* *

*

Sec. 52. "A holder in due course is a holder who has taken the instrument under the following conditions: 3. That he took it in good faith and for value. 4. That at the time it was negotiated to him he had no notice of any * * * defect in the title of the person negotiating it."

Sec. 55. "The title of a person who negotiates an instrument is defective within the meaning of this act 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 fraud." Sec. 56. "To constitute notice of * * * defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of ** * the defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith."

Sec. 57. "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 full amount thereof against all parties liable thereon."

Sec. 58. "In the hands of any holder, other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable.

* *

Sec. 59. "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." GARRIGUES, J. (After stating the case as above.)

1. It is claimed plaintiff is not a holder in due course because: (a) It took the note with notice of the defense the maker had, of want or failure of consideration. (b) It did not take the note in good faith. (c) That plaintiff took the

note with notice of defect in the title of the person negotiating it-Mitchell.

The defenses interposed are controlled entirely by the statute. There is not a particle of evidence that plaintiff had notice of want or failure of consideration; neither is there any evidence that it took the note in bad faith in fact. Bad means evil, something vicious. Bad faith in fact, or mala fides, is the opposite of good faith, and consists in guilty knowledge, or willful ignorance, showing a vicious or evil mind, evidence of which is totally lacking in this The evidence shows that plaintiff, in making this loan and accepting the collateral, acted in the utmost good faith. There is no evidence to the contrary. The court made no finding of actual bad faith, or actual knowledge of a defective title, or that plaintiff possessed knowledge of any defense the maker had to the note; if it had, its action in doing so would have been arbitrary, unwarranted and unsupported by any evidence, or the result of a mistake.

case.

Plaintiff must be a holder in due course, and paragraph 4, section 52, is controlling as to when one is such a holder. If it took the instrument with actual or constructive notice of defect in the title of the person negotiating it, it is not a holder in due course. The statute removes any uncertainty or doubt as to what constitutes a defective title, and also what shall be notice thereof. Section 55 defines a defective title. We will assume for the purpose of this branch of the case that Mitchell negotiated the note under circumstances amounting to a fraud upon the Indemnity Company, which made his title defective. But did plaintiff have notice of such defect? Section 56 provides that to constitute notice of such defective title, the person to whom the note is negotiated must have actual knowledge of such defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. There is no evidence of actual knowledge, and no such finding was made by the court. If plaintiff had no actual knowledge, but had knowledge of "such facts" that its action in taking the note amounted to bad faith, it had constructive notice of Mitch

ell's defective title, and under the statute would not be a holder in due course, of which defendant could take advantage.

It is claimed by defendant that Mitchell, in negotiating the security, was appropriating property of the company to his own personal use. If true, this would amount to a fraud on the company, and his title, under section 55, would be defective. Assuming it was defective, it is as necessary that plaintiff should have notice of such defect as it is that the title should be defective. It is claimed plaintiff had knowledge of such facts that its action in taking the instrument amounted to bad faith, which constituted notice of the defective title. What were the facts proven on the trial, of which plaintiff had knowledge, that made its action in taking the note amount to bad faith? The claim is: Because plaintiff knew that Mitchell was treasurer of the Indemnity Company. Mitchell exercised no function of this office in pledging the note. Bad faith is an inference drawn from the fact that he was treasurer of the company, but the evidence must warrant such an inference. The mere knowledge that Mitchell was treasurer was not knowledge of "such facts" under the undisputed evidence of this case as would justify the deduction that plaintiff's action in taking the note amounted to bad faith, and the court was not warranted either, as a matter of law or fact, in making such deduction. Whether its action in taking the note with such knowledge would warrant the inference of bad faith under section 56 is a question of law. Where, as here, there is no conflict in the evidence regarding knowledge of such facts, whether plaintiff's action in accepting the security amounted to bad faith, rests upon a legal inference drawn from the knowledge that Mitchell was treasurer. Such knowledge does not constitute bad faith in fact, and it would be idle to contend that it constituted bad faith as a matter of law, or that it warranted, in this case, the inference of bad faith. The finding of the court was nothing more than a deduction as to the effect of the knowledge of "such facts," and this is a question of law. No doubt an

