§ 543. When note not collateral security but independent obligation.—A note is not collateral security but an independent obligation, and is a promise in writing to pay the debt of another, where it is given to release a levy upon chattels under execution, issued in an action to which the maker of the note was not a party, said note being given upon the understanding that it should be paid at maturity and the execution held in the meantime; not that the execution would be paid and the note held as security. In such case the note is the primary obligation and the execution the secondary.54 § 544. Note payable to order, assigned but not indorsed.Where a promissory note, payable to order of a named payee and not indorsed or otherwise assigned in writing so as to vest the legal title in the person to whom the same is delivered as collateral, is, by the payee, before its maturity, delivered to another who takes the same bona fide, either as a purchaser or for the purpose of holding it as collateral security, but by mistake or inadvertence, the note is not indorsed or otherwise transferred in writing, the holder takes it subject to all the equities between the original parties to the note existing at the time of such delivery and which arose out of the transaction upon which the note was given. This is true, although at the trial the note was transferred in writing by the original payee to the usee.55 54 So held in Lockner v. Holland, 81 N. Y. S. 730. 55 Benson v. Abbott, 95 Ga. 69, 22 S. E. 127. The court said: "It has been for a long time well-settled law that one who, without indorsement, though for value and without notice, takes a note payable to order, takes it subject to all defenses which would have prevailed against the original payee. It will be observed that the rule under consideration, and which protects the holder against such equities, applies only to commercial paper which is negotiable. Unless a promissory note is made payable to bearer. it is not proprio vigore negotiable in the strict legal sense; it is wanting in the final requisite, which imparts to it the quality of negotiability, namely, indorsement. By this act alone can it become negotiable; and therefore it follows that he who receives it before indorsement does not take it as a negotiable paper, and not being thus negotiable, he takes subject to the equities between the parties. Except in case of negotiable securities, the law indulges no presumptions in favor of the holder; he is not presumed to be such cither bona fide or for value; but, on the contrary, it charges him with notice of, and he takes subject to, all defenses which, originating in the con $545. Agreements and conditions.-A holder and a party to a note can not defend upon the ground that the note was pay tract, might be set up by the maker. Not only is this true where the purpose is to invest the holder with the absolute unqualified title to the paper, but it is likewise true where it is intended only to pledge it as collateral to another liability. In either case the negotiability of the paper is the very essence of the holder's claim to protection against equities.✶✶ ✶ The code, § 2138, declares that promissory notes and other evidences of indebtedness may be delivered in pledge; and § 2139 declares the receiver in pledge of promissory notes is such a bona fide holder as will protect him under the same circumstances as a purchaser, from equities between the parties. Section 2788 declares that the holder of a note as collateral security for a debt stands upon the same footing as a purchaser. He is thus placed upon the same plane as a purchaser. The right of a purchaser for value is to be protected against equities only when, by indorsement, the paper is rendered negotiable, and he is invested with the legal title. So with a pledgee. with the person who holds the paper as collateral security-they all stand upon the same footing. In each case indorsement is the condition of absolution. It is true that notes of the character now under consideration may be pledged as collateral security by manual tradition only, but for such delivery to be effective as against preexisting equities it must be accompanied with the legal requisites to transmission of title. The pledgee must be a holder, a bona fide holder in due course of trade; and a regular indorsement by the payee is necessary to constitute him such. Our attention is directed to the case of Smith v. Jennings, reported in 74 Georgia 551, So as bearing upon and ruling a principle otherwise than is herein expressed. In that case the proceeding was in equity to enforce the alleged lien of a judgment against certain land, a deed to which, together with a promissory note for the purchase-money thereof, had been delivered in pledge. Whether or not the deed alone could have been delivered in pledge so as to vest an interest in the pledgee is not material. When accompanied, however, by the note for the purchase-money, its delivery had the effect to vest in him an equity, and in a contest between this judgment creditor and the pledgee, the latter was entitled, under the rule that he who seeks the aid of a court of equity in vindication of a supposed equitable right, must do equity to have his debt first paid before the thing pledged could be appropriated to the payment of other debts of the pledgor. As between the judgment creditor and the pledgee, the equity of the latter was superior. His interest in the thing pledged had vested prior to the rendition of the judgment. The lien of the judgment, assuming that it could attach at all, would attach only to the interest of the defendant in execution in the thing bailed, and that interest was an equity of redemption. In that case the equities of the judgment creditor arose outside the contract. In this the equity of the surety inheres in the contract itself. In that case notice or want of notice could not affect the lien of the judgment. In this case notice or want of notice is the one potential circumstance to charge the holder of this paper with, or absolve him from, the equities between the parties. In that case the right of the maker to make his defenses to an unindorsed promissory note was not able, under a contemporaneous parol agreement, out of a surplus of certain assets from goods pledged to secure the payor, it appearing that the assets were less than the debt.56 And, where a note with others has been delivered to secure plaintiff as to the payee's indebtedness, the writing evidencing such fact can not be varied by parol proof of different conditions.57 It is also decided, in an action by the payee against the maker, that it can not be shown by parol that the note was conditional or delivered as a pledge or collateral security