I disagree with the majority in all three propositions discussed in the prevailing opinion.
I. The predominant issue in the case was one of equitable cognizance. Respondent L. Romano Engineering Corporation, in its answer and cross-complaint, sought rescission of the entire transaction. It tendered back the machinery purchased and asked that its note be cancelled and that its advance payment be returned. Except as to the provision for interest, the execution, maturity and nonpayment of the note sued on were conceded. Practically all the evidence revolved about the question as to respondent's right to rescind, and the determination of that question governed the outcome of the case. The right to trial by jury is to be determined by reference to all the pleadings in the case and not merely by reference to the allegations in the complaint. The point under consideration is controlled byMillett v. Pacific Cider Vinegar Co., 151 Wash. 561,276 P. 863, and Marion Steam Shovel Co. v. Aukamp, 172 Wash. 455,20 P.2d 851.
II. The representations relied on as constituting fraud, even though made as quoted in the prevailing opinion, constituted nothing more than mere dealer's talk. In any event, the alleged representation to the effect that mono-valve motors were being used on dump trucks all over the United States and that the particular engine would develop more power than motors *Page 300 then in use by respondent, amounted to nothing more than that the prospective motor was adapted to the conditions under which respondent expected to use it and that it would perform the particular work. On this point, the case is controlled byWebster v. Romano Engineering Corp., 178 Wash. 118,34 P.2d 428.
In addition to what has been said under this heading, it appears from the evidence that, when respondent was finally put to the alternative of accepting or refusing the engine, it planted itself squarely upon the defense of guaranty of performance prescribed in the contract. On August 27, 1936, respondent wrote to Ryan and sent a copy thereof to appellant, stating that Ryan had guaranteed that the engine would perform equally as well as a Buda GL 6 gas engine, and demanding that the note and initial payment be returned because of Ryan's failure to comply with the guaranty. On October 1, 1936, respondent's attorney wrote to the appellant referring to the guaranty and its breach and stating that the note would not be paid because of the failure of the guaranty.
The fraudulent representation on which the prevailing opinion is rested was oral. It was not included in the supplementary letter and, of course, was expressly excluded by the terms of the original contract. The prevailing opinion is, of itself, sufficient authority for the rule that a written contract of the kind presented in this case may not be varied by oral agreement. That rule is well settled in this state.
"We have uniformly held that, under such a provision, evidence of express oral warranties is inadmissible. Eilers Music Housev. Oriental Co., 69 Wash. 618, 125 P. 1023; Winton MotorCarriage Co. v. Bloomberg, 84 Wash. 451, 147 P. 21; WesternFarquhar Machinery Co. v. Pierce, 108 Wash. 621, 185 P. 570."Webster v. Romano Engineering Corp., 178 Wash. 118,34 P.2d 428. *Page 301
III. I am most concerned over the holding of the majority on the third proposition, because I think that its effect is to emasculate the negotiable instruments law and seriously to cripple the passing of negotiable instruments.
Rem. Rev. Stat., § 3443 [P.C. § 4123], defines "a holder in due course" as follows:
"A holder in due course is a holder who has taken the instrument under the following conditions: —
"(1) That it is complete and regular upon its face;
"(2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;
"(3) That he took it in good faith and for value;
"(4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it."
We are here concerned only with the third and fourth requirements of that section.
Rem. Rev. Stat., § 3447 [P.C. § 4127], provides:
"To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith."
Thus, a holder in due course is one who has no notice of any infirmity. "Notice" means "actual knowledge of the infirmity" or "knowledge of such facts that his action in taking the instrument amounted to fraud."
The taker of negotiable paper, fair upon its face, is not required to make active inquiry concerning it, in order to avoid the imputation of bad faith. Citizens Bank Trust Co. v.Limpright, 93 Wash. 361, 364, 160 P. 1046.
The question in a given case is not whether the taker *Page 302 of the instrument has made active inquiry, or even whether he has acted as an ordinarily prudent person, but whether he has been guilty of bad faith, and, moreover, he is not to be charged with bad faith merely because he may have had a mere suspicion of some infirmity in the instrument. McNamara v. Jose, 28 Wash. 461,68 P. 903; Gray v. Boyle, 55 Wash. 578, 104 P. 828, 133 Am. St. 1042; Scandinavian American Bank v. Johnston,63 Wash. 187, 115 P. 102; Wells v. Duffy, 69 Wash. 310,124 P. 907; Citizens Bank Trust Co. v. Limpright, 93 Wash. 361,160 P. 1046; Fisk Rubber Co. v. Pinkey, 100 Wash. 220,170 P. 581; Keith v. Tsue Chong, 119 Wash. 507, 205 P. 834; BannerMeat Co. v. Rieger, 125 Wash. 142, 215 P. 334; First Nat.Bank v. Gunning, 127 Wash. 307, 220 P. 793; Mills v. Hayden,128 Wash. 67, 221 P. 994, 34 A.L.R. 1372.
Assuming that the appellant bank had knowledge of the representation made by Ryan, and assuming, further, that the representation was false, there was no evidence that appellant had knowledge, or the slightest suspicion, of its falsity at the time that it took the note. It was in exactly the same position that respondent was. The prevailing opinion results in this anomalous situation: The respondent is held to be acting in good faith, while the appellant is held to be acting in bad faith, in a transaction wherein both occupied exactly the same position with reference to the representation made. This is an inversion of the rule that, when a loss has occurred which must fall upon one of two innocent persons, it must be borne by him who was the occasion of the loss, even though he be without positive fault.
"The basic principle upon which paper having defects, either inherent or collateral, is sustained in the hands of a holder in due course is comprehended in the *Page 303 maxim that, where a loss has happened which must fall upon one of two innocent persons, it shall be borne by him who is the occasion of the loss. The one who made the wrong possible is estopped by his neglect." Fisk Rubber Co. v. Pinkey, 100 Wash. 220,170 P. 581.
Respondent bought the machinery; appellant bought the note. It was the duty of each, so far as the other was concerned, to satisfy itself as to what it was buying. Appellant did so; respondent did not. Having put its note into circulation, respondent was the party, even though innocent, that made the loss possible. Upon it, therefore, the loss should fall.
I think that the judgment should be reversed.