I heartily concur with the prevailing opinion upon the first and second propositions discussed therein, and I am glad that the author of the opinion is now persuaded that fraud and misrepresentation may vitiate contracts. This decision, however, is inconsistent with that incorrectly decided in Webster v.Romano Engineering Corp., 178 Wash. 118, 34 P.2d 428.
As to the third proposition discussed in the majority opinion, some of the material facts in this case are disregarded, as well as general principles of law governing negotiable instruments.
The promissory note sued upon in this case was not "discounted," but was taken by appellant immediately upon its execution, without discount, at its face value, and was due ninety days thereafter. True, appellant knew the representations that had been made by Ryan to Romano. There is not a scintilla of evidence, however, that appellant or Gruwell, its officer, had any knowledge whatever that those representations had not been complied with, or that there was any failure of consideration for the note. The record, *Page 297 therefore, is conclusive that appellant took the note before maturity for value and in good faith.
The cases relied upon by the author of the majority opinion are wholly inapt. The Rapp case, 47 Wash. 30, 91 P. 382, was one where the opinion showed that the manufacturer of "phony" jewelry, an Iowa corporation, sold almost worthless jewelry in this state by false pretenses. An Iowa bank sued upon certain drafts negotiated by the jewelry company to it. It knew of the nature of the business of the jewelry company and that, as we said, "it was hardly legitimate." It had purchased large quantities of that company's paper and had had a number of lawsuits over them where the defense was failure of consideration. There is nothing in that case akin to the facts in this case. In the Keyes case, 88 Wash. 287, 152 P. 1029, the purchaser of a note purchased it, as this court declared, with full knowledge that the consideration had failed, which, of course, would render it not a holder in due course for value. TheDelano case, 168 Wash. 546, 12 P.2d 924, merely restates the rule that, if it is shown that a note had been procured by fraud, the burden of proof is then upon the holder to prove good faith. In that case, the holder merely relied upon the presumption of good faith under the statute.
In the present case, appellant paid full value for a note upon its execution, had no knowledge of, and was not, under the law, put upon inquiry that there might later be, a failure of consideration.
In Cross v. Voss, 132 Wash. 576, 231 P. 929, we held that knowledge by the purchaser of a note before maturity that the same was given as the purchase price for property under a warranty, does not affect its status as a holder in due course, where he had no knowledge that there had been any breach of the *Page 298 warranty, citing Scandinavian American Bank v. Johnston,63 Wash. 187, 115 P. 102; Wells v. Duffy, 69 Wash. 310,124 P. 907; Larsen v. Betcher, 114 Wash. 247, 195 P. 27; Westlandv. Post Land Co., 115 Wash. 329, 197 P. 44; Banner Meat Co.v. Rieger, 125 Wash. 142, 215 P. 334; Lovell v. Dotson,128 Wash. 669, 223 P. 1061.
We there reaffirmed a statement contained in Moyses v. Bell,62 Wash. 534, 114 P. 193, as follows:
"The courts have repeatedly held that knowledge by an endorsee of a note that it had been given in consideration of some executory contract or agreement of the payee, which the payee afterwards fails to perform, will not deprive the endorsee of his character of a bona fide holder in due course, unless prior to its assignment to him he had notice of the breach of the executory contract, and that such breach had theretofore occurred."
In Banner Meat Co. v. Rieger, supra, we said:
"Before the enactment of the negotiable instruments acts in the various states, the prevailing view seems to have been that, if there were any such suspicious circumstances accompanying the transaction as would induce a reasonably prudent man to inquire into the title of the holder or the consideration, he would be bound to make such inquiry. Diligence was made the criterion. But, since the passage of those acts, it is generally held that mere ground for suspicion as to the existence of defenses to the instrument is not equivalent to knowledge thereof by the purchaser, and failure on his part to make such inquiries as a reasonably prudent person would make will not defeat his claim as a purchaser in good faith."
In the case at bar, there is not even a "suspicious circumstance accompanying the transaction," which would have put appellant, or its officer as a reasonably prudent man, to inquire into the consideration *Page 299 or to ascertain later if there had been any failure of consideration.
The prevailing opinion manifestly upsets and confuses the law under our negotiable instruments act, as well as generally.
For these reasons, the judgment should be reversed.