The defendants, in October, 1921, signed three notes, aggregating $27,000, to their own order payable six months thereafter. They handed these notes to a note broker who sold them for the sum of $6,850 to four persons who immediately thereafter formed the plaintiff corporation and transferred the notes to that corporation, receiving therefor stock of the par value of $27,000.
In the present action which has been brought upon one of these notes for the sum of $10,000, the defendants *Page 157 pleaded that the notes were never delivered and at the trial produced evidence to show that these notes were given to the note broker merely to enable the broker to open negotiations for their sale with prospective purchasers; that such prospective purchasers were then to be put in touch with the defendants in order to enable them to close the negotiations; that the broker sold the notes without any notice to the defendants of intention to make such sale and that the defendants never received any of the proceeds thereof. At the close of the defendants' evidence the trial justice directed a verdict in favor of the plaintiff.
Upon this appeal we must assume that the evidence produced by the defendants is true. If this evidence is true it establishes that the notes were delivered to the note broker subject to a condition precedent which was never complied with and that the notes consequently had no valid inception. Since the defendants chose for their own purposes to intrust the broker with possession of and apparent right to transfer negotiable instruments which were apparently valid, they cannot escape liability if the notes were thereafter transferred to an innocent purchaser for value; but the inadequate consideration paid by the purchasers of the notes in this case raises a question whether the purchasers were in fact innocent. These purchasers were the sole incorporators and the sole directors named in the plaintiff's certificate of incorporation and the plaintiff is chargeable with any notice the purchasers may have had. The plaintiff's position is not helped by the circumstance that the defendants admit that they promised the broker to tell prospective purchasers, who might inquire about the notes, that they were valid or by the fact that the defendants signed a letter asserting the validity of the notes. Representations made by the defendant which were brought to the attention of the purchasers might have some bearing on the question of the purchasers' good faith and if acted *Page 158 upon by the purchasers, might even create an estoppel, but in the present case there is no evidence that the purchasers ever made inquiries of the defendants as to the validity of the note or that they purchased the notes in reliance on the defendants' written representations. The testimony in this case establishes that the plaintiff's assignors purchased notes which had no previous legal inception for one-quarter of their face value from a party who was not the owner and who had apparent but not actual right to transfer the notes and upon that testimony it was error to direct a verdict.
The judgments should be reversed and a new trial ordered, with costs to abide the event.
HISCOCK, Ch. J., CARDOZO, POUND, McLAUGHLIN, CRANE and ANDREWS, JJ., concur.
Judgments reversed, etc.