In our earlier opinion in this case we held: (1) that the Bank did not take the 13 fraudulent warehouse receipts (Nos. 974-986) by “due negotiation” and thus did not acquire the rights specified in G.S. 25-7-502; (2) that “nothing else appearing” the Bank was merely a transferee of the negotiable warehouse receipts and thus acquired no greater rights or title than its transferor, Southeastern; (3) that Elevator, by canceling the 16 old receipts, obtained from the Bank by Woodcock’s fraud, ratified Woodcock’s issuance and exchange of the 13 fraudulent receipts for the 16 receipts previously held by the Bank, and it cannot now deny their validity; (4) that there was insufficient evidence to support a finding or conclusion that “the Bank was acting in bad faith” when it exchanged the 16 old receipts for the 13 new ones; that the Bank is entitled to have the new receipts reformed to show they represent 1,120,000 pounds of corn each; and (5) that Woodcock and the surety on his bond are primarily liable to the Bank for his fraud upon it. 286 N.C. at 357, 360, 365, 211 S.E. 2d at 338, 339, 343. Upon this rehearing we have elected to reconsider *178these holdings and to redetermine the questions raised by the appeal.
Our prior holding that the Bank did not take the 13 receipts through “due negotiation” is clearly correct. In pertinent part G.S. 25-7-501 provides:
“(1) A negotiable document of title running to the order of a named person is negotiated by his indorsement and delivery. . . .
“(4) A negotiable document of title is ‘duly negotiated’ when it is negotiated in the manner stated in this section to a holder who purchases it in good faith without notice of any defense against or claim to it on the part of any person and for value, unless it is established that the negotiation is not in the regular course of business or financing or involves receiving the document in settlement or payment of a money obligation.”
Holder, as defined by G.S. 25-1-201(20) “means a person who is in possession of a document of title ... drawn, issued or indorsed to him or to his order or to bearer or in blank.”
By their terms, the grain the 13 warehouse receipts purportedly represented was to be delivered to Southeastern or to its order. These receipts, therefore, were negotiable documents of title. G.S. 25-1-201(15), G.S. 25-7-102(l)(e), G.S.'25-7-104(l)(a). These receipts, however, were not indorsed by Southeastern at the time they were delivered to the Bank. Neither Woodcock, the secretary-treasurer, nor any other officer of Southeastern ever signed the receipts. Upon Bank’s request for its indorsement, Southeastern’s bookkeeper, Mrs. Carlton, stamped the name “Southeastern Farmers Grain Association, Inc.” on the reverse side of the receipts.
As we said in our former opinion, “[T]he affixing of the payee’s (or subsequent holder’s) name upon the reverse side of a negotiable document of title by rubber stamp is a valid indorsement, if done by a person authorized to indorse for the payee and with intent thereby to indorse. Mayers v. McRimmon, 140 N.C. 640, 53 S.E. 447. However, the Superior Court found that Mrs. Carlton, who stamped the name of Southeastern upon the reverse side of these receipts, had neither the authority nor the intent thereby to indorse them in the name of Southeastern. The evidence supports these findings and would support no contrary finding.” Trust Co. v. Gill, State Treasurer, 286 N.C. 342, 358, 211 S.E. 2d 327, 338 (1975). Since the receipts were not properly indorsed to the Bank, they were not negotiated to it. The Bank, therefore, not having acquired the *179receipts through “due negotiation,” did not acquire the rights provided in G.S. 25-7-502.
Under G.S. 25-7-506 the Bank could compel Southeastern to supply the lacking indorsement to the 13 receipts. However, the transfer “becomes a negotiation only as of the time the indorsement is supplied.” Since the Bank was specifically informed of the fraud surrounding the issuance of the receipts on the evening of 7 May 1970 any subsequent indorsement by Southeastern would be ineffective to make the Bank “a holder to whom a negotiable document of title [was] duly negotiated.” G.S. 25-7-501(4).
