CORPORATION v. PANAC ET UX (1944)

Plaintiff brought this action to recover from the defendants the amount of two promissory notes, negotiable in form, executed by them in favor of Home Improvement Company in payment of certain repairs and renovations to be performed by the payee upon two dwelling houses owned by the defendants. The notes were payable in monthly installments, to commence sixty days after their respective dates. They were endorsed by the payee to the plaintiff which, in its complaint, claimed to be their holder for value in due course. The defendants denied that the plaintiff was such holder and, as a separate defense, pleaded fraud on the part of the payee in the procurement of the notes by one William Hart, agent of the payee.

On the first issue the trial court found in favor of the plaintiff; on the issue of fraud it found in favor of the defendants, and rendered judgment that plaintiff take nothing by its action.

Plaintiff appeals from the judgment, contending that the findings on which it is based are not supported by the evidence––in fact are contrary thereto.

Specifically the findings attacked by the appellant are that the defendants are illiterate and unable to read or write the English language; that William Hart gained their trust and confidence; that he falsely and fraudulently represented that a contract for repairs and renovations only was being signed by them; that Hart knew they were illiterate and unable to read or write English; that they were ignorant of the fact that they were affixing their signatures to promissory notes, had no means of knowing they were signing such and had no intention of doing so and would not have done so had they known that the instruments were promissory notes; that they were prevented from seeking independent advice and counsel although they requested to be allowed to do so, and, finally, that they were not guilty of negligence in executing the notes.

At the trial both defendants took the stand as witnesses. Mrs. Panac testified that while she had come to this country at the age of nine years, she had never attended school either in this country or in her native Italy; that she could sign her name and copy; that while she “read very little” she had taught herself the Constitution, having obtained her citizenship approximately eight years prior to the trial. With reference to her ability or desire to read, the following appears in the record:

“The Court: What is this word? You can see all right Mrs. Panac? A. Yes, I can see.

“Q. You have a book on the Constitution, haven't you? A. Yes, but you know. * * *

“Q. Is that the book that you pay 50¢ for? A. Yes, I go the year––

“Q. Did you read those questions and answers? A. Yes, but I forgot all about already.

“The Court: When did you become a citizen? A. About eight years ago. I forgot because I––

“Q. Do you want to read this for me? A. I can't read it very well.

“Q. Just tell me what you think it says, right across there. * * * Do you know what that means? A. No.”

Asked by the court whether she drove an automobile, she stated: “Yes.

“The Court: How can you read the signs? A. Yes, I can read the signs because I learned later for the Constitution.

“The Court: But the signs, what has that got to do with the Constitution? A. Yes, I can read the signs, because it is big, you know.”

The Panacs had acquired several pieces of real property, some of which were income producing, and they had acquired some experience in the execution of papers as evidenced by Mrs. Panac's reiteration that she wished to consult their attorney, and that “I signed the signature, but I don't want to sign first.” Martin Panac testified that he could not read very much nor pronounce well. A daughter of Emelia gave testimony to the effect that “all my life I have been reading, and answering” all her mother's letters, and that on several occasions had been called upon by Martin Panac to read to him notices received from real estate offices and other letters, and to answer them for him. Martin, when giving his testimony, was handed one of the exhibits in the case, called a notice of completion, and which had been signed by him as part of the transaction. It contained the words printed in bold type, “Notice to borrower––Do not sign this certificate until the work is satisfactorily completed.” He was directed to read it, and did so with fair accuracy. Asked what the words meant, he gave their meaning correctly. When pressed he stated: “No, I didn't see it.”

On the question of whether the defendants reposed trust and confidence in Hart, the representative of Home Improvement Company, payee of the promissory notes, and who not only negotiated the transaction resulting in the giving of the notes but who also secured their execution, there is evidence tending to show that Hart was introduced to the Panacs by a friend of theirs, one Krajcr, for whom Home Improvement Company had done repair work similar to that proposed to be done for defendants. Krajcr had been defendants' friend and neighbor for many years and recommended Hart to them highly. Emelia testified that for this reason she was inclined to think that Hart “was all right.” Martin testified that he reposed trust and confidence in him, adding that he was very cordial, a “lovely sort of a man,” a good salesman and gave you the impression that he was your best friend. Emelia also testified that her husband before signing the documents remarked to Hart: “I see you was in the war * * * I trust you * * * I going to sign.” At this point the record shows a question asked by the court: “Then did your husband sign?” to which she answered: “He sign and he make me sign * * * He says, ‘Listen, sign Emelia,’ he says, ‘You see if he [Hart] do something wrong, you see that leg,’ he said, ‘crippled.’ He said, ‘I make another leg a cripple.’ ”

