decided that the indorsee of a negotiable promissory note, to whom the same is transferred by the maker in payment of a pre-existing debt, is entitled to enforce payment of the same against the indorser, irrespective of the equities existing between the original parties.48 Again, the fact that an assignee receives a bond in payment of a pre-existing debt due him by a corporation can make no difference in his rights to a recovery upon it, where he is the assignee for a valuable consideration and so entitled to all rights as such.49 But, whether the giving of notes for an existing indebtedness shall be regarded as an absolute payment or treated as evidence of the original debt, which shall continue in force, is within the control of the parties, and the effect of the transaction is to be determined by their intention and agreement. The common-law rule is that a promissory note made by the debtor does not discharge a pre-existing debt for which it was given unless it be the express agreement of the parties.50 In order that a pre-existing debt may constitute consideration for a note given therefor, the holder must show that he has parted with something, has given up the original debt or the right to sue upon it.51 Generally, however, a note executed for past services rendered the maker by a member of his family can not be enforced, for here the consideration is no more than a moral obligation.52 § 391. Rule as to value-Decisions contra or qualitative.Notwithstanding the weight of authority sustaining the preceding rule, the contrary rule has been asserted in numerous cases. Many of these determinations, however, can not be relied on as establishing a controlling arbitrary rule, since they rest rather upon the circumstances than upon principle, even though upon their face they assert the doctrine of availability of defenses, and in addition they do not all of them positively or in terms negative the general rule first stated, but may be deemed to be exceptions or qualifications thereof.53 So, where the holder, who had a claim against the draw 48 Blanchard v. Stevens, 57 Mass. (3 Cush.) 162, 50 Am. Dec. 723. 49 Fox v. Blackstone, 31 I11. 538. 50 Topeka Capital Co. v. Merriam, 60 Kans. 397, 56 Pac. 757. 51 Rogowski v. Brill, 131 N. Y. S. 589. 52 Harper v. Davis, 115 Md. 349, 80 Atl. 1012, 35 L. R. A. (N. S.) 1026. 53 Jordan & Son v. Thompson, 117 er for the conversion of certain bonds, took a bill in satisfaction thereof, it was decided that there was a precedent liability and as, at the time it was delivered, nor at any time afterwards, the holder Ala. 468, 23 So. 157; Forbes v. Williams, 13 Ill. App. 280; Ingerson v. Starkweather, Walk. Ch. (Mich.) 346; Woodsen v. Owens (Miss.), 12 So. 207; Holmes v. Carman, 1 Freem. Ch. (Miss.) 408; Phoenix Ins. Co. v. Church, 81 N. Y. 218, 59 How. Prac. 293, 37 Am. Rep. 494 ("It is the settled law of this state, that prior equities of antecedent parties to negotiable paper transferred in fraud of their rights will prevail against an indorsee who has received it merely in nominal payment of a precedent debt, there being no evidence of an intention to receive the paper in absolute discharge and satisfaction beyond what may be inferred from the ordinary transaction of accepting or receipting it in payment, or crediting it on account. The law regards the payment under such circumstances as conditional only, and the right of the creditor to proceed upon the original indebtedness after the maturity of the paper is unimpaired"); Lawrence v. Clark, 36 N. Y. 128; Scott v. Ocean Bank, 23 N. Y. 289; Tredwell v. Lincoln, 52 Hun 614, 5 N. Y. S. 341, affd. 127 N. Y. 674, 28 N. E. 255; Rochester Printing Co. v. Loomis, 45 Hun (N. Y.) 93; Burham v. Baylis, 14 Hun (N. Y.) 608; Bright v. Judson, 47 Barb. (N. Y.) 29 (accepting a bill or note in payment of a precedent debt is not parting with value, so as to make the holder a bona fide holder for value); White v. Springfield Bank, 1 Barb. (N. Y.) 225; Philbrick v. Dallett, 34 N. Y. Super. Ct. 370, 43 How. Prac. 419, 12 Abb. Prac. (N. S.) 419 ("our courts held at quite an early day that the receipt of commercial paper, fraudulently put in circulation or diverted from the purpose for which it was originally issued, merely as payment or security for a precedent debt, no new credit or other thing of legal value being given on the faith thereof, and no security being relinquished or discharged, nor any new responsibility incurred on the credit thereof, is not parting with value, such as to enable the holder