Thus, because of the lack of proper negotiation, the Bank became a mere transferee of the 13 warehouse receipts. The status of such a transferee is fixed by G.S. 25-7-504(1) which provides: “A transferee of a document, whether negotiable or nonnegotiable, to whom the document has been delivered but not duly negotiated, acquires the title and rights which his transferor had or had actual authority to convey.” Here Southeastern, the Bank’s transferor, had no title by way of the fraudulent receipts to any grain held by Elevator, and it had no rights against Elevator. Woodcock, acting for and on behalf of Southeastern, had fraudulently procured the issuance of these receipts to Southeastern without the deposit of any grain. Then, as Southeastern’s manager, he had pledged them to Bank in substitution of 16 previously issued receipts purportedly representing corn deposited in Elevator. However, at least six of these represented no grain at the time they were issued, and between the warehouse examiner’s inspection of 10 February 1970 and May 1970, — without requiring the surrender of any receipts —Elevator had delivered to or for the account of Southeastern nearly 113,000 bushels of grain more than Southeastern allegedly had in storage there. Thus, Elevator had no obligation to deliver any grain to Southeastern, and it did not become obligated to Bank merely because Southeastern transferred the receipts.
The foregoing discussion analyses the Bank’s rights and Elevator’s liabilities under G.S. 25-7-502 and G-S. 25-7-504. The primary purpose of these two sections is to determine the priority of competing claims to valid documents and goods actually stored in a warehouse and to determine the issuer’s liability for a misdelivery of goods actually received by it. Generally, a holder of negotiable warehouse receipts acquired through “due negotiation” will receive paramount title not only to the documents but also to the goods *180represented by them, the purpose of U.C.C., Art. 7, Part 5, being to facilitate the negotiability and integrity of negotiable receipts.1-
In situations where there are actual goods, and there are conflicting claims either to them or to the documents, G.S. 25-7-502, G.S. 25-7-503, and G.S. 25-7-504 determine the priority of these claims. In the present case, since the 13 receipts represented no grain in storage at the time of their issuance and no grain was subsequently acquired by the warehouseman, no question of who has paramount title to goods arises. The sole question is under what circumstances and to whom is an issuer liable for the issuance of warehouse receipts when it has not received the goods which the receipts purportedly cover? G.S. 25-7-203 covers this situation. It provides in pertinent part:
“A party to or purchaser for value in good faith of a document of title other than a bill of lading relying in either case upon the description therein of the goods may recover from the issuer damages caused by the non-receipt or misdescription of the goods, except to the extent that. . . the party or purchaser otherwise had notice.”
In the trial below, and in all their briefs submitted to this Court, the parties, overlooking G.S. 25-7-203, have proceeded on the theory that G.S. 25-7-502 and G.S. 25-7-504 govern this case. Furthermore, we did not consider this section in our first opinion.
The purpose of G.S. 25-7-203 is to protect specified parties to or purchasers of warehouse receipts by imposing liability upon the warehouseman when either he or his agent fraudulently or *181mistakenly issues receipts (negotiable or ' nonnegotiable) for misdescribed or nonexistent goods. This section, coupled with the definition of issuer (G.S. 25-7-102(l)(g)), clearly places upon the warehouseman the risk that his agent may fraudulently or mistakenly issue improper receipts. The theory of the law is that the warehouseman, being in the best position to prevent the issuance of mistaken or fraudulent receipts, should be obligated to do so; that such receipts are a risk and cost of the business enterprise which the issuer is best able to absorb. See J. White and R. Summers, Uniform Commercial Code 690 (1972).