Hart, after having been introduced to the defendants by their friend Krajcr, with the statement that he was doing a fine job on his house, accompanied the defendants to the premises upon which repairs and some renovations were to be made. Hart made notes of the details of the work to be done, entering them in a memorandum book––sometimes referred to by the defendants in their testimony as the “black book.” They then went to the home of the Panacs, and there Hart prepared a document which purported to embody the understanding arrived at on the work to be performed and the cost thereof. He presented it to the defendants with a request that they sign it. Both demurred to doing so at once, Mrs. Panac stating that she could not read it and wished to see an attorney before signing. Hart assured her that it was not necessary to see an attorney; that the contract had to be signed at once in order to get the work started; that he had to send a man to the job on the following day, and he offered to read the paper to her. In doing so he read the items of work entered in his note book, stating they were in the agreement, and again urged that the defendants sign. They still objected and this time their scruples were overcome by Hart's assurance that all the work agreed upon would be done to their satisfaction and that it was necessary to start it at once. Martin Panac thereupon affixed his signature to the contract, with the above quoted remark––“I see you was in the war * * * I trust you”––and directed his wife to do the same. Hart then presented to them another paper, divided into three parts by perforated lines, one part being an application for credit, the second a form of promissory note, and the third a declaration that the work for which the credit was required had been satisfactorily completed. To this paper the defendants placed their signatures at the points indicated by Hart upon his assurance that it was part of the contract for the work to be done and without having Hart read it to them. He testified relative to the transaction that he said to Hart: “Now, listen, you got one leg broken, but I going to break the other one if you don't come through.” The second note was executed under the same circumstances. At the time these signatures were thus obtained the price for some of the items of the work had not yet been ascertained or agreed upon. There were present during these proceedings two other persons beside the friend of the Panacs, Krajcr, but neither of the defendants requested any of them to read aloud the documents or to explain the contents thereof. The defendants testified that they understood from Hart that the work was to be paid for in monthly installments to commence sixty days after its completion, but had not contemplated giving notes. The work was never completed notwithstanding vigorous efforts made by the plaintiff and the defendants to induce Home Improvement Company to do so, with the consequence that when the first installment became due on the notes the defendants refused to pay.

Defendants do not contend that the conclusion of law based upon the finding that plaintiff is in fact “a holder in due course of said promissory notes” could have been otherwise. No evidence was introduced that C.I.T. had actual knowledge that the Panacs had been defrauded or any knowledge of a defect in the instruments or of any fact that would justify a finding that plaintiff's acceptance of the instruments amounted to bad faith on their part.

There is sufficient evidence to support a finding that in the failure to perform the work defendants were defrauded by representatives of Home Improvement Company.

As between the original parties the defendants could have pleaded the defense of fraud. The trial court determined that, notwithstanding the possession of some knowledge of the English language on the part of defendants, their neglect to call upon others present to read to them the documents, and their failure to insist on their request for time to seek independent legal advice, the defendants were free from negligence. This finding is based upon conflicting evidence and inferences drawn therefrom very favorable to defendants. A reading of the record alone might well disapprove this finding, but, bearing in mind that the trial court had an opportunity to view the witnesses, note their demeanor, etc., we refrain from stating as a matter of law that there is insufficient evidence to uphold it. Regardless of the finding, however, the judgment should be reversed upon the main issue in the case.

There is a line of cases holding that “the fact that a party whose signature is obtained by a fraudulent representation that the instrument is of a different character from the one that he believes he is signing is an illiterate person is material when such fraud is pleaded as a defense in an action against a bona fide purchaser. The maker or the acceptor must, however, have been guilty of no negligence and must generally have taken advantage of such reasonable means as lay at his hand. Some cases would seem to establish the rule that one who cannot read is negligent in trusting to the representations of the other party to the transaction as to the contents of an instrument which he signs, where he can easily procure the instrument to be read by third persons who are known to him.” 10 C.J.S., Bills and Notes, § 499, p. 1101.

The court found that the notes were subject to fraud in the execution, upon the theory that defendants believed that in signing papers at the places indicated by Hart they were affixing their signatures to a contract for repair and renovation and to “nothing else.” The court also found that defendants affixed their “said signatures to promissory notes” but “had no intention of signing and executing the same.” The evidence shows that defendants knew they were signing a contract to renovate and repair certain premises. They testified that the repairs and renovations were to be paid for commencing sixty days from completion of the work. The defendants admitted the genuineness of their signatures.

