Corpus Juris: Being a Complete and Systematic Statement of the Whole Body of ...

a payee repurchases a bill or note from a bona fide holder; and a holder with notice cannot purge a note of a defense known to him at the time of its transfer to him by merely assigning it to a third person and thereafter obtaining a retransfer.34

The Negotiable Instruments Law expressly provides that a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter.35 But this provision does not apply where a note broker fraudulently

Fed. 672, 26 CCA 82 [rev on other grounds 173 U. S. 243, 19 SCt 398, 43 L. ed. 684].

Ind.-Farber V. National Forge, etc., Co., 140 Ind. 54, 39 NE 249. Mass.-Fowler V. Strickland, 107 Mass. 552.

Mich.-Vinton v. Peck, 14 Mich. 287. Miss.-Sanders v. McAlister, 101 Miss. 227, 57 S 801.

N. Y. Sheridan v. New York, 68 N. Y. 30; Ludlow v. Woodward, 117 App. Div. 525, 102 NYS 647.

S. C.-Dabney v. State Bank, 3 S. C. 124.

Tex.-Masterson v. Ross, (Civ. A.) 152 SW 1156. Eng.-Hunter v. Wilson, 4 Exch. 489, 154 Reprint 1306.

Ont.-Wood v. Ross, 8 U. C.

299.

C. P.

Que.-Laforest v. Inkeil, 11 Super. 534; Pichette v. Lajoie, Montr. Leg. N. 266.

Que.
10

[a] Rule has been applied: (1) Where the holder purchased bank bills at a large discount. Dabney v. State Bank, 3 S. C. 124. (2) In the case of a nominal consideration. Hickman v. Sawyer, 216 Fed. 281, 132 CCA 425.

[b] If value has at any time been given (1) for a note, the holder thereof is a holder for value. Farber v. National Forge, etc., Co., 140 Ind. 54, 39 NE 249. (2) Where one acquires in good faith and for value negotiable paper, it is immaterial whether a subsequent holder thereof pays value or has notice at the time he acquires it. Masterson v. Ross, (Tex. Civ. A.) 152 SW 1156.

[c] Set-off unavailable.-Plaintiff was held to have acquired defendant's note from a bank, which was a bona fide purchaser for value, so that a set-off which defendant had against the payee was unavailable. Sanders v. McAlister, 101 Miss. 227, 57 S 801. 33. See infra § 686. 34.

Hatch v. Johnson L. & T. Co., 79 Fed. 828; Dollarhide v. Hopkins, 72 Ill. A. 509; Bute v. Williams, (Tex. Civ. A.) 162 SW 989 (holding that a holder of a note in whose hands it is unenforceable does not acquire it free of defenses by transferring it to an innocent holder and then repurchasing it from him; and this, although he repurchased it with money furnished by another therefor, on their agreement that the other should share in the profits because of the loan).

35. Underwood v. Fosha, 96 Kan. 240, 150 P 571 (notice immaterial); Horan v. Mason, 141 App. Div. 89, 125 NYS 668; Groh's Sons Co. V. Schneider, 34 Misc. 195, 68 NYS 862; Jennings v. Carlucci, 87 NYS 475; Moyses v. Bell, 62 Wash. 534, 114 P 193; Comstock v. Buckley, 141 Wis 228, 124 NW 414, 135 AmSR 34.

holder in due

sells an accommodation note, with intent to embezzle
the proceeds, to an innocent holder, and thereafter
pays the note, so as to make him or his assignee a
holder in due course.3
36
It also expressly provides

that, where value has at any time been given for the
instrument, the holder is deemed a holder for value
in respect to all parties who became such prior to
that time.37

[ 686] E. Payee as Holder in Due Course. At common law it has been held that a payee may be a holder in due course,38 although ordinarily he is not

[d] Not "holder in due course within the rule. Where one received a check from his brother without consideration, to be used to bind a bargain, conditioned on the purchase of a saloon, and to be void if the bargain failed, and plaintiff received it from the saloon keeper after notice that the bargain had failed and pay. ment of the check had been stopped, neither the payee nor the saloon keeper was a holder in due course, within L. [1897] c 612 § 97, providing that a holder of negotiable paper, deriving his title from a holder in due course, has all the rights of such holder. Groh's Sons Co. v. Schneider, 34 Misc. 195, 68 NYS 862.

36. Comstock v. Buckley, 141 Wis. 228, 124 NW 414, 135 AmSR 34.

37. Petrie v. Miller, 57 App. Div. 17, 67 NYS 1042 [aff 173 N. Y. 596 mem, 65 NE 1121 mem]; Rogers v. Morton, 46 Misc. 494, 95 NYS 49.

"This language is broad enough to include the holder of a negotiable note where value for it has been giv en by payee to maker. The former rule was that in a suit between îndorsee and maker they are regarded as remote parties to each other and that between such parties two distinct considerations must be inquired into in order to perfect a défense against the holder, viz., the consideration which the defendant received for his liability and that which the plaintiff gave for his title." Petrie v. Miller, 57 App. Div. 17, 19, 67 NYS 1042 [aff 173 N. Y. 596 mem, 65 NE 1121 mem].

