Argument for Respondents.

28 Wash. 461, 68 Pac. 903; Gray v. Boyle, 55 Wash. 578, 133 Am. St. 1042, 104 Pac. 828; Tourtelotte v. Brown, 1 Colo. App. 408, 29 Pac. 130; Wedge Mine v. Bank, 19 Colo. App. 182, 73 Pac. 873.)

Past due instalments of interest are not constructive notice of dishonor. (Union Investment Co. v. Wells, 39 Can. 625.) We admit the rule to be that when fraud or illegality is set up as a defense in an action on a negotiable instrument, the plaintiff is required to show that he purchased the note in good faith, for value, before maturity, but the rule goes further, and it is the law that when the holder of a note, in addition to introducing the note, shows by competent evidence that he purchased the same before maturity for value in the usual course of business, he has met the burden required by the rule. (Drovers' Nat. Bank v. Blue, 110 Mich. 31, 64 Am. St. 327, 67 N. W. 1105; Reeve v. Insurance Co., 39 Wis. 520.)

R. T. Morgan and Ezra R. Whitla, for Respondents.

The defendants simply take the position that when they have shown fraud in the inception of the note and defect or infirmity in the title of the person who is negotiating the instrument, the burden is then upon the person claiming to be a holder to prove that he or some other person through whom he claims title is the holder in due course, and sec. 3516, Rev. Codes, shows clearly that when such facts are shown, the plaintiff must show that he had no notice of any infirmity in the instrument or defect in the title of the person who negotiated it to him. Under subdivision 4, sec. 3509, the question as to whether or not the plaintiff is a bona fide holder is a question of fact for the jury to determine.

The notes of McLaughlin Bros. are so fraudulent, and such fact is so well known, that it becomes incumbent upon the one purchasing the same to show that he did not know of the condition surrounding the execution of the note, as these notes have been so often declared fraudulent by the courts of last resort. (Union National Bank v. Winsor, 101 Minn. 470, 118 Am. St. 641, 112 N. W. 999, 11 Ann. Cas. 204; Union Invest

Opinion of the Court-Ailshie, J.

ment Co. v. Wells, 39 Can. 625, 11 Ann. Cas. 33; City National Bank v. Jordan, 139 Iowa, 499, 117 N. W. 758; Schultheis v. Sellers, 223 Pa. 513, 72 Atl. 887, 22 L. R. A., N. S., 1210; Cedar Rapids National Bank v. Myhre, 57 Wash. 596, 107 Pac. 518; City National Bank v. Jordan, 139 Iowa, 499, 117 N. W. 758; McNight v. Parsons, 136 Iowa, 390, 125 Am. St. 265, 113 N. W. 858, 22 L. R. A., N. S., 718, 15 Ann. Cas. 665; Tredick v. Walters, 81 Kan. 828, 106 Pac. 1067; Merchants' National Bank v. Sullivan, 63 Minn. 468, 65 N. W. 924; Merritt v. Duncan, 7 Heisk. (Tenn.) 156, 19 Am. Rep. 612; Bank v. Bennett, 8 Ind. App. 679, 36 N. E. 551; Grant v. Reno, 114 Mich. 41, 72 N. W. 19; Conley v. Winsor, 41 Mich. 253, 2 N. W. 31; Mace v. Kennedy, 68 Mich. 389, 36 N. W. 187; Griffith v. Shipley, 74 Md. 591, 22 Atl. 1107, 14 L. R. A. 405; Arnd v. Aylesworth (Iowa), 123 N. W. 1000.) "An overdue and unpaid instalment of interest known to the indorsee at the time of the purchase dishonors negotiable paper and renders it subject, in the hands of the purchaser, to existing defenses between the original parties, the same as overdue and unpaid instalments of the principal." (Bank v. Forsyth et al., 67 Minn. 257, 64 Am. St. 415, 69 N. W. 909; Chouteau v. Allen, 70 Mo. 290, 339; Newell v. Gregg, 51 Barb. (N. Y.) 263; Bank v. Scott Co., 14 Minn. 77, 100 Am. Dec. 194; Bank v. Kidder, 106 N. Y. 221, 60 Am. Rep. 443, 12 N. E. 577; Parsons v. Jackson, 99 U. S. 434, 25 L. ed. 457; Simmons v. Taylor, 38 Fed. 687.)

