did not take the instrument in good faith.92 Judge Porter, of the New York Court of Appeals, in a leading New York case, said: "One who purchases commercial paper for full value before maturity, without notice of any equities between the original parties, or of any defect of title, is to be deemed a bona fide holder. He is not bound at his peril to be upon the alert for circumstances which might possibly excite the suspicion of wary vigilance. He does not owe to the party who puts negotiable paper afloat the duty of active inquiry to avert the imputation of bad faith. The rights of the holder are to be determined by the simple test of honesty and good faith, and not by a speculative issue as to his diligence or negligence. The rule requires proof direct or by circum

" 93

92. Lack of good faith must be shown. In the United States courts, the weight of authority, since the case of Swift v. Tyson, 16 Pet. (U. S.) 1, has been that one who takes an assignment of commercial paper before maturity, paying value, without notice of infirmities in the title or consideration, is deemed a good faith purchaser, and that to deprive him of that character, it is not enough that he neglected to make inquiry, which under the circumstances a prudent man would or ought to have made. See also Swift v. Smith, 102 U. S. 442; Hotchkiss v. National Banks, 21 Wall. (U. S.) 354, 22 L. Ed. 645; Atlas Nat. Bank v. Holm, 71 Fed. 489, 19 C. C. A. 94; Clark v. Evans, 66 Fed. 263, 13 C. C. A. 433.

In the several States the leading cases favoring the principle in the text

are:

Pennsylvania. Second Nat. Bank v. Morgan, 165 Pa. St. 199, 30 Atl. 957, 44 Am. St. Rep. 652.

93. Megee v. Badger, 34 N. Y. 247. See also Cheever v. Pittsburg, etc., R. Co., 150 N. Y. 60, 66, 44 N. E. 701.

Colorado.- Merchants' Bank v. Mc- Actual notice, or circumstances Clellan, 9 Colo. 608, 13 Pac. 723. showing bad faith. In the case of Georgia.- Montgomery v. Hunt, 93 American Exchange Nat. Bank v. New Ga. 438, 21 S. E. 59. York Belting, etc., Co., 148 N. Y. 698, Iowa.- Lane v. Evans, 49 Iowa, 43 N. E. 168, it was held that, 156; Lake v. Reed, 29 Iowa. 258, 4 where it is sought to defeat the Am. Rep. 209. right of the holder of negotiable Kentucky. Montgomery V. Citi- paper, before maturity, to recover zens' Nat. Bank, 16 Ky. L. Rep. 445. against the maker, it is essential Maine.- Farrell v. Lovett, 68 Me. that actual notice be proved of the de326, 28 Am. Rep. 59. fect in title, or that circumstances be shown evidencing bad faith in the holder, and creating reasonable grounds for suspecting his conduct in the transaction. The mere fact that the holder for value of a promissory note made by a third party receives it from a person engaged in the note brokerage business as collat

Maryland. - Williams v. Huntington, 68 Md. 590, 13 Atl. 336, 6 Am. St. Rep. 477; Citizens' Nat. Bank v. Hooper, 47 Md. 88.

Massachusetts.- Smith v. Livingston, 111 Mass. 342.

Michigan. Helms v. Douglas, 81 Mich. 442, 45 N. W. 1009; Davis v.

94

stances that the holder had notice of the defects or equities; and the plaintiff in an action cannot be charged with such notice by reason of any want of diligence on his part in ascertaining the fact of fraud or want of consideration, even when he is in a situation where such facts could be ascertained by inquiry. While gross negligence on the part of the holder of a negotiable instrument in inquiring as to suspicious facts and circumstances may be evidence of mala fides, it is not equivalent thereto, nor without further evidence will it defeat his title.95 It has been said that: 'Every one must conduct himself honestly in respect to the antecedent parties, when he takes negotiable paper, in order to acquire a title which will protect him against prior equities. While he is not obliged to make inquiries, he must not willfully shut his eyes to the means of knowledge which he knows are at hand, for the reason that such conduct, whether equivalent to notice or not, would be plenary evidence of bad faith." 96

f. Notice before full amount paid; statutory provision.— The Negotiable Instruments Law provides that: "Where the trans"feree receives notice of any infirmity in the instrument or defect "in the title of the person negotiating the same before he has paid "the full amount agreed to be paid therefor, he will be deemed a

eral security for a loan to such broker is not sufficient to raise a doubt as to the authority of the broker to so Ideal with the note. See also Vosburgh v. Diefendorf, 119 N. Y. 357, 23 N. E. 801; Canajoharie Bank v. Diefendorf, 123 N. Y. 191, 25 N. E. 402, 10 L. R. A. 676; Second Nat. Bank v. Weston, 161 N. Y. 520, 55 N. E. 1080.

