Conford, Freund and Kilkenny. The opinion of the court was delivered by Freund, J.A.D.
This appeal from judgment entered in plaintiff's favor on a promissory note was originally resolved by us in favor of affirmance as to the adult maker of the note. Tony Bethea, and reversal and remand for factual determinations regarding the asserted defense of infancy of his co-maker, Lynn Bethea. Bancredit, Inc. v. Bethea , 65 N.J. Super. 538 (App. Div. 1961). The instant rehearing is limited solely to discussion of the issue of fraud in the factum , as it relates to the scope of Tony Bethea's knowledge of the nature of the instrument he was signing and his negligence in so inscribing it.
Defendant brings to our attention that portion of his testimony (65 N.J. Super., supra , at p. 544) in which he states that he "signed a paper to get $500 from Beneficial Loan." Bethea urges that the court misconceived the import of this testimony and mistakenly assumed that Bancredit and Beneficial Loan were one and the same concern. In fact, we are now told by his attorney, Bethea was not aware of the character of the instrument he signed, but rather thought he was signing an application for a loan in the amount of
$500 from Beneficial Finance Company, a separate and distinct organization from plaintiff. We are asked to characterize the latter form of deception as so essential to the making of the contract as to amount to fraud in the execution thereof.
We are satisfied, after review of the record as settled by the trial judge, R.R. 1:6-3, and consideration of the points raised in the briefs and at oral argument of the rehearing, that reasonable fact-finders could not differ as to Tony Bethea's knowledge that the instrument he was signing was a negotiable promissory note. Not only is there Bethea's own testimony that he "sign[ed] papers to borrow $500," and that he "[knew] I signed it for [a] loan"; there is also the undisputed proof that he and Lynn, shortly after they had affixed their signatures, were given a coupon book with a schedule of payments, from which they made three monthly payments before defaulting. It is thus incontrovertible that Bethea was aware of the general form of the obligation he had undertaken, at least insofar as it bound him to make monetary repayments at fixed intervals.
The question is raised, however, as to the possible legal effect, on the defense of fraud in the factum , of Bethea's alleged misunderstanding of the identity of the payee of the instrument (he believed it to be Beneficial Loan when it was in fact Chippy's, and, by express assignment, Bancredit), as well as his professed deception as to the amount of the note. This question recommends to us a re-examination of the pertinent principles shaping the defense of fraud in the factum, with particular attention to our statement in New Jersey Mortgage and Investment Co. v. Dorsey , 60 N.J. Super. 299, 302 (App. Div.), affirmed 33 N.J. 448 (1960), defining the defense as "such fraud in the procurement of the execution of a note or bill as results in the signer's being ignorant of the nature of the instrument he is signing." (Emphasis added). We will consider particularly, in light of our factual determination hereinabove, whether the maker's knowledge merely of the negotiable character of a note conclusively
establishes awareness of its "nature" and thus precludes assertion of fraud in the factum.
The defense of fraud in the factum presents in theory a somewhat confused intermingling of tort and contract principles. At the heart of the assertion of non est factum is the absence of that degree of mutual assent prerequisite to formation of a binding contract; absent the proverbial "meeting of the minds," one cannot be said to have obligated himself in law and the purported transaction is regarded as void. This is basic contract doctrine. New Jersey Mortgage and Investment Co. v. Dorsey, supra (60 N.J. Super. , at pp. 303-304); C.I.T. Corp. v. Panac , 25 Cal. 2 d 547, 154 P. 2 d 710, 160 A.L.R. 1285 (Sup. Ct. 1944); 1 Williston, Contracts (3 d ed. 1957), § 95A, p. 350; 5 Williston, Contracts (Rev. ed. 1937), § 1488, p. 4154; Restatement, Contracts (1932), § 475. See Note, 7 Rutgers L. Rev. 405, 409 (1952). Thus, where the signer of the instrument has been led to believe and does believe that he is signing something of a different character from the note he actually does inscribe, he has not in fact assented to the obligation represented by the paper.
Nevertheless, where the circumstances demonstrate the basic ingredient of voluntary, physical inscription, there has been at least an outward manifestation of assent on the part of the signer, thereby bringing into play -- as against a holder in due course -- additional considerations grounded in equity but phrased in terms of negligence. The signer must in such a situation exercise the caution of a reasonably prudent man to determine the character of the paper upon which he has purposefully placed his signature. The rationale of such a requirement may be found in the desirability of preserving general confidence in commercial paper, as well as in the equitable principle that where one of two innocent persons must suffer by the wrongful act of a third party, he who enabled the third party to perpetrate the wrong must sustain the loss. See Alexander v. Brogley , 63 N.J.L. 307, 308-309 (E. & A. 1899). In fact, not a few courts have
articulated the maker's negligence in terms of estoppel to assert the defense of fraud in the factum. Briggs v. Ewart , 51 Mo. 245 (Sup. Ct. 1873); Citizens' National Bank v. Smith , 55 N.H. 593 (Sup. Ct. 1875); Amato v. ...