AILSHIE, J.-The appellant is the indorsee of the note sued upon. The note was executed by the respondents in favor of McLaughlin Bros. in part payment for an imported stallion. The sale was made at Coeur d'Alene City through one V. E. Woods, as agent for the McLaughlin Bros. At the time the sale was made and the promissory note was executed, Woods, acting as agent for the vendors of the horse, executed and delivered to the vendees, who are the makers of the note, a certificate of warranty and guaranty as to the utility and general condition of the animal sold. The note came due on the 29th day of March, 1908, but prior thereto

Opinion of the Court-Ailshie, J.

and on the 6th day of February, 1908, the payees, the McLaughlin Bros., sold, assigned and transferred the note to the appellant herein. At the time of the sale of the note to appellant, the respondents were in default of the payment of the annual interest due thereon. Defendants refused to pay the note on the ground of failure of consideration and fraud in the inception thereof, and the holder of the note thereupon commenced this action.

The defendants set up as a defense that the note was procured through fraud and deception, and pleaded the guaranty which was given with the animal at the time of the execution of the note, and further alleged a breach of the guaranty and warranties, and alleged that the plaintiff was not a bona fide holder of the note in due course. The evidence was submitted to the jury and they returned a verdict in favor of the defendants from which plaintiff appealed.

The evidence in the record is abundant to establish the first proposition, namely, that there was fraud in the inception of the contract; in other words, that the note was procured through fraudulent misrepresentations. It was shown by competent evidence that the horse was not what he was represented to be, and this defect was of such character that it must have been known to the vendors at the time the sale was made, and the facts and circumstances all point to that conclusion. The respondents gave notice to the agent or agents of the McLaughlin Bros. at Spokane as soon as they discovered the defects and condition of the horse, which was within a very short time after the purchase. It is claimed, however, in the briefs that it was impossible for the unsound condition of the horse and his defects to be discovered in so short a period of time. That might be true under some circumstances, but the condition in which he was at the time and his defects as to loss of vital energy were of such a character that they could as well be discovered and their effect foretold at the time and in the manner the discovery was made as could have been done months later. We conclude without any hesitation that the first proposition was sufficiently

Opinion of the Court-Ailshie, J.

established to go to the jury and to justify a verdict that there was fraud in the inception of the contract.

The second proposition involves the construction of our statute. It is contended by respondent that under the provisions of sec. 3516, Rev. Codes, the moment the defendants proved that McLaughlin Bros.' title to the note was defective and subject to defenses, the burden was at once shifted from the defendants to the plaintiff of showing that he was a bona fide holder of the note in due course. Sec. 3516, Rev. Codes, provides as follows:

"Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title."

Sec. 3509, Rev. Codes, 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: First, that the instrument is complete and regular upon its face; Second, that he became the holder of it before it was cverdue, and without notice that it had been previously dishonored, if such was the fact; Third, that he took it in good faith and for value; Fourth, 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."

The foregoing sections of the statute are parts of what is commonly designated as the uniform negotiable instrument law which has been adopted in this state, and which is now in force in most of the states in the Union. We are therefore not without judicial expression and construction on these provisions of the statute. This same statute is in force in the state of Washington, sec. 3516 of our statute corresponding to sec. 59 of the negotiable instrument law of

Opinion of the Court-Ailshie, J.

Washington, while sec. 3509 of our statute corresponds to sec. 52 of the Washington statute.

In Cedar Rapids Nat. Bank v. Myhre Bros., 57 Wash. 596. 107 Pac. 518, the supreme court of Washington had occasion to consider these two sections of the statute. The question before them was whether the plaintiff was a bona fide holder of a promissory note that had been given for some worthless jewelry. The court first observed: "The testimony is overwhelming that the jewelry was worthless and that the note was obtained by misrepresentation and fraud." After citing and quoting the above-mentioned sections of the statute, the court concluded: "So it appears that the burden was upon the plaintiff in this case to show that it was a holder in good faith, and the question of whether or not that burden was successfully met was one which was submitted to the jury, and by its verdict it has decided that question against the appellant. On both questions involved there was sufficient testimony for the legal consideration of the jury, and their verdict will, therefore, not be disturbed."

In Tredick v. Walters, 81 Kan. 828, 106 Pac. 1067, the supreme court of Kansas, in considering the effect of a certain contract which was executed in connection with the promissory note sued upon and the burden of proving the good faith of the indorsee of the note, said:

"This admission was not that the appellant knew of these contracts at the time he purchased the notes, but it stood in lieu of proof of the contracts at the time of the trial. We think that the contracts afforded sufficient evidence of illegality to shift the burden of proof which usually rests upon the defendant to prove the plaintiff's knowledge of the illegality at the time of purchasing the notes, and to place the burden upon the appellant to prove that he bought the notes before maturity, in due course of business, for value, and without any notice of the illegality of the consideration between the maker and the original payee, his grantor."

In Schultheis v. Sellers, 223 Pa. 513, 72 Atl. 887, 22 L. R. A., N. S., 1210, the supreme court of Pennsylvania, in con