Brannan's Negotiable Instruments Law, 6th ed., pp. 623, 624, as annotated and rearranged by Beutel, sets forth as follows the rights of a holder in due course of a negotiable instrument to sue (note the sections referred to are similar though not in each instance identical with the California codified provisions):

“At common law a real defense was held in most jurisdictions to exist in those cases in which a person, without negligence, has signed an instrument, which was, in fact, a negotiable instrument, but was deceived as to the character of the instrument and without knowledge of it. In such cases, there is no contract because there was no consenting mind, but the signer may be estopped by negligence to deny knowledge of the character of the instrument which he has signed. If he was not negligent he is not liable. * * *

“In Wisconsin, Minnesota, and Illinois (sec. 57) [Calif. Civil Code, sec. 3138] the N.I.L. or other legislation expressly makes fraud in the factum a real defense, supra, pp. 30 to 32. The Uniform Act does not cover the question in so many words. It is possible, however, that such conduct is ‘fraud’ within sec. 55 [Calif. Civil Code, sec. 3136] and hence causes merely a ‘defective’ title, or that it is one of the ‘defenses' under sec. 57. It might also be assimilated to want of delivery, which was made an equitable defense by sec. 16 [Calif. Civil Code, sec. 3097]. Either possibility would change the common law and protect a holder in due course. In further support of this position it should be noted that the other real defenses are covered by the act and a broad interpretation of sec. 55, especially the last clause ‘under such circumstances as amount to a fraud’ certainly includes all kinds of fraud in factum. Since this is so it is hard to believe that the framers overlooked this particular defense. The equities are all in favor of such an interpretation, since the defrauded party really caused the situation and should be the one to suffer. * * *

“Under the old common law view ‘fraud’ in sec. 55 would be limited to fraud in the inducement, and ‘defenses' in sec. 57 restricted to defenses which were equitable at common law, while fraud in the factum would continue to be a real defense analogous to forgery under sec. 23. Such is the result of a number of cases which have arisen since the N.I.L., most of which do not cite the act, but there is a strong line of well reasoned cases contra.”

We are confronted with the following: Plaintiff is a holder in due course of the negotiated instruments; defendants were defrauded but, according to the trial court, not chargeable with negligence on their execution. It appears that the trial court determined the case upon the now well known Wisconsin rule––which has been adopted by other states. In some instances the opinions appear to be judicial adoptions of the Wisconsin statute rather than judicial decisions based upon the law of the state wherein the controversy arose.

We have previously noted that under the common law in most jurisdictions a defense was available if one, without negligence, signed a negotiable instrument being deceived as to its character. In the enactment of provisions of law covering this subject, and particularly in the codification of the rights of a holder of a negotiable instrument and the adoption of The Uniform Negotiable Instruments Law, it must be assumed that if the defenses previously recognized in the common law were to continue provisions covering such defenses would have been included.

“Fraud” is a defense against a holder of a promissory note not in due course (Landreth v. Ducommun, 8 Cal.2d 694, 68 P.2d 231), but it is not an available defense to a holder in due course unless the holder had actual knowledge of the defect, or such knowledge of the facts that the holder's acceptance of the instrument amounted to bad faith. Civil Code, sec. 3137; Appel v. Morford, 62 Cal.App.2d 36, 144 P.2d 95; Howell v. Dowling, 52 Cal.App.2d 487, 126 P.2d 630; James Mills Orchard Co. v. Bank of America, 137 Cal.App. 299, 30 P.2d 626, 32 P.2d 342; Goodale v. Thorn, 199 Cal. 307, 249 P. 11; Eames v. Crosier, 101 Cal. 260, 35 P. 873; Nuckolls v. Bank of California, 10 Cal.2d 278, 74 P.2d 271. California has never adopted any other test. To follow Wisconsin it would be necessary to amend Civil Code section 3136 in substance as the provision reads in the Wisconsin statute. In California and in Wisconsin the negotiable instruments law provides: The title of a person who negotiates an instrument is defective within the meaning of this title when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. In Wisconsin, St.1933, § 116.60, the following is added: “ ‘* * * and the title of such person is absolutely void when such instrument or signature was so procured from a person who did not know the nature of the instrument and could not have obtained such knowledge by the use of ordinary care.’ ” Klosterhuber v. Wisconsin State Bank, 218 Wis. 191, 260 N.W. 644, 646. With reference to the above the court said (260 N.W. at page 646): “The italicized portion of the statute was added to section 55 of the Uniform Negotiable Instruments Act before that act was adopted by the Legislature in 1899 (chapter 356). Wisconsin is the only state that has incorporated that language into the Uniform Negotiable Instruments Act. The Legislature intended thereby to preserve the well–established common law of this state.”

