109

Defense against Payee.

§ 1875. Defenses are available, in general, against the payee or other immediate party to commercial paper as in other contracts. And equities are admissible, in like manner, against the payee's collecting agent; or against one who sues as indorsee "to the use of the payee." 110 So, where the payee is partner and agent of the plaintiff in the transaction for which the note was given.111 And, even where the payee repurchases the note from a bona fide holder he is subject to such defenses as were originally available against him.112 So, where a merely nominal payee indorses to the real party in a usurious contract, the maker will not be liable to the latter, nor

109 Sinnot v. Schlater, 22 La. Ann. 201.

110 E. g. on an agreement to repay the drawer, if collected. Wilson v. Holmes, 5 Mass. 543.

111 Kelly v. Pember, 35 Vt. 183.

112 Kost v. Bender, 25 Mich. 515.

In an

estopped by his admissions to him or to the payee.113 action by the payee, the acceptor cannot set up equities between himself and the drawer, although he had funds of the drawer in his hands at the time of acceptance.114 So, he cannot set up a want of consideration between himself and the drawer, although the payee obtained the bill before acceptance.115 So, a guarantor cannot set up fraud on himself by the maker as against a payee who had no notice of it.116 And, as against such payee, the maker or surety cannot set up that the note was given on condition of another surety being added before delivery.117 But, where a note is made to A. for goods sold by B. with a warranty, a breach of B.'s warranty is admissible in an action brought against the maker by A., although he knew nothing of it.118 On the other hand, where A. gave his note to C. in payment of his own debt to B., and of B.'s debt to C., he cannot set up against C. a defense which would have been available as against B.1

Defense against Holder with Notice.

119

§ 1876. Where the purchaser takes a bill or note with notice, he is subject to defense like the payee. Thus, the maker may set up against such holder that he had retired from a partnership before the firm note was delivered; 120 or that the consideration was illegal; 121 or that the note was given expressly on condition of another surety being added,122 or on conditions as to purchase of goods or other consideration.123 So, he may show that the note

113 Nichols v. Levins, 15 Iowa, 362.

114 Flournoy v. Bank, 78 Ga. 222, 2 S. E. 547. 115 Arpin v. Owens, 140 Mass. 144, 3 N. E. 25.

116 Davis Sewing-Mach. Co. v. Buckles, 89 Ill. 237.

117 Jordan v. Jordan, 10 Lea (Tenn.) 124.

118 Aldrich v. Stockwell, 9 Allen (Mass.) 45.

119 Adams v. Power, 48 Miss. 450.

120 Robb v. Mudge, 14 Gray (Mass.) 534.

121 Wiggin v. Bush, 12 Johns. (N. Y.) 306; Jacobs v. Mitchell, 46 Ohio St. 601, 22 N. E. 768. So, as to usury, Zabriskie v. Spielman, 46 N. J. Law, 35. 122 See 88 187, 916, supra.

123 McFadden v. Maxwell, 17 Johns. (N. Y.) 188; Belleville Sav. Bank v. Bornman (Ill. Sup.) 10 N. E. 552; Murray v. Reed, 17 Wash. 1, 48 Pac. 343.

was obtained by fraud; 124 especially where it was nonnegotiable.125 So, he may show that it was for accommodation for a particular purpose, which had failed or been disregarded; or that the accommodated party had fraudulently diverted the paper.127 But the mere fact of its being accommodation paper constitutes no defense even against a party with notice.12

126

A release may be set up, in like manner, against a purchaser with notice.129 But the fact that the plaintiff purchased with notice that the note was given for an insurance premium will not render a claim of the maker against the company admissible without further notice.130 And a set-off may be available against the payee, and not against a purchaser for value before maturity who had notice of it.131

Defense against Purchaser without Indorsement.

§ 1877. Where the purchaser of a bill or note takes it without indorsement, unless it is transferable by delivery, he will be subject to such defenses as are available against the payee.132 But it is sufficient for his protection if the note is indorsed before maturity,

124 Fowler v. Brantly, 14 Pet. 318; Fisher v. Leland, 4 Cush. (Mass.) 456; First Nat. Bank of Chelsea v. Goodsell, 107 Mass. 149; Burrill v. Stevens, 73 Me. 395; Platt v. Jerome, 2 Blatchf. 186, Fed. Cas. No. 11,217; Gilman v. Railroad Co., 72 Ala. 566; Bank of Tennessee v. Johnson, 1 Swan (Tenn.) 217; Knott v. Tidyman, 86 Wis. 164, 56 N. W. 632. As to payments made after notice, De Mott v. Starkey, 3 Barb. Ch. (N. Y.) 403.

125 Hamilton v. Insurance Co., 65 Ga. 750.

126 Chit. Bills, 250; Lloyd v. Davis, 3 Law J. K. B. 38; Small v. Smith, 1 Denio (N. Y.) 583; Holbrook v. Mix, 1 E. D. Smith (N. Y.) 154; Prall v. Hinchman, 6 Duer (N. Y.) 351; Wagner v. Diedrich, 50 Mo. 484; Moulton v. Posten, 52 Wis. 169; Stone v. Vance, 6 Ohio, 246.

127 Especially where the transfer was also usurious. Powell v. Waters, 8 Cow. (N. Y.) 669, affirming 17 Johns. (N. Y.) 176. And see § 526, supra. 128 See § 561, supra.

129 Case Wagon Co. v. Wolfenden, 63 Wis. 185, 23 N. W. 485.

130 Barker v. Valentine, 10 Gray (Mass.) 341.

See § 1882, infra. But,

131 Patterson v. Wright, 64 Wis. 289, 25 N. W. 10. where the note was fraudulently transferred by the payee to evade the set-off, an indorsee with notice was held subject to it as a trustee for the payee. Hillhouse v. Adams, 57 Conn. 153, 17 Atl. 698.

