8 98

Rights of Holder

L. 1909, ch. 43

"The presumption of law is that the transferee of negotiable paper became a transferee in due course, and in an action to recover thereon the burden is on the defendant to prove the contrary. The negotiable quality of commercial paper rests chiefly on this rule, and every one may rely on it implicitly. Such burden never shifts, unless the defendant proves that the negotiable instrument was lost or stolen, or obtained by duress or fraud, or, in this state, diverted from the purpose for which it was issued by a fraudulent breach of trust; in which cases the burden is shifted to the plaintiff to show that he is a holder in due course, i. e. that he took it before it was due without notice of the defenses against it and for value; or that some of his predecessor transferees so took it." Citizens' State Bank v. Cowles, (1903) 39 Misc. 571, 80 N. Y. S. 598, affirmed 89 App. Div. 281, reversed on other grounds (1905) 180 N. Y. 346.

"It is well settled that the burden rests upon the plaintiff throughout the entire case of showing that he is a holder for good faith and for value. It is true that when he has put the negotiable paper sued on in evidence there is a presumption in his favor that he is a holder in good faith and for value; in other words, the proof is then sufficient to support a judgment in his favor if no evidence is given by the defendant. But where the defendant goes into his case and shows that the paper has been wrongfully diverted, the presumption upon which the plaintiff was entitled to rely is dispelled, and he must then prove that he acquired the instrument for value and without knowledge of the matters relied upon by the defendant to avoid his liability." Wisner v. Osteyee Bros., (1898) 24 Misc. 704, 53 N. Y. S. 793. See also to the same effect, Bass v. Goldstein, (1913) 83 Misc. 412, 145 N. Y. S. 38.

Where in an action on a note given for the purchase price of a saloon the maker defends on the ground that a portion of the stock was fraudulently removed before the delivery of possession thereof, and that the plaintiff to whom the note was indorsed is not a holder in due course, and it appears that the indorsee is the wife of one of the real owners of the saloon at the time of the sale, the burden is upon her to show, not only payment of value for the note, but also that she took it without notice of the fraudulent disposal of the stock before the delivery of the note. Goldberg v. Berg, (1916) 93 Misc. 498, 157 N. Y. S. 209.

Partnership obligation.— When it is shown that an indorsement of a firm on a note was made by one member thereof without the authority of the other members and for a purpose outside of the firm business, the burden of proof shifts to the holder of the note, and it is necessary for him to show that he was a holder in due course or that the indorsement was authorized. Smith v. Weston, (1899) 159 N. Y. 194, 54 N. E. 38, affirming 88 Hun 25, 34 N. Y. S. 557. See also supra, §§ 37, 95, as to firm obligations signed by one member.

Instrument diverted from proper purpose.-- Where in an action by the transferee of a negotiable instrument it is shown that the instrument was diverted by the payee or other prior party from the purposes for which it was made, the burden is placed on the plaintiff to show that he is a holder in due course or that he acquired his title from such a holder. American Exch. Nat. Bank v. New York Belting, etc., Co., (1896) 148 N. Y. 698, 43 N. E. 168; Nickerson v. Ruger, (1879) 76 N. Y. 279; Farmer's, etc., Nat. Bank v. Noxon, (1871) 45 N. Y. 762; Peterson v. Fowler, (1914) 162 App. Div. 21, 147 N. Y. S. 280; Mitchell v. Baldwin, (1903) 88 App. Div. 265, 84 N. Y. S. 1043; Waxberg v. Stappler, (1913) 83 Misc. 78, 144 N. Y. S. 608; National Bank v. Foley, (1907) 54 Misc. 126, 103 N. Y. S. 553; Mundy v. Pritchard, (1897) 22 Misc. 22, 47 N. Y. S. 1073; Berman v. Zuckerman, (1898) 22 Misc. 744, 49 N. Y. S. 1070; Zwerdling v. Kitrosser, (1914) 148 N. Y. S. 99; Title Guarantee, etc., Co. v. Pam, (1915) 155 N. Y. S. 333.

L. 1909, ch. 43

Rights of Holder

8 98

"It is well settled that if a note has been diverted or negotiated in violation of an agreement under which it was given, such negotiation constitutes a breach of faith, amounts to a fraud upon the maker, and when the fact appears the holder cannot recover upon it against the maker without showing that he received it in the ordinary course of trade for a valuable consideration and without knowledge of such agreement." German-American Bank v. Cunningham, (1904) 97 App. Div. 244, 89 N. Y. S. 836.

course.

