c. Effect of statute. The effect of the above section of the statute is to make a uniform rule in all States which have adopted the Negotiable Instruments Law. The liability imposed upon an indorser, not otherwise a party to an instrument, is the same as that of a general indorser, at least in respect to those persons who become indorsers subsequent to his indorsement. It seems to be in recognition of the rule which has existed in California by virtue of a provision of the Civil Code,63 to the effect that "one who indorses a negotiable instrument before it is delivered to the payee is liable to the payee thereon as an indorser." The statute makes absolute his liability to the payee, which is a complete change in the New York rule that a person indorsing in blank before delivery to the payee was presumptively a second indorser and, therefore, only liable to the payee who was deemed the first indorser.64 The change seems reasonable in view of the fact that in nearly every case where a third party places his name on the back of an instrument before its delivery to the payee he intends thereby to aid the credit of the payee and render himself directly responsible to him.65 Prior to the enactment of the above section of the statute a complaint was fatally defective which did not allege that an indorsement before delivery by a third party was made in order to give the maker credit with the payee or as surety for the maker;66 it would seem that the statute has rendered such an allegation immaterial.67 The section in question only applies to an indorsement by a third party before delivery; and where it is alleged in a complaint that such an indorsement was made after delivery, it is essential that the plaintiff should allege and affirmatively substantiate that such indorsement was made for the purpose of lending credit to the maker and with the intent to charge the indorser thereon to the payee.68

63. California Civil Code, § 3117; Fessenden v. Summers, 62 Cal. 484; Fisk v. Miller, 63 Cal. 367.

64. See ante, note 40.

65. In the case of Davis v. Baron, 13 Wis. 227, 229, the court says: "Obviously, a person indorsing a note before delivery thereof to the payee, intends rendering himself liable to the payee in some character and upon some ground. He must intend and design to secure its payment and give credit to the paper by placing his name upon it, even in the hands of the payee. He cannot complain if the courts hold him to his contract."

66. Edison Gen. Elect. Co. v. Zabley, 72 Hun (N. Y.), 166; McPhillips v. Jones, 73 Hun (N. Y.), 516; Draper v. Chase Mfg. Co., 2 Abb. N. C. (N. Y.) 79; Phelps v. Vischer, 50 N. Y. 69; Bacon v. Burnham, 37 N. Y. 614, 616.

67. People ex rel. Cotton Oil Co. v. Roberts, 25 App. Div. (N. Y.) 11, 48 N. Y. Supp. 100.

68. Application of section of statute.- In the case of Kohn v. Consolidated Butter & Egg Co., 30 Misc. (N. Y.) 725, 63 N. Y. Supp. 265, Judge McAdam of the Supreme Court, in speaking of the allegation and proof that

§ 85. Warranties where instrument is negotiated by delivery or qualified indorsement.

a. Statutory provision.- The Negotiable Instruments Law provides that: "Every person negotiating an instrument by delivery or by a qualified indorsement, warrants:

"1. That the instrument is genuine and in all respects what it "6 purports to be;

"2. That he has a good title to it;

"3. That all prior parties had capacity to contract;

"4. That he has no knowledge of any fact which would impair "the validity of the instrument or render it valueless.

69

"But when the negotiation is by delivery only, the warranty "extends in favor of no holder other than the immediate trans"feree. The provisions of subdivision three of this section do not apply to persons negotiating public or corporate securities, other "than bills and notes." It is provided in the English Bills of Exchange Act that: "A transferrer by delivery who negotiates a bill, thereby warrants to his immediate transferee, being a holder for full value, that the bill is what it purports to be, and that he has a right to transfer it, and that at the time of the transfer he

against irregular indorsers would be to impute to the legislative wisdom a design repugnant to every notion of judicial procedure, especially in a provision enacted in the interest of law reform."

an indorsement of a third party be fore delivery was made "for the purpose of lending their credit," etc., said: Prior to the statute of 1897 (Neg. Inst. Law), the allegation referred to was a necessary one in such cases, and, if denied, the onus of proving the al- But see Spencer v. Allerton, 60 legation was on the plaintiff, for the Conn. 410, 22 ̊ Atl. 778, where, under payee was presumably the first in- Gen. Stat., 1860, which provided dorser. Since the state the legal that "the blank indorsement of a nepresumption is changed where the com- gotiable or nonnegotiable note, by a plaint alleges that the irregular in- person who is neither the maker or dorsers indorsed the paper before de- payee, before or after its indorsement livery' to the payee. And when this by the payee, shall import the confact is established the onus is cast tract of an ordinary indorsement of upon such indorsers to allege and negotiable paper, as between such inprove that, notwithstanding such de- dorser and the payee or subsequent livery, the payee was to become first holders;" it was held that the statute indorser according to the customary intended to give to the contract of such form of the contract, and that they an indorser the same certainty as to did not indorse for the purpose of lend

ing their credit to the maker or with its import that the law gives to an the intention of becoming liable to the ordinary indorsement of commercial payee. That this is the proper inter- paper; and that the legal contract impretation of the act is obvious. The plied by such an indorsement cannot, true intention of the indorsers, as be- therefore, be varied by parol evidence tween themselves, can always be shown of a different agreement. by oral evidence. To go further and decide that the statute intended to For same section in statutes of other create an incontestible liability States see Appendix.