course, having ac- [c] Notice immaterial.-Underquired an unconditional property wood v. Fosha, 96 Kan. 240, 150 P right in the instrument, had, as a 571. part of such property right, power to sell it free from all restrictions even to one who had notice of an infirmity in the instrument. To this rule it is declared by text-writers, and in some adjudged cases, that there is but one exception, and that is that the payee of the note, who participated in the infirmity, cannot shelter himself behind the rights of a bona fide holder from whom he may have purchased it subsequently. . . In the case at bar the plaintiff was not the payee of the note, and the exception to the general rule cannot apply as against him, as he did not personally participate in any fraud connected with the making and delivery of the note, if there was any fraud, even though he might be chargeable with actual or constructive notice of it. The payee of the note was a corporation, the HoranMarshall Company. The plaintiff was its president when the note was delivered and when it was transferred to him individually by indorsement. The respondent contends that under these circumstances the plaintiff is to be considered as if he were the payee, and that any fraud of the corporation must be charged to all its officers as if it were their personal fraud, notwithstanding any absence of personal participation in it. This contention is based upon familiar authorities which charge a corporation with the knowledge of any of its officers acquired in the course of their duty; but if there be any authority for the proposition that the knowledge so imputed to a corporation in order to bind it is again imputable to others of its officers in order to bind them personally, it is not cited to us. That there is authority for this proposition may well be doubted. If it be a matter of first impression, it may be said that the contention has no reasonable basis." Horan v. Mason, 141 App. Div. 89, 91, 125 NYS 668. (2) It enacts a rule which exists in favor of all persons other than the original payee who become purchasers from a bona fide holder, although such purchasers have notice of an infirmity in the paper as between the original parties thereto. Moyses v. Bell, 62 Wash. 534, 114 P 193. (3) Under the common law and the direct provisions of the Negotiable Instruments Law a holder who derives his title through a holder in due course, and who is not himself a party to any fraud, duress, or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to such former holder. Comstock v. Buckley, 141 Wis. 228, 124 SW 414, 135 AmSR 34.

38.

Armstrong v. American Exch. Nat. Bank, 133 U. S. 433, 10 SCt 450, 33 L. ed. 747; J. G. Brill Co. v. Norton, etc., St. R. Co., 189 Mass. 431. 437, 75 NE 1090, 2 LRANS 525; Boston Steel, etc., Co. v. Steuer, 183 Mass. 140, 66 NE 646, 97 AmSR 426; First Nat. Bank v. Union Trust Co.. 158 Mich. 94, 122 NW 547, 133 AmSR 362; Nelson v. Cowing, 6 Hill (N. Y.) 336;. Lookout Bank v. Aull, 93 Tenn. 645, 27 SW 1014, 42 AmSR 934.

"It was stated by Lord Russell in Lewis v. Clay, 67 L. J. Q. B. 224. that a payee of a promissory note cannot be a holder in due course within § 29 of the English bills of exchange act of 1882. In Herdman v. Wheeler, [1902] 1 K. B. 361, 372, it was pointed out that this statement of Lord Russell's was obiter, and it was also pointed out that in Herdman v. Wheeler, supra, as in Lewis v. Clay, supra, it was not necessary to pass on that point. The case of Watson v Russell, 3 B. & S. 34, 113 ECL 34 122 Reprint 14 [aff 5 B. & S. 968, 117 ECL 968, 122 Reprint 1090], does not seem [b] Where a note was indorsed to have been brought to the attenby the payee to another and by three tion of the court in either of these successive holders before it was ac- cases. And in neither case does the quired by plaintiff, and the indorser court seem to have taken into conto plaintiff was a bona fide holder of sideration the practice of a check the note and transferred it for value, being procured drawn by another to after maturity, to plaintiff, defenses be used in paying a debt due from the available as between the original person procuring the check to the parties were not available against person to whom the debtor has had Jennings v. Carlucci, 87 the check made payable. The prac tice is recognized in case of foreign

[a] "This provision of the statute declared no new rule, (1) but simply modified a rule of general application in the law of commercial paper which had been applied uniformly in all the reported decisions of the various jurisdictions and which are so numerous and so continuous as to require no present citation. The principle of plaintiff. the rule arose from the fact that a NYS 475.

payee is a holder in due course.43 On the other hand, one who is in effect the payee is not a holder in due course, although the bill or note is made payable to another and then transferred to the real payee.** So it has been held that a partner is not a holder in due course where he obtained it from his firm which was the payee and he is the assignee of the interest of his copartner.45

There is some conflict in the decisions, under the Negotiable Instruments Law, as to whether the payee may be a holder in due course. It has been held in Iowa,46 Missouri,47 Oregon,48 and Washington19 that he is not a holder in due course under such statute. On the other hand, it has been held in Alabama,50

a bona fide holder,39 even where made payee as an agent of the real creditor.40 But where a note is made payable to a creditor of the person to whom the maker is indebted, to pay a debt of the creditor of the maker, such payee has been held a bona fide purchaser, so as not to be affected by the failure of the consideration as between the original debtor (the maker), and the creditor (the debtor of the payee),11 since the transaction is the same in substance as if the note had been drawn in favor of the original creditor and by him indorsed to the payee.42 So if a draft is purchased to be transmitted to another in payment of a debt of the purchaser of the draft, and the draft is drawn payable to the creditor, the bills of exchange, and the person 81 Fed. 902, 26 CCA 673; Jones v. procuring the bill is known technical- Citizens' State Bank, 39 Okl. 393, 135 ly as the remitter of it. See Munroe P 373. v. Bordier, 8 C. B. 862, 65 ECL 862, 137 Reprint 747, where it was held that the payee of a foreign bill, who took it from the remitter of it for value, is a bona fide purchaser for value. It was this practice which was applied in Watson v. Russell, supra, in case of a check. In our opinion, a check received by the payee named in it, in payment of a debt due from the remitter of the check, is received by a holder in due course within § 69 of the negotiable instruments act, St. 1898, c. 533, R. L. c. 73, and that is so even if we should follow the decision made in Herdman v. Wheeler, supra, and hold that a payee never can be a holder in due course to whom the bill has been 'negotiated' within the last clause of § 31 of our act, R. L. c. 73, which is taken from § 20 of the English bills of exchange act of 1882 (45 & 46 Vict.) c. 61. The rule that payment of a pre-existing debt makes the holder a holder for value was adopted in R. L. c. 73, § 42." Boston Steel, etc., Co. v. Steuer, 183 Mass. 140, 144, 66 NE 646, 97 AmSR 426.