In the Comment to G.S. 25-7-203 it is said: “The issuer is liable on documents issued by an agent, contrary to instructions of his principal, without receiving goods. No disclaimer of the latter liability is permitted.” Issuer is defined by G.S. 25-7-102 as “a bailee who issues a document.... Issuer includes any person for whom an agent or employee purports to act in issuing a document if the agent or employee has real or apparent authority to issue documents, notwithstanding that the issuer received no goods or that the goods were misdescribed or that in any other respect the agent or employee violated his instructions.” Under these provisions Elevator would clearly be liable to the Bank on the 13 fraudulent receipts issued by its agent Woodcock provided the Bank could carry its burden of affirmatively proving that it came within the protection of G.S. 25-7-203.
Since G.S. 25-7-203 governs Bank’s right to recover, under G.S. 25-1-103, the doctrine of agency and ratification discussed in our first opinion are “displaced”.
We now consider whether the Bank qualifies for this protection. At the outset of our discussion we note that G.S. 25-7-203 contains no requirement that the purchaser take negotiable documents through “due negotiation” before he can recover from the issuer. (Compare this section with the analogous U.C.C. provision covering bills of lading, which provides protection to “a consignee of a nonnegotiable bill who has given value in good faith or a holder to whom a negotiable bill has been duly negotiated relying in either case upon the description. . . .” G.S. 25-7-301(1).) Of course, had the Bank met all the requirements of due negotiation it also would have met the requirements of G.S. 25-7-203.
To be entitled to recover under G.S. 25-7-203 a claimant has the burden of proving that he (1) is a party to or purchaser of a docur ment of title other than a bill of lading; (2) gave value for the docu*182ment; (3) took the document in good faith-, (4) relied to his detriment upon the description of the goods in the document; and (5) took without notice that the goods were misdescribed or were never received by the issuer. Many of these terms are defined in Article 1 of the U.C.C. (G.S. 25-1-201), and those definitions are also made applicable to Article 7. G.S. 25-7-102(4).
Under G.S. 25-1-201(33) and G.S. 25-1-201(32) Bank acquired the 13 negotiable warehouse receipts by purchase. Further, when Bank surrendered to Southeastern its old notes and the 16 receipts securing them, taking in return the new notes secured by the 13 receipts, it gave “value.” Under G.S. 25-1-201(44) a person, inter alia, gives “value” for rights if he acquires them “(b) as security for or in total or partial satisfaction of a pre-existing claim .... or (d) generally in return for any consideration sufficient to support a simple contract.” It now remains to determine whether Bank, at the time it relinquished the 16 old receipts in return for the 13 receipts, was acting (1) without notice that no goods had been received by the issuer for the 13 receipts, (2) in good faith, and (3) in reliance upon the descriptions in the receipts.
The trial court, after making detailed findings as to facts known to Bank at the time it accepted the 13 receipts, found and concluded the ultimate fact that “the plaintiff Bank did not receive warehouse receipts numbered 974 through 986 in good faith without notice of claims and defenses.” This finding, although stated in the negative in order to use the precise language of G.S. 25-7-501(4), is equivalent to a positive finding that Bank took the 13 receipts with notice that they were spurious. On the same findings the judge also concluded that plaintiff did not come into court with “clean hands.” This finding likewise is equivalent in import and meaning to a finding that Bank did not take the 13 receipts in good faith. Trust Co. v. Gill, State Treasurer, 286 N.C. 342, 364, 211 S.E. 2d 327, 342; 27 Am. Jur. 2d, Equity § 137 (1966); 30 C.J.S., Equity § 93 (1965). Upon these findings he held that plaintiff had no cause of action either at law or in equity based on the 13 receipts against either the State Warehouse Superintendent or against the State Treasurer as custodian of the State Indemnity and Guaranty Fund. We must, therefore, deter-' mine whether these findings are supported by competent evidence.
Upon our reconsideration of this case we have concluded (1) that the record evidence fully supports .the trial judge’s findings that Bank did not take the receipts in good faith and without notice *183that they had been fraudulently issued and (2) that his findings compel his conclusions of law.