This is not a problem in which the courts of last resort of a state, irrespective of statutory provisions, have followed the provisions of the statutes of another state and in the absence of legislative action those courts may say that from such inaction it may be assumed that the legislature concluded that the previous or present provisions are sufficient to sustain the decisions of the foreign state.

Several cases indicate that judicial view in California is to the contrary of that in Wisconsin. The facts in Bedell v. Herring, 77 Cal. 572, 20 P. 129, 11 Am.St.Rep. 307, are not identical but similar in that there was a representation that an instrument presented for signature was a contract of agency. The defendant actually signed a promissory note without knowing its contents. The court in that case found that the defendant did not exercise ordinary care in regard to the character of the paper. The judgment in favor of an innocent third person as the holder of the note was affirmed. In the Bedell case, where the contentions were similar to those of the present case, the court said (77 Cal. at pages 573, 574, 20 P. at page 130, 11 Am.St.Rep. 307): “It is not necessary here to pass definitely upon the broader question discussed in the briefs, whether or not payment of a negotiable note in the hands of an innocent indorsee, who received it before maturity, can be avoided, under any circumstances, on the ground that it was procured by fraud. It is apparent that to apply to such an instrument the principles which establish the essentials of an ordinary contract as between the original parties––as, for instance, that there must be consent of the parties and a sufficient consideration; that where there was no intention to sign, there was, in law, no signature; that fraud vitiates a contract ab initio, etc.––would be to undermine the whole structure of commercial law, and ‘shake paper credit to its foundation.’ The former decisions of this court seem to be in the direction of holding that in such a case payment cannot be avoided for fraud in the original procurement of the note.” See, also, First Nat. Bk. of Iowa City v. Trognitz, 14 Cal.App. 176, 111 P. 402.

One difficulty in determining the rights of a holder of a negotiable instrument is the confusion that may arise relative to the method by which he acquired it. If by assignment he takes it subject to any defenses that the maker might interpose against the payee, while under the well recognized “law merchant,” and in California under the provisions of the code, a holder in due course of a negotiable instrument without notice of defect, sec. 3137, holds “free from any defect of title of prior parties, and free from defenses available to prior parties among themselves,” sec. 3138. As previously stated, defendants herein do not contend that there was notice to plaintiff of any defect, or knowledge of such facts as would make its acquisition of the instruments an act of bad faith.

It seems necessary to repeat that in California a holder in due course takes title free from defect and free from defenses available to prior parties, sec. 3138, unless the defense may be asserted against a holder irrespective of innocence. Such a defense may be referred to as a real––a statutory––defense. A real defense, so far as the holder in due course is concerned, should also be distinguished from a defense that is personal––that is, a defense between the original parties. Likewise, a statutory or real defense should be distinguished from an appellate court defense––that is, one acceptable to a judicial officer, who interprets the statute, taking into consideration expediency and prudence, and thereupon states what the law should be. This method has been adopted in some states holding contrary to California.

A holder in due course of a negotiable instrument acquires it free from any defect of title of prior parties and free from defenses available to prior parties among themselves, sec. 3138, but California does not protect a holder in due course from a real or statutory existent defense. A holder in due course, not a party to an alteration, may enforce payment of an instrument, genuine as to signature, according to its original tenor, Civil Code, sec. 3205, but when a signature is forged it is inoperative in the hands of a third person or any party against the person whose name has been forged unless the latter person “is precluded from setting up the forgery or want of authority,” sec. 3104. Want of capacity, as in the case of an infant, may exonerate from liability, but endorsement or assignment “by an infant passes the property therein,” sec. 3103. “Absence or failure of consideration is matter of defense as against any person not a holder in due course” sec. 3109. Where “the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him * * * is conclusively presumed,” sec. 3097. (Italics added).

Whatever defenses may exist under the common law or statutory rule, California by codification has been careful to state the real and the personal defenses. Section 3136 provides: “The title of a person who negotiates an instrument is defective within the meaning of this title when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.” The personal or original defenses are available “In the hands of any holder other than a holder in due course,” sec. 3139. Payment for the full amount may be enforced by a holder in due course, sec. 3138, unless there is actual knowledge of the defect or knowledge of such facts from which a reasonable inference may be drawn that in acquiring the instrument he was not acting in good faith.

