mercial paper from the apparent owner for full value, without notice of any equities between the parties or of any defect in the title of the presumptive owner, is to be deemed a bona fide holder.70

74. When holder of instrument payable on demand deemed holder in due course.

a. Statutory provision.- The Negotiable Instruments Law provides that: "Where an instrument payable on demand is nego"tiated an unreasonable length of time after its issue, the holder "is not deemed a holder in due course. "71 This section is declaratory of the common law.72 To determine when instruments are payable on demand reference should be made to a section in the preceding chapter of this work. 73 Where no time of payment is specified, the instrument is deemed payable on demand, and presumably the same rule would apply to such an instrument. The courts differ somewhat as to what constitutes a reasonable time after the issue of a negotiable instrument within which a transfer may be made which will constitute the holder a holder in due

73. See ante, chap. III, § 39 (c). Neg. Inst. L. (N. Y.), § 4, provides that in determining what is unreasonable time, regard should be had to the nature of the instrument, the usage of trade or business (if any), with respect to such instruments, and the facts of the particular case."

74

could not be considered as overdue, at the time of its transfer by R., so as to render claims against R., then owned and held by the maker, available as a set-off. Weeks v. Pryor, 27 Barb. (N. Y.) 79.

75. Reasonable time.- A demand note negotiated within twenty-three days after date is negotiated within a reasonable time. Mitchell v. Catchings, 23 Fed. 710. So is seven days a reasonable time. Thurston v. McKown, 6 Mass. 428. And five weeks after date. Wethey v. Andrews, 3 Hill (N. Y.), 582. And two days after date. Pindar v. Barlow, 31 Vt. 529; Dennett v. Wyman, 13 Vt. 485.

A note payable on demand, with in74. No time of payment specified.- terest, transferred nearly three months Where a promissory note dated Jan. after date, the parties having their 24, 1853, was made by P., payable to places of business in the same street R., or bearer, with use, no time of of the same city, must be considered payment being specified, and the same to have become due, without demand was within three days after its date made, in such sense that the transsold by R. to M., by whom it was sub- feree takes it subject to all the sequently transferred to plaintiff; it equities existing in behalf of the was held that although the note was maker against the payee previous payable on demand, yet that it was to the transfer. Herrick v. Wolevident from the fact of its bearing verton, 41 N. Y. 581, 1 Am. Rep. 461. interest, that an immediate demand of The following cases are instances payment was not contemplated by the where the transfer was not made a parties; and that consequently it reasonable time after date: Three or

§ 75. Notice of infirmity or defect.

a. Statutory provision.— The Negotiable Instruments Law provides that: "To constitute notice of an infirmity in the instru"ment or defect in the title of the person negotiating the same, "the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that "his action in taking the instrument amounted to bad faith." 76 This section is, without doubt, declaratory of the existing rule.”

b. Actual knowledge.- Actual knowledge of a defect or infirmity in an instrument on the part of the indorsee, although purchased by him, for value and otherwise in good faith, will destroy the protection which the law affords to a holder in due course.78 Where the holder had actual knowledge of the fraud with which the instrument is tainted or of the illegality or inadequacy of the consideration, he is not a holder in good faith. In any event his superior title is destroyed and he occupies no better position than his transferrer.79 The fact that full value was given for an

83; Bryant v. Couillard, 32 Me. 520; Hunt v. Rumsey, 83 Mich. 156, 47 N. W. 105, 9 L. R. A. 674; Myers v. Bealer, 30 Neb. 280, 46 N. W. 479; Proctor v. McCall, 2 Bailey (S. C.), 298, 23 Am. Dec. 135.

four months. Paine v. Central Vt. R.
Co., 14 Fed. 269. Nine months.
Nevens v. Townsend, 6 Conn. 5.
Four months. Parker v. Tuttle, 44
Me. 459. Eight months. Ayer v.
Hutchins, 4 Mass. 370, 3 Am. Dec.
332; American Bank v. Jenness, 2
Metc. (Mass.) 288. One year. Hem- or
menway v. Stone, 7 Mass. 58, 5 Am. v.
Dec. 27. Eleven months. Sylvester v.
v. Crapo, 15 Pick. (Mass.) 192. Five v.
months. Le Due v. First Nat. Bank, ner
31 Minn. 33, 16 N. W. 426. Ten
months. Morey v. Wakefield, 41 Vt.
24, 98 Am. Dec. 562.

76. Neg. Inst. L. (N. Y.), § 95. For same section in statutes of other States see Appendix.

77. Notice is defined by Chalmers in his work on Bills of Exchange (5th ed.), p. 90, as meaning actual, though not formal notice, that is to say, either knowledge of the facts, or a suspicion of something wrong, combined with a willful disregard of the means of knowledge.

