ity and had acted in fraud of the actual owner or diverted the paper from the purpose for which it was given, he will not be regarded as a bona fide holder.22 Nor will one be regarded as such a holder where he takes the paper without valuable consideration.23

§ 572. Paper taken in ordinary course of business-Evidence -Burden of proof.—If in an action upon a bill or note, against the maker or indorser, it is shown that the paper has been diverted from the purpose for which it was given, the burden is then cast upon the plaintiff of showing that he is a bona fide holder or has succeeded to the rights of such a holder.24 Thus, in a case in West Virginia, it is declared that: "It is the settled rule of commercial law that where a negotiable note is given for a specific purpose, is indorsed and used by the payee for an entirely different purpose, without the knowledge or consent of the maker, the burden of proof is on the holder of such note to show that he received it in the ordinary course of business before maturity for a valuable consideration, and without notice of its misuse by the payee, before he can recover from the maker."25 So, in an action upon a promissory note, it has been held error to sustain an objection to the admission of evidence showing that the note was executed by the defendants as makers without any consideration and for the purpose of taking up another note given as collateral security for the benefit of the payee, and that he did not take up such note, the ground of the objection being that it had not been shown that plaintiffs were not innocent holders for value, it being declared that if the offered proof had been made the burden

22 Haynes v. Foster, 2 Cromp. & M. 237; Rambaut v. Tevis, 164 App. Div. 324, 149 N. Y. S. 993; Baruch v. Buckley, 167 App. Div. 113, 151 N. Y. S. 853.

23 Theurer v. Schmidt, 10 La. Ann. 293; Lincoln v. Fitch, 42 Maine 456; Victor v. Bauer, 11 N. Y. St. 531; Carpenter v. National Bank of Republic, 106 Pa. St. 170.

24 Farmers & Citizens Bank v. Noxon, 45 N. Y. 762; American Exchange Nat. Bank v. New York Belting & P. Co., 74 Hun 446, 6 N. Y. S. 822, affd. 148 N. Y. 698; Davis v. Bartlett, 12 Ohio St. 584, 80 Am. Dec. 375; Smith v. Popular Loan & Bldg. Assn., 93 Pa. St. 19.

25 Union Trust Co. v. McClellan, 40 W. Va. 405, 21 S. E. 1025.

would then rest on the plaintiffs to show that they were bona fide holders for value.26

§ 573. Paper taken in ordinary course of business-Transfer in violation of statute.-Where a note, deposited as collateral security with a person, has been transferred by him to an innocent holder, an action by the latter against the maker or indorser can not be defeated by the fact that such transfer was in violation of a statute making it a criminal offense to dispose of collateral security before the maturity of the debt secured, where there is nothing in the statute providing that the title of an innocent holder in such a case shall be affected by the fraudulent transfer.27

§ 574. Accommodation paper-Bona fide holder.28-It is no defense to an action by a bona fide holder that there has been a misappropriation or fraudulent diversion or transfer of accommodation paper.29 Where, in order to enable his son to

26 Nickerson v. Ruger, 76 N. Y. 279. 27 Gardner v. Gager, 1 Allen (Mass.) 502. The statute in this case provided that if any person who shall hold any collateral security, deposited with him for the payment of any debt which may be due to him, shall, before such debt shall have become due and payable, and without the authority of the party who shall have deposited with aim such collateral security, sell, pledge, loan, or in any way dispose of the same, he shall be deemed to be guilty of a criminal offense and shall be punished by a fine or imprisonment. Mass. Stat. 1855, ch. 213.

