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courts quite universally hold that knowledge that a note was given in consideration of the executory agreement or contract of the payee which has not been performed will not deprive the indorsee of the character of a bona fide holder, unless he also has notice of the breach of that agreement or contract: See 1 Edwards on Bills and Notes, sec. 519; 1 Daniel on Negotiable Instruments, 740-748; Rublee v. Davis, 33 Neb. 779, 29 Am. St. Rep. 509, 51 N. W. 135; Miller v. Finley, 26 Mich. 219, 12 Am. Rep. 306; Porter v. Pittsburg B. Steel Co., 122 U. S. 267, 7 Sup. Ct. Rep. 1206, 30 L. ed. 1210; 2 Randolph on Commercial Paper, secs. 1018, 1019. The case made by the defendant lacks in this respect the element of notice to the indorsee of the breach of the warranty or failure of consideration, and the bank must be held to have received the note in good faith, unless its position be found vulnerable to some of the other objections made.
2. The good faith of the indorsement of the bank is also challenged, on the ground that it does not appear to have become an indorsee or purchaser in due course of business. This objection is grounded on the fact that the cashier, 393 while testifying that the bank purchased and paid for the note, says that the so-called payment therefor was effected by giving Bigler & Sons credit on the books of the bank. He further says that, to the best of his recollection, the account of Bigler & Sons was not then or at any time thereafter overdrawn, and there is no showing or suggestion that such credit was ever canceled by withdrawals or applied by the bank to the payment of claims in its hands against Bigler & Sons. In this condition of the record, it is very clear that such transaction did not constitute the bank an innocent holder in due course of business, unless its claim is strengthened or improved by another fact about to be stated : City Deposit Bank v. Green, 130 Iowa, 384; Lancaster Co. Nat. Bank v. Huver, 114 Pa. 216, 6 Atl. 141; Manufacturers' Nat. Bank v. Newell, 71 Wis. 309, 37 N. W. 420; Mann v. National Bank, 30 Kan. 412, 1 Pac. 579; Drovers' Nat. Bank v. Blue, 110 Mich. 31, 64 Am. St. Rep. 327, 67 N. W. 1105; Central Nat. Bank v. Valentine, 18 Hun, 417; Thompson v. Sioux Falls Nat. Bank, 150 U. S. 231, 14 Sup. Ct. Rep. 94, 37 L. ed. 1063; First Nat. Bank v. Nelson, 105 Ala. 180, 16 South. 707; Scott v. Ocean Bank, 23 N. Y. 289.
The doctrine of these cases is that the transfer of negotiable paper to a bank in consideration of credit upon its books, which credit is not absorbed by an antecedent indebtedness or exhausted by subsequent withdrawals, is not a purchase
in the ordinary sense of the term. To avoid the application of this rule in the case at bar, reliance is had on the conceded fact that after this transaction, and before the beginning of this suit, Bigler & Sons were adjudged bankrupts, and it is said we must therefore presume that the credit of said firm on the books of the bank was exhausted, and the bank's status as a purchaser in due course thus perfected. Whether this presumption obtains is a question upon which, if necessary to the disposition of the appeal, the members of this court might not be fully agreed, but, for reasons hereinafter shown, we need not now undertake to pass upon it.
3. Appellant argues that the note in suit having 394 been delivered upon the condition that it was not to be negotiated, and to be of no effect if the payee failed to deliver the cow in calf as agreed, the act of the payee in negotiating and putting the note in circulation was such a fraud upon defendant as casts upon the plaintiff the burden of showing that he received the instrument in good faith and without notice. This point is met by the appellee with the contention that proof of the matter alleged by appellant must be excluded under the rule prohibiting the admission of parol evidence to vary the terms of a written contract. The soundness of the latter rule thus appealed to is elementary, but its application is not to be so extended as to exclude oral testimony to establish failure of consideration or a plea of fraud where the controversy is between the original parties to a note, or between the maker and one who is not a good faith holder of the instrument: Marsh v. Chown, 104 Iowa, 556, 73 N. W. 1046; First Nat. Bank v. Snyder, 79 Iowa, 191, 44 N. W. 356; Day v. Lown, 51 Iowa, 364, 1 N. W. 786; First M. E. Church v. Sweny, 85 Iowa, 627, 52 N. W. 546; Dowagiac Mfg. Co. v. Gibson, 73 Iowa, 525, 5 Am. St. Rep. 697, 35 N. W. 603; Ilumbert v. Larson, 99 Iowa, 275, 68 N. W.703. As between such parties, it is also a well-established general rule that the delivery of a written instrument which is in form a complete contract will not exclude parol evidence that such delivery was conditional, and was not to become a binding or enforceable obligation upon the maker until the performance or discharge of such condition precedent: See Cavanagh v. Iowa Beer Co., 136 Iowa, 236, 113 N. W. 856; and Hinsdale v. McCune, 135 Iowa, 682, 113 N. W. 478; and see, also, Sutton v. Weber, 127 Iowa, 361, 101 N. W. 775; Hilsdale College v. Thomas, 40 Wis. 661; Juilliard v. Chaffee, 92 N. Y. 529; Seymour v. Cowing, 1 Keyes, 532; Burke v. Dulaney, 153 U. S. 228, 14 Sup. Ct. Rep. 816, 38 L. ed. 698.
