To be a holder in due course, a transferee of negotiable paper must acquire it in good faith.
(1) In general.
If a purchaser has actual notice of an "infirmity in the instrument" or "defect in the title of the person negotiating it,"88 he clearly does not purchase in good faith. But if he have no actual notice, what will constitute lack of good faith? The act says:
"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."89
A rule applied in some early cases that one who buys under circumstances that would put a prudent man on inquiry is not a holder in due course is supplanted by the simple rule that it is sufficient if one buys in good faith. If that is true, it is not material that he did not use the prudence of an ordinarily prudent man. The rule of the law is deemed the better one because there should be no discouragement to the transfer of paper whose chief use is that of negotiation by setting up a strict standard to which one must conform to be protected against unknown equities. If he buy in good faith, it is enough.
"However harsh this rule may, on first impression, seem to be, it is based upon the policy of the law which gives full faith and credit to commercial paper transferred before maturity, so that it may circulate, as far as possible, with all the conveniences of currency." 90
88. Nego. Instru. Law, Sec 52 (4).
89. Id. SEC. 56.
"Good faith * * * is consistent with negligence, even gross negligence. A blundering fool may therefore be found to have acted in good faith, though under like circumstances, a shrewd business man might be deemed to have acted in bad faith." 91
One may, however, have bad faith even if he does not know the exact trouble if he knows there is or must be something wrong.92 He may be a purchaser in good faith even if negligent, but if he refrains from making inquiry because he fears to do so unless he discover something wrong, he is not a purchaser in good faith.92a And furthermore, we may frequently infer that the purchaser does know of the wrong though unable to prove it except circumstantially by showing the conditions under which he acquired it.
(2) Payment of less than face value as showing bad faith.
We have seen that one who buys an instrument for less than the face value thereof (1) gives value, and (2) may be for all of that a purchaser in good faith; but the inadequacy of the amount paid may be a circumstance showing lack of good faith. The circumstances of the particular case are all material: the solvency of the maker, the time the paper has to yet run before maturity, whether the paper is secured or not, or any other material facts, are pertinent. If one is offered a note almost due made by a solvent maker, for a great discount, he might thereby be informed that something was the matter with it, especially if some reasonable explanation were not forthcoming; while a note made by one of doubtful solvency, having some time yet to run, might readily enough be disposed of at a considerable discount without advising one that there was anything questionable.
90. Bradwell v. Pryor, 221 111. 606.
91. Schintz v. Bank, 152 111. Ap. 76.
92. Paika v. Perry, 225 Mass. 563, 114 N. E. 830. 92a. Knowlton v. Schultz, 71 N. W. (N. D.) 550.
Example 39. A bought from B a note made by C, a responsible person, the note having but 6 weeks to run, for one half its face value. There was a good defense against the note in B's hands. A claimed that C was not a holder in due course as not having bought in good faith: Held: that C's good or bad faith was on this evidence a question for the jury.93
(3) Knowledge that consideration is still unperformed.
It has been seen that a recital of a consideration in negotiable paper does not destroy negotiability. It consistently follows from that that a knowledge that there is an executory agreement still to be performed by the payee, does not make one a holder in bad faith, unless he knows that it is still unperformed in violation of the executory agreement.94