28 See ch. 2, "Accommodation Paper."

29 Bunzel v. Maas, 116 Ala. 68, 22 So. 568; Lay v. Wallace, 106 Ark. 458, 153 S. W. 601; Brush v. Scribner, 11 Conn. 388, 29 Am. Dec. 303; Richards v. Street, 31 App. D. C. 427; Miller v. Larned, 103 I11. 570; Tomblin v. Callen, 69 Iowa 229, 28 N. W. 573; Winters v. Home Ins. Co., 30 Iowa

172; Iowa College Trustees v. Hill, 12 Iowa 462; Frank v. Quast, 8 Ky. L. 780; Hutchinson v. Mitchell, 15 La. Ann. 326; Breckenridge v. Lewis, 84 Maine 349, 24 Atl. 864; Nutter v. Stover, 48 Maine 163; Maitland v. Citizens Nat. Bank, 40 Md. 540, 17 Am. Rep. 620; Woodruff v. Hill, 116 Mass. 310; Clark v. Thayer, 105 Mass. 216, 7 Am. Rep. 511; Sweetser v. French, 14 Metc. (Mass.) 262; Wareham Bank v. Lincoln, 3 Allen (Mass.) 192; Faulkner v. White, 33 Nebr. 199, 49 N. W. 1122; Merchants Nat. Bank v. Comstock, 55 N. Y. 24; Bank of New York v. Vanderhorst, 32 N. Y. 553; Blair v. Hagemeyer, 26 App. Div. 219, 49 N. Y. S. 65; Brooks v. Hey, 23 Hun (N. Y.) 372; Tinsdale v. Murray, 9 Daly (N. Y.) 446; Ray v. Banks, 6 Jones L. (N. Car.) 118; Witte v. Williams, 8 S. Car. 290; Brown v. Thompson, 79 Tex. 58, 15 S. W. 168; Quinn v. Hard. 43 Vt. 375; Farmers & Mechanics Bank v. Humphrey, 36 Vt. 554; Etheridge v. Parker, 76 Va. 247; Peters

acquire a half interest in a corporate business, a father indorsed his notes, the father was not released as indorser by the fact that one share of the son's stock was transferred to another, as it was not such a violation of the agreement of the father as accommodation indorser as to release him from liability.30 Thus in an early case it is said: "When negotiable paper is made for a particular object, as when it is indorsed for a specific purpose, the indorser lending his name to accommodate the maker, as to renew another note, and the maker applies it to a different purpose, to the prejudice of the indorser and this is known to the person receiving it, he shall stand upon no better ground than the fraudulent assignor. But if the assignment of such note or bill is a fraud upon the indorser, yet a bona fide holder for a valuable consideration, without notice, to whom such note or bill has been transferred, will be protected in receiving such paper in the usual course of business."31 And, in a case in New York, where the defendant sought to avail himself of such a defense, the court declared that: "The fact that the note in suit, of which the defendant was an accommodation indorser as the surety for the makers, was diverted from the purpose for which it was made and indorsed, to the prejudice of the indorser, is fully met and overcome as a defense by the fact, also proved, that the plaintiff became the holder and owner of the note before its maturity for value actually paid, and without notice of any defense to the note, or defect in the title of its immediate indorser."32 But, under the Negotiable Instruments Law, providing that: "A holder in due course is a holder who has taken the instrument under the following conditions: * that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it," mere notice of suspicious circumstances, or notice of facts from which on inquiry the infirmity in the instrument might be discovered, is not sufficient to establish that the holder of collateral negotiable paper

v. Gay, 9 Wash. 383, 37 Pac. 325; Gillespie v. Campbell, 39 Fed. 724.

30 Haas v. Commerce Trust Co., 194 Ala. 672, 69 So. 894.

31 Brush v. Scribner, 11 Conn. 388, 29 Am. Dec. 303.

32 Merchants Nat. Bank v. Comstock, 55 N. Y. 24.

did not become possessed of such paper as a holder in due course.33

In an action by an indorsee against the indorsers of negotiable promissory notes, where the defense relied on by the defendants was that they were accommodation indorsers and that the indorsements were made upon the promise of the maker of said notes that, by the use of said indorsements, he would pay off an indebtedness for which collaterals were pledged, and deliver such collaterals to the defendants together with a written guaranty of a certain firm as further security, and that the maker had fraudulently diverted the indorsements and failed to keep said promises, it was decided that the jury should be instructed that the plaintiff was entitled to recover if the jury believe from the evidence that he purchased the notes before maturity in good faith, without notice that the indorsements were without consideration or had been procured by fraud, or that the notes or the proceeds thereof had been misapplied or dealt with in any manner which would impeach their validity. It is, however, decided that, under some circumstances, a bona fide holder in good faith will be limited in his recovery to the amount which he has actually paid for the same. In such a case, however, upon proof of the fact that there has been a diversion of negotiable paper the burden is then held to rest upon the holder to show that he is a bona fide holder.3 36