When it is shown that an instrument signed or indorsed by an accommodation party is diverted by the party accommodated from the purpose for which it was intended and fraudulently put in circulation, it becomes necessary for the transferee to show that he became a holder in due course. Sutherland v. Mead, (1903) 80 App. Div. 103, 80 N. Y. S. 504. Any ruling to the contrary by the trial court is reversible error, though the maker thereafter assumes the burden of showing lack of good faith in the transferee. Nickerson v. Ruger, (1879) 76 N. Y. 279. Where one having possession of certain bonds as a pledgee negotiates them contrary to the terms of the pledge, the burden is upon the one to whom they are negotiated to show that he acquired title as a holder in due course. Interboro Brewing Co. v. Doyle, (1915) 165 App. Div. 646, 151 N. Y. S. 325. But proof merely that the proceeds of a negotiable instrument have been diverted, does not repel the presumption that the transferee of the instrument was a holder in due Mitchell v. Baldwin, (1903) 88 App. Div. 265, 84 N. Y. S. 1043. Fraud or duress. The presumption that a transferee of a negotiable instrument is a holder in due course is repelled when it is shown that the note was originally procured by fraud or duress, and the burden is then placed on the transferee of showing that he acquired the instrument as a holder in due course or from one who had acquired the rights of such a holder. American Exch. Nat. Bank v. New York Belting, etc., Co., (1896) 148 N. Y. 698, 43 N. E. 168; Grant v. Walsh, (1895) 145 N. Y. 502, 40 N. E. 209, 45 A. S. R. 626; Joy v. Diefendorf, (1891) 130 N. Y. 6, 28 N. E. 602, 27 A. S. R. 484; Vosburgh v. Diefendorf, (1890) 119 N. Y. 357, 23 N. E. 801, 16 A. S. R. 836; Ocean Nat. Bank v. Carll, (1874) 55 N. Y. 440; Hurst v. Lee, (1911) 143 App. Div. 614, 127 N. Y. S. 1040; Eisenberg v. Lefkowitz, (1911) 142 App. Div. 569, 127 N. Y. S. 595; Consolidation Nat. Bank v. Kirkland, (1904) 99 App. Div. 121, 9 N. Y. S. 353; 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; Harford Nat. Bank v. Gardner, (1916) 157 N. Y. S. 849; Tunick v. Jasper, (1915) 155 N. Y. S. 201; Midwood Park Co. v. Baker, (1891) 128 N. Y. S. 954; Packard v. Figlinolo, (1909) 114 N. Y. S. 753. So, when it appears that the plaintiff's transferor was guilty of fraud in securing the instrument, the plaintiff has the burden of showing that he is a holder in due course. Anchor Realty Co. v. Bankers' Trust Co., (1916) 161 N. Y. S.

300.

The burden on the holder after proof of fraud has been made is not satisfied by showing that he paid value for the instrument, but it is necessary for him to show that he had no knowledge or notice of the fraud with which the instrument was originally tainted. Vosburgh v. Diefendorf, (1890) 119 N. Y. 357, 23 N. E. 801, 16 A. S. R. 836. When it is sought to prove the good faith of a bank, entries made by the discount clerk can be proved only by the clerk making them if he is alive and within the state; and it is error to receive a statement from other witnesses, not made from personal knowledge. Ocean Nat. Bank v. Carll, (1874) 55 N. Y. 440.

Corporation as an accommodation indorser.-A business corporation is not generally authorized to become the accommodation indorser of commercial paper, and it is not liable on such paper to one taking the instrument with knowledge of the nature of its indorsement. See supra, § 55. In an action on such an instrument, proof of the accommodation character of the corporate indorsement places the burden on the holder to show that he is a

$ 98

Rights of Holder

L. 1909, ch. 43

holder for value and became such without notice that the indorsement was for accommodation. Abbott v. Le Prevost, (1915) 166 App. Div. 40, 151 N. Y. S. 616; National Bank v. H. P. Snyder Mfg. Co., (1907) 117 App. Div. 370, 102 N. Y. S. 478.

Gambling transaction. Upon proof that the consideration for a note was a marginal gambling transaction, the burden is on the indorsee to show that he is a holder in due course. Matter of Hill, (1911) 187 Fed. 214.

Stolen instrument.- In an action by the rightful owner of certain negotiable bonds to recover the same from one to whom they were transferred by a thief, it is incumbent upon the defendant to give evidence that he became a holder in due course. Lawyers' Title, etc., Co. v. Jones, On proof that the indorser

(1906) 113 App. Div. 105, 98 N. Y. S. 871. of a note stole the same, the burden is on the holder to show that he acquired title as a holder in due course. Ecks v. Montanara, (1915) 152 N. Y. S. 1010.

66

Lack or failure of consideration.— Prior to the enactment of the Negotiable Instruments Law, proof of a want or failure of consideration between the original parties to a negotiable instrument did not dispel the presumption or require a transferee to prove that he was a bona fide holder for value. Mechanics', etc., Nat. Bank v. Crow, (1875) 60 N. Y. 85. In the absence of proof of fraud or misappropriation, the presumption is that the indorsee of a negotiable bill or note is a bona fide holder for value, and this presumption is not repelled merely by proof that the bill or note as between the immediate parties was without consideration." Harger v. Worrall, (1877) 69 N. Y. 370, 25 Am. Rep. 206.

