This action is brought to recover on a promissory note made by the defendants to the Bishop Company of Fargo. It appears that the plaintiff is a banking corporation engaged in business in Fargo, North Dakota; that the defendants are engaged in the automobile business in Richland county; that the Bishop Company was, at the time of the transaction out of which this litigation grew, engaged in manufacturing and selling individual electric light plants. In January, 1920, the Bishop Company entered into a contract with the defendants, under the terms of which the defendants were to buy of the Bishop Company and sell to the trade certain electric light plants. Purporting to act under this contract, the Bishop Company shipped ten plants to the defendants at Mantador, North Dakota, on bills of lading. The Bishop Company took the bills of lading to the plaintiff bank, drew drafts aggregating $2,925 against the defendants for the price of the plants, and presented the drafts, with bills of lading attached, to the plaintiff. The plaintiff in the usual course of business of this character credited the amount of the drafts to the Bishop Company's account and forwarded the bills of lading with drafts attached to the bank at Mantador. The defendants refused to pay the drafts or accept the plants, setting up various matters as reasons for this dishonor. The plants were left in the depot at Mantador and finally shipped to the railroad company headquarters in St. Paul as unclaimed freight. The drafts remained at the bank at Mantador unpaid for several months. Plaintiff desired payment and pressed the Bishop Company, and finally at the suggestion of the plaintiff the Bishop Company sent its representative to see the defendants. Thereupon and on December 14, 1920, a new contract, known in the record as Exhibit 2, was entered into between the defendants and the Bishop Company in adjustment and settlement of the differences between those parties, and at the same time a note, Exhibit 1, payable November 1, 1921, for the purchase price of the plants which had been shipped and the freight charges thereon was executed and delivered to the Bishop Company. The contract Exhibit 2 so entered into was as follows:
"Article of agreement between A.L. Bishop and Son Company, a corporation of Fargo, North Dakota of the first part, and Reiland Jacobs Motor Company of the second part. The said Reiland Jacobs Motor Company is giving a note for $3,150 in settlement for ten Gate *Page 294 City light plants which was shipped to them by A.L. Bishop and Son Company of the first part. It is further agreed that the said A.L. Bishop and Son Company will send a salesman to canvass for the sale of light plants, and the said Reiland Jacobs Motor Company agrees to pay half the salary and expenses of said salesman while employed in selling the above-named plants and the profits on each sale to be equally divided between the above named parties. The said A.L. Bishop and Son Company agrees to accept farmers' notes that is rated good by the local banks for the sale of said plants at the face value of said notes and credit same on the note given by the Reiland Jacobs Motor Company in settlement of the above-named plants. The said A.L. Bishop and Son Company further agrees that if it is necessary they will transfer the last four plants to some other territory and credit the net price of said four plants on note given by the said Reiland Jacobs Motor Company."
The Bishop Company's representative immediately returned to Fargo and transferred the note to the plaintiff bank. The bank credited the Bishop Company's account with the amount of the note, which credit was at once exhausted by the Bishop Company. One of the items paid therewith was the charge on account of the original unpaid drafts on the defendant. In the meantime, however, and prior to the settlement of December 14th, the Bishop Company had sued the defendants on account of their refusal to accept and pay for the ten plants. The defendants had answered, setting up various defenses including fraud, nonperformance, etc. At the time the contract of December 14th was entered into, it was the understanding and arrangement that the same disposed of all difficulties existing prior thereto between the defendants and the Bishop Company. In August, 1921, after the making of the contract of settlement, the Bishop Company went into bankruptcy. Prior to that time, the Bishop Company had procured the ten light plants from the railroad company and they were in its possession when it was adjudged a bankrupt. No demand was made upon the Bishop Company for them, nor was there tender or offer of performance by the defendants under the terms of the contract made by the Bishop Company. There is a conflict in the testimony as to whether the Bishop Company had furnished or offered to furnish salesmen to canvass for the sale of the plants, as required by the terms *Page 295 of Exhibit 2. The plaintiff bank is now suing upon the note Exhibit 1 so executed on December 14th and transferred to it. The defense is want of consideration, failure of consideration and fraud in the execution of the note and that the plaintiff took the same with knowledge of the whole transaction and subject to defenses.
On the trial the defendants offered evidence to show the particulars of the whole transaction prior to December 14, 1920. This was objected to by the plaintiff on the ground that the same was irrelevant and immaterial and that the difficulties existing between the parties had been adjusted and wiped out by the contract of December 14th. However, such evidence was received. At the close of the trial the plaintiff moved for a directed verdict. The defendants resisted the motion and also moved for a directed verdict demanding, however, that in any event the issues be submitted to the jury. The jury found for the defendants and respondents. The plaintiff moved for judgment notwithstanding the verdict, which motion was denied, and judgment was entered for the defendants on the verdict. Plaintiff now brings this appeal from the order denying its motion for judgment notwithstanding the verdict and from the judgment.