to enforce such commercial paper against an accommodation party, or to hold it against the true owner, or to hold it free of equities existing upon it against the transferrer at the time of the transfer. This rule has been firmly maintained, both at law and in equity, by a long and uninterrupted series of adjudications, and is beyond question the settled law of this state"); Bell v. McNiece, 17 N. Y. S. 846 (note was received subject to defenses where it does not appear that anything of value was parted with or relinquished); Stalker v. McDonald, 6 Hill (N. Y.) 93, 40 Am. Dec. 389; Ontario Bank v. Worthington, 12 Wend. (N. Y.) 593; Bank v. Johnston, 105 Tenn. 521, 59 S. W. 131; Vatterlien v. Howell, 37 Tenn. (5 Sneed) 441; Rhea v. Allison, 3 Head (Tenn.) 176; King v. Doolittle, 1 Head (Tenn.) 77; Ingram v. Morgan, 23 Tenn. (4) Humph.) 66, 40 Am. Dec. 626; Ferress v. Tavel, 87 Tenn. (3 Pick) 386, 11 S. W. 93, 3 L. R. A. 414. See Credit Co., Ltd., v. Howe Machine Co., 54 Conn. 357, 8 Atl. 472, 1 Am. St. 123. That one who takes a draft in payment of pre-existing debt is not a bona fide holder for value, no release having been given and nothing of value having been relinquished. See Webster v. Howe Machine Co., 54 Conn. 394, 8 Atl. 482. had surrendered nothing held by him for the bill, he was not such a bona fide holder as to preclude a defense of want or failure of consideration. And if no valuable security or lien is relinquished by the holder of negotiable paper, who has taken it for an antecedent indebtedness, the fact that he takes the note in good faith is held not to protect him either in law or equity against the true owner.55 So, where a note is taken for a subsisting indebtedness, it is decided that the holder can not recover thereon where he is not a holder for a valuable consideration.56 And payments made to an assignor of a note for a pre-existing debt may operate to reduce the amount of recovery.57 So the defense of want or failure of consideration is held to be available against a creditor who takes a note originally signed in blank, although filled up before delivery to such holder, especially where he has not incurred loss by giving credit to the paper or by paying a fair equivalent for it and the notes were not received in the usual course of trade for a valuable consideration.58 $392. Banks-Distinction between crediting amount of note on undrawn deposit and crediting on pre-existing indebtedness —Bona fide holder.—An indorsee bank is a bona fide holder of a note given for past indebtedness.59 And if a note is given to a bank for a pre-existing debt the bank is a bona fide holder to the extent of the debt due and not to the amount of the note.Go Again after a note has been negotiated in a bank the consideration thereof, whilst the note is the property of the bank, can not be questioned by the payor. And where a bank receives and discounts negotiable 61 54 Lindon v. Beach, 6 Hun (N. Y.) 200. 55 Clark v. Ely, 2 Sandf. Ch. (N. Y.) 166. 56 Petrie v. Clark, 11 Serg. & R. (Pa.) 377, 14 Am. Dec. 636. 57 Bond v. Fitzpatrick, 72 Mass. (8 Gray) 536. 58 Riley v. Johnson, 8 Ohio 526 (decided 1838). 59 Mechanics Bank v. Chardavoyne, 69 N. J. L. 256, 55 Atl. 1080. But the note was indorsed in blank and given to another to get discounted who in dorsed it to the bank in payment of his debt then due to the bank. The question, however, was determined under the law of New York as the lex loci contractus. Where a bank took the note of its cashier for his preexisting indebtedness, it was for value, and the bank is not a holder in due course. Mays v. First State Bank (Tex. Civ. App.), 233 S. W. 326. 60 Citizens Bank v. Payne, 18 La. Ann. 222, 89 Am. Dec. 650. 61 Tuggle v. Adams, 3 A. K. Marsh. (Ky.) 429. paper, places the proceeds to the credit of the holder, and charges over against him and cancels other notes upon which are responsible parties, but which are overdue and lie under protest, such cancelation is equivalent to paying value at the time, and precludes all defenses existing as between the original parties.62 A distinction exists, however, between a case where a bank gives a depositor credit on a pre-existing indebtedness, such as for money loaned, or for an overdraft of his account, or the like, and a case where a bank discounts paper for a depositor, and gives him credit upon its books for the proceeds thereof, since in the latter case the bank is not a bona fide holder for value so as to be protected against infirmities of the paper, unless in addition