“ ‘Good faith’ means honesty in fact in the conduct or transaction concerned.” G.S. 25-1-201(19). The absence of evidence that Bank’s agents had themselves verified Elevator’s shortage of grain or had eyewitness knowledge that the 13 receipts were fraudulently issued does not necessarily mean they did not in fact know, and it did not preclude a finding by the judge that Bank did not acquire the receipts in good faith and without notice of claims and defenses.
Under G.S. 25-1-201(25) a person, or corporation (G.S. 25-1-201(30), (28), (27)), has “notice” of a fact not only when he has actual knowledge of it, but also when “from all the facts and circumstances known to him at the time in question he has reason to know that it exists.”
Good faith (“honesty in fact”) and “notice,” although not synonymous, are inherently intertwined. Therefore, the relation between the two cannot be ignored. “The same facts which call a party’s ‘good faith’ into question may also give him ‘notice of a defense.’ ” J. White and R. Summers, Uniform Commercial Code § 14-6 at 471 (1972). Certainly the power of a court under G.S. 25-1-201(25) to find notice when a holder or transferee “has reason to know” that something exists on the basis of the “facts and circumstances known to him” makes it “a short step from that definition to say that one ‘knows’ what a reasonable prudent man in his circumstances ‘knows.’ ” Id. at 473. As pointed out in 1 R. Anderson, Uniform Commercial Code at 104 (1970), “... as a practical matter, it must be recognized that the circumstances may be such that the trier of fact will conclude that the person in question just could not have had a particular belief [good faith] because no reasonable man under the circumstances would have so believed.”
The crucial question in this case is whether, from all the facts and circumstances known to the Bank at the time it relinquished the 16 receipts to Southeastern in exchange for the 13 receipts, Bank had reason to know that Elevator had received no grain for them, for if it did, recovery is precluded. The voluminous evidence in this case permits the finding that the Bank did in fact have reason to know that the receipts were fraudulently issued and that it was not acting in good faith.
First, as the trial judge found (findings of fact Nos. 9 and 11) Bank was specifically informed of the manner in which Elevator was operated and fully alerted to Woodcock’s dual agency as manager of *184both Elevator and Southeastern. Furthermore, it was warned of the opportunity for fraud inherent in that situation. There is testimony to the effect that Parham met with officials of the Bank and Elevator and explained to them the mechanics of operating a grain elevator and the handling of warehouse receipts as collateral. Parham informed them Bank could protect itself from fraud by requiring all receipts pledged as collateral to show the number of the in ticket it purported to represent. The Bank followed this procedure until Brewer became manager of the Warsaw Branch at which time it was discontinued. Furthermore, the receipts themselves gave notice that Elevator’s manager was also an officer of Southeastern.
Secondly, in May 1970, Bank was acutely aware of Southeastern’s precarious financial condition. Yet it had continuously dealt with Southeastern in a manner inconsistent with sound banking practice as well as its own policies purporting to govern Southeastern’s line of credit. On numerous occasions Southeastern’s total outstanding indebtedness, as permitted by the Warsaw Branch, exceeded the line of credit authorized by Bank’s home office. Furthermore, despite Bank’s requirement that Southeastern furnish weekly inventory reports and additional financial information evidencing a satisfactory financial condition, the use of these safeguards was gradually discontinued and ultimately ignored.2 As early as June 1969 the Warsaw Branch, for extended periods, consistently held Southeastern’s checks for substantial sums when its checking account balance was insufficient to pay the checks.3 Bank’s home office required daily reports of any such retained items. However, the Warsaw Branch frequently failed to report these items. (The retention of these items, of course, amounted to interest-free advances to Southeastern above its already overextended credit line.) See Findings Nos. 12-15.
Finally Southeastern’s requests on February 10,1970 and May 6, 1970, the dates on which the warehouse examiner arrived at the Elevator for a routine inspection, that Bank refinance existing demand notes without increasing the indebtedness and exchange the warehouse receipts securing the old notes for new receipts, was so highly irregular as to provide notice that Elevator was short of grain; and Bank’s acquiescence in these requests permits the finding that Bank’s participation in these transactions was not in good faith.