The plaintiff here contends that it was entitled to judgment notwithstanding the verdict; that it was the holder of the note in question in due course; that there were no defenses against the note at the time that appellant took it; that plaintiff had no knowledge of the collateral contract; that even though it had at the time the note was negotiated, that fact could make no difference, since the contract was wholly executory, constituted a good consideration and had not been breached at that time; that the fact that the Bishop Company subsequently became bankrupt and was in no position to perform its part of the contract, can not make any difference as against the plaintiff. Plaintiff further contends that the testimony received by the trial court as to transactions occurring before the 14th of December, 1920, was irrelevant and immaterial and could have but the effect of influencing and prejudicing the jury, and that, in any event, by reason of the erroneous reception of such evidence and on account of other errors during the course of the trial, the plaintiff is entitled to a new trial. The defendants, on the other hand, contend that the evidence of the details of the transaction prior to December 14, 1920, was properly received for the purpose *Page 296 of showing the whole course of the transaction and the fraud therein; that the plaintiff took the note sued on with knowledge of all the defenses and was, in fact, a party to the whole transaction; that by reason of the fact that the plaintiff had advanced money on the drafts and bills of lading and had taken the same as security for such advancement, it became the owner of the property covered by such bills of lading; that when the representative of the Bishop Company made the settlement and adjustment of December 14, such settlement and adjustment was made by him as agent for the plaintiff; that, therefore, the plaintiff bank is itself the principal party in interest and not the purchaser of the note in question; that in any event the judgment should stand and the case be affirmed.
The plaintiff has specified many alleged errors on the record, which it assigns as grounds for reversal on this appeal. In the interest of brevity, we shall depart somewhat from the order of the plaintiff's assignments. A consideration of the fundamental propositions will render it unnecessary to discuss some of the errors assigned.
In the first place, we are of the opinion that there is no merit to the contention of the defendants that, by reason of the facts in connection with the drafts and bills of lading, the plaintiff was the owner of the light plants shipped and that, therefore, when at its suggestion the Bishop Company sent a representative to Mantador and made a settlement with the defendants that the Bishop Company was in such negotiations acting as the agent and for the plaintiff. It appears from the record that the whole transaction, with reference to the crediting of the drafts on bills of lading, was in the usual course of banking business. While it is doubtless true that the title to the property covered by the bills of lading was in the appellant bank (see Comp. Laws 1913, §§ 6210, 6211), yet it was so only as security on account of the advances made on the drafts for which the Bishop Company was before acceptance primarily liable. See 4 R.C.L. 33; American Thresherman v. Tamble Motors Co. (American Thresherman v. Citizens Bank) 49 L.R.A.(N.S.) 644 and note (154 Wis. 366, 141 N.W. 210). When the Bishop Company, being pressed for payment and to make an adjustment of its difficulties with the defendants, sent its representative and made such adjustment, it was acting in its own behalf and not as agent of the bank. That being the case, the bank was not *Page 297 chargeable with notice of what was done with relation to the adjustment and was not the owner of the note taken as a part of such adjustment.
It was the plaintiff's position at the time of the trial, and the plaintiff still seeks to maintain that position, that it was a purchaser for value of the note; that it had no notice of the collateral contract; that the contract was a good consideration for the note; and that there was no breach thereof at the time that plaintiff took the note; that even though plaintiff had notice of the contract, a subsequent breach may not be shown in defense of the note. The appellant, in support of this position, relies upon the case of Embden State Bank v. Boyle, 50 N.D. 573, 196 N.W. 820. There is no question, we believe, but that the general rule as laid down in the Boyle case is correct, and that where an executory contract is the consideration for a negotiable instrument, he who takes such instrument in good faith and for value, may recover as against the maker notwithstanding a subsequent breach which would constitute a good defense as between the parties. See also McNight v. Parsons, 136 Iowa, 390, 22 L.R.A.(N.S.) 718, 125 Am. St. Rep. 265, 113 N.W. 858, 15 Ann. Cas. 665; Flood v. Petry, 46 L.R.A.(N.S.) 861 and note (165 Cal. 309,132 P. 256). But we are of the opinion that the facts in the instant case are such that it is not within this rule. The facts and circumstances in each particular case must control.
Where the payee of a negotiable instrument has a defective title to the same, a third person to whom the instrument is negotiated has the burden of establishing that he is the holder in due course. That is, the ordinary rule as to the burden does not apply. See Comp. Laws 1913, § 6944 (Neg. Inst. Law, § 59). And if he fails to assume such burden and it appears that he took it with notice of all the attending facts and circumstances, then the instrument is subject to the same defenses as if it were non-negotiable. See § 6943, Comp. Laws 1913 (Neg. Inst. Law, § 58). Section 6940, Comp. Laws 1913 (Neg. Inst. Law, § 55) provides:
"The title of a person who negotiates an instrument is defective within the meaning of this chapter when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates *Page 298 it in breach of faith, or under such circumstances as amount to a fraud."
