had, prior to plaintiff’s acquisition of the paper-writing in controversy, notified the plaintiff that the defendant disputed the validity of the same and the grounds thereof. The further and fuller allegations of the defendant appear in the answer, as set forth in pages 4-12 of the record.
    There was a verdict in favor of the plaintiff, and the defendant appealed.
    
      Pou, Bailey & Pou for plaintiff.
    
    
      R. N. Simms for defendant.
    
   Ciabk, C. J.

The defense set up by the defendant is that the note sued on was procured by false and fraudulent representation and by disregard of the requirements of the “Blue-Sky Law,” and the defendant offered evidence to show that the plaintiff bank in this case acquired about the same time $15,000 or $20,000 of similar paper held by the Cumberland Eailway and Power Company, and that it had knowledge of the defects alleged.

There are numerous other exceptions assigned as error, but it is unnecessary to do more than, to mention the following evidence, which was excluded and its exclusion excepted to by the defendant, which was offered to show knowledge on tbe part of tbe bank, and especially tbat tbe bank bad acquired a note executed by A. W. Thompson to the Cumberland Eailway and Power Company; tbat said Thompson was, and bad been for many years, one of tbe directors of plaintiff bank, and offered evidence to show tbat said Thompson acquainted tbe cashier of tbe bank with tbe said fraudulent practices by which this paper in question was procured, and tbat after some controversy tbe bank returned said paper. to Thompson. It is true tbat tbe cashier testified tbat Thompson paid tbe paper, but there was also evidence offered tbat be bad acquainted tbe cashier with tbe defects, and tbat tbe paper was returned to him by tbe cashier canceled and without payment.

C. S., 3040, provides: “When it is shown tbat tbe title of any person who bad negotiated tbe instrument was defective, tbe burden is on tbe bolder tbat be, or some person under whom be claims, acquired tbe title from tbe bolder in due course.” There are numerous cases which bold: “Upon proof of fraud or illegality being offered, burden is shifted to bolder, and be must show tbat be received tbe instrument bona fide and for value.” Discount Co. v. Baker, 176 N. C., 546; Moon v. Simpson, 170 N. C., 335; Wilson v. Lewis, ib., 47; Smathers v. Hotel Co., 168 N. C., 69; Bank v. Drug Co., 166 N. C., 99; Bank v. Branson, 165 N. C., 344; Trust Co. v. Whitehead, ib., 74; Trust Co. v. Ellen, 163 N. C., 45; Bank v. Exum, ib., 199; Hardy v. Mitchell, 161 N. C., 351; S. c., 156 N. C., 76; Myers v. Petty, 153 N. C., 462; and many others. Where evidence establishes tbe title of party who negotiated a check to defendant was defective, burden is upon tbe defendant claiming to be bona fide purchaser, for value and without notice, to make good claim by greater weight of tbe evidence. Mfg. Co. v. Summers, 143 N. C., 103. Also, where tbe complaint in an action by endorsee of instrument does not state tbat be is bolder in due course, and defendant alleges tbat tbe execution of instrument was procured by fraud of payee, burden is on endorsee to show tbat be is tbe bolder-in due course. Campbell v. Patton, 113 N. C., 481.

Tbe evidence offered by defendant for tbe above purpose, and excluded, is as follows:

Mr. E. W. Kurfees, cashier of tbe plaintiff bank, testified: “We bad bought other notes of tbe Cumberland Eailway and Power Company at tbe time we bought this. I could not tell you bow long we bad been doing this. I cannot say. We bad bought some stocks or bonds with tbe Cumberland Eailway and Power Company in connection with this matter. They were delivered with tbe note, or soon afterwards, by tbe stock salesman. I could not say whether Mr. Sherron brought them in or not. I think tbat tbe stock salesman brought them in because I requested bim to bring them in as soon as they were issued. I knew that they were connected with the note. I knew that this was the note given for the purchase of bonds or certificates of the Cumberland Railway and Power Company, as he told me he had sold some stock. That was at the time he was offering us this note for sale. The stock certificate that I mentioned while ago was stock certificate of the Cumberland Railway and Power Company which we had in our possession.”

Said Kurfees also testified that they took $15,000 or $20,000 of the notes held by the Cumberland Railway and Power Company. He said he did not take the note of A. W. Thompson and turn it back on him; that said A. W. Thompson was a director of his bank. Question: “I ask you if he did not tell you that it was not a bona fidenote?” To this the plaintiff objected, which objection was sustained, and the defendant excepted. This is exception 8. The defendant proposed to show that the said Thompson did have a controversy with the bank about some of this Cumberland Railway and Power Company paper.