[a] Certification of check.-It seems that the original holder of a check who procures its certification by the drawee bank may be a bona fide holder for value. First Nat. Bank v. Union Trust Co., 158 Mich. 94, 122 NW 547, 133 AmSR 362.

39. Lamson v. Beard, 94 Fed. 30, 36 CCA 56, 45 LRA 822; Sweet v. Swift, 65 Mich. 90, 31 NW 767; National Citizens' Bank v. Ertz, 83 Minn. 12, 85 NW 821, 85 AmSR 438, 53 LRA 174; Jones v. Citizens' State Bank, 39 Okl. 393, 135 P 373. Compare Trezevant v. Powel, (Tex. Civ. A.) 130 SW 234 (construction of an answer involving this rule).

[a] Illustration.-Where a mortgagor is authorized by a mortgagee to sell the property, and it is sold and paid for by a check payable to the mortgagor who thereupon indorses and delivers it to the mortgagee for the purpose of having the proceeds applied on the debt, the latter is not a bona fide holder for value and without notice of the equities which may have grown out of the falsity of the representations or the failure of the warranty made by the mortgagor. National Citizens' Bank v. Ertz, 83 Minn. 12, 85 NW 821, 85 AmSR 438, 53 LRA 174.

[b] A payee cannot be a bona fide holder without notice of an obligation made to him directly, and on negotiation carried on with him personally. Sweet v. Swift, 65 Mich. 90, 31 NW 767. 40. Bradshaw v. Miners' Bank, 81 Fed. 902, 26 CCA 673.

[a] Thus a note given for the purchase price of property, and made payable to a bank at the request and for the benefit of the seller, is subject, in the hands of the bank, to all infirmities in the original consideration between the payers and such seller, in the absence of circumstances creating an estoppel in equity. Bradshaw v. Miners' Bank,

41. Cagle v. Lane, 49 Ark. 465, 5 SW 790; Munroe v. Bordier, 8 C. B. 862, 65 ECL 862, 137 Reprint 747; Poirier v. Morris, 2 E. & B. 89, 75 ECL 89, 118 Reprint 702. Compare South Boston Iron Co. v. Brown, 63 Me. 139; Bowles Co. v. Clark, 59 Wash. 336, 109 P 812, 31 LRANS 613. "Where, at the request of the party with whom he deals, one makes his promissory note, which is to be a partial payment for a piece of work to be done for him, payable to a third party, who is a creditor of the party with whom he contracts for the work, and it is credited by the payee to such party, in good faith, the maker cannot set up a failure of consideration as between himself and the party with whom he deals, in defense of a suit upon such note in the name of the payee.' South Boston Iron Co. v. Brown, 63 Me. 139, 140. 42. Cagle v. Lane, 49 Ark. 465, 5 SW 790.

43. Armstrong v. American Exch. Nat. Bank, 133 U. S. 433, 10 SCt 450, 33 L. ed. 747; Lamson v. Beard, 94 Fed. 30, 36 CCA 56, 45 LRA 822.

44. Caraker v. Hicks, 9 Ga. A. 493, 71 SE 765; Empire Mut. Annuity, etc., Ins. Co. v. Avery, 3 Ga. A. 97, 59 SE 324; Johnson v. Harrison, 177 Ind. 240, 97 NE 930, 39 LRANS 1207; Ruth v. Cobe, (Tex. Civ. A.) 165 SW 530; Allenberg v. Wainwright, 62 Wash. 234, 113 P 585.

[a] Illustrations.-(1) Where an indorser of a check presented it to the indorsee not as his own, but in behalf of the maker, and the indorsee understood that he was making a loan to the maker and taking the check as evidence, the indorsee stands in the position of a payee and is subject to defenses available to a maker against a payee. Johnson v. Harrison, 177 Ind. 240, 97 NE 930, 39 LRANS 1207. (2) One by causing a note for which he is to furnish the consideration to be made payable to another and by having the latter indorse it does not become a bona fide purchaser for value, entitled to immunity from defenses. Empire Mut. Annuity, etc., Ins. Co. v. Avery, 3 Ga. A. 97, 59 SE 324. (3) Where S, having contracted to sell land to defendants, sold the land to plaintiff who reconveyed the same to S to enable him to fulfill his contract on his transfer of the purchase-money notes to plaintiff, plaintiff was not a bona fide purchaser of the notes. Ruth v. Cobe, (Tex. Civ. A.) 165 SW 530.

[b] Where receipts by a life insurance agent were accepted by the company as much as by the general agents to whom the receipts were executed, the insurance company in suing on them cannot be deemed an Innocent holder so as to preclude the agent from showing that his obligation to repay was not absolute. Allenberg v. Wainwright, 62 Wash. 234, 113 P 585.

45. Hartsell v. Roberts, 185 Ala. 201, 64 S 90.

[a] Thus where a member of a firm purchases a note due the firm, which is void because it was given in consideration of an agreement to dismiss a criminal prosecution and to hold the accused harmless, he is not a bona fide purchaser for value without notice. Hartsell v. Roberts, 185 Ala. 201, 64 S 90.