132 Weber v. Orten, 91 Mo. 677, 4 S. W. 271. E. g. want of consideration, Camp v. Sturdevant, 16 Neb. 693, 21 N. W. 449; or an agreement for exten

although previously transferred by delivery only.133 Where one takes from the payee by assignment for the benefit of creditors, he is in like manner subject to defenses existing against the payee.134 So, where a note is made payable to A., and delivered without indorsement in the first instance to B., the latter will be subject to defense as payee.135 And where one purchases in good faith, but under a forged indorsement, he takes the paper subject to defense like a purchaser without indorsement.1

136

Defense against Holder without Consideration-Pledgee.

§ 1878. One who takes a note without consideration takes it subject to defense.137 So, where the drawee pays drafts out of the drawer's funds in hand, and holds them as vouchers, they are open to equities between himself and the drawer.138 And, where one purchases a note for less than its face, he is only entitled to protection against defenses to the extent of the consideration paid.139 So, where he purchases stolen bank bills at a discount below their market value, and after they have been protested.1

140

One who holds commercial paper as a pledgee is protected as a bona fide holder,141 but not beyond the amount of the debt secured

sion, Ferguson v. Hill, 3 Stew. (Ala.) 485; or for another surety, Gibson v. Miller, 29 Mich. 355; or not to transfer, Trust Co. v. National Bank, 101 U. S. 68; or a part payment, Dunn v. Meserve, 58 N. H. 429. And see §§ 789, 989. supra; and as to the effect of indorsement without recourse, § 722, supra, and restrictive indorsement, § 727, supra.

133 Irwin v. Bailey, 8 Biss. 523, Fed. Cas. No. 7,079.

134 Sims v. Wilson, 47 Ind. 226.

135 E. g. of usury, Marvin v. McCullum, 20 Johns. (N. Y.) 288; or fraud, Boody v. Bartlett, 42 N. H. 558.

136 Rowe v. Putnam, 131 Mass. 281.

137 E. g. usury, Harpham v. Haynes, 30 Ill. 405; or fraud, Millard v. Barton, 13 R. I. 601; Sawyer v. Wiswell, 9 Allen (Mass.) 39. And see § 990 et seq., supra.

138 Randall v. Weld, 86 Pa. St. 357.

139 Holcomb v. Wyckoff, 35 N. J. Law, 35. And see §§ 452, 994, supra.

140 Olmstead v. Bank, 32 Conn, 278.

141 Saloy v. Bank, 39 La. Ann. 90, 1 South. 657; Doane v. King, 30 Fed. 106; Partridge v. Williams, 72 Ga. 807. So, by statute in GEORGIA (Code, § 3697).

by the pledge.142 As to the excess, it is admissible to show failure of the original consideration,143 or a part payment, or other defense.144 But where a certificate is assigned expressly for value, and pledged by the assignee, the pledgee may hold it as security for his debt, notwithstanding an agreement between the original parties to the transfer for its return on a certain condition.11 Where the pledge is usurious, the maker may set up a payment made to the payee without notice of the transfer.14 It is, however, no defense against a pledgee to show that the note was pledged to him as collateral security for a verbal agreement.147

Defense against Purchaser after Maturity.

§ 1879. Defenses are, in general, admissible against a purchaser after maturity as against the original payee.148 And this is expressly provided by statute in some states.149 And in Illinois intermediate defenses also are reserved as against such holder.150 The rule subjecting a purchaser after maturity to defenses available against the payee applies also to negotiable coupon bonds,151 and to the coupons 142 Union Nat. Bank v. Roberts, 45 Wis. 373; Chicopee Bank v. Chapin, 8 Metc. (Mass.) 40; International Bank v. German Bank, 71 Mo. 183. And see §§ 799, 800, supra.

143 Exchange Bank v. Butner, 60 Ga. 654.

144 Bond v. Fitzpatrick, 8 Gray (Mass.) 536; or fraud, Carpenter v. Bank, 106 Pa. St. 171.

145 Moore v. Bank, 55 N. Y. 41.

146 Caswell v. Railroad Co., 50 Ga. 70.

147 Walker v. Crawford, 56 Ill. 444.

148 Davis v. Briggs, 39 Me. 304; Paine v. Railroad Co., 118 U. S. 152, 6 Sup. Ct. 1019; Smith v. Lawson, 18 W. Va. 212; Lanata v. Bayhi, 31 La. Ann. 229; McNitt v. Helm, 33 Iowa, 342; British American Mortg. Co. v. Smith, 45 S. C. 83, 22 S. E. 747. Although the note purported on its face to have been indorsed before maturity. Goodson v. Johnson, 35 Tex. 622. And irrespective of the good faith of the indorsee. Pugh v. Grant, 86 N. C. 39. And see § 674, supra.

149 COLORADO (Mills' Ann. St. § 248); GEORGIA (Code, § 3695); KANSAS (Gen. St. c. 115, § 2); NEBRASKA (Comp. St. § 3383); MINNESOTA (Gen. St. c. 66, § 27). So, by the Negotiable Instruments Law in COLORADO, CONNECTICUT, FLORIDA, VIRGINIA (§ 58), MARYLAND (§ 77), and NEW YORK (§ 97).

150 ILLINOIS (Hurd's Rev. St. c. 98, § 11).

151 National Bank of Washington v. Texas, 20 Wall. 72; Texas v. White,