*185On 9 February 1970 the United States Warehouse examiner arrived at Elevator for an inspection. He determined from its records that Elevator’s total recorded obligation on warehouse receipts was 449,261 bushels, 320,000 bushels of which were covered by receipts to Southeastern. Southeastern, however, on February 10th, actually held receipts for 460,000 bushels, which had been pledged to Bank to secure six notes totaling $165,760.00. These receipts represented 140,000 more bushels than the Elevator’s records showed. In order to keep the examiner from learning that Southeastern had obtained grain without surrendering warehouse receipts, Woodcock signed and had his secretary, Mrs. Carlton, deliver to Bank a check for $165,760.00. On that day Southeastern’s bank balance was $104,751.82. However, in spite of insufficient funds to pay the check, the Warsaw Branch under Brewer’s management released to Southeastern nine warehouse receipts representing the 140,000 bushels of corn previously delivered to Southeastern. The word “Hold” was placed on Southeastern’s checking account ledger sheet by the balance to indicate that no further checks would be charged to the account.
The nine warehouse receipts thus obtained were presented to the examiner as an oversight and he stamped them canceled on February 10th. This cancellation “left the warehouse temporarily in a favorable position.” On February 12th, after the examiner had left the Elevator, Southeastern delivered a new note for $71,040.00 to Bank along with six new warehouse receipts (Nos. 962-967) for 60,000 bushels of yellow corn. Elevator had received no new corn to support these new receipts. This deposit made Southeastern’s check for $165,760.00 good and the notes for that amount which had been secured by the previously surrendered receipts were then marked paid.
Brewer testified that he could not explain how warehouse receipts for 140,000 bushels were released by the Warsaw Branch on February 10th and canceled by the warehouse examiner when the notes secured by them had not been paid by a check drawn on sufficient funds in the bank to cover the check. Each of the Bank’s employees who had authority to release collateral denied any recollection of having released the nine warehouse receipts which Mrs. Carlton obtained from Bank on February 10th.
Brewer also testified that during March and April 1970 Bank’s records showed that Southeastern ordered 300,932.85 bushels of grain to be shipped on bills of lading and that during this period Southeastern had pledged with the Bank warehouse receipts to *186secure approximately $400,000.00 in loans. Inter alia, he said: “I cannot answer your question, ‘Did you ever suggest to Mr. Woodcock that he might sell the grain in the warehouses and pay us off, rather than get it from outside?’ I cannot answer your question, ‘Did it arouse any suspicion in your mind that he was ordering grain from outside, at a time when you were trying to get your money, and not selling the grain he had in his warehouse to pay you off?’ ”
On the afternoon of 5 May 1970, Mr. L. L. Brown, a United States Warehouse Examiner, arrived at the Elevator to make a periodic check of the grain storage operation. Woodcock knew he did not have enough grain in storage to pass inspection, and Southeastern’s checking account contained only enough money to cover “the loan value plus interest” on two of its receipts pledged to the bank, Nos. 951 and 953. After Brown had started his inspection Woodcock prepared and signed a check in the amount of $83,625.92, dated 5 May 1970. With this check Mrs. Carlton procured the two receipts numbered 951 and 953.
Soon after the beginning of work on May 6th Brown asked Mrs. Carlton for the canceled warehouse receipts. She gave him all she had on hand, including Nos. 951 and 953. Shortly thereafter Woodcock left for the bank.
On the morning of 6 May 1970 Bank held demand notes against Southeastern in the amount of $544,424.00, on which the sum of $338,224.00 was due. This figure represented the face amount of three demand notes dated respectively 6 January 1970,12 February 1970, and 8 April 1970 and the balance due on two demand notes, each dated 5 January 1970. The last four notes were secured by the 16 warehouse receipts which Elevator had issued to Southeastern and which then represented no corn in storage. These receipts were Nos. 954-958, 962-967, 969-973.
