68

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tion cannot be allowed to ingraft a condition upon the instrument such that it will affect third parties." But where the indorsement is in writing, the rule is so far settled that the maker or acceptor and probably prior parties are bound to take notice of the title of the indorsee, and, having such notice, they pay the instrument to him or to subsequent parties at the risk of repayment to the conditional indorser, if the condition is unfulfilled. But, on the other hand, the conditional indorser cannot restrict the negotiability of the instrument and prevent its further indorsement by his indorsee. The terms of the original instrument making it negotiable prevail, and persons other than the conditional indorsee may take it subject to the notice of the condition. And though there is little, if any, authority upon the point, still it may be assumed that in the absence of an express warranty no other than a conditional warranty of title in the subsequent indorser would be implied. There seems to be no reason why the other implied warranties should not remain a part of the contract. But the notice of a conditional title with which the subsequent purchaser of the instrument would be charged would seem to expressly except warranty of title from the obligations of the indorser.

Restrictive Indorsement

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The last of these peculiar classes of indorsements originating in the needs of commerce is the restrictive indorsement. It is of two kinds.70 The first and commonest va

66 Byles, Bills, p. 155; Willse v. Whitaker, 22 Hun (N. Y.) 242. 67 ROBERTSON v. KENSINGTON, 4 Taunt. 30, Moore Cases Bills and Notes, 115; Savage v. Aldren, 2 Starkie, 232. "Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make payment to the indorsee or his transferee, whether the condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally." N. I. L. § 39. This section changes the law.

68 Soares v. Glyn, 8 Q. B. 24, 14 L. J. Q. B. 313.

69 Mandeville v. Newton, 119 N. Y. 10, 23 N. E. 920.

70 "An indorsement is restrictive which either (1) prohibits the further negotiation of the instrument; or (2) constitutes the indorsee

riety, and the one which is generally spoken of by the text writers as the restrictive indorsement, is that where the holder deputes to some other person the business of collecting the bill; the other where the holder indorses the instrument to one person for the use or benefit of, or as the trustee of, another. Upon an indorsement of the first kind the instrument is no longer negotiable; the second variety of indorsement does not, however, restrict its circulation. Examples of the first species of indorsement are indorsements "For collection," "1 the indorsement for collection meaning that the holder takes no title to it and can transfer none, but can merely present it and receive the money upon In construing these and other cases like them, such

72

the agent of the indorser; or (3) vests the title in the indorsee in trust for or to the use of some other person. But the mere absence of words implying power to negotiate does not make an indorsement restrictive." N. I. L. § 36. The first and second subdivisions cover the first class of indorsements discussed in this paragraph, the third subdivision the second class. "A restrictive indorsement confers upon the indorsee the right (1) to receive payment of the instrument; (2) to bring any action thereon that the indorser could bring; (3) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so. But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement." Id. § 37. This section declares the law substantially as stated in this paragraph.

71 National City Bank of Brooklyn v. Westcott, 118 N. Y. 468, 23 N. E. 900, 16 Am. St. Rep. 771; Rand. Com. Paper, 726. So an indorsement on a check by a bank: "Indorsement guaranteed. Pay any national or state bank or order”-is only an indorsement for collection, and does not transfer the beneficial title to the indorsee. National Bank of Rolla v. First Nat. Bank of Salem, 125 S. W. 513, 141 Mo. App. 719 (N. I. L.). It is generally held that indorsement "for deposit" passes title. National Commercial Bank v. Miller, 77 Ala. 168, 54 Am. Rep. 50; Wasson v. Lamb, 120 Ind. 514, 22 N. E. 729, 6 L. R. A. 191, 16 Am. St. Rep. 342; Security Bank of Minnesota v. Northwestern Fuel Co., 58 Minn. 141, 59 N. W. 987. Beal v. City of Somerville, 1 C. C. A. 598, 50 Fed. 647, 17 L. R. A. 291, contra.

72 Sigourney v. Lloyd, 8 Barn. & C. 622; Lloyd v. Sigourney, 5 Bing. 525; White v. Miners' Nat. Bank, 102 U. S. 658, 26 L. Ed. 250. The indorsee "for collection" may bring suit in his own name. Boyd v. Corbitt, 37 Mich. 52; Wilson v. Tolson, 79 Ga. 137, 3 S. E. 900; Rand. Com. Paper, § 726. Rock County Nat. Bank of Janesville v.

74

as "Pay to A. only," " or "Pay to A. for my use," or "Pay to A. for me,' ,"75 or "Pay to my steward and no other person," or "Pay to my servant for my use," 76 the courts have been governed by two principles. The first and most important is the reason that the natural construction of such a form of words is that it implies a mere authority to receive the money called for in the instrument for the use of the indorser himself, or according to his directions. Such an indorsement therefore constitutes the indorsee a trustee for his indorser, and shows that he, at least, did not give a valuable consideration for the bill or note and is not therefore its beneficial owner. It follows from this that the restrictive indorser, in creating such a trust, did not intend to pass the beneficial title to the indorsee, but rather to retain it in himself. And hence the instrument cannot be negotiated by the restrictive indorsee in breach of trust." The second is the reason that the restrictive indorsement, like the conditional indorsement, operates as notice both to the persons called upon to pay the instrument and those who might acquire it after the indorsement as purchasers. No subsequent purchaser could take the instrument in good faith, because whoever reads the indorsement, as it would be every purchaser's legal duty to read it, must see that its operation was limited. Such a purchaser must see that the object of the indorser was to prevent the money received

Hollister, 21 Minn. 385 (under statute requiring action to be prosecuted in name of real party in interest), contra. See Commercial Nat. Bank v. Armstrong, 148 U. S. 50, 13 Sup. Ct. 533, 37 L. Ed. 363. Under section 38 (subd. 2), N. I. L., the restrictive indorsee may sue in his own name.