46. Builders' Lime, etc., Co. V. Weimer, (Iowa) 151 NW 100; Vander Ploeg v. Van Zuuk, 135 Iowa 350, 112 NW 807, 124 AmSR 275, 13 LRANS 490 and note.

[a] In Iowa, (1) under Code Suppl. (1907) §§ 3060a191, 3060a52 par 4, and § 3060a30, only one to whom a note has been negotiated after completion and delivery thereof is a holder in due course. Builders Lime, etc., Co. v. Weimer, 170 lowa 444, 151 NW 100. (2) Under the Negotiable Instruments Law, where a person signs a note in blank and delivers it to another person who fills in the blank and makes it payable to a third person to whom it is delivered, the latter is not a bona fide holder in due course, so that he could not recover where the note was not filled in by the person to whom it was originally delivered in accordance with the authority conferred on him by the maker. But the court said: "We do not mean to say that in no case can the person named as payee in a negotiable instrument be the holder thereof 'in due course"". Vander Ploeg v. Van Zuuk, 135 Iowa 350, 355, 112 NW 807, 124 AmSR 275, 13 LRANS 490 and note.

47. St. Charles Sav. Bank v. Edwards, 243 Mo. 553, 147 SW 978; Long v. Shafer, 185 Mo. A. 641, 171 SW 690.

"Section 10001 defines when an instrument is negotiated, and does not include the handing over of a promissory note by the maker to the payee. The act, in sections 10022, 10027 and 10028, makes a distinction between a holder and a holder in due course. To shut off the defense here set up, the holder must bring himself within the terms of sections 10027 and 10028, the note must have been negotiated to him. The maker handing his note to the payee is not a negotiation of the instrument, and such payee is a holder other than in due course, and thus falls within the terms of section 10028." Long v. Shafer, 185 Mo. A. 641, 648, 171 SW 690. To same effect Long v. Shafer, 185 Mo. A. 641, 171 SW 690.

[a] The word "holder," as used in Rev. St. (1909) § 10026, and in the rule that constructive notice is insufficient to impair the title of a bona fide holder for value, is limited to an indorsee, and has no application to the payee as the original holder of the instrument. St. Charles Sav. Bank v. Edwards, 243 Mo. 553, 147 SW 978; Long v. Shafer, 185 Mo. A. 641, 171 SW 690.

48. Gresham Bank v. Walch, 76 Or. 272. 147 P 534.

49. Bowles Co. v. Clark, 59 Wash. 336, 109 P 812, 31 LRANS 613.

50. Ex p. Goldberg, (Ala.) 67 S 839 [rev 10 Ala. A. 485, 65 S 454] (re

Massachusetts,51 and New York52 that the payee may be a holder in due course. In England the decisions construing the Bills of Exchange Act are more or less conflicting, it being held in some cases that the payee is not a holder in due course,5 53 while in a later decision the authority of earlier decisions has been at least limited on the theory of an estoppel.54 In Canada it has been held that the payee may be a holder in due course.55

against the maker than he possessed in the first instance.56 The same is true where the note is retransferred to an agent of the payee.57

Transfer by and retransfer to party with notice. So a party having full knowledge of the defense which a maker may have to a note at the time he received it may not purge it of an equitable defense by merely assigning the note to a third party and receiving it back from the latter at a subsequent time.58 [ 687] F. Usual Course of Business-1. General Rule. While, in order to constitute a person a bona fide holder, he must be a purchaser in the usual course of business,59 it is not easy to lay down a N. Y.-Eckhert v. Ellis, 26 Hun 663; | avoids circuity of action, expense to Devlin v. Brady, 32 Barb. 518 [aff 36 the parties, and inconvenience to the N. Y. 531]. courts, without, at the same time, endangering any substantial rights." Per Cooley, C. J., in Kost v. Bender, 25 Mich. 515, 516.

Oh.-Tod v. Wick, 36 Oh. St. 370.
Pa.-Erie Boot, etc., Co. v. Eichen-
laub, 127 Pa. 164, 17 A 889.
R. I.-Hoye v. Kalashian, 22 R. I.
101, 46 A 271.

Repurchase by payee. Where the payee of a note sells it to an innocent third person and repurchases it for value, he does not thereby become possessed, as a bona fide purchaser, of any better right as viewing at length the English and Canadian decisions and also conflicting decisions in this country, and holding that a payee is not withdrawn from the status of a holder in due course in those cases where he was so regarded and protected prior to its enactment, and that the provisions of the statute do not, by necessary implication, exclude a payee in every case from the status of a "holder in due course"; and that the payee of a completed negotiable note to whom it is given for value, without notice, and in the ordinary course of business by one of several makers to whom it has been intrusted by another maker for that purpose, although by fraud or on condition, is, as to the obligation of such other party, a bona fide holder in due course of trade, and is, as for such fraud or breach of authority between the obligors, entitled to enforce the obligation).

51. Liberty Trust Co. v. Tilton, 217 Mass. 462, 105 NE 605, LRA 1915B 144 and note (holding that the payee of a note who purchased it complete in form, for value, before maturity, in good faith, and without notice that an accommodation indorser signed on condition that another indorse it and that it be filled out for a less sum, was a "holder in due course").

52. Brown v. Rowan, 154 NYS 1098.

53. Herdman v. Wheeler, [1902] 1 K. B. 361, 5 BRC 651; Lewis v. Clay, 67 L. J. Q. B. 224 (holding that a payee cannot be a holder in due course inasmuch as he is not a person to whom, after its completion, by and as between the immediate parties, the note has been negotiated).

