L. 1909, ch. 43

Rights of Holder

§ 96

and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.

This section was derived from the Negotiable Instruments Law of 1897, § 96.

Who are holders in due course: see supra, § 91. Failure of consideration as defense: see supra, § 54.

History and reason of rule." The rigid rule of the common law which prohibited the assignment of choses in action was, in England, at an early day, relaxed to some extent to conform to the usages of merchants and the necessities of commerce, and at length, by the aid of statutes and judicial decisions, bills of exchange and promissory notes were completely taken out of its influence, and they came to have distinct attributes and qualities not pertaining to any other form of contract. They were not only made transferable by delivery and suable in the name of the transferee, but, contrary to the general rule of the common law, 'honest acquisition' for value was held to give to the transferee a new and original title, wholly independent of that of the prior holder and subject to no infirmity which affected the paper in his hands. The real owner, who had been despoiled of the paper by robbery or theft, or who had lost it without negligence, was concluded from re-claiming it, and the maker, although he had been defrauded into executing it, could not be heard to allege the fraud as a defense against a bona fide holder. And the transferee although he may have been negligent in taking it, and omitted precautions which a prudent man would have taken, nevertheless, unless he acted mala fide, his title, according to the doctrine now settled, will prevail. These familiar but arbitrary principles applicable to commercial paper, originating in commercial policy, the encouragement of trade, the convenience of having some representative of money readily convertible and commanding confidence, while they operate in many cases with great severity upon the rights of innocent persons, have contributed greatly to stimulate commerce and advance the prosperity of states." Knox v. Eden Musee American Co., (1896) 148 N. Y. 441, 42 N. E. 988, 51 A. S. R. 700, 31 L. R. A. 779.

Usury as defense against holder in due course.- Where the holder in due course of negotiable paper is a bank, it is clearly established that usury in the inception of the paper is not a defense. Schlesinger v. Gilhooly, (1907) 189 N. Y. 1, 81 N. E. 619, 12 Ann. Cas. 1138. Though, if the bank had knowledge of the usury at the time of the discount, it cannot enforce the obligation as against the maker. Schlesinger v. Lehmaier, (1908) 191 N. Y. 69, 83 N. E. 657, 123 A. S. R. 591, 16 L. R. A. (N. S.) 626, reversing 117 App. Div. 428, 102 N. Y. S. 630, but affirming 50 Misc. 610, 99 N. Y. S. 389. And see also, Schlesinger v. Kelly, (1906) 114 App. Div. 546, 99 N. Y. S. 1083. As to matters of usury, see BANKING LAW, § 114; GENERAL BUSINESS LAW, § 373. But considerable difficulty has been encountered in determining whether usury is a defense as against a holder in due course who is not a banker. Before the enactment of the Negotiable Instruments Law, it was well established that an obligation void in its inception for usury continued void forever, whatever its subsequent history might be. Claflin v. Boorum, (1890) 122 N. Y. 385, 25 N. E. 360. And the fact that the instrument passed into the hands of a bona fide holder for value without notice of the defect, did not affect the right of the maker to interpose the defense of usury. Powell v. Waters, (1826) 8 Cow. 669; Wilkie v. Roosevelt, (1802) 3 Johns. Cas. 206, 2 Am. Dec. 149.

In several cases after the enactment of the Negotiable Instruments Law, it was held that the prior rule has not been changed as to a holder who is not a banker, and that usury is a defense. Sabine v. Paine, (1915) 166 App. Div. 9, 151 N. Y. S. 735; Strickland v. Henry, (1901) 66 App. Div. 23, 73 N. Y. S. 6

$ 96

Rights of Holder

L. 1909, ch. 43

12; Crusins v. Siegman, (1913) 81 Misc. 367, 142 N. Y. S. 348. In other cases, it has been held that a holder in due course takes the obligation transferred to him free from the defense of usury as between the original parties. Oeser v. Behrend, (1915) 89 Misc. 391, 151 N. Y. S. 873; Kiar v. Kostiuk, (1909) 65 Misc. 199, 119 N. Y. S. 683; Broadway Trust Co. v. Manheim, (1905) 47 Misc. 415, 95 N. Y. S. 93. But, assuming that usury is not a defense as against a holder in due course, the burden is by section 98 placed on him to show that he took the instrument without knowledge of the usury. Simpson v. Hefter, (1904) 42 Misc. 482, 87 N.. Y. S. 243. See also Kass v. Blumberg, (1913) 142 N. Y. S. 544.

