CHAPTER VI.

Rights of Holders.

§ 72. Right of Holder to Sue; Payment.

a. Statutory provision.

b. Rule at common law.

§ 73. What Constitutes a Holder in Due Course.

a. Statutory provision.

b. In general.

c. Instrument complete and regular on its face.

d. Holder before maturity.

(1) In general.

(2) Indorsement after maturity where transferred before maturity.

(3) Equities and defenses where paper is transferred after

maturity.

e. Holder in good faith and for value.

f. Notice of infirmity or defect.

§ 74. When Holder of Instrument Payable on Demand Deemed Holder in Due Course.

a. Statutory provision.

§ 75. Notice of Infirmity or Defect.

a. Statutory provision.

b. Actual knowledge.

c. When an inquiry should be made.

d. Knowledge that person negotiating instrument is acting in fiduciary capacity.

e. Suspicious circumstances and gross negligence.

f. Notice before full amount paid; statutory provision.

76. When Title Defective.

a. Statutory provision.

b. Fraud and duress.

c. Illegal consideration; usury.

77. Rights of Holder in Due Course.

a. Statutory provision.

b. Effect of statute.

c. Declaratory of the general rule.

d. Incapacity of parties and want of authority.

e. Conditions and agreements between original parties.

§ 78. Defenses where Instrument is in Hands of Person who is not Holder in Due Course; Rights of Persons Deriving Title through Holder in Due Course.

a. Statutory provision.

b. Defenses where instrument is in hands of person other than holder in due course.

c. Person deriving title through holder in due course.

d. Transfer after maturity.

e. Application to purchase made by payee from bona fide holder.

§ 79. Presumption as to Holder in Due Course; Burden of Proof. a. Statutory provision.

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b. Presumption that person is holder in due course.

c. When burden of proof shifts.

72. Right of holder to sue; payment.

a. Statutory provision.- The Negotiable Instruments Law provides that: "The holder of a negotiable instrument may sue thereon in his own name; and payment to him in due course discharges the instrument." 28 The term "holder,” as here used, means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.29

b. Rule at common law. The person who, by a general indorsement, or where it is payable to bearer, by a delivery, becomes a holder, may sue in his own name on the contract, and if he is a bona fide holder for value, he has a good title, notwithstanding any defect of title in the party, whether indorser or deliverer, from whom he took the instrument.30 It is a general rule that the holder of the legal title of a negotiable instrument may sue thereon, though he is not the full owner, unless it appears that the maker will be prejudiced thereby in his defense.31 Under the statutes in many of the States an action will lie upon a negotiable instrument by the equitable owner in his own name, and the possession of the note is itself evidence of such ownership.3 We have already discussed the rights of assignees of negotiable and nonnegotiable instruments to maintain actions thereon.34

28. Neg. Inst. L. (N. Y.), § 90. For the same section in the statutes of other States see Appendix.

29. Neg. Inst. L. (N. Y.), § 2. 30. Justice Blackburn, in Crouch v. Credit Foncier, L. R., 8 Q. B. (Eng.) 374.

31. Irwin V. Bailey, Fed. Cas. No. 7,079, 8 Biss. (U. S.) 523; Freeman v. Perry, 22 Conn. 617; Richards

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v. Betzer, 53 Ill. 466; Peaslee v. McLoon, 16 Gray (Mass.), 488; Hargous v. Lahens, 3 Sandf. (N. Y.) 213; Freeman v. Falconer, 12 Jones & S. (N. Y.) 132.

32. Hudson v. Wier, 29 Ala. 294; Garner v. Cook, 30 Ind. 331; Harriman v. Hill, 14 Me. 127; Guest v. Rhine, 16 Tex. 549.

34. See ante, § 71.

73. What constitutes a holder in due course.

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a. Statutory provision.— The Negotiable Instruments Law vides that: "A holder in due course is a holder who has taken "the instrument under the following conditions:

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"1. That it is complete and regular upon its face;

"2. That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;

3. That he took it in good faith and for value;

"4. That at the time it was negotiated to him he had no notice "of any infirmity in the instrument or defect in the title of the person negotiating it." 35 This section is in all respects declaratory of the common law, and is substantially the same as a section contained in the English Bills of Exchange Act.36

b. In general. The expression "holder in due course" is a substitute made by the statute for the former cumbersome phrase of "bona fide holder for value without notice before due." 37 The statute has not in any sense affected the necessary qualifications of a bona fide purchaser or holder for value. The same rules applicable to the rights of a holder in due course before the enactment of this statute are still in force thereunder. An instrument payable to bearer or indorser in blank and delivered by the maker or indorser to another person will constitute a bona fide purchaser of such note a holder in due course." An indorsement for colleclection does not constitute the indorsee a holder in due course.39 But the rights of a holder in due course are not affected by an indorsement on the instrument, accompanied by a guaranty of payment."

