defendant would be liable to such prior holder, and the plaintiff only stands in his place. For example: The plaintiffs are joint indorsees, and the defendant is maker, of a promissory note sued upon. There was no consideration between the original parties, and the note was not made for accommodation. One of the plaintiffs is a bona fide holder for value, the other took the note with notice of the want of consideration; but title is derived through others who were bona fide holders for value. The plaintiffs are entitled to recover.1

§ 5. AMOUNT OF RECOVERY.

Paper sold and paper taken to secure debt.

The question often arises where the holder, being a bona fide holder for value, has not paid the face or market value of the bill, note, or cheque, whether he is entitled to recover the face value or must be content with less, and if with less, how much less, assuming the existence of equities available against a prior holder. The question will depend upon the consideration whether the instrument was (1) bought outright or taken in absolute payment of debt, or (2) taken to secure or in conditional payment of debt.

If the holder took the instrument in the first way, he is entitled, by the decided weight of authority, to claim the face value, though he may have paid much less for it, assuming, of course, that he is a bona fide holder for value." The holder is entitled to recover the face of the instrument not only when he has bought the paper in the ordinary sense, as by discounting it, but also when he has taken it in payIowa, 257; Boyd v. McCann, 10 Md. 118; Prentice v. Zane, 2 Gratt. 262; Lynchburg v. Slaughter, 75 Va. 57; Jones v. Wiesen, 50 Neb. 243; Bassett v. Avery, 15 Ohio St. 299; Woodworth v. Huntoon, 40 Ill. 131; Robinson v. Reynolds, 2 Q. B. 196, 211. But see Elwell v. Tatum, 6 Texas Civ. Ap. 397. 1 Hascall v. Whitmore, supra.

2 Fowler v. Strickland, 107 Mass. 552; Cromwell v. Sac, 96 U. S. 51; Dresser v. Missouri Ry. Co., 93 U. S. 92; Moore v. Baird, 30 Penn. St. 138; Bange v. Flint, 25 Wis. 544; Lay v. Wissman, 36 Iowa, 305; Bailey v. Smith, 14 Ohio St. 396; Jones v. Gordon, 2 App. Cas. 616, 622; In re Gomersall, L. R. 1 Ch. 137, 142. But see Oppenheimer v. Bank, 97 Tenn. 19, holding that in case of fraud (available against a prior holder) the plaintiff can recover no more than he paid for the instrument.

ment of property then sold, or in the course of a barter, or has given his negotiable security for it, provided it was received in absolute payment.' It matters not whether the defendant's contract was entered into for actual or supposed valuable consideration or for accommodation.2

Some authorities however hold that where the plaintiff paid less than the face value, he can, against one in whose favor equities exist which would be available against a prior holder, recover no more than he or some holder before him paid for the paper.

If the holder took the paper to secure or in conditional payment of a debt, precedent or then newly created, obviously his claim, between him and his debtor, cannot be greater than the amount due on the debt; but it may be that the debtor himself had a claim for the full amount of the paper, notwithstanding the equities, and in that case his creditor, the holder, would be entitled to recover the face value, holding the excess above the debt in trust for the debtor.5 Or it may be that some prior holder might claim the face value of the instrument; in such a case too the defendant owes the amount to some one, and it cannot matter to him who demands it, provided the person can give him a discharge. If however no one had a better claim upon the instrument than the debtor, the creditor will be entitled to recover no more than the amount of his debt; assuming the existence of equities against the debtor."

6

1 Dresser v. Missouri Ry. Co., supra; Woodruff v. Hill, 116 Mass. 310.

2 Allaire v. Hartshorne, 1 Zabr. 665; Williams v. Smith, 2 Hill, 301; Edwards v. Jones, 2 Mees. & W. 414.

3 Holcomb v. Wyckoff, 35 N. J. 35; Holman v. Hobson, 8 Humph. 127. See Park Bank v. Watson, 42 N. Y. 490.

5 Lay v. Wissman, 36 Iowa, 305; Allaire v. Hartshorne, 1 Zabr. 665; Chicopee Bank v. Chapin, 8 Met. 40, 44.

6 Allaire v. Hartshorne, supra.

Memphis Bethel v. Bank, 101 Tenn. 130.

CHAPTER XVIII.

DISCHARGE OF SURETY: DEALINGS WITH PRINCIPAL

DEBTOR.

§ 1. INDORSER AS SURETY: THE STATUTE.

merchant.