54. Lloyd's Bank v. Cooke, [1907] 1 K. B. 794, 8 AnnCas 182, 5 BRC 666. 55. Knechtel Furniture Co. v. Ideal House Furnishers, 19 Man. 652; McDonough v. Cook, 19 Ont. L. 267, 13 OntWR 808, 11 OntWR 991; Lilly v. Farrar, 17 Que. K. B. 554.

56. U. S.-Hatch v. Johnson L. & T. Co., 79 Fed. 828. See also Bradshaw v. Miners' Bank, 81 Fed. 902, 26 CCA 673; The W. B. Cole, 59 Fed. 182, 334, 8 CCA 78.

Conn.-Webster v. Howe Mach. Co., 54 Conn. 394, 8 A 482.

Ga.-Weil v. Carswell, 119 Ga. 873, 47 SE 217; Boit v. Whitehead, 50 Ga. 76.

Ill-Dollarhide v. Hopkins, 72 Ill.

A. 509.

Mass.-Berenson V. Conant, 214 Mass. 127. 101 NE 60; King Nichols, 138 Mass. 18; Sawyer v. Wiswell, 9 Allen 39.

Mich. Kost v. Bender, 25 Mich. 515. See also Battersbee v. Calkins, 128 Mich. 569, 87 NW 760.

Mo.-St. Charles Sav. Bank v. Edwards, 243 Mo. 553, 147 SW 978.

Nebr.-Camp V. Sturtevant, 16 Nebr. 693, 21 NW 449; Chariton Plow Co. v. Davidson, 16 Nebr. 374, 20 NW 256; Vorce v. Rosenbery, 12 Nebr. 448, 11 NW 879. See also Brandhoefer v. Bain, 45 Nebr. 781, 64 NW 213.

S. D.-Shade v. Barnes, 35 S. D.
142, 151 NW 42, LRA1915D 271.
Tex.-Elwell v. Tatum, 6 Tex. Civ.
A. 397, 24 SW, 71, 25 SW 434.
Va.-Aragon Coffee Co. v. Rogers,
105 Va. 51, 52 SE 843, 8 AnnCas 623
and note.

Wis. Andrews v. Robertson, 111
Wis. 334, 87 NW 190, 87 AmSR 870,
54 LRA 673 and note; Verbeck v.
Scott, 71 Wis. 59, 36 NW 600.

[b] Illustration.-Where, in consideration of a husband's debt, a wife gives her note to a firm which transfers it to an innocent purchaser as collateral for its debt, and on dissolution a partner assumes such debt and regains the wife's note, he is not an innocent purchaser and protected against the wife's defense. Weil v. Carswell, 119 Ga. 873, 47 SE 217.

[c] In Massachusetts despite the statute providing that a holder who derives his title through a holder in due course and who is not a party to any fraud has the rights of such former holder, an indorser who in the pursuance of his contract takes up a note is not a purchaser of the holder's title, but is a mere indorser. Berenson v. Conant, 214 Mass. 127, 101 NE 60.

[d] Where a note is retransferred by a bona fide holder in due course to the payee it becomes subject to original defenses. Shade v. Barnes, 35 S. D. 142, 151 NW 42, LRA1915D 271.

[e] Nominal payee.-It has been held, however, that a nominal payee may take as a bona fide holder clear of defenses where he takes by discount or purchase from an intermediate party to whom the bill was delivered by the drawer. Armstrong v. American Exch. Nat. Bank, 133 U. S. 433, 10 SCt 450, 33 L. ed. 747.

57. Battersbee V. Calkins, 128

Mich. 569, 87 NW 760.

58. Dollarhide v. Hopkins, 72 Ill. A. 509.

59. U. S.-Brooklyn City, etc., R. Co. v. National Bank of Republic, 102 U. S. 14, 26 L. ed. 61.

[a] Reason for rule.-"It is perfectly true as a general rule, that the bona fide holder of negotiable paper has a right to sell the same, with all the rights and equities attaching to it in his own hands, to whoever may see fit to buy of him, whether such purchaser was aware of the original infirmity or not. Without this right he would not have the full protection which the law merchant designs to afford him, and negotiable paper would cease to be a safe and reliable medium for the exchanges of commerce. For if one can stop the negotiability of paper against which there is no defense, by giving notice that a defense once existed while it was held by another, it is obvious that an important element in its value is at once taken away. But I am not aware that this rule has ever been applied to a purchase by the original payee, nor can I perceive that it is essential to the protection of the innocent indorsee, that it should be. It can not be very important to him, that there is one person incapable of succeeding to his equities, and who consequently would not be likely to become a purchaser. If he may sell to all the rest of the community, the market value of his security is not likely to be affected by the circumstance that a single individual can not compete for its purchase, especially when we consider that the nature of negotiable securities is such that their market value is very little influenced by competition. Nor do I perceive that any rule or principle of law would be violated by permitting the maker to set up this defense against the payee, when he becomes indorsee, with the same effect as he might have done before it had been sold at all, or that there is any valid reason against it. . If the defendant had a legal and just defense to the note, either in whole or in part, arising from the conduct of the plaintiff, it was the duty of the latter to recognize and allow it, and he had no moral right to cut it off, or to attempt so to do, by any transfer. But, having done so, and afterwards acquired the note the second Minn. Merchants', etc., Sav. Bank time, the law, we think, will not per- v. Cross, 65 Minn. 154, 67 NW 1147; mit him to take advantage of this Stephens v. Olson, 62 Minn. 295, 64 wrong, but will remit the defendant NW 898; Fredin v. Richards, 61 Minn. to his original rights. Such, we 490, 63 NW 1031; Elias v. Finnegan, think, should be the rule; because it 37 Minn. 144, 33 NW 330.

