Gerseta Corporation v. Wessex-Campbell Silk Co., 3 F.2d 236 (2d Cir. 1924)

*237 Mortimer Hays, Herman Shulman, and Jacob J. Podell, all of New York City, for plaintiff in error.

I. Gainsburg and Joseph P. Segal, both of New York City, for defendant in error.

Before ROGERS, HOUGH, and MANTON, Circuit Judges.

HOUGH, Circuit Judge (after stating the facts as above).

Section 91 of the Negotiable Instruments Law (Consol. Laws N. Y. c. 38) declares that one is a holder of an instrument under certain enumerated conditions, of which one is "that he took it in good faith and for value." Section 95 of the same statute declares that to constitute notice of a defect in the title of the person negotiating a bill or note, "the person to whom it is negotiated must have had actual notice of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith."

This writ seems to us an attempt to find or make some conflict or discord between the quoted portions of the two sections of the statute. The proposition is, as applied to the case at bar, that even if the plaintiff had no actual knowledge of the alleged diversion of the instruments in suit, and even if it had no knowledge of any facts rendering it bad faith to take the instruments (section *238 95), and even if full value was paid for the bill or note, yet if under all the surrounding circumstances as elicited at the trial the jury did not think he acted in good faith (section 91), the verdict should be for the defendant. Such a rule leaves far too many actions on negotiable paper to the mere whims or personal dislikes of jurymen; generated by unnoticed, and certainly immaterial, circumstances of trial.

It is obvious that the word "faith" is used in the same sense in both sections of the statute, i. e., a "recognition of the obligations of morals and honor" (Cent. Dic.), and the opposing adjectives coupled with it do not require any explanation. Good faith is fidelity and honesty, and bad faith is the opposite; and the definition of one defines its antonym by the addition of a negative. The late William G. Choate, some time judge of the court below, sitting as referee in Ward v. City Trust Co., 117 App. Div. 130, 140, 102 N.Y.S. 50, pointed out that section 95 is merely the declared rule of many courts, including those of New York, made into a statute; and that rule is that the notice of a defect or want of power in the transferor (here Raw Silk Company) to make a valid transfer must be knowledge of such facts on the part of the transferee that his action in taking the instrument amounted to bad faith, i. e., to dishonesty and absence of fidelity to the obligations of morals and honor.

Again it has been pointed out that the kind of faith referred to in the statute is commercial faith. The effort is always to ascertain whether the person whose actions are inquired into exercised that degree of both intelligence and uprightness which is deemed necessary to uphold the commercial morals of the community without unduly impairing the intended easy negotiability of promissory paper. Thus Carlisle v. Norris, 215 N.Y. 400, 415, 109 N.E. 564, 569 (Ann. Cas. 1917A, 429), declares that transferees are "not bound to conjure up all such doubts and suspicions, if any, as might have been suggested to the mind of a very vigilant and mistrustful person. Even negligence would not defeat their right. They were simply bound to act honestly and in good faith, and in the absence of evidence which would justify a jury in convicting them of bad faith because not pursuing an inquiry into the origin" of the promissory paper, the recovery of its proceeds cannot be denied. Further the transferee holder "is not bound at his peril to be on the alert for circumstances which might possibly excite the suspicion of wary vigilance; he does not owe to the party who puts the paper afloat the duty of active inquiry in order to avert the imputation of bad faith. * * * The holder's rights cannot be defeated without proof of actual notice of the defect in title or bad faith on his part evidenced by circumstances. Though he may have been negligent in taking the paper, and omitted precautions which a prudent man would have taken, nevertheless, unless he acted mala fide, his title, according to settled doctrine, will prevail." Cole v. Harrison, 167 App. Div. 336, 153 N.Y.S. 200, quoting from Cheever v. Pittsburgh, etc., Co., 150 N.Y. 59, 44 N.E. 701, 34 L. R. A. 69, 55 Am. St. Rep. 646. To the same effect, Interboro, etc., v. Doyle, 165 App. Div. 646, 151 N.Y.S. 325. The foregoing is no more than an elaboration of the rule of Murray v. Lardner, 2 Wall. 110, 17 L. Ed. 857, the leading case in the courts of the United States, of which the latest restatement is Meyer v. Guardian Co. (C. C. A.) 296 F. 789, 794.

The difference between "good faith" and "bad faith" has probably been treated by every court in the world, but the measure of bad faith has, we think, never been better stated than by Loring, J., in Paika v. Perry, 225 Mass. 563, 114 N.E. 830, where in commenting upon the sections of the Negotiable Instruments Act now at bar, the learned judge remarked that it was not necessary to show that the person under investigation knew the exact fraud that was practiced, "it being sufficient to show that he had notice that there was something wrong about his assignor's acquisition of title, although he did not have notice of the particular wrong that was committed."

We conclude that the statute means and says that under section 91, a holder must take in good faith, but if he does not take in bad faith, his good faith is sufficiently shown, and bad faith under section 95 means that he must have knowledge of facts which render it dishonest to take the particular piece of negotiable paper under discussion. Knowledge, not surmise, suspicion, or fear, is necessary; not knowledge of the exact truth, but knowledge of some truth that would prevent action by those commercially honest men for whom law is made; if we were all gentlemanly saints, law would be a simpler and quite different thing.

It follows that, regarded as a commentary on the applicable sections of the statute, the charge was without error.

Regarded, however, as something related to the evidence produced, we think defendant had far too much consideration. There *239 was, as above stated, direct evidence of the existence of an agreement to restrict the use of defendant's acceptances, but there was not an iota of evidence that plaintiff knew or ought to have known anything about that arrangement. There was no basis of fact for the instructions requested. Any verdict for defendant should have been set aside, as opposed to all the evidence.

We do not consider it necessary to treat of the assignments relating to admission or rejection of evidence; and the evidence against plaintiff's ownership of the bills was trivial the jury disposed of that.

Judgment affirmed, with costs.