73 Power v. Finnie, 4 Call (Va.) 411.

74 Lloyd v. Sigourney, 5 Bing. 525.

75 Williams v. Potter, 72 Ind. 354.

76 Edie v. East India Co., 2 Burrows, 1221.

77 A restrictive indorser of a bill or note, to whom it has been returned by his indorsee, is the holder of the instrument, and entitled to enforce it without striking out the restrictive indorsement. New Haven Mfg. Co. v. New Haven Pulp & Board Co., 76 Conn. 126, 55 Atl. 604 (N. I. L.). See, also, Jerman v. Edwards, 29 App. D. C. 535 (N. I. L.); National Bank of Rolla v. First Nat. Bank of Salem, 141 Mo. App. 719, 125 S. W. 513 (N. I. L.).

from being applied to the use of any other person than himself. And therefore, to whomsoever the money might be paid, it would be paid in trust for the indorser, and wheresoever the instrument traveled it carried that trust on the face of it.78 But there is a class of so-called restrictive indorsements which has a very different construction at the hands of the courts. The words in which these indorsements are framed are such as "Pay to A. or order for the use of B.," " and "Pay to the order of A. for the benefit of B." 80 The meaning of these words is declared to be that

78 Lloyd v. Sigourney, 5 Bing. 525. In this case the indorsement was to this effect: "Pay to S. W., or order, for my use. Henry Sigourney." It was held that such indorsement was restrictive, and was sufficient to put a purchaser of such bill upon inquiry, since it indicates that the holder is simply acting as the agent for the one for whose use he is holding. Ancher v. Bank of England, 2 Doug. 637; BLAINE, GOULD & SHORT v. BOURNE & CO., 11 R. I. 119, 23 Am. Rep. 429, Moore Cases Bills and Notes, 117. See Williams, Deacon & Co. v. Shadbolt, 1 Cababé & Ellis, 529 (B. E. A.); Citizens' State Bank v. E. A. Tessman & Co., 121 Minn. 34, 140 N. W. 178.

79 Evans v. Cramlington, Carth. 5, affirmed in the Exchequer Chamber 2 Vent. 309.

80 HOOK V. PRATT, 78 N. Y. 371, 34 Am. Rep. 539, Moore Cases Bills and Notes, 121. In this case the payee, who was also drawer, of a draft indorsed it to the order of Mrs. Mary Hook "for the benefit of her son Charlie." In an action by her, as trustee of her son, against the executors of the drawer, it was held that she could maintain the action. Rapallo, J., said: "She was constituted trustee of her son, and held the legal title. The indorsement gave notice of the trust, so that, if she had passed it off for her own debt, or in any other manner indicating that the transfer was in violation of the trust, her transferee would take it subject to the trust, but there was nothing reserved to the drawer and indorser. The presumption is that the draft was drawn and indorsed by him for a consideration received either from the indorsee or the beneficiary.” See ante, p. 102. In Treuttel v. Barandon, 8 Taunt. 100, the indorsement was in form "Pay to A. or order for account of B." (a third person). This would seem to transfer the legal title to A. in trust for B., yet it was held that B. could maintain trover for the value of the bill against one with whom A. had deposited it for cash advances. This bill was properly negotiable, like the draft in HOOK v. PRATT, subject to the trust. "The plaintiff, who was cestui que trust, seems clearly to have misconceived his action in bringing trover against his trustee; but the point was not taken." 2 Ames Cas. Bills & N.

on making such an indorsement the indorser intended to part with his whole title to the instrument. The indorsee is a trustee for the designated beneficiary. For this reason the indorsement must be presumed to have been made upon a consideration. And being thus a transfer, with its operation limited to the right of the indorsee to apply its proceeds to the benefit of some person other than himself, the instrument could in turn be transferred, and so the paper continued negotiable. And because it was negotiable it was a pledge of the credit of the restrictive indorser. It is settled that an indorsement "Pay to A." does not restrict the negotiation of the instrument, because the intention of the original parties to make the instrument negotiable prevails over the absence of words of negotiability in the indorsement. And for the same reason, with these forms of words the instrument should continue negotiable unless it expressly appears from the contract between the indorser and indorsee that the indorser intended to absolve himself from liability as an indorser and to destroy the effect of the general rule that the indorsee, having possession of the instrument, was its owner.82

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NATURE OF INDORSEMENT

65. The nature of an indorsement is as follows: It is (a) A contract which the indorser assumes with his indorsee and subsequent holders that, if the drawee, acceptor, or maker fails to honor the bill or note, he will, upon the performance of certain conditions imposed by the law merchant, indemnify the holder for all loss incurred by reason of the dishonor of the bill or note.

(b) A transfer of the title to the instrument.8

83

81 N. I. L. § 36; Edie v. East India Co., 1 W. Bl. 295, 2 Burrows, 1216; More v. Manning, Comyn, 311; Leavitt v. Putnam, 3 N. Y. 494, 53 Am. Dec. 322.

82 While these views seem sound, it must be admitted that the distinction between these two classes of restrictive indorsements is 83 2 Ames, Bills & N. p. 837.