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CAROLINA HOUSING & MTG. CORP. v. REYNOLDS

January 31, 1957

CAROLINA HOUSING & MORTGAGE CORPORATION, RESPONDENT,
v.
ARTHUR CARLTON REYNOLDS AND GLADYS REYNOLDS, APPELLANTS.



The opinion of the court was delivered by: Stukes, Chief Justice.

January 31, 1957.

The sole question presented by the appellants in this case is whether the respondent is a holder in due course, without notice, of the negotiable promissory note in suit.

It was given in payment for repairs and improvements to appellants' residence and was payable in monthly installments over a period of thirty-six months, the first of which fell due in April 1953 and was paid by the appellants who, however, defaulted upon the subsequent installments. The note was secured by a mortgage of the property and the action was for judgment upon it and foreclosure of the mortgage, subject to the lien of a prior mortgage. However, the mortgage was held by the lower court to be invalid because of an incompetent witness and there was no appeal. The appeal is from the money judgment upon the indebtedness which was evidenced by the note. It was given to the contractor who sold and endorsed it for value to the respondent before maturity of the first installment.

Respondent's agent inspected the house before respondent purchased the note and mortgage, and reported to it that the repairs and improvements had been completed. Respondent had been furnished with a copy of the construction contract and, apparently out of a superabundance of caution, procured the inspection to be made before advancing its funds for the purchase of the note and mortgage. The inspector testified that he viewed the exterior of the premises and believed, and reported to his principal, that the work had been completed. He was inexperienced in building and had not at that time seen the contract.

The evidence indicated, and the master found, that the work had not been done in a workmanlike manner and that it would cost about $500 to perfect it. He recommended that such amount be offset against the indebtedness and that judgment be rendered for the balance of about $1,200. Upon exceptions to the master's report it was reversed in that particular and the court concluded that respondent was a holder of the negotiable note in due course, free from the defense of failure of consideration; and judgment was entered accordingly.

"Absence or failure of consideration is a matter of defense as against any person not a holder in due course and partial failure of consideration is a defense pro tanto whether the failure is an ascertained and liquidated amount or otherwise."

However, we agree with the trial court that respondent is a holder in due course and the quoted statute does not apply.

Section 886 of the Code governs. It follows:

"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."

Home Bank & Trust Co. v. Davis, 134 S.C. 508, 133 S.E. 467, construed and applied the above quoted sections of the code to facts which are comparable to those of the instant case. It was held that notice or knowledge of the nature of the consideration of a note does not affect its negotiability, First National Bank of Richmond, Ind., v. Badham, 86 S.C. 170, 68 S.E. 536, 138 Am. St. Rep. 1043, and that there was no evidence in that case that the purchaser of the note had cause to suspect that the payee would violate his obligation under the contract in consideration of which the note was given, and, therefore, that failure of consideration was not a defense to the action by the plaintiff holder in due course.

The last cited provision of the code is followed by Sec. 8-887.

"A holder in due course holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves and may enforce payment of the instrument for the ...


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