Diversion. The diversion of a note from the purpose for which it was executed by the maker is no defense as against a holder in due course. Maurice v. Fowler, (1912) 78 Misc. 357, 138 N. Y. S. 425. Where negotiable bonds are placed by a debtor with his creditor as a pledge to secure the debt, and the pledgee thereafter pledges the bonds with milk producers in order to secure such producers for milk delivered to a corporation of which he is an officer, such producers, if holders in due course, can hold the bonds as against the original pledgor. Interboro Brewing Co. v. Doyle, (1915) 165 App. Div. 646, 151 N. Y. S. 325.

If a note is indorsed by an accommodation indorser on the condition that another indorser be procured, and such condition is not performed, the indorser is not liable except to a holder in due course. Baruch v. Buckley, (1915) 167 App. Div. 113, 151 N. Y. S. 853. The act of one partner who without authority places the firm name upon accommodation paper will not bind the firm when the paper is held by parties having knowledge of the consideration, but when negotiated to a bona fide holder the firm is precluded from questioning the authority of the partner and is effectually bound. Monongahela Val. Bank v. Weston, (1902) 172 N. Y. 259, 64 N. E. 946. And see supra, § 55, as to accommodation indorsements.

Fraud. A holder in due course of a note is entitled to enforce the same against the maker, although the payee procured it from the maker by fraud. Eisenberg v. Lefkowitz, (1911) 142 App. Div. 569, 127 N. Y. S. 595. And an indorsement, though fraudulently obtained, binds the indorser, where the note becomes the property of a holder in due course. Clothier v. Adriance, (1873) 51 N. Y. 322.

Stolen instruments.-A bona fide holder of commercial paper will acquire a good title, although the paper was stolen and transferred by the thief. Turnbull v. Bowyer, (1869) 40 N. Y. 456, 100 Am. Dec. 523. A holder in due course of stolen negotiable coupons to a bond acquires a good title thereto. Evertson v. National Bank, (1876) 66 N. Y. 14, 23 Am. Rep. 9. A holder in due course of a stolen treasury note issued under the Act of Congress of March 3, 1865, might acquire a good title. Dinsmore v. Duncan, (1874) 57 N. Y. 573, 15 Am. Rep. 534.

Bonds which have been stolen may pass into the hands of a holder in due course, so that he will have a better title than the person from whom they were stolen. Hibbs v. Brown, (1907) 190 N. Y. 167, 82 N. E. 1108, affirming 112 App. Div. 214, 98 N. Y. S. 353. In an action by the owner of bonds which were stolen from him and transferred to another, to recover from such transferee a sum of money which the owner had paid to such transferee to secure the return of the bonds, the complaint must allege that the defendants were not bona fide holders of the bonds and were not entitled to the money they received. Lawyers' Title Insurance, etc., Co. v. Jones, (1906) 113 App Div. 105, 98 N. Y. S. 871.

Checks. One to whom a check has been transferred may be a holder in due course and be entitled to recover the amount thereof from the drawer, regardless of the equities between the drawer and the drawee. Benedict v. Kress, (1904) 97 App. Div. 65, 89 N. Y. S. 607; Riverside Bank v. Woodhaven Junction Land Co., (1898) 34 App. Div. 359, 54 N. Y. S. 266.

L. 1909, ch. 43

Rights of Holder

8 97

Payment before maturity.-A holder in due course is not bound by a payment made on a note between its date and the time of its maturity, when made to a prior holder after the negotiation of the instrument. Buffalo Third Nat. Bank v. Bowman Spring, (1900) 50 App. Div. 66, 63 N. Y. S. 410.

--

Amount of recovery. Under this section, a holder in due course is entitled to recover the face value of an instrument held by him, although he may have parted with a less amount on receiving the instrument. See Title Guarantee, etc., Co. v. Pam, (1915) 155 N. Y. S. 333. Prior to the enactment of this section, it was held that the bona fide holder of a note was protected only to the extent of the consideration paid for the instrument. Huff v. Wagner, (1872) 63 Barb. 215; Harger v. Wilson, (1872) 63 Barb. 237. And see Todd v. Shelbourne, (1878) 8 Hun 510, wherein it was said: "Accordingly, it has been held that the indorsee of commercial paper not valid as a legal obligation in the hands of the payee negotiating it, must be restricted in his recovery to the value with interest advanced by him to the payee upon the faith of it (citing cases). These authorities fully sustain that proposition, and they are in no sense in conflict with the rule which allows a recovery for the full amount of paper improperly negotiated when an adequate consideration has been advanced before its maturity in good faith upon it. The paper derives its vitality wholly from the circumstance that it has been obtained for value without notice by an innocent purchaser. For his protection it is maintained in his hands as a legal obligation. The object of the law is to save him from loss; and to do that, a recovery of the amount he may have advanced is all that can be required. To go beyond it would be inequitable and unjust to the party, after that, equally entitled to be protected from unnecessary loss."