The enactment of the statute seems to have made no change in the rule, for it is held that failure or want of consideration is not one of the defenses specified in this section, and therefore the holder, on proof of want of consideration, is not put to his proof to sustain his status as a holder in due course. Mitchell v. Baldwin, (1903) 88 App. Div. 265, 84 N. Y. S. 1043; Broderick, etc., Rope Co. v. McGrath, (1913) 81 Misc. 199, 142 N. Y. S. 497; Joveshof v. Rockey, (1908) 58 Misc. 559, 109 N. Y. S. 818. See also Tischler v. Shurman, (1906) 49 Misc. 257, 97 N. Y. S. 360. The rule, however, is not a rule of pleading, and one defending an action on the instrument is not obliged to allege the want of consideration. Mechanics', etc., Nat. Bank v. Termini, (1915) 93 Misc. 1, 156 N. Y. S. 433.

Order of proof.— In an action by the indorsee of a note against the maker, the defendant may show that the title of the indorser is defective, and is not compelled to show first that the plaintiff is not a holder in due course; upon proof of the defect in title, the burden is on the plaintiff to show that he is a holder in due course. Kennedy v. Spilka, (1911) 72 Misc. 89, 129 N. Y. S. 390; Gimsberg v. Shurman, (1911) 71 Misc. 463, 128 N. Y. S. 653; Engle v. Hyman, (1907) 54 Misc. 251, 104 N. Y. S. 390.

Assumption in Court of Appeals as to holder in due course.— Where it appears that both the court and the counsel have assumed that the plaintiff was a holder in due course of the instrument in suit, he will be permitted to occupy that position in the Court of Appeals, and the correctness of that assumption cannot be disputed on the appeal. Wilson v. Rocke, (1874) 58 N. Y. 642.

Weight of holder's testimony.-Where the transferee of a note is required under this section to prove that he is a holder in due course, and he attempts to meet this burden with his own testimony only, a question for the jury is presented. Joy v. Diefendorf, (1891) 130 N. Y. 6, 28 N. E. 602, 27 A. S. R. 484. Although his testimony as to the circumstances under which he obtained the note is uncontradicted, he is an interested witness whose credibility should be submitted to the jury. Engle v. Hyman, (1907) 54 Misc. 251, 104 N. Y. S. 390. But it has been held that where his testimony is uncontradicted and is

L. 1909, ch. 43

Rights of Holder

§ 98

consistent with good faith and shows a payment of consideration for the instrument, and no good reason appears for rejecting such testimony, it is conclusive. Siegmeister v. Lispenard Realty Co., (1907) 107 N. Y. S. 158.

Cited.-A. E. McBee Co. v. Shoemaker, (1916) 174 App. Div. 291, 160 N. Y. 251; Warnock Uniform Co. v. Garifalos, (1915) 170 App. Div. 674, 156 N. Y. S. 637; Manufacturers' Commercial Co. v. Blitz, (1909) 131 App. Div. 17, 115 N. Y. S. 402; Benedict v. Kress, (1904) 97 App. Div. 65, 89 N. Y. S. 607; Karsch v. Pottier, etc., Mfg., etc., Co., (1903) 82 App. Div. 230, 81 N. Y. S. 782; Laing v. Hudgens, (1913) 82 Misc. 388, 143 N. Y. S. 763; Colburn v. Arbecam, (1907) 54 Misc. 623, 104 N. Y. S. 986.

§ 110

Liabilities of Parties

L. 1909, ch. 43

ARTICLE 7

LIABILITIES OF PARTIES

Section 110. Liability of maker. 111. Liability of drawer.

112. Liability of acceptor.

113. When person deemed indorser.

114. Liability of irregular indorser.

115. Warranty; where negotiation by delivery or by a qualified indorsement.

116. Liability of general indorser.

117. Liability of indorser where paper negotiable by

delivery.

118. Order in which indorsers are liable.

119. Liability of agent or broker.

§ 110. Liability of maker. The maker of a negotiable instrument by making it engages that he will pay it according to its tenor; and admits the existence of the payee and his then capacity to indorse.

This section was derived from the Negotiable Instruments Law of 1897, § 110.

Discharge of liability: see infra, §§ 200-206. Liability of drawer: see infra, § 111. Liability of acceptor: see infra, § 112. Liability of indorser: see infra, §§ 113-118.

Joint makers.— Several makers of a promissory note as between themselves are liable jointly; and if one of them pays the amount of the note to the payee or holder the others are liable to contribute. Owens v. Blackburn,

(1914) 161 App. Div. 827, 146 N. Y. S. 966.

Obligation to accommodation payee.-A payee and indorser for the accommodation of the maker is, as between such parties, a surety of the maker; and the maker impliedly engages that he will indemnify the payee and reimburse him in case he is compelled to pay the instrument. This engagement on the part of the maker is not created by the instrument; the failure of the maker to pay the note does not create a cause of action in favor of the accommodation payee, but a payment by such payee to the holder does. Hence, the statute of limitations in an action by the payee against the maker does not commence to run at the maturity of the note, but only at the date of payment to the holder. Blanchard v. Blanchard, (1911) 201 N. Y. 134, 94 N. E. 630, 37 L. R. A. (N. S.) 783.

Parol evidence to change relation.-"It is always competent, certainly between the original parties, to show that one whose name appears to a note or any other obligation, whatever may be the relative position which the name occupies, placed it there, not as a maker of the instrument, but to attest its execution, or for some other lawful purpose." Palmer v. Stephen's, (1845) 1 Denio 471.