94. Lake v. Reed, 29 Iowa, 258, 4 Am. Rep. 209; Richardson v. Monroe, 85 Iowa, 359, 52 N. W. 339; Cok v. Werman, 51 Iowa, 564, 2 N. W. 386.

95. Goodman v. Harvey, 4 Ad. & El. (Eng.) 870.

Gross negligence not sufficient. In the case of Murray v. Lard ner, 2 Wall. (U. S.) 110, 17 L. Ed. 857, the court said: "The party who takes a note before due for a valuable consideration, without knowledge of any defect of title and in good faith, holds it by a title valid against all the world. Suspicion of defect of title or knowledge of circumstances which would excite suspicion in the mind of a prudent man,

or gross negligence on the part of the taker, at the time of the transfer, will not defeat his title. That result can be produced only by bad faith on his part." See also Swift v. Tyson, 102 U. S. 442, 26 L. Ed. 193; Comstock v. Hannah, 76 Ill. 530; Shreeves v. Allen, 79 Ill. 553; Merritt v. Boyden, 191 Ill. 136, 60 N. E. 907; Morehead v. Gilmore, 77 Pa. St. 118, 18 Am. Rep. 435; Buchanan v. Wren, 10 Tex. Civ. App. 560, 30 S. W. 1077.

Suspicion of defect of title; knowledge of circumstances which would excite such suspicion in the mind of a prudent man; disregard of means of information, an examination of which would disclose such defect; in fine, gross negligence at the time of the purchase will not alone defeat the purchaser's title. It is evidence, but not conclusive, of bad faith, and that must be established by one seeking to impeach such title. Seybel v. National Currency Bank, 54 N. Y. 288.

96. Goodman v. Simonds, 20 How. (U. S.) 343, 15 L. Ed. 934; Spero v. Holoschutz, 36 Misc. (N. Y.) 764, 74 N. Y. Supp. 852.

"holder in due course only to the extent of the amount thereto"fore paid by him." This provision seems to be declaratory of the general rule.98

§ 76. When title defective.

a. Statutory provision.- The Negotiable Instruments Law provides that: "The title of a person who negotiates an instrument "is defective within the meaning of this act, when he obtained "the instrument, or any signature thereto, by fraud, duress, or "force and fear, or other unlawful means, or for an illegal con"sideration, or when he negotiates it in breach of faith, or under 66 such circumstances as amounts to a fraud." 99 This section is identical with a provision of the English Bills of Exchange Act.1 As Judge Chalmers observes, the list of defects in title contained in such section may not be exhaustive.2

b. Fraud and duress.- Fraud vitiates every contract, and as between the immediate parties to a negotiable instrument, and as against every other person who has notice thereof, fraud is a valid defense in an action thereon. It is not our purpose to discuss at

3

97. Neg. Inst. L. (N. Y.), § 93. For same section in statutes of other States see Appendix.

98. Notice before full amount paid. -In the case of Dressen v. Missouri, etc., R. Const. Co., 93 U. S. 92, it was held that a bona fide holder of negotiable paper, purchased before its maturity, upon an unexecuted contract, on which part payment only had been made, when he received notice of fraud and a prohibition to make further payments, is protected only to the amount paid, before the receipt of such notice.

In the case of Crandell v. Vickery, 45 Barb. (N. Y.) 156, H. obtained the indorsement of Vickery of the former's notes by false and fraudulent representations. These notes were transferred to plaintiff, without notice or knowledge of the fraud, he giving to H. several checks for the amount, upon the understanding that they were not to be presented for payment, but when the money was wanted he was to give new checks as needed. Before giving the new checks plaintiff was informed of the fraud, and requested not to make payment or to give his checks. He did, however, give his new checks according to the original agreement,

and brought suit upon the notes against Vickery, the indorser. It was held that he was not a bona fide holder for the reason that the transaction was executory, when he received notice of the fraud; that he had then parted with no value; that the real obligations were given afterward, and under circumstances that afforded no protection.

99. Neg. Inst. L. (N. Y.), § 94. For same section in statutes of other States see Appendix.

1. English Bills of Exchange Act, 1882, § 29 (2).

2. Chalmers on Bills of Exchange (5th ed.), p. 92.

3. Fraud avoids a negotiable instrument and defeats recovery thereon. See:

Alabama.- Wyatt v. Ayres, 2 Port.

157.

California.- Domingo v. Getman, 9 Cal. 97.

Colorado.- Buno v. Gabriel, 2 Colo. App. 295, 30 Pac. 260.

Connecticut.- Shepard v. Hall, 1 Conn. 329.

Georgia.- Janes v. Mercer University, 17 Ga. 515.