Liability for wrongful negotiation.-Where one fraudulently negotiates an instrument to a holder in due course, so as to render the maker thereof liable when there would have been no liability had it not been so negotiated, the one committing such act is liable to the maker as for a tort; and, in such an action, it is not necessary for the maker to prove that he has paid the note to the holder in due course, but it is sufficient if he alleges that he is legally liable to pay it. Metropolitan El. R. Co. v. Kneeland, (1890) 120 N. Y. 134, 24 N. E. 381, 17 A. S. R. 619, 8 L. R. A. 253, wherein it was said: "We think the cases relating to this subject rest upon the principle that a person who fraudulently places in circulation the negotiable instrument of another, whether made by him or by his apparent authority, and thereby renders him liable to pay the same to a bona fide purchaser, is guilty of a tort, and, in the absence of special circumstances diminishing its value, is presumptively liable to the injured party for the face value thereof."

Cited. A. E. McBee Co. v. Shoemaker, (1916) 174 App. Div. 291, 160 N. Y. S. 251; Equitable Trust Co. v. Taylor, (1911) 146 App. Div. 424, 131 N. Y. S. 475; German-American Bank v. Cunningham, (1904) 97 App. Div. 244, 89 N. Y. S. 836; Sutherland v. Mead, (1903) 80 App. Div. 103, 80 N. Y. S. 504; Joveshof v. Rockey, (1908) 58 Misc. 559, 109 N. Y. S. 818; Gansevoort Bank v. Gilday, (1907) 53 Misc. 107, 104 N. Y. S. 271; Greeser v. Sugarman, (1902) 37 Misc. 799, 76 N. Y. S. 922; Siegmeister v. Lispenard Realty Co., (1907) 107 N. Y. S. 158.

§ 97. When subject to original defenses. 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. But a holder who derives his title through a holder in due course, and

$ 97

Rights of Holder

L. 1909, ch. 43

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.

Transferee of holder in due course.

This section was derived from the Negotiable Instruments Law of 1897, § 97. The provision of this section giving to one who obtains his title from a holder in due course the rights of such holder, does not declare any new rule, but simply states 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. The principle of the rule arose from the fact that a holder in due course acquired an unconditional property right in the instrument and had as a part of such property right the power to sell it free from all restrictions even to one who had notice of n infirmity in the instrument. To this rule, it is declared by text-writers and in some adjudged cases, there is but one exception, that is, that the payee of a note who participated in the infirmity cannot shelter himself behind the rights of the bona fide holder from whom he may have purchased it subsequently. Horan v. Mason, (1910) 141 App. Div. 89, 125 N. Y. S. 668.

A transferee of a negotiable instrument may recover thereon as against the maker, although the note was originally procured by fraud or duress, if be derives his title from one who was a bona fide holder thereof, even though such transferee himself had notice of the infirmity of the paper. Vosburgh v. Diefendorf, (1890) 119 N. Y. 357, 23 N. E. 801, 16 A. S. R. 836. One to whom a note is transferred after maturity by a holder in due course may enforce the same without the intervention of defenses between the original parties. Jennings v. Carlucci, (1904) 87 N. Y. S. 475; A. E. McBee Co. ". Shoemaker, (1916) 174 App. Div. 291, 160 N. Y. S. 251.

Where a note payable to a corporation is transferred by the corporation to its president and by the president to a holder in due course, and after its maturity the holder in due course surrenders it to the president, the latter has the rights of the holder in due course and can enforce the instrument against the maker, although between the original parties the note was illegal for fraud. Horan v. Mason, (1910) 141 App. Div. 89, 125 N. Y. S. 668.

