#### ELGIN CITY BANKING COMPANY v. R. A. McEACHERN et al.

(Filed 22 October, 1913.)

1. Bills and Notes — Indorsement of Payee — Equitable Title — Original Defenses.

Where a note is'payable to order and not to bearer, the indorsement of the payee is necessary to transfer the legal title; and where this is not done, a subsequent holder is not one in due course, though the instrument may have been indorsed to him for value by an intermediate holder; and as he is the equitable owner, the instrument is subject to the defenses existing between the original parties.

2. Same — Evidence of Indorsement — Burden of Proof.

Where one claims to be the holder in due course by indorsement of a negotiable nqte made payable to the order of the payee, and the payee’s indorsement is denied, in his action to recover on the note the burden of proof is on him to prove the indorsement; and where the name of the payee appears thereon as an indorser, and the only evidence of its indorsement by the payee is a promise by him that he would do so, the question of hi's indorsement is one for the determination of the jury under instructions from the court that the plaintiff must satisfy them thereof by the greater weight of the evidence.

3. Bills and Notes — Indorsement of Payee — Subsequent Indorsee — . Equitable Title — Original Defenses.

Where a note payable to order is acquired by the holder from one to whom the note has been delivered, for a valuable consideration by the payee, but without the latter’s indorsement, the present holder cannot have acquired a bette.r legal title than his indorsee; and as such indorsee was the owner of the equitable title only, the instrument is still subject to the defenses existing between the original parties.

4. Bills and Notes — Fraud—Equitable Title — Good Faith.

Where fraud in -the execution of a negotiable instrument payable to order has been established, the question of good faith in acquiring the instrument does not arise in a suit thereon brought by the owner of the equitable title, who has acquired the instrument without the indorsement of the payee.

Appeal by plaintiff from Ferguson, J., at April Term, 1913, of BobesoN.

This is an action upon a note executed by tbe defendant, and payable to tbe order of Albert O. Tracy, for tbe purchase price of a borse.

*334Tbe plaintiff alleged that tbe note was transferred for value and before it was due, by indorsement to Coleman & Son, and by Coleman & Son to tbe plaintiff.

Tbe defendant denied tbe indorsement by Tracy, and alleged that tbe note was procured by false and fraudulent representations.

Defendants further alleged tbat tbe note was not to become effective until and unless it was signed by fourteen solvent persons, tbe plan of sale being tbat fourteen men would take shares of $200 each, making up tbe total purchase price of $2,800, and it was only signed by eleven men, some of whom were not solvent.

Tbe evidence as to tbe indorsement of tbe note was as follows

Charles R. Coleman testified: “I reside.at Wayne, Illinois, and am engaged in importing and breeding percheron horses, and farming. I am associated with my sons in business under tbe firm name of Charles R. Coleman & Sons. On 13 February, 1910, I purchased from Alvin O. Tracy tbe note of Robert A. Mc-Eachem et al. (Tbe note was exhibited to him and is tbe same note sued on in this case.) I accepted this note, the face value thereof with accrued interest thereon, in payment for an imported stallion. Mr. Tracy gave me tbe bank letter from tbe Bank of Red Springs at tbe same time tbat I bought tbe note. Tbe purchase price of tbe horse I sold Tracy was something like $1,000. I inquired about tbe note from Tracy, and be satisfied me tbat tbe makers were solvent and responsible. I made no inquiry as to what tbe note was given for. He recommended it so highly tbat be said be bad just as soon put bis name across tbe back of tbe note. He said be would put bis name on tbe back of tbe note.”

Tbe jury returned tbe following verdict:

“1. Did tbe plaintiff become tbe bolder of tbe note sued on before overdue and without notice tbat it bad previously been dishonored, and did it take it in good faith and for value, without notice of any infirmity or defect in tbe same ? Answer: No.

“2. Is tbe plaintiff tbe equitable owner of tbe note sued on? Answer: Yes.

*335“3. Did the defendants sign the note sued on with the agreement made at the time that the note should be surrendered in the event Tracy or his agent, James, failed to procure the signature of fourteen solvent or responsible parties to said note? Answer: Yes.

“4. Was the execution of the note sued on procured by false and fraudulent' representations, as alleged in the answer ? Answer: Yes.”

The plaintiff requested the following special instructions to be given to the jury by his Honor:

“1. If the jury shall find from the evidence that the note, in question was, on 13 February, 1910, sold and delivered, for value, by Alvin 0. Tracy to Charles E. Coleman & Sons, and on 10 May, 1910, the same was indorsed, sold, and delivered by said Coleman & Sons to the Elgin City Banking Company, for value, the said plaintiff is presumed to be the holder of said note in due course.” His Honor refused to give this instruction, and the plaintiff excepted.