for the performance of a parol agreement.58 But, if a note is given as collateral security for a certain agreement, after the expiration of the time in which the note is payable, and after its breach by the maker, he is liable thereon, he having received advances for the amount of the paper.59 Where, however, a note is deposited by one party in the hands of a third person as collateral security on a contract to secure its fulfillment, the other party to the contract has no right to bring suit upon such note merely for his fulfillment of the contract so long as it is not agreed that the note shall be liquidated damages for nonperformance, and the damages have not been determined in a suit on the contract.60 And, where a contract between the transferrer and transferee of a demand note does not show that the note was held as collateral security but appears to be an absolute transfer with a conditional guaranty, the transferee is not subject to the defense of failure of consideration. And called in question. Here it is the direct issue between the parties. So it appears that there is no conflict between the principle there declared and that here ruled. Indeed, it is apparent that the two cases involve the application of distinct principles, each equally well established. The views herein expressed, defining the rights of the holder of an unindorsed promissory note made payable to order, are in perfect harmony with the great current of approved authority; and we are thus led to conclude that in the case now under review, the paper in question having gone into the hands of the usee without indorsement or assign 61 ment (whether this occurred through inadvertence or otherwise is immaterial), they took it charged with notice of, and subject to, the pre-existing equities, and though an assignment was in fact executed at the trial, this could not avail as against equities in favor of the maker which sprang out of and inhered in the contract itself." 56 Guy v. Bibend, 41 Cal. 322. 57 Hardie v. Wright, 83 Tex. 345, 18 S. W. 615. 58 Walker v. Crawford, 56 I11. 444. 59 Costelo v. Crowell, 134 Mass. 280. 60 Rumney v. Coville, 51 Mich. 186, 16 N. W. 372. 61 Sawyer v. Phaley, 33 Vt. 69. although the pledgor fraudulently suppresses certain facts as a means to obtain the indorsement, and the indorsee or pledgee had no knowledge thereof, he can recover notwithstanding he failed to make inquiries.62 And even though a note is entrusted to one upon condition and in violation thereof and without authority he transfers it to another in payment or as security for a debt, the transferee without notice is protected as a bona fide holder for value.63 Again, under a "syndicate" and "bondholder's" agreement a certain amount was agreed to be loaned as specified, secured by notes. The terms of the notes were to control the times of payment subject to certain contingencies, certain bonds were attached as collateral, but the notes were the principal obligations and the bonds merely incidents in the nature of security for their payment. The defendant had the privilege of substituting as collateral for the notes a certain new and contemplated issue of bonds; such new bonds, however, were not issued so that any covenant of the syndicate concerning them ever became the subject of default on the part of the plaintiffs. There was therefore no breach of condition. or duty by the plaintiffs and no default by them which precluded enforcing the obligations owned by them and no reason why they should be held liable to defendants. Under a clause in the "syndicate" agreement in the event of the nonpurchase of a certain waterworks system and nonpayment of defendant's note then the syndicate was to act as a unit for their mutual interests. The purchase not being made, the defendants urged that the loans could be enforced by the syndicate only after all the members thereof had voted to enforce them. It was held that the syndicate agreement was no bar to the action on the notes and was immaterial as a matter of defense.64 § 546. Security for performance of illegal contract. It is a good defense to an action by an indorsee against the indorser of a note, indorsed for the accommodation of the maker, that 62 Lee v. Whitney, 149 Mass. 447, 21 N. E. 948. 63 National Bank v. Dakin, 54 Kans. 656, 39 Pac. 180, 45 Am. St. 299. 64 Coffin v. Grand Rapids Hydraulic Co., 18 N. Y. S. 783, affd. 136 N. Y. 655, 32 N. E. 1076. the indorsee received the note as security for the performance of an illegal contract between him and the maker.65 § 547. Note secured by mortgage-Mortgagee against maker-Surety. While ordinarily, a mortgagee can not sue and obtain judgment on a note secured by collateral mortgage, except by foreclosure of the mortgage, if he, by his own act or neglect, deprives himself of the right to foreclose the mortgage, he at the same time precludes himself from a right of action upon the note. He will not be permitted, without the consent of the mortgagor, to release the mortgage in order to sue upon the note. He can not waive the security and bring an action on the indebtedness.66 So, where a mortgagee consented to the sale of the mortgaged property by the mortgagor, with the understanding between the mortgagee and the mortgagor and the purchaser that the purchaser should give his note to the mortgagor, with a given person thereon as surety for the purchase-price of the property; that the mortgagor should indorse the note to the mortgagee, and that upon its payment it should be credited on the mortgage; and the sale was made, the note given and indorsed by the mortgagor to the mortgagee, in pursuance of such arrangement, the mortgagee taking the note before maturity and without notice of any defects in the property sold, it was held that in suit brought by the mortgagee on the note against the maker and the surety, a failure of consideration could not be set up as a defense.67 § 548. Note secured by mortgage or other instrumentBona fide holder-Pledgee.-It is held that the assignee of mortgages or other securities collateral to negotiable paper 65 Dunscombe v. Bunker, 2 Metc. (Mass.) 8; Weimer v. Shelton, 7 Mo. 237. A note given by a grantee for part of the proceeds of land which was conveyed by grantor to avoid his creditors, is in disaffirmance of the fraud, and not in furtherance thereof; and the payee is liable thereon when the note is sold to a purchaser having knowledge of the fraudulent transac tion. Peoples Bank v. True, 144 Tenn. 171, 231 S. W. 541. 66 Hibernia Sav. & Loan Soc. v. Thornton, 109 Cal. 427, 42 Pac. 447, 50 Am. St. 52. Examine Savings Bank v. Central Market Co., 122 Cal. 28, 54 Pac. 273; Donaldson v. Grant, 15 Utah 231, 49 Pac. 779. 67 Graham v. Cambell, 105 Ga. 839, 32 S. E. 118. |