Kurfees, the cashier, stated that Thompson was a director of the bank from the time it started business in 1914 until 1921. Question: “He had a controversy with your bank about some of this Cumberland Railway and Power Company paper?” The plaintiff objected; sustained, and the defendant excepted. This was the ninth exception.

The defendant Sherron testified that when the Cumberland Railway and Power Company got him to sign the note in question, they read it over to him, and a few days thereafter Kurfees, the cashier of the bank, said, “Mr. Sherron, I will handle some of your paper if you say so,” and he replied that he had forty years and that the dividends would pay that off. “I told him they got it through fraud, and that it was not recommended to me like it was. I did not agree that Mr. Kurfees should buy that paper. He mentioned to me about paying the interest, and I told him he would have to get it out of the dividend; that I had forty years on it.” When Sherron was asked about the statements made to him by the Cumberland Railway and Power Company’s agent — “You found out that it was all to the bad?” — objection by plaintiff; sustained, and defendant excepted. This was the seventeenth exception.

Sherron testified that there was nothing in any contract between him and the Cumberland Railway and Power Company containing the language required by the statute, C. S., 6361: “No sum shall be used for commission, promotion, and organization expenses on account of any shares of stock in this company in excess of one per cent of the amount actually paid upon separate subscriptions (or in lieu thereof may be inserted, or one dollar per share for every fully paid subscription) for such securities, and the remainder of such securities shall be held or invested as authorized by the law governing such company and held by tbe organizers (or trustees, as the case may be) and the directors and officers of such company after organization, as bailee for the subscriber, to be used only in the conduct of the business of such company after having been licensed and authorized therefor by proper authority.”

He said he knew Mr. A. W. Thompson, and that he was a director of defendant bank. When asked the question, “Was he assisting in the selling of the stock of the Cumberland Railway and Power Company?” the plaintiff objected; sustained, and defendant excepted. This was the eighteenth exception. The defendant proposed by this question to show that A. W. Thompson, one of the directors of plaintiff bank, was assisting in the sale of this stock of the Cumberland Company.

' The court informed counsel that it could- ask the witness if Thompson sold him any stock. He asked, “Mr. Sherron, did you hear any conversation between Mr. A. W. Thompson, director of the Bank of Varina, and any person concerning the alleged note of A. W. Thompson claimed to have been given to the Cumberland Railway and Power Company?” Objection by the plaintiff; sustained, and defendant excepted. This was the nineteenth exception.

The defendant then asked, “State if you know whether or not the plaintiff, Bank of Varina, claimed to hold the note of A. W. Thompson acquired by said bank of the Cumberland Railway and Power Company, the authenticity of which was disputed by Mr. Thompson.” Objection by plaintiff; sustained, and defendant excepted. This was the twentieth exception. The defendant proposed to show by this witness that it did.

Question: “State if you know whether or not the Bank of Varina surrendered to Mr. A. W. Thompson a note similar to the one in controversy, claimed to have been signed by Mr. Thompson and disputed by him.” Objection by plaintiff; sustained, and defendant excepted. This was the twenty-first exception. The defendant proposed to show by this inquiry that the said bank did surrender to A. W. Thompson such note.

The defendant also excepted for refusal to admit divers witnesses to testify that stock salesmen made to them the same false and fraudulent representations concerning said Cumberland Railway and Power Company and its stock in order to procure signature to notes similar to the false representation made to Sherron, and to prove by them further that such representations were false and fraudulent. A11 of these exclusions of testimony were duly excepted to, and assigned as error.

There were other exceptions, for which error is assigned, but, in view of the above assignments, it is not necessary to discuss them.

The case should go back, that this excluded evidence may be admitted and be passed upon by a jury.

New trial.

Staoy, J.,

dissenting: The jury returned the following verdict in this case:

“1. Was the note sued on secured by fraud of the Cumberland Railway and Power Company? Answer: No.’
“2. Did the defendant endorse the note, as alleged in the complaint? Answer: ‘Yes.’
“3. Are the plaintiffs the holder of the note in due course? Answer: ‘Yes.’
“4. What sum is plaintiff entitled to recover of the defendants? Answer: ‘$2,500, with interest from 18 November, 1919, less two payments of $30, 8 March, 1920, and $150 paid 12 November, 1920.’ ”

It will be observed, in the first place, that the allegation of fraud has been negatived by the jury’s answer to the first issue. In the face of this finding, I do not think the proposed excluded evidence of the defendant, bearing only upon the third issue, meets the test as laid down in Holloman v. Trust Co., 185 N. C., 49: “To constitute a 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.” C. S., 3037.

A careful perusal of the entire record leaves me with the impression that the case has been tried in substantial conformity to the law bearing on the subject, and, in my opinion, the verdict and judgment entered below should be upheld.  