Story Case

Stephen Deering was approached in his office one day by a man who introduced himself as Harry McDonald, saying that he was a close friend of Deering's brother and the proprietor of a business in a nearby town where the brother lived. He had some shares of stock which he was offering for sale, and which he stated to be well worth the price he named. Relying on his assumed business standing, and the supposed friendship with his brother, Deering accepted McDonald's statements about the stock and bought it from him. In payment, he gave his note. He later discovered the stock was worthless, that McDonald was wholly unknown to Deering's brother, and that he owned no business in the town as he had represented. The note was not presented to Deering at its maturity, but about two months later he was called upon to pay it by a James Trainer, who had bought it from McDonald when it was several weeks overdue. Deering refused to pay it, on the ground that it had been obtained from him by fraud. When Trainer brought suit, the fraud was offered as a defense. The reply of Trainer was that he had known nothing of the fraud practised and should, therefore, not be bound by it. What judgment should be given?

Ruling Court Case. Chapman Vs. Rose, Volume 56 New York Reports, Page 137

Rose entered into a contract with one, Miller, to act as his agent for the sale of a patent hay-fork and pulley. A contract was drawn up by Miller and signed by both parties. Miller also filled out, and Rose signed, an order for a hay-fork and two pulleys, for which Rose agreed to pay $9. Another paper was then presented to Rose for his signature, which Miller represented to be a duplicate of the order. Rose, believing such representation, and, without reading or examining it, signed it and gave it to Miller. It was a promissory note for $270. It was transferred to Chapman, who was not aware of the foregoing circumstances, and who gave value for it.

Rose contended that this fraud which was perpetrated upon him by Miller in reference to this note, constituted a real defense; and that not even a bona fide purchaser could enforce it against him.

Mr. Justice Johnson said: "There does not appear to have been any physical obstacle to the defendant's reading the paper before he signed it. He understood that he was signing a paper by which he was about to incur an obligation of some sort, and he abstained from reading it. He had the power to know with certainty the exact obligation he was assuming, and chose to trust the integrity of the person with whom he was dealing, instead of exercising his own power to protect himself. It turns out that he signed a promissory note, and that it is now in the hands of a holder in good faith for value. When a person signs an obligation without ascertaining its character and extent, which he has the means to do, upon the representation of another, he puts confidence in that person; and if injury ensues to an innocent third person by reason of that confidence, his act is the means of the injury, and he ought to answer to it." Judgment was given for Chapman.

Ruling Law. Story Case Answer

Simple fraud, or fraud in the inducement is only a personal defense. By fraud in the inducement is meant a false consideration or representation by which the maker is induced to sign an instrument. He knows that he is making an instrument of binding character, but is induced to do so by fraudulent representations or by fradulent consideration. Since this is a personal defense, he may escape payment as against a person who knows of the fraud, and of course against the person who perpetrated the fraud. But if the instrument has been transferred to a bona fide purchaser for value, who knows nothing of the circumstances under which the instrument was procured, the maker cannot maintain the fact that he was fraudulently induced to make the instrument.

The fraud practised upon Deering would entitle him to be protected against payment of the note to McDonald or anyone working in conspiracy with him. But a bona fide purchaser could not be met with that defense, since Deering had not been deceived into signing what he did not believe to be a note. The fraud consisted in the misrepresentations which induced him to sign the note. This would be a personal defense only, not valid against a bona fide purchaser. But this note was sold to Trainer after its maturity. It should have appeared to him that there was some defense to the note, otherwise it would not have remained unpaid after it was due. He is, therefore, subject to the defense, whatever it may be, and can not recover. A purchaser after maturity is not a bona fide purchaser, and is not protected against personal defenses. Judgment will be given for the defendant.