Freedom from negligence on the part of the makers of a negotiable instrument has never been regarded in California in following the common law rule, or made by statute a defense, real or personal, against a claim of a holder of a negotiable instrument in due course. If the legislature had intended such defense it would undoubtedly have so provided in no uncertain terms, as the courts of this state have not, at any time, recognized such a defense.

The following cases were all decided prior to the adoption by California of The Negotiable Instruments Law. There is no doubt of the California rule. If the legislature did not deem it advisable to incorporate some provision similar to that in Wisconsin, surely the judiciary should not interfere. In First Nat. Bk. of Iowa City v. Trognitz, supra [14 Cal.App. 176, 111 P. 403], the court found that the defendant “was misled when he signed the instruments and did not intend to execute anything more than a mere memorandum form to be retained * * * in connection with the purchase of goods.” The defendant in fact signed four negotiable instruments, which contained blanks later filled in. At page 180, of 14 Cal.App., at page 403 of 111 P., the court said: “Where negotiable paper of the kind here sought to be recovered on is issued in blank, it is no protection to the acceptor to say, as against the claim of an innocent holder for value before maturity, that he did not intend to create any liability against himself.” In Hellmann v. Potter, 6 Cal. 13, 15, the court said: “A party who gives his power of attorney to another authorizing the latter in general terms ‘to manage and transact all business matters of every nature and description in which I may be interested,’ and ‘to make, execute and deliver promissory notes, bills or bonds,’ will be held liable for all such securities executed in his name by his attorney, where they have reached the hands of an innocent holder, although they may have been made for the private individual purposes of his attorney. Where one of two innocent parties must suffer, it must fall on him who has trusted most.” In Rich v. Davis, 4 Cal. 22, reaffirmed and approved in Rich v. Davis, 6 Cal. 141, the court said (4 Cal. at pages 22, 23): “The principle has been long settled that, when a partner makes a note in the name of the partnership, it will render all the partners liable to a bona fide holder, although it has no relation to the partnership business, and the other partners were wholly ignorant of the transaction, and were even intentionally defrauded by their partner. See Chitty on Bills; Story on Prom. Notes; Story on Part; 3 Kent.” In Haight v. Joyce, 2 Cal. 64, 66, 56 Am.Dec. 311, it was said: “Although want or illegality of consideration may be inquired into in a suit upon a bill or note between the original parties, by the general mercantile law, where these securities have passed into the hands of third persons without notice, the maker is estopped from setting up such defense. This peculiar system of credit is favored by the law; and a rule requiring the indorsee of every bill or note to inquire into the consideration, would retard commercial transactions, and, in the language of Lord Kenyon, ‘shake paper credit to its foundation.’ ” See, also, Fuller v. Hutchings & Sweetzer, 10 Cal. 523, 70 Am.Dec. 746; Poorman v. Mills & Co., 39 Cal. 345, 2 Am.Rep. 451; Smith v. Silsby, 55 Cal. 470.

If it be assumed that the Negotiable Instruments Law covered defenses not originating in legislative enactments but recognized in some other states, and that California might with propriety follow such judge–made law, we are confronted with the situation that California has not adopted in toto or word for word The Negotiable Instruments Law, but has phrased its code sections to conform to its own ideas after study not only of general but of specific provisions and possible defenses.

There is a rule in some jurisdictions that where one is induced to sign a negotiable instrument under the belief or, as has been loosely stated, the impression that an instrument of a different character is being signed, the defense of fraud is available against a holder in due course in the absence of an estoppel in pais or one based on negligence. “But there is authority to the contrary to the effect that the defense is not available against a holder in due course, even though the person fraudulently induced to sign the instrument was free from negligence. The availability of the defense is based upon statute in some jurisdictions.” 8 Am.Jur., sec. 589, p. 296. The general rule is that in the absence of statutory provision fraud is not a defense as against a holder in due course. 10 C.J.S., Bills and Notes, sec. 499, pages 1097, 1101.

The California statute is plain upon the subject. In this state in order to be a holder in due course it is essential that the holder at the time the instrument was negotiated did not have knowlege of the defect or infirmity or knowledge of such facts which if known and disregarded would have amounted to bad faith in acquiring the instrument. And in this state there is no duty cast upon such a holder to show that the maker in executing the instrument is chargeable with negligence. It follows from what we have said that the defendants were not in a position to set up as a defense in this case any equities existing between them and the Home Improvement Company even if, as found by the court, they were free from negligence in executing the notes.

