#### THE BANK OF SAMPSON v. H. B. HATCHER et als.

(Filed 1 December, 1909.)

1. Negotiable Instruments — Endorsee—“Without- Recourse” — “Due Course.”

An endorsee of a negotiable instrument is not deprived of the position as holder in due course by the fact, and that alone, that said endorsement is in form “without recourse.”

2. Same — Vendor and Vendee — Equities—Notice.

An endorsee for value and “holder in due course” of a negotiable instalment given for the purchase price of goods under an executory contract is not subject to equities and defenses existent between the vendor and vendee of which he had no knowledge or notice, and when he was not interested in the goods or the transaction concerning them, otherwise than as such endorsee.

3. Same — Infirmities—lnterpretation*of Statutes.

An endorsee will not be affected with notice of an infirmity in a negotiable instrument taken from the payee without recourse and arising from a breach of warranty in an executory contract between the original parties, when it does not appear that he was aware of its terms, or there was nothing in the contract restricting the negotiability of the note or indicating fraud or imposition or an existent breach; and this is true though the note or instrument may contain on its face an express statement of the transaction which gives rise to the instrument. Revisal, 1905, sec. 2153. Case of Howard v. Kimhall, 65 N. C., 175, cited and commented on.

*360 Appeal from W. B. Allen, J., May Term, 1909, of Sampson.

Civil action, to recover tbe amount of a promissory note for $144. On tbe trial it appeared in evidence for plaintiff tbat on 16 May, 1907, tbe defendant executed tbe note in question for $144 to C. S. Lotbrop & Co., payable on 25 November, 1907, witb interest at six per cent., for value received, and on 22 May, 1907, tbe same was endorsed by said payees “without recourse” to tbe plaintiff bank at a discount of ten per cent.

In tbe justice’s court tbe defendant filed a written answer, admitting tbe execution of tbe note and its endorsement for value to plaintiff at tbe time stated, and alleged, by way of counterclaim, in effect., tbat tbe note was procured by false and fraudulent representations on tbe part of tbe payees, of wbicb tbe plaintiff bank was cognizant at tbe time of tbe endorsement. Tbe defendants alleged, further, tbat tbe note was given in a transaction in wbicb defendants bad bought from payees tbe right to sell a “safety sash lock,”, and tbat there bad been a breach of warranty as to tbe value and salability of such lock, causing damage, and tbat tbe damage incident to such breach was available against tbe plaintiff bank, who was associated in interest witb tbe payees in the contract and bad taken part therein.

In support of their counterclaim, tbe defendants offered testimony tending to show tbat C. S. Lotbrop & Co., payees, held a contract witb tbe Nickel Manufacturing Company, of Illinois, to manufacture tbe safety locks, and said company bad given an accompanying guarantee tbat the locks vrould be manufactured “as per sample and be delivered in perfect working order,” and to furnish same as they would be ordered by agents, at tbe contract price of $2 per dozen. Said payees, holders of such contract, had joined in this stipulation, bad sold to defendants tbe exclusive right to sell said lock in tbe county of Northampton, and, in connection witb other agents, to sell tbe same in Sampson and other counties, and agreed that for every sixty dozen of locks ordered the defendants should have control of an additional county, etc.; tbat defendants executed tbe note sued on in pursuance of this contract, and some time thereafter, to-wit, in June or July following, had ordered a'quantity of tbe locks, and, having procured a number of agents, endeavored to sell same. One of defendants, testifying, said that tbe sample showed a good, well-made, workable lock, but tbe goods sent were made of inferior material, rough moulded, not smooth, weak sj)ring, would not work, bind, and would not hold the windows, and were worthless and unsalable, and all of them had to be filed before *361they would spring; tbat tbe agents bad to stop, and tbe locks ordered were left on plaintiff’s bands.

It was further agreed upon, as facts relevant to tbe inquiry, tbat said contract was delivered to tbe defendants at tbe time tbe note was executed, and as a part of one transaction; tbat plaintiff bank knew of tbis fact and of said contract at tbe time it took tbe note; tbat tbe transaction between defendants and a member of tbe firm of Lotbrop & Co. took place in tbe law office of H. A. Grady, wbo was also vice-president of tbe bank. Tbe said H. A. Grady and tbe cashier of tbe bank has a similar contract with tbe payees, and they bad both advised defendants tbat they thought it was a good thing; tbat tbe vice-president and cashier were on tbe discount committee of tbe bank, and bad passed upon tbis note; tbat tbe note in question was written on a form of tbe bank, a number of which were in tbe office of H. A. Grady at tbe time, and was signed in tbe office of said H. A. Grady; tbat an arrangement bad been made with plaintiff to discount at ten per cent, all these notes by Lotbrop & Co., and tbat these payees left tbe State on 25 May, 1907, and bad not since returned. There was also testimony to tbe effect tbat H. A. Grady and tbe cashier bad made inquiry and received assurances to satisfy them of tbe standing and solvency of Lotbrop & Co., and there was no evidence tbat tbis information was incorrect.