“2. If the jury shall find from the evidence that the Elgin City Banking Company had no knowledge of any fraud or defect in the execution of said note, at the time of the purchase of same from said Coleman & Sons, and that said note was indorsed by said Coleman & Sons and delivered, for value, before maturity, to plaintiff, the said Elgin City Banking Company will be presumed to be the holder of said note in due course.” His Honor refused to give this instruction. Plaintiff excepted.

His Honor charged on the first issue: “In order for the plaintiff to be the holder of the note in due course, it is necessary for the plaintiff to show to you from the evidence, and by its greater weight, that it is a purchaser of the note for a valuable consideration, and before it is due; and in order to constitute the plaintiff a holder in due course, it is necessary that it • should be indorsed by the payee on the note, and when the indorsement is denied, it devolves upon the plaintiff to prove the indorsement, by the greater weight of the evidence. So that, one of the first questions for you to inquire into is whether or not the note was indorsed by Tracy to Coleman. The evi- • *336dence touching the indorsement, and the only testimony in,, regard to that, is contained in the deposition of Coleman, and it is contained in that portion of the deposition in which the question is asked, ‘Was there any contract between you and A. 0. Tracy or between the firm of 0. R. Coleman & Son and A. O. Tracy, at or prior to the indorsement of this note, that the note should be returned if it is not good, and he recommended it so highly that he had said he had just as 'soon put his name across the back?’ There was nothing said about the indorsement on the note, he said he would put his name on the back of the note; that is all the evidence touching the question of indorsement. It is contended on the part of the defendants that it was only a promise to put it on the back of the note, and there is no evidence that he actually did write his name on the back of the note, but he only agreed to do it, without any proof that he did do so. If, upon the evidence, you shall be satisfied by its greater weight that he indorsed the note, then it would be your duty to find that as a fact in consideration of the first issue; but .if the proof does not satisfy you by its greater weight, when you come to. examine that part of the testimony, and you fail to find that it was indorsed by A. 0. Tracy — not that his name was on it, but if he put his name on it himself — then it will become your duty to answer the first issue ‘No,’ -because, unless it was indorsed by the payee, A. O. Tracy, the legal title would not pass to Coleman, and could not by Coleman’s indorsement pass to the plaintiff. If you should find that the note was indorsed, then it was purchased' for a valuable consideration, without notice of its infirmity.”

Judgment was entered upon the verdict in favor of the defendants, and the plaintiffs excepted and appealed.

A. P. Spell and B. E. Lee for plaintiff.

McIntyre, Lawrence & Proctor and McLean, Parser & McLean for defendants.

AlleN, J.

As the note sued on is payable to order and not to bearer, the indorsement by Tracy was necessary to pass the title to Coleman & Son, freed of the equities and defenses of the makers against the payee, ánd without such indorsement *337tbe holders of the note were only the equitable owners, and subject to these defenses (Revisal, see. 2178; Tyson v. Joyner, 139 N. C., 72), and the jury, under proper instructions, has found in answer to the first and second issues that the indorsement was not made. Coleman & Son then became the equitable owners of the note under the findings of the jury, subject to the legal defenses of the defendants against Tracy, and as they could not sell more than they owned, the plaintiff took the note by purchase from Coleman & Son with the same infirmity attached.

It follows, therefore, that the prayers for instruction requested by the plaintiff were properly refused, as they were predicated upon the idea that the plaintiff was a holder in due course and was the owner of the legal and equitable title.

In this view of the case, it is not necessary to consider the first four exceptions to evidence, as they all bear on the question of good faith on the part of the plaintiff, and its notice of fraud, which was immaterial if the plaintiff was only, the equitable owner.

It also appears that his Honor charged the jury that the plaintiff had no actual notice of any fraud.

The letter offered in evidence was properly excluded, as the declaration of a stranger and hearsay, but if admitted, it could have had no bearing on the case except to show good faith on the part of Coleman & Son in the purchase of the note, and good faith could have added nothing to their title if there was no indorsement.

There are many other exceptions in the record, most of them being directed to the evidence to prove false and fraudulent representations.

We have examined all of them, and find nothing that will justify a reversal of the judgment.

The evidence of fraud is stronger than in many of the actions on so-called “horse notes” that have been before us.

No error.