On 6 May 1970, in the absence of Brewer, who was away on naval reserve training, C. C. Rouse, the general operations and business loans manager, was in charge of Bank’s Warsaw Branch. Rouse had been employed by Bank for 23 years, the last 17 at the Warsaw Branch. Rouse’s testimony, summarized except when quoted, tends to show: On 6 May 1970, shortly after the bank opened at 9:00 a.m., Woodcock came in. “He stated that he had the Warehouse Examiners in his office and that he wanted to have us release all the warehouse receipts showing yellow corn . . . that he wanted to take these receipts to the examiners for his inspection with the possibility of working out a change in the method of issuing *187these receipts, and that he would — expect within a day or two sufficient funds — collections to pay the notes that these receipts . . . secured.”
Woodcock’s request being “a little more than [he] would care to handle,” Rouse called Vice-President Bateman at the home office in Wilson for instructions. In consequence, he told Woodcock he would not release the receipts until the notes they secured were paid. Woodcock’s reply was, “Well, I’ll make other arrangements.” About 11:00 a.m. Woodcock returned to the bank “and made a proposal and request that he be permitted to issue new warehouse receipts along with notes and deposit it with the bank which would generate sufficient funds to pay off the notes, and of course release the collateral on the notes that the bank was at that time holding.”
Rouse again called Bateman and reported Woodcock’s proposal to him. “Mr. Bateman responded that if it would appear that everything was in order in the way of issuing new receipts, and that we will follow the prescribed procedure that we had followed in the past, and that it was not going to increase the loans outstanding, and that the existing loan with the bank would be paid off, he would have no objections to [Rouse] handling it.4 And with this [Rouse] was back in touch with Mr. Woodcock and told him that [they] would be able to handle it in this way. Mr. Woodcock suggested that we issue receipts in an even amount, uniform amounts of 20,000 bushels per receipt.” (Emphasis added.)
Woodcock returned to his office and, pursuant to his instructions, Mrs. Carlton prepared (a) a check for $328,952.00, which covered the loan value of the 16 receipts held by the Bank; (b) two demand notes for $165,760.00 and $142,080.00 respectively (these notes had previously been signed in blank by Southeastern’s president); (c) a deposit slip in the amount of $307,840.00 (the sum of the two notes); and (d) 13 new warehouse receipts (Nos. 974-986) for 20,000 bushels of yellow corn each.
In preparing these receipts Mrs. Carlton erroneously showed the poundage on each as 112,000 pounds instead of 1,112,000 pounds.
After having procured Woodcock’s signature to the documents, Mrs. Carlton delivered them to Bank’s note teller, Mrs. Walker. At that time, Rouse asked Mrs. Carlton why the old receipts were be*188ing canceled and new ones issued. She replied that she did not know that Woodcock had told her to do it. Mrs. Walker then gave her the old receipts in return for the check for $328,952.00. However, she kept the old notes in order to figure the interest for collection. Mrs. Carlton returned to her office, canceled the 16 receipts and immediately informed Brown that she “had found an additional 16 receipts.” Shortly after lunch Mrs. Walker called to say that Woodcock had not indorsed the 13 new warehouse receipts. Mrs. Carlton returned to the Bank and stamped the name “Southeastern Farmers Grain Association, Inc.” on the back of each of the 13 receipts. Woodcock told Mrs. Carlton he would go to the Bank and indorse the receipts that afternoon or the next morning, but never did. No explanation for Bank’s failure to note the errors and absence of indorsement before accepting the new receipts in substitution for the old was attempted.
On May 7th Mrs. Walker called to say that the interest on the notes covered by the 16 surrendered warehouse receipts was $3,393.20. Accordingly Mrs. Carlton prepared a check for that amount, Woodcock signed it, and she delivered it to the Bank.