Notice published in a newspaper warning the public not to purchase a certain note described therein does not bind one who neither saw the notice nor had knowledge of its contents. English-American L. & T. Co. v. Hiers, 112 Ga. 823, 38 S. E. 103; Gehlbach v. Carlinville Nat. Bank, 83 Ill. App. 129. 78. See Zook v. Simonson, 72 Ind.

Actual knowledge (1) of failure
want of consideration, see Easton
Blanchard, 3 Ill. 420; Mitchell
Stinson, 80 Ind. 324; Scotten
Randolph, 96 Ind. 581; Skin-

v. Raynor, 95 Iowa, 536, 64 N. W. 601; Starr v. Torrey, 22 N. J. L. 190; (2) of illegal consideration, Perry v. Crammond, Fed. Cas. No. 11,005; Tompkins v. Compton, 93 Ga. 520, 21 S. E. 79; (3) of agreement or undertaking between maker and payee, Jones v. Swan, 6 Wend. (N. Y.) 589; Gafford v. Hall, 39 Kan. 166, 17 Pac. 851; Sanderson v. Goodrich, 46 Barb. (N. Y.) 616; Howk v. Eckert, 4 Thomp. & C. (N. Y.) 300; Garfield Nat. Bank v. Colwell, 57 Hun (N. Y.), 169, 10 N. Y. Supp. 864.

V.

79. Instances of knowledge of defects.- In the case of Hanauer Doane, 12 Wall. (U. S.) 342, 20 L. Ed. 439, it was held that an action will not lie for the price of goods sold to aid the Rebellion, and a promissory note, the consideration of which is wholly or in part the price of such goods, is void, and an action cannot be sustained thereon by a holder who re

instrument will not benefit the holder where it appears that he had actual knowledge of facts which impeach the title thereof or prevent a recovery thereon by him.80 Knowledge of the agent acting within the scope of his authority is notice to the principal, and where the agent of a purchaser of a note having its origin in fraud had knowledge that "there was trouble about the trade" in which the note was given, this is sufficient to charge the purchaser with notice of the fraud.81

c. Where an inquiry should be made. If the instrument is fair upon its face the indorsee is not bound to inquire into the consideration or circumstances under which it was given.82 The indorsee is under no obligation to inquire of the maker before purchasing a note, although it is nearly due and it is offered to him at an unreasonably large discount.83 To establish bad faith on the

84

part of the purchaser of a negotiable instrument of one having no authority to sell, as against the rightful owner, it must appear that the purchaser knew of facts which would lead the mind to believe that the seller was disposing of the paper without lawful authority. The fact that a purchaser of a note knew that the payee was engaged in the selling of spirituous liquors is not sufficient to put the purchaser upon inquiry as to whether the note was given as the price of liquors sold by the dealer contrary to law. The purchase by a bank at a large discount of notes of farmers and residents in the vicinity from a stranger selling churns throughout the county is chargeable with notice of such facts as might have been ascertained upon inquiry, affecting the validity of the notes.86

85

d. Knowledge that person negotiating instrument is acting in fiduciary capacity. The fact that the instrument on its face is made payable to a person in his fiduciary capacity is notice that the payee is acting in such capacity and that he can only give title or deal with such instrument for the benefit of the person whom he represents." Where one was known to be an agent for the

87

purchasing commercial paper, tainted with fraud, is bound to show the payment of a valuable consideration, and to rebut notice of the fraud, such purchaser is not called upon to make inquiry of the maker or holder as to the circumstances under which the paper is executed, unless there is something about the paper itself, or the circumstances under which it is presented, to excite the suspicion of a person of common prudence. But persons dealing in commercial paper are expected to use reasonable diligence where such paper is offered for sale under circumstances that are calculated to excite the suspicion of a reasonably cautious person."

84. Trumblety v. O'Connor, 13 Daly (N. Y.), 177.

85. Bottomley v. Goldsmith, Mich. 27.

36

86. Anten v. Gruner, 90 Ill. 300. As to purchase of notes from strangers, see Smith v. Mechanics & Traders' Bank, 6 La. Ann. 610; Jennings v. Todd, 108 Mo. 296, 24 S. W. 148, 40 Am. St. Rep. 373.