34

§ 575. Accommodation paper-Other holders.37-The maker of, or surety on, an accommodation note has the right to determine what use shall be made of the same and may impose material or immaterial conditions or terms in regard to its use, and one who takes the paper with knowledge of the terms

33 Negot. Inst. Law, art. "Rights of Holders," § 52; A. E. McBee Co. v. Shoemaker, 174 App. Div. 291, 160 N. Y. S. 251.

34 Bunzel v. Maas, 116 Ala. 68, 22 So. 568.

35 Chicopee Bank v. Chapin, 8 Metc. (Mass.) 40; Stoddard v. Kimball, 6 Cush. (Mass.) 469; Faulkner v. White.

33 Nebr. 199, 49 N. W. 1122; Brown v. Mott, 7 Johns. (N. Y.) 361; First Nat. Bank v. Fowler, 36 Ohio St. 524, 38 Am. Rep. 610.

36 Ives v. Jacobs, 21 Abb. N. C. (N. Y.) 151.

37 See Ch. 2, "Accommodation Pa

per."

and conditions imposed will be subject to the defense that there has been a diversion of the instrument from the use contemplated.38 Thus it is said that: "If accommodation paper is given for a particular purpose, and that purpose is known to the holder at the time it is taken, a diversion of the paper from that purpose or misappropriation of it will release the party giving the accommodation from all responsibility." And such a defense is, as a general rule, available against all parties except one who occupies the position of a bona fide holder.40 So, where defendant signed a note and put it into the hands of the plaintiff for the purpose of having it indorsed by the promisee and then paying with it a debt due from the promisee to a stranger, on the condition, however, that the plaintiff should procure a certain chattel of the promisee and hold it for the defendant's use, but the plaintiff paid the debt with his own funds and took the note himself as indorsee and procured the chattel of the promisee, but afterwards restored it to him, it was held that such facts constituted a good defense.11 In this class of cases the question whether the plaintiff had such knowledge or not is one of fact for the jury.42

§ 576. Accommodation paper-Where purpose substantially effected or no restrictions imposed.--If a person affixes his name to accommodation paper either as maker or indorser, and has no interest in the way in which such paper or the proceeds therefrom are to be used, it will be no defense to an action against such party that it has been diverted from the precise

38 Brush v. Scribner, 11 Conn. 388, 29 Am. Dec. 303; Maitland v. Citizens Nat. Bank, 40 Md. 540, 17 Am. Rep. 620; Benjamin v. Rogers, 126 N. Y. 60; McAdam v. Cooke, 6 Daly (N. Y.) 101; Rochester v. Taylor, 23 Barb. (N. Y.) 18. Compare Ransom v. Turley, 50 Ind. 273.

39 Olds Wagon Works v. Bank of Louisville, 10 Ky. L. 235.

40 Johnston v. May, 76 Ind. 293; Thompson v. Poston, 1 Duv. (Ky.) 389; Brown v. Taber, 5 Wend. (N. Y.)

566; Tinsdale v. Murray, 9 Daly (N. Y.) 446; Garfield Nat. Bank v. Colwell, 57 Hun 169, 10 N. Y. S. 864; Cozen v. Middleton, 118 Pa. St. 622, 12 Atl. 566; Jordan v. Jordan, 10 Lea (Tenn.) 124; Bowman v. Van Kuren, 29 Wis. 209; Quebec Bank v. Hellman, 110 U. S. 178, 28 L. ed. 111, 4 Sup. Ct. 76.1

41 Boutelle v. Wheaton, 13 Pick. (Mass.) 499.

42 Maitland v. Citizens Nat. Bank, 40 Md. 540, 17 Am. Rep. 620.