Commercial documents such as negotiable instruments are used in lieu of money. “ ‘To require each assignee, before accepting them, to inquire into and investigate every circumstance bearing upon the original execution and to take cognizance of all the equities between the original parties, would utterly destroy their commercial value and seriously impede business transactions.’ ” Adolph Ramish, Inc., v. Woodruff, 2 Cal.2d 190, 40 P.2d 509, 514, 96 A.L.R. 1146.

The judgment is reversed.

I dissent.

The question presented on this appeal can be simply stated: Where a person who is himself free from negligence is induced by fraud to sign a negotiable instrument not knowing it to be such, and in the reasonable belief that it is a document of an entirely different nature, is such fraud a defense good against a holder in due course? The majority opinion holds that such fraud in the execution, like fraud in the inducement, is a mere personal defense which may not be asserted successfully against a holder in due course. Such holding, adopted by the majority, is contrary to the common law rule, both in England and in this country, is contrary to the cases decided under the English Bills of Exchange Act, is contrary to the overwhelming majority of cases decided under the Negotiable Instruments Law, is contrary to the views expressed by most legal writers in this field, and is contrary to basic principles of the law of contracts.

The facts need not be discussed in detail. The majority opinion concedes, expressly or impliedly, that the following basic findings are supported by substantial evidence:

1. That appellant is a holder in due course of the negotiable notes in question;

2. That Hart, the representative of the Home Improvement Company, payee of the notes, was guilty of fraud in the execution in securing respondents' signatures to the notes; and

3. That the respondents reasonably placed trust and confidence in Hart, and were not negligent in not knowing that the documents were in fact promissory notes.

These findings are amply supported. The respondents signed the promissory notes and a notice of completion before any work was started and before the price as to certain items were agreed upon. This they did upon Hart's representations that they were merely signing a contract to do the work. They did not know they were signing promissory notes. They were practically illiterate, and had no real understanding of the written word. They placed trust and confidence in Hart and in their supposedly close friend, Krajer, who introduced them to Hart. The majority opinion fails to state that, unknown to respondents, Krajer was an agent of Hart's, and was working for him on the promise of a substantial commission if he could get respondents and others to hire Hart as a contractor. Hart purportedly read the contract to respondents, but failed to include the notes in such reading. Respondents wanted independent legal advice but were thwarted by Hart. Under these circumstances, the trial court was justified in finding that respondents were not negligent and that Hart was guilty of fraud in the execution.

The type of fraud here involved has been referred to as fraud in esse contractus, fraud in the factum, fraud in the inception or fraud in the execution, to distinguish it from fraud in the inducement, which is a mere personal defense. At common law the cases were practically unanimous that fraud in the execution was a real defense. The leading English case is Foster v. Mackinnon (1869) L.R. 4 C.P. 704. That case unequivocally held that, in the absence of negligence on the part of the maker, such fraud was a defense against a holder in due course. This rule was followed by practically every American jurisdiction where the problem was considered prior to the drafting and adopttion of the Uniform Negotiable Instruments Law, with the possible exception of West Virginia and Connecticut. See cases collected 36 L.R.A. 434; 11 Am.St.Rep. 318; 35 L.R.A.,N.S., 776.

In England the Bills of Exchange Act was adopted in 1882. So far as the problem under discussion is concerned, the sections of that act are almost identical with those of the N.I.L. In Lewis v. Clay (1897), 67 L.J.Q.B. 224, it was declared that fraud in the execution, in the absence of negligence, was an absolute defense, and that the adoption of the English statute in no way changed the rule of Foster v. Mackinnon, supra. This is still the English law.

In United States, the N.I.L. was drafted by John J. Crawford in 1896. Over the years, at different times, every American state has adopted the act, not always verbatim, but in substance. California was one of the latest states to adopt the act, it being adopted in this state in 1917, Stats. of 1917, p. 1531, Chap. 751. There have been many cases decided by the various states since they adopted the N.I.L. The overwhelming weight of authority is to the effect that the adoption of the N.I.L. in no way changed the common law rule, and that both before and after the adoption of that uniform statute, fraud in the execution was, and remained, a real defense.