Ir the doctrines of the law pertaining to the contracts of guaranty and suretyship in regard to dealings with the principal debtor were confined to those two subjects, this Indorsement a chapter would be unnecessary; at any rate, it surety of law would only be necessary to say that dealings with the principal debtor have the same effect upon the contract of a guarantor or a surety in contracts of the law merchant as elsewhere in the law. But those doctrines are not confined to guaranty and suretyship; they apply to indorsement as well, indorsement itself being in reality a contract of assurance, though in a sense of its own; indeed, for the purposes in question, indorsement is often called a contract of suretyship. It is obvious that each indorser is then a surety, not merely for the maker or acceptor, but also for all parties before him; all prior parties, in other words, are principal debtors in relation to any particular indorser, and so the matter must be understood in this chapter.

The fact should, therefore, be stated that dealings with the principal debtor which would have the effect to discharge a surety in the ordinary sense will have a like effect upon an indorser and all other parties secondarily liable.'

The Statute puts the matter of discharging parties secondarily liable thus: A person secondarily liable on the instrument

1 For convenience the word 'indorser' will often be used in the present chapter in a comprehensive sense, as including all parties secondarily liable.

is discharged (1) by any act which discharges the instrument; How the Stat (2) by the intentional cancellation of his signature ute deals with by the holder; (3) by the discharge of a prior the subject. party; (4) by a valid tender of payment made by a prior party; (5) by a release of the principal debtor, unless the holder's right of recourse against the party secondarily liable is expressly reserved; (6) by any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument, unless the right of recourse against such party is expressly reserved.2

The present chapter will however treat only of dealings with the principal debtor, affecting the rights of the surety.

One of the chief rules of suretyship is that the creditor must not surrender to the principal debtor securities placed in his hands to assure performance of the contract or paySubrogation. ment of the debt, on the ground that the surety, in virtue of a doctrine of equity called subrogation, would be entitled to such securities for the same purpose in case he should be compelled to pay, or being bound to pay should pay voluntarily. The surrender of such securities, without the surety's consent, would therefore be a violation of the surety's rights, and hence would discharge him to the extent of his loss.3 That rule applies as well in favor of an indorser in the case of dealings of the kind between the holder of the paper and any party before the indorser.

$ 3. AGREEMENT FOR TIME: COMPOSITIONS: RESERVATION OF RIGHTS.

Another of the chief rules of suretyship is this: The creditor must not discharge the principal debtor, or make any binding

1 No consideration is necessary for discharging the party.

2 N. I. L. § 127.

Shannon v. McMullin, 25 Gratt. 211. See Vose v. Florida R. Co., 50 N. Y. 369, 375.

1

agreement with him to extend the time of performance agreed upon in the contract with the surety, without the Discharge of surety's consent, unless (in cases where he may) he debtor, or exprincipal plainly reserves his rights against the surety. To tending time. give such a discharge, or to make such an agreement, without the reservation of rights, would discharge the surety. That rule also applies to indorsers and other parties secondarily liable; binding agreements of the kind, without consent of such parties and without a reservation of rights against them, operate as a discharge of their liability.2

In regard to discharges, the rule is that a discharge of any party to a bill, note, or cheque is a discharge of all subsequent non-consenting parties, not merely where the discharge granted in favor of the earlier party is effected by payment of the paper by him, but presumptively where it arises from mere agreement to compound or release liability. Payment of the paper extinguishes it, and hence the liability of all parties to it; agreement to compound discharges the party towards the holder, and so may well be treated as a presumptive discharge of all who follow as sureties for him. For example: The defendant is second indorser, with liability once duly fixed, and the plaintiff is holder of a promissory note. The plaintiff gives a discharge, without the defendant's consent, to the first indorser of the note, by contract under seal; that party's liability also having been duly fixed. The defendant is discharged.

3

It is true that in such a case the defendant, if compelled to pay, would have recourse over against the prior party discharged; but the practical result of such recourse in most cases would be that the party who

Presumptive effect: reservation of rights.

1 It is said that a mere agreement to extend the time of payment is valid on the ground that it implies a promise by the debtor to pay interest. Nelson v. Flagg, 50 Pac. R. 571. But see 2 Daniel, Neg. Inst. 1319 a; Woodhall v. Streeter, 39 S. W. 169 (Texas). 2 N. I. L. § 127, supra. See Shannon v. McMullin, 25 Gratt. 211; Dey v. Martin, 78 Va. 1; Exchange Bank v. Bayless, 91 Va. 134; Beacon Trust Co. v. Robbins, 173 Mass. 261, 271, 274. In Massachusetts discharge of the maker under composition proceedings does not discharge indorsers, in virtue of statute. Skillings v. Marcus, 159 Mass. 51.

8 Newcomb v. Raynor, 21 Wend. 108.