69. Neg. Inst. L. (N. Y.), § 115.

is not aware of any fact which renders it valueless." 70 It should be remembered in construing the above provision of the statute tha an instrument payable to bearer is negotiable by delivery;"1 and that it is provided that a qualified indorsement constitutes the indorser a mere assignee of the title of the instrument.72

b. Warranty of genuineness. The principle is well settled that where personal property of any kind is sold, there is, on the part of the seller, an implied warranty that he has title to the property, and that it is what it purports to be, and is that for which it was sold, as understood by the parties at the time.73 This principle is universally applied to a sale of negotiable instruments transferable by delivery." The vendor of a bill or note without indorsement is responsible for the genuineness of the paper. He is considered as representing the note to be signed and indorsed by the persons whose names appear upon it in that character, and if these signatures are forgeries, the consideration fails.75 It has been held in New York that where the holder of a promissory note which is tainted with usury transfers the same for a valuable consideration, without indorsement, and without representation as to legality, in the absence of knowledge on his part, at the time of the transfer, of the defect, no warranty against it will be implied, and an action cannot be sustained against him for loss occasioned by reason of the defect, since scienter is essential to establish an implied warranty as to the validity of a promissory note.76 The rule as laid down by the Court of Appeals in New York has not escaped criticism. The United States Supreme Court has expressly dissented therefrom, and has held that the implied warranty of

70. English Bills of Exchange Act, 1882, 58 (3).

71. Neg. Inst. L. (N. Y.), § 60. ante, § 56, p. 316.

72. Neg. Inst. L. (N. Y.), § 68.

ante, § 61 (c), p. 336.

See

See

63 N. Y. 613, the rule of implied warranty on the part of the vendor was applied to the sale of a bond and mortgage which were usurious and void, but the defendant in that case knew of the defect at the

73. Hannum v. Richardson, 48 Vt. time of the sale; and in Delaware 508, 21 Am. Rep. 152.

74. Meyer v. Richards, 163 U. S. 385, 16 Sup. Ct. 1148, 41 L. Ed. 199; Semmes v. Wilson, Fed. Cas. No. 12.658; Foster v. Swasey, Fed. Cas. No. 4,984; Sering v. Findley, 7 Ind. 247.

75. Thompson v. McCullough, 31 Mo. 224; Swanzey v. Parker, 50 Pa. St. 441, 88 Am. Dec. 549; Aldrich v. Jackson, 5 R. I. 218.

76. Implied warranty in absence of knowledge.- Littauer V. Goldman, 72 N. Y. 506, 28 Am. Rep. 171. In the case of Ross v. Terry,

Bank v. Jarvis, 20 N. Y. 226, the defendant had transferred to the plaintiff without indorsement a promissory note which had been taken at a usurious premium. The court held that whether the defendant had knowledge of the usury was not a material circumstance and that "the vendor of the chose in action in the absence of express stipulations, impliedly warrants its legal soundness and validity." Ten years later this case was followed and made the basis of judgment in Fake v. Smith, 2 Abb. Dec. (N. Y.) 76.

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identity of the thing sold which arises at common law on the sale of goods and chattels, applies on the sale of commercial paper, without indorsement, or without express assumption of liability on the paper itself." It would seem that the New York rule as above referred to has not been unequivocally adopted by the courts in that State. There have been recent decisions where the effect of the rule has been limited and its application restricted." The true rule seems to be, as now declared by the statute, that upon the sale of commercial paper without indorsement, there is an implied warranty that the thing sold is what it purports to be.79 In the sale of commercial paper, without indorsement, the obligation of the vendor is not restricted to the mere question of forgery vel non, but depends upon whether he has delivered that which he has contracted to sell, this rule being designated in England as a condition of the principal contract as to the essentials and substance of the thing agreed to be sold, and in this country being generally termed an implied warranty of identity of the thing sold.80

77. Implied warranty of identity of thing sold as applied to commercial paper. Meyer v. Richards, 163 U. S. 385, 411, 16 Sup. Ct. 1148, 41 L. Ed. 199, where the court says: "There is an exceptional case (Littauer v. Goldman, 72 N. Y. 506), which holds that the common-law obligation as to the implied warranty of identity in the thing sold, in the case of commercial paper extends only to the genuineness of the instrument. The case was one involving the nullity of a usurious note, and, if correctly decided, would be authority for the proposition that there was a peculiar species of warranty in the sale of commercial paper differing from all others; in other words, that there was a law merchant of warranty where there was no commercial contract. The opinion in this case illustrates the same contradictory position presented by the argument of the defendant in error, to which we have just called attention, that is, that it admits the common-law rule and then denies its essential result by eliminating conditions of nonexistence which are necessarily imposed by it. It follows that this New York decision leads logically to the view expressed in the Maine and Maryland cases just referred to; for

either the principle of warranty of identity must be accepted or rejected; it cannot be accepted and its legitimate and inevitable results be denied. The rule there announced was in conflict with previous decisions in New York, and the decision is strongly criticised in the Court of Errors and Appeals of New Jersey, in Wood v. Sheldon, 42 N. J. L. 421, 425."

