This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
Direct evidence of bad faith is not necessary however. The fact that the holder takes under circumstances which should arouse suspicion, or is guilty of gross negligence, is a circumstance to be considered in determining whether he takes in good faith. The transferee may know facts extrinsic to the note which raise so strong an inference of its irregularity that a finding of fact that he did not take in good faith may be warranted.1 Thus if the transferee knows that the note was given for "hull-less oats," and that the "hull-less oats" scheme as operated by the Hull-less Oats Company, the payee, is a fraud;2 or if he knows that the amount of the note is disproportionately large for the means of the maker;3 or if he knows that the maker and his sons have been under arrest on a charge of murder, that the payee is their attorney, and that the amount of the note is exorbitant;4 or that his indorser is a gambler, the certificate of deposit being sold at much less than its face value; 5 or that the instrument was given for corporate stock which was practically worthless,6 such knowledge may justify a finding of bad faith as a fact.
Whether the knowledge of the holder, that his indorser has obtained other notes of like general character, which were subject to defenses, prevents such holder from being a bona fide holder in case he does not know of defenses to the particular note, is a question upon which there is a conflict of authority. In some jurisdictions it is held that such knowledge is sufficient to prevent the holder from taking in good faith, or at least is sufficient to justify a finding of bad faith.7 In other jurisdictions it seems to be held that notice as to the invalidity of such other notes does not prevent the holder from being a bona fide holder of the specific notes concerning which he had no actual notice.8
1 Indiana. Shirk v. Neible, 156 Ind. 66, 83 Am. St. Rep. 150, 59 N. E. 281.
Michigan. Goodrich v. McDonald, 77 Mich. 486, 43 N. W. 1019.
Minnesota. Bank v. Beecher, 133 Minn. 81, 157 N. W. 1070.
New York. Canajoharie National Bank v. Diefendorf, 123 N. Y. 191, 10 L. R. A. 676, 25 N. E. 402.
South Dakota. Dunn v. Bank, 15 S. D. 454, 90 N. W. 1045.
Washington. Hamilton v. Mihills, 92 Wash. 675, 159 Pac. 887.
See also Stockyards National Bank v. First National Bank, 249 Fed. 421.
2 Griffith v. Shipley, 74 Md. 591, 14
L. R. A. 405, 22 Atl. 1107. For a similar case involving a Bohemian oats note, see McNamara v. Gargett, 68 Mich. 454, 13 Am. St. Rep. 355, 36 N. W. 218.
3 Canajoharie National Bank v. Diefendorf, 123 N. Y. 191, 10 L. R. A. 676, 25 N. E. 402.
4 Shirk v. Neible, 156 Ind. 66, 83 Am. St. Rep. 150, 59 N. E. 281.
5 Dunn v. Bank, 15 S. D. 454, 90 N. W. 1045.
6 Hamilton v. Mihills, 92 Wash. 675, 159 Pac. 887.
7 State Bank v. Lawrence, 177 Ind. 515, 42 L. R. A. (N.S.) 326, 96 N. E.
Under some jurisdictions, however, it is still held that one who has knowledge of facts which would put a reasonably prudent man on inquiry, and who fails to make such inquiry, is not a bona fide holder as to defenses which such inquiry would have disclosed.9 The fact that the indorser is one who is comparatively a stranger to the indorsee, is a non-resident, and that he indorses the notes without recourse at a distance from the residence of the maker, although there are several banks in the vicinity of the residence of the maker, has been said to be sufficient to put the indorsee upon inquiry as a reasonable and prudent man, so as to prevent him from being a bona fide holder.10