In New York, a leading case on the duty of a bank purchasing negotiable paper from an entire stranger is that of Canajoharie Nat. Bank v. Diefen

dorf, 123 N. Y. 191, 25 N. E. 402, 10 L. R. A. 676, in which it was held that negotiable instruments bought by a bank cashier cannot, as a matter of law, be said to have been purchased in good faith, in the ordinary course of business, so as to cut off the defense of fraudulent inception, where it appears that the payee procured the notes by fraud and misrepresentation from the maker, and that plaintiff, through its cashier, purchased the notes of the payee, a perfect stranger to him, at an illegal rate of discount, payment to be made for the notes in drafts; the payee gave the cashier no information where he might receive notice of protest, or as to his pecuniary circumstances, and no such information was required of him; and also, where it appears that the cashier did not know defendant's handwriting and made no inquiries of any one in regard thereto.

87. Thurber v. Cecil Nat. Bank, 52 Fed. 513; Payne v. Flournoy, 29 Ark. 500; McMasters v. Dunbar, 2 La. Ann. 577; Third Nat. Bank v. Lange, 51 Md. 138, 34 Am. Rep. 304; Turner v. Hoyle, 95 Mo. 337, 8 S. W. 157; Bay v. Coddington, 5 Johns. Ch. (N. Y.) 54, 9 Am. Dec. 268; Gale v.

negotiation of his principal's draft, and he negotiates the draft to a third person in payment of the agent's debt, such person will acquire no title to the instrument, however honest his intention may have been.88 If a corporation authorizes its officers to execute and indorse negotiable instruments, one who, before maturity and for value, acquires such an instrument, is not put upon inquiry as to the purpose for which it was given, and as to whether or not such officers had exceeded their authority. A holder for value of a note given by a firm to one of its members, is a holder in due course.90 And where a note is made by a member of a firm to his own order and is indorsed by the firm, it is not notice that it was for the maker's accommodation, although such indorsement was made by the member benefited.91

89

e. Suspicious circumstances and gross negligence.- Suspicious circumstances are not, in themselves, sufficient to constitute one who takes an assignment of commercial paper before maturity, paying value therefor, a purchaser in bad faith; nor is it enough that he neglected to make the inquiry which, under the circumstances, a prudent man would, or ought to, have made. In order that the holder's title may be destroyed, it must be shown that he

Wells, 12 Barb. (N. Y.) 84; Fellows v. Longyor, 91 N. Y. 331; Alexander v. Alderson, 66 Tenn. 403.

88. Dowden v. Cryder, 55 N. J. L. 329, 26 Atl. 941; Weeks v. Fox, 3 Thomp. & C. (N. Y.) 354; Petrie v. Williams, 68 Hun (N. Y.), 589, 23 N. Y. Supp. 237.

The words "Agent, Glass Buildings," added to the signature of a check, are enough to put one who receives it in payment of a debt on inquiry as to his authority to use the fund for such payment. Gerrard v. McCormick, 130 N. Y. 261, 29 N. E. 115, 14 L. R. A. 234.

89. Wilson v. Metropolitan R. Co., 120 N. Y. 145, 24 N. È. 384; Marine Bank v. Clements, 31 N. Y. 33; Scott v. Johnson, 5 Bosw. (N. Y.) 213; American Exchange Nat. Bank v. Oregon Pottery Co., 55 Fed. 265; Wormer v. Agricultural Works, 50 Iowa, 262; Merchants' Nat. Bank v. Citizens' Gas Light Co., 159 Mass. 505, 34 N. E. 183, 38 Am. St. Rep. 453; Hiawatha Iron Co. v. John Strange Paper Co., 106 Wis. 111, 81 N. W. 1034.

90. Thompson v. Low, 111 Ind. 272,

12 N. E. 476; Hapgood v. Watson, 65 Me. 510.

91. Indorsement by member of firm. Redlon v. Churchill, 73 Me. 146, 40 Am. Rep. 345; Bueltner v. Steinbrecker, 91 Iowa, 588, 60 N. W. 177.

In an action by a bank against a firm, upon its indorsement of a note given by one of its members to pay his individual debt, which note was indorsed by him for himself and the defendant firm, without the latter's knowledge, the fact that the bank purchased the note instead of discounting it does not avail the defendants. Atlantic State Bank v. Savery, 82 N. Y. 291. But if the bank knew, or had reason to know, that the partnership name was used without authority, the bank is not a bona fide holder of the note discounted by it. Spalding v. Kelly, 43 Hun (N. Y.), 361; National Bank v. Underhill, 21 Hun (N. Y.), 178. And see also Austin v. Vandermark, 4 Hun (N. Y.), 259; Bank of St. Albans v. Gilliland, 23 Wend. (N. Y.) 324; Lucker v. Iba, 54 App. Div. (N. Y.) 566, 66 N. Y. Supp. 1019.