Colo. Merchants' Bank v. McClelland, 9 Colo. 608, 13 P 723; Kinkel v. Harper, 7 Colo. A. 45, 42 P 173.

Conn.-Roberts v. Hall, 37 Conn. 205, 9 AmR 308; Olmstead v. Winsted Bank, 32 Conn. 278, 85 AmD 260.

Del.-McCready v. Cann, 5 Del. 175. D. C.-O'Toole v. Lamson, 41 App. 276; Averell v. Second Nat. Bank, 19 D. C. 246.

Ill. Sturges v. Miller, 80 Ill. 241; Harpham v. Haynes, 30 Ill. 404.

Iowa.-Condon v. Barnum, 106 NW 514; Bettanier v. Smith, 129 Iowa 597. 105 NW 999, 5 LRANS 628; Moore v. Moore, 39 Iowa 461; Iowa College v. Hill, 12 Iowa 462.

Kan.-Cross v. Thompson, 50 Kan. 627, 32 P 357. Ky.-Spencers v. Briggs, 2 Metc.

123.

La.-Dupeux v. Troxler, 8 La. 92. Me.-Kellogg v. Curtis, 69 Me. 212, 31 AmR 273.

Mass.-Merriam v. Granite Bank, 8 Gray 254.

property is in the usual course of business, as is a transfer in escrow.67 So a transfer in payment of a preëxisting debt is in the ordinary or usual course of business,68 and this is true, according to the general rule, where the paper is transferred as collateral security for a contemporaneous or preexisting debt.69

general rule as to what shall be deemed the usual or common course of business, this depending largely on the circumstances of each particular case. The words are usually defined to mean "according to the usages and customs of commercial transactions," 61 although sometimes defined as meaning a transfer for value.62 It is clear, however, that the transfer must be before maturity, for value, and by indorsement, or delivery if the paper is payable to bearer.65 The obtaining of a note in exchange for Mo.-Goodfellow v. Landis, 36 Mo. | was held to be a purchaser of the 168; Martindale v. Hudson, 25 Mo. bill in the regular course of busi422. ness. National Bank of Republic v. Perry, 2 WklyNC (Pa.) 484.

The Negotiable Instruments Law, in defining a holder in due course, does not enumerate the condition that the transfer must be in the usual course of pute notice that the certificate was not negotiated in the regular course of business by defendant bank. Johnson v. Buffalo Center State Bank, 134 Iowa 731, 112 NW 165.

Nebr.-Helmer v. Commercial Bank, 28 Nebr. 474, 44 NW 482. [b] Commercial paper may be said N. H.-Crosby v. Grant, 36 N. H. to be received in the "usual course of 273. business" when it is indorsed and deN. Y.-Goldsmid v. Lewis County livered for value under such circumBank, 12 Barb. 407; Rogers v. Mor- stances that a business man of orditon, 46 Misc. 494, 95 NYS 49; Payne nary intelligence and capacity would v. Cutler, 13 Wend. 605; Bay v. Cod-give his money, goods, or credit for dington, 5 Johns. Ch. 54, 9 AmD 268 it, when offered for the purpose for and note. which it is transferred; and it would not be in due course if he should at once suspect the integrity of the paper itself, or the credit and standing of the party offering it. Matlock v. Scheuerman, 51 Or. 49, 93 P 823, 17 LRANS 747.

N. D.-St. Thomas First Nat. Bank v. Flath, 10 N. D. 281, 86 NW 867; Christianson v. Farmers' Warehouse Assoc., 5 N. D. 438, 67 NW 300, 32 LRA 730.

Pa.-Kuhns V. Gettysburg Nat. Bank, 68 Pa. 445; National Bank of Republic v. Perry, 2 WklyNC 484 (where a bank, refusing to discount a bill of exchange, although it paid drafts drawn on the faith of it, was held to be a purchaser of the bill in the regular course of business).

R. I.-Millard v. Barton, 13 R. I. 601, 43 AmR 51.

Tenn.-Nichol v. Bate, 10 Yerg. 429. Wis.-Hodge v. Smith, 130 Wis. 326, 110 NW 192; Burnham v. Merchants' Exch, Bank, 92 Wis. 277, 66 NW 510. 60. U. S.-In re Charles R. Partridge Lumber Co., 215 Fed. 973.

Colo. Merchants' Bank v. McClelland, 9 Colo. 608, 13 P 723; Kinkel v. Harper, 7 Colo. A. 45, 42 P 173. Conn.-Roberts v. Hall, 37 Conn. 205, 9 AmR 308.

D. C.-Howell v. Commercial Nat. Bank, 40 App. 370.

Iowa.-Johnson v. Buffalo Center State Bank, 134 Iowa 731, 112 NW 165; Bettanier v. Smith, 129 Iowa 597, 105 NW 999, 5 LRANS 628 (exhibition of note by agent to principal). Mass.-Merriam v. Granite Bank, 8 Gray 254.

Mo.-Kansas City Southwest Nat. Bank v. House, 172 Mo. A. 197, 157 SW 809.

N. H.-Crosby v. Grant, 36 N. H. 273.

N. Y.-Citizens' State Bank Cowles, 89 App. Div. 281, 86 NYS 38 (rev on other grounds 180 N. Y. 346, 73 NE 33, 105 AmSR 765].

N. D.-Walters v. Rock, 18 N. D. 45, 115 NW 511.

Or-Matlock v. Scheuerman, 51 Or. 49, 58, 93 P 823, 17 LRANS 747 [cit Cycl.

Wis.-Paulson v. Boyd, 137 Wis. 241, 118 NW 841.