Subject to original equities.-A transferee of a negotiable instrument who is not a holder in due course and did not acquire the instrument from one who is such, takes a title which is subject to the equities between the original parties. Scott v. Scott, (1896) 2 App. Div. 240, 38 N. Y. S. 613; Olsen v. Ensign, (1894) 7 Misc. 682, 28 N. Y. S. 38. As against one who is not a holder in due course, an accommodation indorser may show that he indorsed and delivered the instrument on the condition that it should be negotiated only in a certain State. United States Nat. Bank v. Ewing, (1892) 131 N. Y. 506, 30 N. E. 501, 27 A. S. R. 615. While the holder in due course of a negotiable instrument is allowed to recover the face amount thereof under section 96, supra, one not such a holder can recover only the amount due thereon. Title Guarantee, etc., Co. v. Pam, (1915) 155 N. Y. S. 333.

Subsequent equities.-" People who receive gifts of negotiable securities, take them subject to all equities then existing between the original parties, but not subject to all which may thereafter, and while they are absolute' owners of such securities, exist between those parties." Champlain First Nat. Bank v. Wood, (1891) 128 N. Y. 35, 27 N. E. 1020.

Action to cancel notes.-Where notes are obtained by fraud from the maker thereof for a specific purpose, but are converted to another use, and the transferees take them with knowledge of the facts or with such information as puts them on inquiry, the maker may maintain an action in equity to cancel the notes, not only to avoid a multiplicity of suits, but to preserve the evidence establishing that they are not legal instruments in the hands

L. 1909, ch. 43

Rights of Holder

§ 98

of the defendants. Warnock Uniform Co. v. Garifalos, (1915) 170 App. Div. 674, 156 N. Y. S. 637.

Breach of warranty. In an action on a note given for the purchase price of a grain drill, the maker of the note may set up, as a defense against one not a holder in due course, breach of warranty in the sale of the drill. American Seeding Mach. Co. v. Slocum, (1908) 58 Misc. 458, 108 N. Y. S. 1042.

Cited. Weiss v. Rieser, (1909) 62 Misc. 292, 114 N. Y. S. 983; Siegmeister V. Lispenard Realty Co., (1907) 107 N. Y. S. 158.

§ 98. Who deemed holder in due course. 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 instrurent 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 it 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.

This section was derived from the Negotiable Instruments Law of 1897, § 98.

Who are holders in due course: see supra, § 91. Right of holder in due course to recover on instrument: see supra, § 96. Presumption of consideration: see supra, § 50.

Prior rule. This section relative to who is deemed a holder in due course, is declaratory of the law as it existed before the enactment of the Negotiable Instruments Law. Engle v. Hyman, (1907) 54 Misc. 251, 104 N. Y. S. 390. Before the enactment of the statute, where it appeared that the instrument had been fraudulently or illegally obtained from its maker, it was incumbent upon the holder to show the circumstances under which it came into his possession and that he acted in good faith in the transaction. Canajoharie Nat. Bank v. Diefendorf, (1890) 123 N. Y. 191, 25 N. E. 402, 10 L. R. A. 676; Cunningham v. Scott, (1895) 90 Hun 410, 35 N. Y. S. 881; Mandan First Nat. Bank v. Gilmor, (1896) 18 Misc. 614, 42 N. Y. S. 467. But see also, Cowing v. Altman, (1877) 71 N. Y. 435, 27 Am. Rep. 70, wherein it was said: "The transferee for value of a negotiable instrument, tainted by fraud or illegality in its inception, to maintain his action, is not bound to show, in addition to the fact that he received it for value before due, that he had no notice of the original infirmity in the paper. The burden of showing notice is upon the party who seeks to impeach his title."

Rebuttable presumption that holder is one in due course. Upon the production of a note by a transferee thereof, a presumption arises under this section that such transferee is a holder in due course; but, when it is shown that the transferor's title was defective, the burden is then placed on the transferee to show that he acquired the instrument in due course or that some prior party under whom he claims was a holder in due course. Hurst v. Lee, (1911) 143 App. Div. 614, 127 N. Y. S. 1040; Beck v. Maller, (1909) 131 App. Div. 243, 115 N. Y. S. 596; Mitchell v. Baldwin, (1903) 88 App. Div. 265, 84 N. Y. S. 1043; Strickland v. Henry, (1901) 66 App. Div. 23, 73 N. Y. S. 12; Lucker v. Iba, (1909) 54 App. Div. 566, 66 N. Y. S. 1019; Waxberg v. Stappler, (1913) 83 Misc. 78, 144 N. Y. S. 608; Bass v. Goldstein, (1913) 83 Misc. 412, 145 N. Y. S. 38; Joveshof v. Rockey, (1908) 58 Misc. 559, 109 N. Y. S. 818.