inference of bad faith may be drawn, if warranted, as a deduction by the court or jury, and where there is sufficient evidence to warrant or justify it, the inference when made becomes proof as a fact of bad faith, and a court of review would not interfere with the finding; but there must be sufficient legal evidence to warrant such inference. There is no evidence of bad faith in fact, and because plaintiff knew that Mitchell was treasurer of the Indemnity Company was insufficient in law to warrant the inference of bad faith. Merchants Bank v. McClelland, 9 Colo. 608-611, 13 Pac. 723; Coors v. German Nat. Bank, 14 Colo. 202-206, 23 Pac. 328, 7 L. R. A. 845; Tourtelotte v. Brown, 1 Colo. App. 408-417, 29 Pac. 130; Colomon v. Brodie, 10 Colo. App. 353-359-360, 50 Pac. 1045; Wedge Co. v. Denver Bank, 19 Colo. App. 182-189, 73 Pac. 873; German-American Co. v. State Bank, 26 Colo. App. 242, 142 Pac. 189; Montvale v. Peoples Bank, 74 N. J. L. 464, 67 Atl. 67; Fillebrown v. Hayward, 190 Mass., 472-480, 77 N. E. 45; Rockville Bank v. Citizens Co., 72 Conn. 576-582-583, 45 Atl. 361; Kaiser v. U. S. Bank, 99 Ga. 258, 25 S. E. 620; Doe v. N. W. C. & T. Co., 78 Fed. 62, 68-69; Kaiser v. First Nat. Bank, 78 Fed., 281-284, 24 C. C. 88; Farmers Co. v. Madison Co., 153 Fed. 310-319.

2. That the rule of law contended for by defendant does not prevail in this state is shown by the citations. We have adopted and are following the federal rule in this regard. But even if the rule relied upon by defendant prevailed here, the facts in this case do not bring it within the rule. In the class of cases supporting the rule contended for, the party accepting the security from the company officer, for a personal loan, could see upon the face of the transaction that the officer, by exercising the function of his office, was at the same time using the security belonging to the company for his own personal benefit; that is, that it was in connection with, or by his act, as an officer, that he was appropriating company property to his own use. Using this case as an illustration, it would be the same as though Harrell, in his official capacity as

president, endorsed the company's name on the Sethman note, and offered it to plaintiff so endorsed as security in connection with his application for a personal loan, in which event plaintiff could see that the president and general manager, with power to endorse the company's name, was exercising a function of his office and at the same time using the security endorsed by him for his individual purpose. This case is very different. The note had been regularly endorsed by the company, by its president, authorized so to do by the by-laws, and delivered to Mitchell. Plaintiff found Mitchell in the possession of such endorsed paper. Mitchell did not exercise any official act in negotiating and delivering the note, and had nothing to do with the endorsement. It had already been endorsed by the company and delivered to him. Upon inquiry as to the president's right to endorse the company's name upon the note, plaintiff was shown the by-law giving the president entire control of the business affairs and management of the corporation, and was informed that the note had been delivered to Mitchell on account of commissions on the sale of stock. Mitchell exercised no function of his office as treasurer in connection with the loan.

3. The court based plaintiff's knowledge of such facts that its action in taking the note amounted to bad faith, constituting notice of Mitchell's defective title, upon plaintiff's lack of diligence in making inquiry as to Mitchell's right to use the note; that is, that plaintiff was guilty of negligence in not making diligent inquiry, which amounted to bad faith under section 56, constituting such notice. Plaintiff was under no obligation to inquire of the maker of the note; if so, no one could ever purchase negotiable paper, and be a holder in due course, without first making inquiry of the maker. Inquiry, if necessary here, was as to the title of the person negotiating the instrument. The court found plaintiff failed to use due diligence in making such inquiry. This was in effect a finding of knowledge of facts amounting to bad faith in taking the instrument, constituting notice of such defective title. There is no con