Eng. Johnson v. Robarts, L. R. 10 Ch. 505 (where the transaction was held to constitute plaintiffs holders in due course).

The test is, "would a business man of ordinary intelligence and capacity receive commercial paper, when offered for the purposes for which this was transferred, as money, and upon its credit part with his property? Or would he at once suspect the integrity of the paper itself, and the credit and standing of the party offering it?" Roberts v. Hall, 37 Conn. 205, 212, 9 AmR 308; Howell v. Commercial Nat. Bank, 40 App. (D. C.) 370, 376.

[a] Purchase in due course (1) "means a purchase before maturity for value without notice and in good faith." Walters v. Rock, 18 N. D. 45, 115 NW 511. (2) A bank, refusing to discount a bill of exchange, although it paid drafts drawn on the faith of it,

[c] Not in usual course of business. (1) The assignment of a note to a bank under such circumstances as to constitute an assignment without recourse was not made in the due course of trade, because such "is not the usual course of transferring a security indorsed in blank.' Shaw, C. J., said: "It is not easy to prescribe a general rule, as to what shall be the common course of business; it must depend much upon the circumstances of each particular case." Merriam v. Granite Bank, 8 Gray (Mass.) 254, 259. (2) A bank which allowed a depositor to draw against a large check deposited before receiving an answer from the bank on which it was drawn to the customary inquiry whether it was good was not a purchaser in the usual course of business. Kansas City Southwest_Nat. Bank v. House, 172 Mo. A. 197, 157 SW 809.

[d] Paper must pass in ordinary manner.-"The general proposition that the note, in order that it may be protected against equities as between prior parties, must be taken in the usual course of business, is undoubtedly correct. If it be received on any other footing than as a bona fide purchase by the holder, independent of any previous connection with it, or with any of the parties upon it, so that he does not take it as such paper ordinarily passes from the holder to the indorser upon a purchase and sale of the security, then he takes it, not in the usual course of business, and consequently subject to the same defences as if negotiated after dishonor." Crosby v. Grant, 36 N. H. 273, 279.

[e] The fact that a bank purchased a check instead of receiving it on deposit for collection is not evidence of a deviation from the usual course of business, such as would justify a conclusion of bad faith on its part. Citizens' State Bank V. Cowles, 89 App. Div. 281, 86 NYS 38 [rev on other grounds 180 N. Y. 346, 73 NE 33, 105 AmSR 765].

[f] Where notes executed by a bankrupt were filed as a claim against its state, and then the claim was assigned, the assignee could not be accorded the rights of a bona fide holder for value. In re Charles R. Partridge Lumber Co., 215 Fed. 973. [g] Transfer of certificate of deposit.-In a suit on a certificate of deposit, the facts that the certificate bore eight per cent interest and that the bank transferred it instead of presenting it for payment, both of which circumstances it is claimed were unusual, were insufficient to im

[h] Where a corporation organized to take over the assets of a private bank agreed to assume the liabilities of the bank in consideration of the transfer of the assets of the old bank among which was defendant's note, the corporation was not a bona fide purchaser of the note in due course, and was subject to the conditions of a contemporaneous parol agreement by which the note never became an absolute obligation in præsenti. Paulson v. Boyd, 137 Wis. 241, 118 NW 841.

[1] Where a surety received a note to be transferred to a creditor, but did not deliver it to such creditor, and afterward sued on the note himself, it was held that he was not a holder in due course and that it was not free from equities existing between the original parties to the note. Robertson v. Glenn, 26 Ga. 555.

[j] Expert evidence as to "due course of trade" held inadmissible. Merchants', etc., Sav. Bank v. Cross, 65 Minn. 154, 67 NW 1147.

61. Tescher v. Merea, 118 Ind. 586, 589, 21 NE 316; Kellogg v. Curtis, 69 Me. 212, 214, 31 AmR 273 [quot Christianson V. Farmers' Warehouse Assoc., 5 N. D. 438, 449, 67 NW 300, 32 LRA 730]; Van Slyke v. Rooks, 181 Mich. 88, 147 NW 579; St. Thomas First Nat. Bank v. Flath, 10 N. D. 281, 86 NW 867.

"Its application to the purchase of a mercantile note is not confined to persons engaged habitually in banking or purchasing notes." Tescher v. Merea, 118 Ind. 586, 589, 21 NE 316.

"The error in the contention lies in the assumption that a purchase, to be in the ordinary course of business, must be made in accordance with the particular rules, customs, or laws which govern the conduct of the purchaser. Such is not the law. The purchase is only required to be in accordance with 'the usages and customs of commercial transactions,' and when it is so made the fact that it. was made in violation of some rule or law peculiar to the purchaser is of no importance." St. Thomas First Nat. Bank v. Flath, 10 N. D. 281, 286, 86 NW 867.

62. Parsons v. Utica Cement Mfg. Co., 82 Conn. 333, 73 A 785, 135 AmSR 278; Miller v. Mayfield, 37 Miss. 688; Kimbro v. Lytle, 10 Yerg. (Tenn.) 417, 428, 31 AmD 585 [quot Nichol v. Bate, 10 Yerg. (Tenn.) 429, 433]. Το same effect Merchants' Bank v. McClelland, 9 Colo. 608, 13 P 723.

[a] A holder "in the due course of commercial transactions" is defined as one "who has given his money for it, his goods or his credit, at the time of receiving it, or who, then, on account of it, sustained some loss or incurred some liability." Kimbro v. Lytle, 10 Yerg. (Tenn.) 417, 428, 31 AmD 585 [quot Nichol v. Bate, 10 Yerg. (Tenn.) 429].