The applicable rule under the N.I.L. is stated as follows in 10 C.J.S., Bills and Notes, p. 1100, § 499(b): “Although there are some decisions to the contrary [citing one case each from Connecticut and West Virginia], the weight of authority holds that, if a person * * *, intending to sign an instrument of an entirely different character, * * * places his signature to a negotiable instrument, the mistake as to the terms or character of the instrument being caused by the fraud, deceit, or misrepresentations of another, and not being due to laches or negligence on the part of the signer, the latter is not liable on the instrument, although it has passed into the hands of a bona fide holder for value.” In the footnotes relatively recent cases from Illinois, Indiana, Michigan, Minnesota, Missouri, North Carolina, Oklahoma and Texas are cited in support of that rule. In 8 Corpus Juris, p. 790, § 1049, the same rule is stated and many earlier cases, not only from the above states, but also from Arkansas, Iowa, Kentucky, Maine, Nebraska, New York, Ohio, Washington and Wisconsin, are cited in support thereof.

The identical rule, supported by many cases, is stated as follows in 8 Am.Jur. p. 295, § 589: “The majority rule is that fraud whereby one is induced to sign a negotiable instrument believing that he is signing an instrument of a different character is a defense, even against a holder in due course, in the absence of an estoppel in pais or one based on negligence.”

Mr. Brannon, as the quotation set forth in the majority opinion indicates, does approve the minority rule. The great majority of legal writers in this field, however, advocate the majority rule. See Britton on Bills and Notes (1943) p. 566, § 130; Burdick, Real and Personal Defenses in Actions on Negotiable Paper, 3 Cornell Law Quarterly, 171; 2 Daniels on Negotiable Instruments, 7th Ed., p. 1075, §§ 991, 992; 4 Williston on Contracts, Rev.Ed., p. 3337, § 1159; Danforth, Illegality under the Negotiable Instruments Law, 92 Cent. L. Jour. 27; Green, Real Defenses and the Negotiable Instruments Law, 9 Tulane Law Rev. 78; Rosson, Bills and Notes––Fraud in the Inception––Negotiability and Real Defenses, 6 Ore.L.Rev. 160; Britton, Fraud in the Inception of Bills and Notes, 9 Cornell Law Quarterly 138; Notes, 12 Va.L.Rev. 324; 6 Tex.L.Rev. 114; 12 Tex.L.Rev. 228; 13 Mich.L.Rev. 601; 29 Yale Law Journal 797.

The many courts and legal writers above referred to have not approved the rule that fraud in the execution, where the maker is not negligent, is a real defense, by blindly following the common law rule. Cogent and compelling reasons exist for this approval. It must be remembered that the N.I.L. is not an entirely new statute, nor did it purport to repeal the entire law of contracts. It purported to codify the fundamental rules of the law merchant, and where there was a conflict to adopt what was considered to be the better rule. Where the N.I.L. has no express provision, or where its meaning is ambiguous, cases decided under the law merchant and fundamental rules of contract should be looked to in arriving at a proper interpretation. Wettlaufer v. Baxter, 137 Ky. 362, 125 S.W. 741, 26 L.R.A.,N.S., 804; Trustees of American Bank v. McComb, 105 Va. 22, 54 S.E. 14; Haddock, Blanchard & Co. v. Haddock, 118 App.Div. 412; 103 N.Y.S. 584, affirmed in 192 N.Y. 499, 85 N.E. 682, 19 L.R.A.,N.S., 136; Parsons v. Utica Cement Co., 82 Conn. 333, 73 A. 785, 135 Am.St.Rep. 278; see cases collected 12 Va.L.Rev. 324.

So far as the present problem is concerned, the N.I.L. has no express provision covering the subject. There are provisions, however, which tend to show that the drafter of the act intended fraud in the execution to be a real defense.

Section 57 of the N.I.L., Section 3138 of the Civil Code, provides that the holder in due course holds “free from any defect of title of prior parties, and free from defenses available to prior parties among themselves.” (Italics added.) When a party, without negligence, signs a document by reason of the fraud of another, and honestly and reasonably believes it to be something else other than a negotiable instrument, the document, when executed, is not merely voidable––it is void. Fraud in the execution prohibits any valid contract from coming into existence. Fraud of this type is not a mere “defense” nor a mere “defect of title,” such as is referred to in § 57. It is a factor which renders the instrument non–existent as a binding obligation. Section 57 also provides that a holder in due course may enforce payment “against all parties liable thereon.” The maker of a totally void instrument was never “liable” thereon. The sections dealing with the liabilities of the maker, § 60, N.I.L., § 3141, Civ.Code, of the drawer, § 61, N.I.L., § 3142, Civ.Code, of the acceptor, § 62, N.I.L., § 3143, Civ.Code, and of the endorsers, § 66, N.I.L., § 3147, Civ.Code, all provide that by making, drawing, accepting or endorsing the instrument such persons “engage” to pay the instrument according to their respective contracts. This clearly indicates that there must be an assent to be bound, otherwise there is no contract. There is no difference in theory between such a situation and an outright forgery, which is admittedly a real defense. Reality of consent underlies all contractual relationships. See Britton, Bills and Notes (1943) at p. 586; 12 Va.L.Rev. 324; Green, Real Defenses and the Negotiable Instruments Law, 9 Tulane L.Rev. 78, at p. 82. Underlying these concepts is the thought that a negotiable instrument is a specialized form of simple contract. Where, because of fraud in the execution, no contract in the form of a negotiable instrument has ever come into existence, no liability or rights attach to the instrument. The document comes into the world stillborn. Negotiation alone cannot breathe life into it.