It is also held that, if a party to whom the conditional delivery of a written obligation has been made puts it in circulation in violation of that agreement, such act is a fraud, tainting the inception of the instrument, and constitutes a 395 good defense to an action thereon by one who is not a bona fide holder: Merchants’ Bank v. Luckow, 37 Minn. 542, 35 N. W. 434. The general rule is ordinarily stated as follows: “Where negotiable paper has been lost, or stolen, or obtained by duress, or procured or put in circulation by fraud, proof of these circumstances may be given against the plaintiff, and, on such proof being given, it is incumbent on the plaintiff to show himself to be a holder bona fide and for a valuable consideration”: Cummings v. Thompson, 18 Minn. (Gil. 228) 246. The reason of this rule is said by the English courts to be found in the presumption that the holder of paper affected in his hands by fraud or illegality would be likely to indorse it away without consideration to some confederate or agent, and it is therefore but just to require one who sues upon it to prove his bona fides: Fitch v. Jones, 5 El. & B. 238. This reasoning has also had the approval of the courts of this country. In Perrin v. Noyes, 39 Me. 384, 63 Am. Dec. 633, it is said that, if the note in suit has been fraudulently put in circulation, the burden is cast upon the plaintiff''to show that he came by the possession fairly in due course of business, and without any knowledge of the fraud and unattended with circumstances justly calculated to awaken suspicion.” Mr. Justice Cooley, of Michigan, applied this rule to the plaintiff in an action upon a promissory note put in circulation in violation of an agreement that, if the representations upon which the sale was made proved to be false, the consideration might be returned and the note surrendered: Conley v. Winsor, 41 Mich. 253, 2 N. W. 31.
In National Revere Bank v. Morse, 163 Mass. 383, 40 N. E. 180, we have a case directly in point upon the proposition now being considered. It was there held that, where a note given under an agreement that it should not be negotiated until a certain contingency arose was negotiated in violation of such agreement, this was a sufficient showing of fraud in putting the paper into circulation to require the plaintiff 396 to show that he took it for value and in good faith before maturity. Such, also, was the holding in Merchants' Nat. Bank v. Haverhill Iron Works, 159 Mass. 158, 34 N. E. 93. Without further quotation, we may add the following citations, bearing more or less directly on the question: Farrar v. Mathews, 37 Iowa, 418; Graham v. Remmel, 76 Ark. 140, 88 S. W. 899; Vosburgh v. Diefendorf, 119 N. Y. 357, 16 Am. St. Rep. 836, 23 N. E. 801; Joy v. Diefendorf, 130 N. Y. 6, 27 Am. St. Rep. 484, 28 N. E. 602; Sistermans v. Fields, 9 Gray, 331; Williams v. Huntington, 68 MD. 590, 6 Am. St. Rep. 477, 13 Atl. 336; Griswold v. Scott, 13 Ga. 210; Barlow v. Fleming, 6 Ala. 146; Labbee v. Johnson, 66 Vt. 234, 28 Atl. 986; Lyons v. Stills, 97 Tenn. 514, 37 S. W. 280; Trumbull v. O'Hara, 71 Conn. 172, 41 Atl. 546 ; Monroe v. Cooper, 5 Pick. 412; Smith v. Sac Co., 11 Wall. 139, 20 L. ed. 102; Stewart v. Lansing, 104 U. S. 505, 26 L. ed. 866; Landauer v. Sioux Falls Imp. Co., 10 S. D. 205, 72 N. W. 467; Benton County Sav. Bank v. Boddicker, 105 Iowa, 548, 67 Am. St. Rep. 310, 75 N. W. 632, 45 L. R. A. 321; Sullivan v. Langley,
Mass. 437; First Nat. Bank v. Holan, 63 Minn. 525, 65 N. W. 952; 2 Encyclopedia of Evidence, 524, note 48; Oakland C. Assn. v. Lakins, 126 Iowa, 121, 101 N. W. 778, and note to same case in 3 Am. & Eng. Ann. Cas. 560. The rule is held equally applicable whether the delivery be to a third person in escrow or to the payee or obligee: Ware v. Allen, 128 U. S. 590, 9 Sup. Ct. Rep. 174, 32 L. ed. 563; Burke v. Dulaney, 153 U. S. 228, 14 Sup. Ct. Rep. 816, 38 L. ed. 698.