Although Woodcock’s substitution of demand notes and warehouse receipts as collateral had been sufficient to cover up Elevator’s shortage in February, it was insufficient in May. On May 7th the warehouse examiner discovered both the shortage and that the spurious 13 receipts were missing from the receipts book. (For further details of this discovery see State v. Woodcock, 17 N.C. App. 242, 193 S.E. 2d 759 (1973).)
The evidence recapitulated above should remove any lingering doubt that the record fully supports the trial judge’s findings and conclusion that Bank did not take the 13 warehouse receipts in good faith and without notice that corn had not been received for them. It overtaxes credulity to accept plaintiff s contention that experienced bankers could have lacked notice of Woodcock’s fraud. Measured by any acceptable standard of banking or business judgment, the reasons which Woodcock gave Bank on the morning of May 6th for wanting to obtain the 16 old receipts were so improbable that, under all the circumstances, its officers “must have known” there was a shortage of grain at the Elevator. (Cf. State v. Oxendine, 223 N.C. 659, 661, 27 S.E. 2d 814, 815 (1943), which discusses the test of knowledge required to carry a case to the jury on the issue of receiving stolen goods.)
It would appear that the Bank officials acquiesced in Woodcock’s request because they erroneously believed that so long as *189they did not themselves actually verify a shortage, Bank was protected by the statement on each of the 13 receipts in suit that, “The State of North Carolina guarantees the integrity of this receipt.” Certainly Bank’s conduct engenders the strong inference that it wilfully failed to seek actual knowledge as to why Southeastern wanted to substitute notes and receipts because of the well-founded belief that an inquiry would disclose that the new receipts represented no grain in Elevator. The trial judge, who heard the voluminous evidence in this case without a jury, and carefully considered and unraveled the complications which resulted from Woodcock’s dual agency, came to that conclusion. There being ample evidence to support his findings and conclusions we are not at liberty to disturb them. Young v. Insurance Co., 267 N.C. 339, 148 S.E. 2d 226 (1966).
Albeit “good faith” is literally defined as “honesty in fact in the conduct or transaction concerned,” G.S. 25-1-201(19), the Uniform Commercial Code (G.S. 25-7-203 and G.S. 25-1-201(25)) does not permit parties to intentionally keep themselves in ignorance of facts which, if known, would defeat their rights in a negotiable document of title. See Winter & Hirsch, Inc. v. Passarelli, 122 Ill. App. 2d 372, 259 N.E. 2d 312 (1970). Nor will it allow Bank to recover losses which it received through its participation in Woodcock’s fraudulent efforts to cover up Elevator’s grain shortages.
It follows from the trial judge’s findings that Bank was in pari delicto with Woodcock in this attempt. To permit recovery under the facts found would be contra bonos mores. The doctrine which bars a party’s right to recover in an action grounded on his own fraud “is based on the principle that to give plaintiff relief in such case would contravene public morals and impair the good society.” 37 Am. Jur. 2d, Fraud and Deceit § 303 (1968). See 17 Am. Jur., Contracts § 222 (1964); Lawrence Warehouse Co. v. Dove Creek State Bank, 172 Colo. 90, 470 P. 2d 838 (1970).
The Code was not designed to permit those dealing in the commercial world to obtain rights by an absence of inquiry under circumstances amounting to an intentional closing of the eyes and mind to defects in or defenses to the transaction. See General Investment Corp. v. Angelini, 58 N.J. 396, 278 A. 2d 193 (1971). Nor did the General Assembly, when, by G.S. 106-435, it created the State Indemnifying and Guaranty Fund to safeguard the State Warehouse System and to make its receipts acceptable as collateral, intend that it should encourage individuals or financial institutions to engage in transactions from which they would otherwise have *190recoiled. On the contrary, the fund was created to protect those parties to or purchasers of warehouse receipts who, acting in good faith and without reason to know that the goods described thereon are misdescribed or nonexistent, suffer loss through their acceptance or purchase of the receipt. Lacy v. Indemnity Co., 189 N.C. 24, 126 S.E. 316 (1925).