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35. Neg. Inst. L. (N. Y.), § 91. For the same section in the statutes of other States see Appendix.

36. English Bills of Exchange Act, 1882, § 29 (1).

37. Byles on Bills (16th ed.), p. 144.

38. Esty v. Snyder, 41 Ill. 363; Goodfellow v. Landis, 36 Mo. 168; Gould v. Segee, 5 Duer (N. Y.), 260. As to instruments payable to bearer, see Central Bank v. Lang, 1 Bosw. (N. Y.) 202; Matthews v. Poythress, 4 Ga. 287; Lane v. Krekle, 22 Iowa, 399; Winstead v. Davis, 40 Miss. 785; Bank of Winona v. Wofford, 71 Miss. 711, 14 South. 262.

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39. Bank of Metropolis v. First Nat. Bank, 19 Fed. 301; Peoples Bank v. Jefferson County Sav. Bank, 106 Ala. 524, 17 South. 728; Wilson v. Tolson, 79 Ga. 137, 3 S. E. 900; Claflin v. Wilson, 51 Iowa, 15, 50 N. W. 578; First Nat. Bank v. Strauss, 66 Miss. 479, 6 South. 232, 14 Am. St. Rep. 579; Hoffman V. Miller, 9 Bosw. (N. Y.) 334; Filbrick v. Ballett, 2 Jones & S. (N. Y.) 370.

40. Central Trust Co. v. Wyandotte Bank, 101 U. S. 68, 25 L. Ed. 876; State Nat. Bank v. Haylen, 14 Neb. 480, 16 N. W. 754; Bank of Woodstock v. Kent, 15 N. H. 579; Dunham v. Peterson, 5 N. D. 414, 67 N. W. 293.

c. Instrument complete and regular on its face.-A party purchasing commercial paper which remains in some essential particular incomplete and imperfect does not become a bona fide holder; thus where a blank was left for the signature of the president, in paper issued by a corporation, but the paper was negotiated unsigned by such president, it was held that the party taking it was not a bona fide holder.11 And where, at the time the holder of a note purchased it, it was irregular on its face, the effect of the irregularity cannot be avoided by afterward having the note corrected.42 But the transfer of a postdated note before the day of its date affords no cause of suspicion, so as to put the indorsee on inquiry, and subject him to the equities existing between the parties."

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d. Holder before maturity.—(1) In general. The statute requires that the holder of a negotiable instrument to constitute himself a holder in due course should become such holder before the instrument was overdue.** An instrument is overdue as soon as the time of payment specified therein has passed,45 and in those States where days of grace are still allowed, a purchaser of an instrument before the expiration of the last day of grace is a purchaser before maturity.46 An instrument payable in installments

41. Davis Sewing Mach. Co. v. Best, due bill, before its maturity. City 105 N. Y. 59, 11 N. E. 146. Bank of Dowagiac v. Dill, 84 Mich. 549, 47 N. W. 1109.

42. Losee v. Bissell, 76 Pa. St. 459. 43. Brewster v. McCardell, 8 Wend. (N. Y.) 478. But see, as to postdated check, Mayer v. Mode, 14 Hun (N. Y.), 155; Walker v. Geisee, 4 Whart. (Pa.) 252, 33 Am. Dec. 60.

44. Neg. Inst. L. (N. Y.), § 91 (2). See ante, § 73 (a), p. 359.

45. First Nat. Bank V. Scott County Comrs., 14 Minn. 77; Wallach v. Bader, 7 N. Y. St. Rep. 375.

Where a note payable one day after date is transferred on the second day after its date, the transferee takes subject to equities. Baucom v. Smith, 66 N. C. 537.