The majority opinion refers to the doctrine that where the signer is free of negligence fraud in the execution is a real defense, as an “appellate court defense,” and as “judge–made law,” and argues that this rule is a creature solely of the courts. Quite to the contrary, as has already been pointed out, the rule is based on a proper interpretation of the act, and upon basic rules in the law merchant and in the law of contracts in existence long before the act was adopted. The majority opinion also refers to this rule as the “Wisconsin rule.” Does this imply that the rule originated in that state? If so, the implication is contrary to the fact. The rule originated nearly a half century before Wisconsin adopted the statute expressly making fraud in the execution a real defense. Many cases had been decided in England and in this country before Wisconsin adopted its statute. Wisconsin merely codified existing law. The fact that Wisconsin saw fit to thus put into express terms the rule of the existing cases does not necessarily mean that this addition changed the existing law. It is much more reasonable to imply that Wisconsin merely codified the existing rule and clarified what otherwise might be an ambiguity. There is another consideration that supports the conclusion that the majority rule should be adopted in this state. As already pointed out, California did not adopt the N.I.L. until 1917. By that year all but two or three of the other states had adopted the uniform act. See table, 5 Uniform Laws Annotated, p. XIII. At that time the great bulk of the cases above referred to, which have adopted the majority rule, had been decided. It is far more reasonable to imply that the legislature intended to adopt the rule approved by the overwhelming weight of authority, than to assume that it intended to approve the rule adopted by a small minority. It is an elementary rule of construction that in adopting the statute of a sister state, the interpretation of that statute by the sister state is included. Moreover, there is a strong public policy in favor of uniform interpretation of uniform statutes. Otherwise, the whole purpose of such acts is thwarted.

The majority opinion urges that to adopt the rule advocated in this dissent will be to “undermine” the whole structure of commercial paper. That is the familiar cry raised every time the question of whether a particular defense is a real or personal defense is involved. The obvious answer is that under the common law, and in the great majority of states in this country, the rule is as is here advocated, and yet commercial institutions seem to struggle along without too much difficulty. The limitation, which denies the defense to one who has been guilty of negligence, is ample protection to such institutions.

The majority opinion refers to many California cases. Not one of them involved the point here under discussion. The problem has never been decided by a California appellate court, either before or after the adoption of the N.I.L. In Bedell v. Herring, 77 Cal. 572, 20 P. 129, 11 Am.St.Rep. 307, quoted from at length in the majority opinion, a person did sign a document without knowing it was a negotiable instrument. Unlike the instant case, the trial court found that the “defendant signed said note voluntarily, and without exercising the ordinary care in regard to the character of the paper signed which a prudent business man would and should exercise.” 77 Cal. at page 573, 20 P. at page 130. The only holding of the court is that where the signer is negligent he cannot set up fraud in the execution against a holder in due course. That is sound law. The court expressly refrained from passing on the question here involved, stating (77 Cal. at page 573, 20 P. at page 130): “It is not necessary here to pass definitely upon the broader question discussed in the briefs, whether or not payment of a negotiable note in the hands of an innocent endorsee, who received it before maturity, can be avoided, under any circumstances, on the ground that it was procured by fraud.” What the court said in the next few sentences––quoted in the majority opinion––was obviously dicta. From the cases cited by the court in support of this dicta it is apparent that the court was confused as to the distinction between fraud in the inducement and fraud in the execution. Most, if not all, of the cases cited deal with fraud in the inducement. The last sentence of this dicta that: “The current of American authorities seems to be in the same direction,” is just contrary to the actual fact. None of the other California cases cited in the majority opinion or in the briefs even remotely involved the problem here under discussion.

For the foregoing reasons, in my opinion, the judgment should be affirmed.

WARD, Justice.

KNIGHT, J., concurs.