The case comes down to this: Plaintiff Bank based its right to recover on the 13 fraudulent warehouse receipts numbered 974-986 for which Elevator received no grain. Its action, if any, was under G.S. 25-7-203. Therefore, if plaintiff could prove it acquired the receipts in good faith and without notice of the fraud, it was entitled to recover; otherwise, not. The trier of facts, upon sufficient evidence, found that plaintiff did not acquire the receipts in good faith and without notice.
The judgment of the trial court is therefore affirmed as to all defendants and our former decision as reported in 286 N.C. 342, 211 S.E. 2d 327 (1975) is withdrawn.
Affirmed.
Justice COPELAND did not participate in the hearing or decision of this case.. A few examples will more fully explain the manner in which these sections are intended to work.
(1) An owner of goods (0) stores them in a warehouse, taking from the warehouseman negotiable receipts in bearer form. A thief (T) steals the bearer receipts and sells them to a holder who takes them through due negotiation. The holder acquires title to the receipts and to the goods represented by them and defeats 0’s claim to them. (G.S. 25-7-502(2).) If the purchaser for some reason did not acquire the receipts through due negotiation, or if the receipts were nonnegotiable, 0 would prevail against him. Similarly, assume 0 stores goods in a warehouse taking in return negotiable receipts made to a named person’s order. Thereafter T steals them and transfers them to an innocent purchaser for value, forging the necessary indorsement. As between 0 and the innocent purchaser, 0 would prevail. The innocent purchaser could not be a holder through due negotiation under G.S. 25-7-502 and G.S. 25-7-501. Therefore, under G.S. 25-7-504 he would have only the rights and title to the document that his transferor had. Since his transferor was a thief having no title to the document, 0 would prevail against the innocent party.
(2) O stores his goods with warehouseman (W) who is not a merchant selling goods of that kind. Thereafter W, contrary to O’s instructions, issued negotiable warehouse receipts which are ultimately duly negotiated to third-party (P). As between P and O, P would have title to the goods represented by the receipts. (G.S. 25-7-502, G.S. 25-7-503.) If P did not take by due negotiation he would have only the rights and title of his transferor and would not prevail against O (G.S. 25-7-504).
(3) Warehouseman (W) fraudulently issues negotiable receipts not covering goods actually in storage to third-party (P), who takes through due negotiation. Thereafter W acquires goods purportedly covered by the receipt. As against P, W is estopped from denying that he did not have title when the receipts were issued. G.S. 25-7-502(l)(c) and Comment thereto.
(4) Assume that a thief (T) steals goods from their owner (O) and stores them in a warehouse, taking negotiable receipts in return. T then negotiates the receipts to a purchaser (P) who takes through due negotiation. As between 0 and P, O has the superior right to the goods in the warehouse even though P took through due negotiation. G.S. 25-7-503. See generally J. White and R. Summers, Uniform Commercial Code 684-87 (1972).
. For example, the report due on 31 May 1969 did not arrive until about November 15th. The first and only report received in 1970 came on 27 January 1970.
. On 21 July 1969 the list of Southeastern’s cash items held over included a check for $23,835.10 held since July 3rd. On 17 November 1969 cash items held over reached a high of $212,848.17.
. In this connection it is also relevant to recall that on the last prior occasion of an examiner's presence in town a similar incident of renewing demand notes and substituting new warehouse receipts for old had occurred. With reference to these renewals Brewer testified, “I can’t determine why a demand note would be renewed by a demand note. It's completely unusual... I never recall a bank renewing a demand note, and I never recall renewing a demand note, but I guess we did it. There’s no reason to renew a demand note.”