At tbe close of tbe testimony, and on tbe additional facts agreed upon, tbe court charged tbe jury, if they believed tbe evidence, they would render a verdict for plaintiff. Yerdict for amount of tbe note and interest. Judgment on tbe verdict, and defendant excepted and appealed.

Faison & Wright and F. B. Cooper for plaintiff.

George E. Butler for. defendant.

Hoke, J.,

after stating tbe case: There was no evidence tending to establish any breach of contract ,at tbe time plaintiff became endorsee for value of tbe note sued on, tbe testimony showing tbat tbe locks were not ordered by defendant until June or July following, and tbe defects complained of were not disclosed until some time thereafter. Nor was there any testimony amounting to legal evidence to show tbat tbe plaintiff bank was interested with tbe payees in their transaction with defendants, otherwise than as endorsees of tbe notes, nor to show fraud on tbe part of tbe bank in connection with tbe matter, or any knowledge or notice of it! On tbe contrary, while tbe trade was made in tbe law office of H. A. Grady, Esq., wbo was at tbe time *362vice-president of the bank, it appears that said Grady and the cashier of the bank had made a contract with Lothrop & Go. similar to that of defendants, and had taken the precaution to inquire as to the business standing and solvency of the payees, and had received assurances that both were good,-and there was nothing offered to show that these assurances were untrue.

There are several well-considered decisions of the Court which support this view of the facts in evidence, among others, Farthing v. Dark, 111 N. C., 243; Applegarth v. Tillery, 105 N. C., 407; and our statute on the subject (Revisal, sec. 2205) is conclusive:

> “2205. Actual Knowledge Necessary to Constitute Notice of Infirmity. 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.”

It has further been held with us (Evans v. Freeman, 142 N. C., 61) that the form of the endorsement, “without recourse,” does not affect the question, and the defense indicated in the counterclaim can only be sustained, if at all, on the ground that at the time of the endorsement the plaintiff bank was cognizant of the fact that defendant’s obligation arose out of an executory contract and was aware of its terms, and when there was nothing in such contract restricting the negotiability of the notes nor to indicate fraud or imposition or an existent breach; and the correct doctrine is against the defense suggested, on the principle stated and upheld in Mason v. Cotton Co., 148 N. C., 492. Even when such a notice appears on the face of the note, the authorities are against defendant’s position. Siegel v. Bank, 131 Ill., 569; Ferriss v. Tarbel, 87 Tenn., 386; Bank v. Barret, 38 Ga., 126.

The only decision we find which tends to support a contrary view is one in our own Reports (Howard v. Kimball, 65 N. C., 175). An examination into the facts of that case will disclose that the assignee of a note which expressed upon its face that it was given as purchase money of a certain tract of land not only had actual notice of the defect of title at the time he purchased, but he had taken a deed for such defective title from the original vendor, and held same, to be conveyed to the vendee when the note was paid. The case, therefore, is undoubtedly well decided; but, in so far as the opinion gives countenance to the position that a defect of title is available against an endorsee for value of a note for the purchase money, from the fact, and from that *363alone, that tbe note on its face is expressed to be for tbe purchase money of land or a given tract of land, tbe case is not in accord with tbe better-considered decisions. As an authority for such a position, it was in effect disapproved by a subsequent decision of this Court, in Bank v. Michael, 96 N. C., 53, in which a note of that kind was held to be “negotiable”; the term “negotiable” being used in the sense that an endorsfee for value, without notice, ultra, became the owner of the note, unaffected by the equities and defenses existent between the original parties to the contract.

Our present statute on the subject would seem to put the matter at rest (Revisal 1905, ch. 54, sec. 2153). This, being one of the sections defining what constitutes negotiability of notes, provides:

> “2153. What Promise Unconditional. An unqualified order or promise to pay is unconditional, within the meaning of this chapter, though coupled with (1) an indication of a particular fund, out of which reimbursement is to be made or a particular account to be debited with the amount, or (2)-a statement of the transaction which gives rise to the instrument. .But an order or promise to pay out of a particular fund is not unconditional.”

There was no error in the charge of the court or in the trial of the cause, and the judgment below is affirmed.

No error.