There is, perhaps, room to doubt whether the doctrine that the negotiation of a promissory note in violation of an agreement by the payee not to do so until certain conditions have been performed is a fraud which casts upon the indorsee the burden of showing the good faith of his possession of the instrument was recognized by this court prior to the passage of our present statute, but whatever may be the fact in this respect, legislative enactment has brought the law of the state into harmony with the rule of the cases to which 397 attention has been called: Code Supp. 1902, secs. 3060-a55, 3060a59. By this statute the title of any person who negotiates an instrument in breach of faith or under circumstances amounting to a fraud is defective, and the burden is cast upon the holder to show that he or some person through whom he claims acquired the paper innocently: Keegan v. Rock, 128 Iowa, 39, 102 N. W. 805.
4. It is suggested in argument that, even if the law be as we have here indicated, there was no evidence on which to submit the fact in question to the jury. Counsel either misapprehend the record, or fail to make proper application of the rule. Defendant swears that he made the note on the express agreement of Bigler that the latter would retain it and give it back to defendant if the cow was not delivered to him safely with calf. Such an agreement, if established,
would, as we have seen under the authorities cited, make the act of Bigler & Sons in putting the note in circulation in violation thereof a fraud upon the defendant. True, such fraud was not necessarily established by the testimony of the defendant, but the value and weight of his testimony in that regard were for the jury, and not for the court. Such being the situation, the burden was upon the plaintiff to show the good faith of the transfer of the note either to himself or to his immediate indorser, the bank. To uphold the ruling of the trial court in directing a verdict for the plaintiff, it must appear that the plaintiff has established the good faith of one or both of these transactions by evidence of such clear and undisputed character that no question of fact was left for the finding of the jury. But this we are not prepared to affirm.
The testimony of the cashier of the bank that he or the bank purchased the note for value before maturity, even though he be not disputed by any other witnesses to the transaction, is not necessarily sufficient to enable the court to say as a matter of law that he 398 received it in good faith. Such evidence does not negative notice or knowledge on part of other officers of the bank. Moreover, the bank being an interested party, the credibility of the testimony of the cashier was a matter for the jury to pass upon in the light of all the facts and circumstances surrounding the matter under inquiry. In Joy v. Diefendorf, 130 N. Y. 6, 27 Am. St. Rep. 484, 28 N. E. 602, the plaintiff sought by his own evidence to prove the circumstances attesting good faith of his possession of the note; and in Canajoharie Bank v. Diefendorf, 123 N. Y. 191, 25 N. E. 402, 10 L. R. A. 676, the bank gave like evidence by its cashier, and it was held in each case that even though undisputed, the credibility of such evidence and its sufficiency to satisfy the burden of proof resting upon the plaintiff were matters for the jury, and not a question of law to be disposed of by the court: See, also, Elwood v. Western Union Tel. Co., 45 N. Y. 549, 6 Am. Rep. 140. It follows, therefore, that, so far as plaintiff's case rested on the indorsement of the note from Bigler & Sons to the bank, the motion to direct a verdict was improperly sustained.
Concerning the showing of good faith in the transfer from the bank to the plaintiff, it may be conceded that the general rule of the cases, as well as of our statute (Code Supp. 1902, sec. 3060-a56), is to the effect that the notice which will invalidate a note in the hands of an indorsee is actual knowledge of the infirmity or defect, or of such facts that his