Illinois. Hodson v. Eugene Glass Co., 156 Ill. 397, 40 N. E. 971; Edle

length the general principles involved in the issue of fraud as a defense in an action on a negotiable instrument; it would be beyond the scope of our work to characterize the fraud which will vitiate and avoid such an instrument. Reference is made to works on Contracts, or Fraud and Mistake for a more detailed discussion of such principles. A holder in due course is protected against the defense of fraud; being a purchaser for value, before maturity, and without notice of the fraud, he takes the instrument freed of all defenses and equities between the original parties. There is

man v. Byers, 75 Ill. 367; Wilson v. Miller, 72 Ill. 616; Homes v. Hale, 71 Ill. 552.

Indiana.- Palmer v. Poor, 121 Ind. 135, 22 N. E. 984, 6 L. R. A. 469; New v. Walker, 108 Ind. 365; Eichelberger v. Old Nat. Bank, 103 Ind. 401; Scotten v. Randolph, 96 Ind. 581; Overshiner v. Wisehart, 59 Ind. 135; Schofield v. Holland, 37 Ind. 220.

Iowa.-Sullivan v. Collins, 18 Iowa,

228.

Kentucky. Coleman v. McKinney, 3 J. J. Marsh. 246; Wood v. Waters, 1 Litt. 176, 13 Am. Dec. 228.

Minnesota.- Second Nat. Bank v. Howe, 40 Minn. 390, 42 N. W. 200, 12 Am. St. Rep. 744.

Missouri.-Carter v. McClintock, 29 Mo. 464; Stephens v. Spiers, 25 Mo. 386; City Bank of Columbus v. Phillips, 22 Mo. 85, 64 Am. Dec. 254.

New Hampshire.-Goodwin Horne, 60 N. H. 485.

* *

court in Swift v. Tyson, 16 Pet. (U. S.) 1, as long ago as 1842; and we adopt that exposition relative to the point under consideration on the present occasion, as one accurately defining the nature and character of the title to those instruments which such holder acquires when they are transferred to him for a valuable consideration. This court then said, and we now repeat, that a bona fide holder of a negotiable instrument for a valuable consideration, without notice of facts which impeach its validity between the antecedent parties, if he takes it under an indorsement made before the same became due, holds the title unaffected by these facts, and may recover thereon, although, as between the antecedent parties, the transaction may be without any legal validity. Such being the well-settled v. law of this court, it would seem to follow as a necessary consequence, from the proposition as stated, that if a bill of exchange indorsed in blank, so as to be transferable by delivery, be misappropriated by one to whom it was intrusted, or even if it be lost or stolen, and afterward negotiated to one having no knowledge of these facts, for a valuable consideration, and in the usual course of business, his title would be good, and he would be entitled to recover the amount. The law was thus framed and has been so administered, in order to encourage the free circulation of negotiable paper by giving confidence and security to those who receive it for value; and this principle is so comprehensive in respect to bills of exchange and promissory notes which pass by delivery, that the title and possession are considered as one and inseparable, and in the absence of any explanation the

New York.-Briggs v. Merrill, 58 Barb. 389; Barber v. Kerr, 3 Barb. 149; Whitney v. Snyder, 2 Lans. 477; Matson v. Blossom, 31 N. Y. St. Rep. 228, 9 N. Y. Supp. 225.

Pennsylvania.-Moore v. Hershey, 90 Pa. St. 196.

Fraud which does not injure the promisor is not sufficient to invalidate a promissory note. Anstell v. Rice, 5 Ga. 472. And fraudulent representations which do not appear to have been acted upon by the defendant constitute no ground of defense. Janes v. Mercer University, 17 Ga. 515.

4. Effect of fraud on holders in due course. In the case of Goodman v. Simonds, 20 How. (U. S.) 343, 364, Justice Clifford said: "A well-defined and correct exposition of the rights of a bona fide holder of a negotiable instrument was given by this

an apparent exception to this general principle where the signature of a party is secured to an instrument under fraudulent representations as to its character; in many States, by virtue of a statutory provision or the decisions of the courts, instruments

Michigan. - First Nat. Bank v. Houseknecht, 121 Mich. 313. 80 N. W. 13; Cristy v. Campau, 107 Mich. 172, And in Wisconsin, in the section 65 N. W. 12; First Nat. Bank v. corresponding to the one under conDeal, 55 Mich. 592, 22 N. W. 53. sideration (Neg. Inst. L. [N. Y.], Minnesota.- Rosemond v. Graham, § 94), the following sentence was in54 Minn. 323, 56 N. W. 38, 40 Am. serted: "And the title of such person St. Rep. 336. is absolutely void when such instru