to the mere fact of crediting the depositor with the proceeds of the paper, some other and valuable consideration passes. Such a transaction simply creates the relation of debtor and creditor between the bank and the depositor, and so long as that relation continues and the deposit is not drawn out, the bank stands in the same position as the original party to whom the paper was made payable, even though the bank took the paper before maturity and without notice. By giving credit to the indorser of the note on his deposit account, the bank in effect agrees to pay him that amount of money on demand by check or order, and parts with nothing of value. When it receives notice of defenses to the note, it is still in a situation, provided the amount thus credited has remained undrawn by the depositor, to return the note to him and cancel the credit.63 So it is decided in New York that the mere crediting to a depositor's account, on the books of a bank, of the amount of a check drawn upon another bank, where the depositor's account continues to be sufficient to pay the check in case it is dishonored, does not constitute the bank a holder in due course within the law merchant, as that term is now defined in the Negotiable Instruments Law so as to render its title superior to the defenses which the drawer of the check may have against the payee. So in an 62 Salina Bank v. Babcock, 21 Wend. (N. Y.) 499 (the contention was that no value had been given and diversion). 63 City Deposit Bank V. Green (Iowa), 103 N. W. 96, also charge of trial court affirmed. 64 Citizens State Bank v. Cowles, 180 N. Y. 346, 73 N. E. 33; Negot. Inst. Law, art. "Rights of Holder", § 52. Case reversed, 89 App. Div. 281, 86 N. Y. S. 38. In the principal case the court cites Albany County Bank v. Peoples Co-Operative Ice Co., 92 App. other case in that state it is held that a bank is not a holder of a note in due course, when the proceeds of the note are simply credited to the person from whom it was purchased, and not paid out until the bank has notice of an infirmity in the instrument or defect in the title of the person from whom the note was purchased. The Negotiable Instruments Law seems declaratory of the law as uniformly stated in the decisions of New York and other states, and notice to the bank of an infirmity in the instrument in suit or of defect in the title, before it has paid out the full amount agreed to be paid therefor, entitles the maker to avail himself of the defense of failure of consideration.65 Where a bank has notes of an individual on which he was indebted and it becomes expedient for a corporation to purchase his personal property and the bank desiring that adequate provision should be made for the payment of its debts an agreement was reached between the parties whereby. with the bank's consent, the individual's notes were retired with new notes of the corporation, such notes were based upon a sufficient consideration.66 Again, the partial or total failure of consideration or fraud, in the execution and negotiation of a note made payable at an incorporated bank, which had been discounted before maturity by a bank of the commonwealth of Kentucky or organized under the laws of the United States, is not available as a defense to it, if purchased in good faith by the bank without notice Div. 47, 86 N. Y. S. 773; Dykman v. Northridge, 80 Hun (N. Y.) 258; Central Nat. Bank v. Valentine, 18 Hun (N. Y.) 417; Thompson v. Sioux Falls Nat. Bank, 150 U. S. 231, 37 L. ed. 1063, 14 Sup. Ct. 94. 65 Albany County Bank v. Peoples Co-Operative Ice Co., 92 App. Div. 47, 86 N. Y. S. 773, quoting from New York County Nat. Bank v. Massey, 192 U. S. 138, 48 L. ed. 138, 24 Sup. Ct. 199; Aetna Nat. Bank v. Fourth Nat. Bank, 46 N. Y. 82, 7 Am. Rep. 314; Thompson v. Sioux Falls Nat. Bank, 150 U. S. 231, 37 L. ed. 1063, 14 Sup. Ct. 94; Central Nat. Bank v. Valentine, 18 Hun (N. Y.) 417; Dykman v. Northridge, 80 Hun 258, 30 N. Y. S. 164; Sixth Nat. Bank v. Lorillard Brickworks Co., 18 N. Y. S. 861; Clark Nat. Bank v. Bank of Albion, 52 Barb. (N. Y.) 592; Negot. Inst. Law, art. "Rights of Holder", §§ 54, 57; Daniel on Negot. Inst. (5th ed.), §§ 779b, 782; 4 Amer. & Eng. Ency. of L. 298. The court, in the principal case, said, however: "Whether notice of dishonor of a note is alone sufficient in all cases to constitute notice of an infirmity or defect in the title of the person negotiating the same is not necessary now to determine." 66 Flour City Nat. Bank v. Shire, 88 App. Div. 401, 84 N. Y. S. 810. |