A note payable on or before three years from its date is payable in three years, and a purchaser for value within three years is a purchaser for value before maturity, and, therefore, a holder in due course. Helmer v. Krolick, 36 Mich. 371.

46. Transfer before expiration of grace.-Crosby v. Grant, 36 N. H. 273; Johnson v. Glover, 121 Ill. 283, 12 N. E. 257; Goodpaster v. Voris, 8 Iowa, 334.

In New York days of grace have been abolished since 1894, but prior to that time the rule was settled that the Where a due bill payable one day af- maker has the whole of the last day ter date is assigned by the payee on of grace within which to pay. Osborn the day of its date as collateral se- v. Moncure, 3 Wend. (N. Y.) 170; curity for a loan not evidenced by any Hoppin v. Quin, 12 Wend. (N. Y.) note, but ten days afterward the payee 517; Cayuga County Bank v. Hunt, 2 in the due bill gives his note, payable Hill (N. Y.), 635; Smith v. Ayleswith 10 per cent. interest, for the cash worth, 40 Barb. (N. Y.) 104: Ootpreviously loaned him, and permits hout v. Ballard, 41 Barb. (N. Y.) 33. the assignee of the due bill to keep it In the case of Harmon v. Hope, 87 as security for this note, such assignee N. Y. 8. 10, the court said: "While a is not an innocent purchaser of the different rule prevails elsewhere to

is overdue upon the failure to pay any one of the installments upon the day of payment, and thereafter one who takes it is not a holder in due course.

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(2) Indorsement after maturity where transferred before maturity. An instrument transferred without indorsement may be subsequently indorsed by the transferrer, and upon the request of the transferee of such an instrument payable to order, it is the duty of the transferrer to indorse it.48 If such an indorsement be made after the maturity of the note, it will not constitute the indorsee a holder in due course, but, since the negotiation only takes effect from the time the indorsement is made, the indorsement will be regarded in the same manner as any other indorsement after maturity, and the instrument in the hands of a holder will be subject to all the defenses and equities existing between the original parties thereto.50

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(3) Equities and defenses where paper is transferred after maturity. When a negotiable instrument is transferred after maturity the holder takes the same subject to all the equities and defenses existing between the original parties. This is an elementary principle of commercial law, and is sustained by a large number of cases, among which are those cited in the note.

some extent (Story on Promissory Notes, § 278, note 2; Sargent v. Southgate, 5 Pick. [Mass.] 312; Ayer v. Hutchins, 4 Mass. 370; Pine v. Smith, 11 Gray [Mass.], 38), the current of authority in this State is very manifest, and we can see no good reason for doubting it, or departing from it. Although this note was transferred on the last day of grace, it was yet transferred before actual dishonor, and so as to bar the equities sought to be interposed."

47. Vinton v. King, 4 Allen (Mass.), 562; Vette v. La Barge, 64 Mo. App. 179; McCorkle v. Miller, 64 Mo. App. 153.

48. Neg. Inst. L. (N. Y.), § 79. See ante, § 69.

49. Idem, § 69 (c).

50. Clark v. Whitaker, 50 N. H. 474; Harkell v. Mitchell, 53 Me. 468, 89 Am. Dec. 711; Lancaster Nat. Bank v. Taylor, 100 Mass. 18, 97 Am. Dec. 70.

51. Instrument transferred after maturity_subject to equities and defenses. Bayley, in his treatise on Bills

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In an

United States.- Smyth v. Strader, 4 How. 404, 11 L. Ed. 1031; Central Trust Co. v. First Nat. Bank, 101 U. S. 68, 25 L. Ed. 876.

Alabama.- Ware v. Russell, 57 Ala. 43, 29 Am. Rep. 710; Battle v. Weems, 44 Ala. 105.

California.- Templeton v. Poole, 59 Cal. 286; Fuller v. Hutchins, 10 Cal. 523, 70 Am. Dec. 746.

Connecticut.- Robins v. Lyman, 10 Conn. 30, 25 Am. Dec. 52.

Georgia.- Burton v. Wynne, 55 Ga. 615; Harrell v. Broxton, 78 Ga. 129, 3 S. E. 5.

Illinois. Eagle v. Kohn, 84 Ill. 292; Bissell v. Kurran, 69 Ill. 20; Lock v. Fulford, 52 Ill. 166; Griffin v. Ketcham, 18 Ill. 392.