78. Flandrow v. Hammond, 148 N. Y. 129, 42 N. E. 511; McClure v. Central Trust Co., 165 N. Y. 108, 126, 58 N. E. 777.

79. Terry v. Bissell, 26 Conn. 23; Smith v. McNair, 19 Kan. 330; Bell v. Cafferty, 21 Ind. 411, 413; Snyder v. Reno, 38 Iowa, 329, 333; Ware v. McCormack, 96 Ky. 139, 28 S. W. 157; Hurst v. Chambers, 12 Bush (Ky.), 155, 158; Hussey v. Sibley, 66 Me. 192; Worthington v. Cowles, 112 Mass. 30; Merriman v. Walcott, 85 Mass. 258; Lobdell v. Baker, 3 Metc. (Mass.) 472; Brown v. Ames, 59 Minn. 476, 61 N. W. 448; Rogers v. Walsh, 12 Neb. 28; Palmer v. Courtenay, 32 Neb. 773, 49 N. W. 754: Milliken v. Chapman, 75 Me. 306: Wood v. Sheldon, 42 N. J. L. 421; Flinn v. Allen, 57 Pa. St. 482; Daskam v. Ullman, 74 Wis. 474.

80. Meyer v. Richards, 163 U. S. 385, 16 Sup. Ct. 1148, 41 L. Ed. 199.

The words "without recourse," as used in the indorsement of commercial paper, constitute a qualified indorsement, and, under the above section of the statute, and also under the common law, the indorser in using such words nevertheless warrants that the note is genuine, and that it is of the kind or description that it purports to be.81

c. Warranty of title. He who negotiates an instrument by delivery or by a qualified indorsement warrants by implication, unless otherwise agreed, that he is the lawful holder thereof, and has a valid title thereto and a right to so negotiate it.82 He warrants the genuineness and validity of the indorsements, and that he is the lawful holder of the instrument by virtue thereof.83 If the indorsement of any of the previous parties is a forgery, which defeats the title of the instrument in the hands of the vendee, the vendor is liable to the vendee for what he has received thereon, with interest from the time of the receipt.84

Warranty of validity.- Benjamin, in his work on Sales (7th ed.), § 607, states the English rule, when he says: "Under this head may also properly be included a class of cases in which it has been held that the vendor who sells bills of exchange, notes, shares, certificates, and other securities, is bound, not by the collateral contract of warranty, but by the principal contract itself to deliver, as a condition precedent, that which is genuine, not that which is false, counterfeit, or not marketable, by the name or denomination used in describing it."

but both parties are clearly ignorant and clearly innocent; under these circumstances, he states that the weight of reasoning and the weight of authority seem to be in favor of holding that the seller in such cases must bear the loss.

81. Dayton v. Tillotson, 39 Iowa, 404; Watson v. Chesire, 18 Iowa, 202, 87 Am. Dec. 382; Challiss v. McCrum, 22 Kan. 157, 31 Am. Rep. 181; Ware v. McCormack, 96 Ky. 139, 28 S. W. 157; Palmer v. Courtenay, 32 Neb. 773, 49 N. W. 754; Dumont v. Williamson, 18 Ohio St. 515, 98 Am. Dec. 186.

82. Meriden Nat. Bank v. Gallaudet, 120 N. Y. 298, 24 N. E. 994; Littauer v. Goldman, 72 N. Y. 506, 8 Am. Rep. 171; Delaware Bank v. Jarvis, 20 N. Y. 226.

Story, in his work on Promissory Notes, 118 et seq., says in effect that the seller of a note warrants by implication, unless otherwise agreed, that he is the lawful holder, and has a just and valid title to the instrument, 83. Strange v. Ellison, 2 Bailey (S. or a right to transfer it by delivery; C.), 385; Allen v. Clark, 49 Vt. 390. that the instrument is genuine, and In the case of Giffert v. West, 37 Wis. not forged or fictitious; that it is of 115, it was held that the sale and the kind and description it purports on transfer, for a full and fair price, of its face to be, and that he has no knowledge of any facts which prove the instrument, if originally valid, to be worthless, either by failure of the maker or by its being paid, or otherwise to have become void or defunct. He further says, however, that the authorities are in conflict when a fact exists which makes a note of no value,

a note past due, indorser in blank by the person to whose order it is payable, implies a warranty by the vendor that such indorsement is valid; but an express warranty in such a sale may be so framed as to exclude all other warranty which would otherwise be implied by law.

84. Aldrich v. Jackson, 5 R. I. 218.