We think, in the instant case, that we should consider the contract Exhibit 2 in connection with the instrument sued upon in determining whether or not the title of the payee therein was defective. See Comp. Laws 1913, § 5902. Embden State Bank v. Boyle, supra; First Nat. Bank v. Flath, 10 N.D. 281, 86 N.W. 867. See also Myrick v. Purcell, 5 Ann. Cas. 148 and note (95 Minn. 133, 103 N.W. 902). We are of the opinion that the terms of the instrument Exhibit 2 clearly indicate that when the note Exhibit 1 was executed and delivered, it was the intention of the parties that it should not be negotiated. Any other intention would be inconsistent with the provisions of Exhibit 2 as to the manner in which the instrument might be paid and as to the credits that should be given thereon in case the last four light plants were not disposed of. It is certain that if the instrument were negotiated, it would be impossible to insure the payment thereof by the taking of farmers' notes or the crediting thereon of the value of the four light plants. If these provisions had been incorporated in the note itself, it would thereby have been rendered non-negotiable. See Comp. Laws 1913, § 6886 (Neg. Inst. Law, § 1). Fleming v. Sherwood, 24 N.D. 144, 43 L.R.A.(N.S.) 945, 139 N.W. 101; 8 C.J. 130. It seems to us that it necessarily follows that a negotiation of the instrument was in breach of faith and, under the circumstances, amounted to a fraud and that the payee's title was defective within the purview of § 6940, supra. It therefore follows that the instrument sued upon was subject to the same defenses in the hands of the plaintiff as when in the hands of the payee, unless the plaintiff was able to assume the burden and establish by a preponderance of the evidence that it was a holder in due course. We think that there is evidence in the record which might warrant the jury, if they saw fit so to do, in holding that the plaintiff had actual knowledge of the contract and that it did not act in good faith in taking the instrument sued upon.
It appears from the record that the light plants were never in fact delivered to the defendants. It is impossible to say whether or not a delivery of the plants can now be made or might have been made at any time since the bankruptcy of the Bishop Company in August, 1921. There is some dispute as to when and under what conditions *Page 299 such deliveries were to be made. It is not clear whether the Bishop Company was the party on account of whose fault the contract was not complied with or whether the fault was on the part of the defendants. We think there was at least a question as to whether the defendants had a good defense, in whole or in part, as against the Bishop Company and that it was for the jury to say from all the evidence whether such defense existed.
These things being true, it is manifest that the plaintiff's motion for a directed verdict, made at the close of the case, was properly denied. It follows that the motion for judgment notwithstanding the verdict was likewise properly denied. There remains, then, the question as to whether there was such error of the law during the course of the trial as to require a reversal and new trial. The plaintiff insists that there was. It specifies many errors arising on account of rulings by the court touching the admission or rejection of evidence. The first assignment of the plaintiff, in this respect, is based upon those alleged errors specified by reason of the admission of evidence tending to show the particulars of the original transactions between the Bishop Company and the defendant. The original contract between these parties was entered into on January 26, 1920. The defendants offered testimony to show the details and particulars of the transactions leading up to the execution of that contract and subsequently thereto. All such matters occurred prior to the 14th of December, 1920 when the contract Exhibit 2 was entered into. There is no question but that it was the intention of the parties to the contract Exhibit 2 to adjust and wipe out all of the difficulties that existed between them prior to the time when they entered into such contract. The defendants had full knowledge of what had been done with respect to the original contract by the Bishop Company. There is no room to say that they did not know of every fact that existed touching those previous transactions. In their answer, they pled an adjustment and settlement of all existing differences by the contract Exhibit 2. It therefore seems to us that when the defendants were permitted to offer evidence showing all of those matters and things which they relied upon as establishing fraud, misrepresentation, failure or want of consideration, or kindred matters touching the earlier transactions, such offers were properly objectionable on the ground that they were immaterial. All of those matters and things were *Page 300 waived by the contract Exhibit 2. See 27 C.J. 24 and cases cited. The nature of this evidence was such that its admission could not be otherwise than prejudicial to the plaintiff. We, therefore, think that on this account the judgment must be reversed and a new trial ordered.
Various other matters are specified and assigned as error. However, what we have said above renders it unnecessary to consider such matters. Judgment reversed and a new trial ordered.
BRONSON, Ch. J., and BIRDZELL, JOHNSON, and CHRISTIANSON, JJ., concur.