63.

64.

65.

66.

See infra §§ 693-697.
See infra § 698.
See infra § 689.

Cunningham V. Holmes, 66 Nebr. 723, 92 NW 1023. 67. Cunningham V. Holmes, 66 Nebr. 723, 92 NW 1023. 68. See infra § 704. 69.

See infra §§ 702, 703.

business. In the following section it lays down the rule that, where an instrument payable on demand is negotiated an unreasonable length of time after its issue, the holder is not deemed a holder in due course. It has been held that, inasmuch as the preceding section establishes an exception, the exception negatives the idea that any other class was to be excepted, and hence that a holder may be a holder in due course, notwithstanding he has not received the paper in the ordinary course of business.70

Transfer on Sunday. Where the transfer is consummated on Sunday, it has been held that such paper is not taken in the usual course of business and that the indorsee will not be protected as a bona fide holder.71

A purchase from the drawer of a bill before maturity, where the instrument has already been accepted, is not, at least where the instrument is payable to the drawer's order, out of the ordinary course of business.72

Purchase from maker. It has been held that if a note is taken from the hands of the maker who is not the payee it is not taken in the due course of business, 73 but the better rule is to the contrary,74 on the theory that such fact is merely notice that the paper is accommodation paper. 75 In any event, if

the instrument has been so indorsed as to become payable to bearer, it has been held immaterial that the bearer was also the maker, as far as the question of his transferee being a holder in due course was concerned.76

70. American Bank v. McComb, 105 Va. 473, 54 SE 14.

71. Ball v. Powers, 62 Ga. 757 [appr Harrison v. Powers, 76 Ga. 218]. See generally Sunday [37 Cyc 535].

72. Wait v. Thayer, 118 Mass. 473; Columbus Ins., etc., Co. v. Columbus First Nat. Bank, 73 Miss. 96, 15 S 138; Chemical Nat. Bank v. Colwell, 16 Daly 29, 9 NYS 285. Compare Merritt v. Duncan, 7 Heisk. (Tenn.) 156, 19 AmR 612 (holding that the fact of purchase of an indorsed bill before maturity from the drawer, while it does not, as matter of law, carry with it notice of prior equities to the purchaser, is to be taken into consideration, with surrounding circumstances, in determining whether the purchaser had notice or not).

73. Smith v. Cooley, (Tex. Civ. A.) 164 SW 1050; Battle v. Cushman, (Tex. Civ. A.) 33 SW 1037.

"If the note is taken from the hands of the maker, it being payable to a named person or bearer, it is not taken in due course of business,' and it would be the duty of the purchaser to inquire." Battle v. Cushman, (Tex. Civ. A.) 33 SW 1037. 74. Howell v. Commercial Nat. Bank, 40 App. (D. C.) 370; Lincoln v. Stevens, 7 Metc. (Mass.) 529; Eckert v. Cameron, 43 Pa. 120.

[a] By indorsing a note in blank and delivering it back to the maker, the payee constitutes the maker his agent to negotiate the note, and one receiving it from the latter in good faith, for value, and before maturity, receives it in due course, and may recover thereon. Howell v. Commercial Nat. Bank, 40 App. (D. C.) 370.

75. Lincoln v. Stevens, 7 Metc. (Mass.) 529. 76. Massachusetts Nat. Bank v. Snow, 187 Mass. 159, 72 NE 959. 77. Stark v. Alford, 49 Tex. 260. 78. U. S.-Hoffman V. National City Bank, 12 Wall. 181, 20 L. ed. 366. Conn.-Webster v. Howe Mach. Co., 54 Conn. 394, 8 A 482; Credit Co. v. Howe Mach. Co., 54 Conn. 357, 8 A 472, 1 AmSR 123.

Payment by acceptor before maturity. As an acceptor's obligation is to pay the bill when due and not before, a payment before maturity would be out of due course and could not change the relationship of the original parties to it and to each other and thus cut off all equities."

Transfer of bill before acceptance. The fact that the holder of a bill of exchange acquires the same before its acceptance does not prevent him from being a holder in the usual course of business.78

[§ 688] 2. Transfers by Operation of Law. Transfers that are effected by operation of law, such as those under a bankrupt or insolvent law,79 or transfers to receivers,80 are not in the usual course of business, and the transferee acquires no better title than that residing in the last holder. This rule likewise applies to a transfer by a payee or a holder to a trustee for the benefit of creditors,81 and to the purchaser at a judicial sale.82 So a change in the members of a partnership by new members being taken into the firm and purchasing an interest in the assets of the original firm does not constitute a purchase according to the usual or due course of commercial transactions within the meaning of the law merchant.8 83 By statute, however, in Iowa, a transfer by a sheriff of paper levied on has the same effect as if made by the holder himself.84

Under the Negotiable Instruments Law, it has been held that a holder in due course, as therein defined, need not take in the usual course of business,85 and hence that a trustee in a deed of trust executed

III.-Mt. Vernon Nat. Bank v. Kelling-Karel Co., 189 Ill. A. 375. Mass.-Ft. Dearborn Nat. Bank v. Carter, 152 Mass. 34, 25 NE 27; Arpin v. Owens, 140 Mass. 144, 3 NE 25. Minn. American Trust, etc., Bank v. Gluck, 68 Minn. 129, 70 NW 1085.

N. Y.-Heuertematte v. Morris, 101 N. Y. 63, 4 NE 1, 54 AmR 657 [overr Farmers', etc., Bank v. Empire Stone Dressing Co., 18 N. Y. Super. 275].

Pa.-Commercial Bank v. Blauvelt, 21 Pa. Dist. 997.

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