some three years before the foreclosure. These payments, on the mortgagor's part, were made without notice or knowledge of the assignments. And upon these facts it was held that the mortgagor was to be protected, and would even have been protected if the assignments had been recorded, because notice must be given or brought home to the mortgagor not to pay the original mortgagee, else payments to such mortgagee on account of the mortgage are perfectly valid.35 This is the logical outgrowth of the theory of assignment, as explained in the English case of Stocks v. Dobson. "The debtor," said the court, "is liable at law to the assignor of the debt, and at law must pay the assignor if the assignor sues in respect of it. If so, it follows that he may pay without suit. The payment of the debtor to the assignor discharges the debt at law. The assignee has no legal right, and can only sue in the assignor's name. How can he sue if the debt has been paid? The law, therefore, has required notice to be given to the debtor of the assignment, in order to perfect the title of the assignee." There is another feature of assignments to be considered. It is true that the courts in many of the states at the present day will decline to examine into the consideration of the assignment of an ordinary contract, holding that a payment of it by the debtor to the person who holds the rights under a valid assignment will release the debtor from his liability. But it was probably the common-law rule, and certainly the equity rule, that an assignment would not be supported unless consideration had been given by the assignee.38

37

Negotiability

The rules in regard to negotiability are in sharp contrast with these principles governing assignments. If a negotiable bill or note is made payable to bearer, or indorsed in

35 Van Keuren v. Corkins, 66 N. Y. 77.

36 Stocks v. Dobson, 4 DeGex, M. & G. 15.

37 Sheridan v. Mayor, etc., of City of New York, 68 N. Y. 30; Burtnett v. Gwynne, 2 Abb. Prac. (N. Y.) 79; Stone v. Frost, 61 N. Y. 614; Allen v. Brown, 44 N. Y. 228; Durgin v. Ireland, 14 N. Y. 322. 38 Anson, Cont. p. 222.

41

blank, the debtor is prima facie protected in payments made to the person who has the instrument in his possession.39 The person having the instrument in his possession is, under such circumstances, presumed to own it, and to have a legal right to it.40 A purchaser in good faith from one who has stolen it acquires a valid title. If these were not the rules every bank or merchant who took the instrument, and gave money or value for it, would be compelled to make inquiries, and also give notice of ownership of the instrument to all prior parties, in order to prevent the instrument being paid to some one else. Several results would inevitably flow from these conditions. Business men would decline to take such trouble. This friction would check the circulation of bills and notes, and destroy their effectiveness. as a quasi money.

Equities between Prior Parties

The last and perhaps most important distinction made between the transfers of non-negotiable contracts and those of negotiable bills and notes is that in case of the former the assignee takes subject to the equities or defenses existing between the prior parties, while the bona fide holder of a negotiable instrument may disregard these equities, and recover upon suit the full amount called for by the instrument he buys. According to the Honorable Theodore Dwight,*2 the assignee of a non-negotiable contract takes subject, not only to the equities existing between the original parties, but also must always abide the case of the person from

39 Pettee v. Prout, 3 Gray (Mass.) 502, 63 Am. Dec. 778; Way v. Richardson, 3 Gray (Mass.) 412, 63 Am. Dec. 760; Garvin v. Wiswell, 83 Ill. 215; Jewett v. Cook, 81 Ill. 260; Collins v. Gilbert, 94 U. S. 753, 24 L. Ed. 170; Rubey v. Culbertson, 35 Iowa, 264; Ecton v. Halan, 20 Kan. 452; Wells v. Schoonover, 9 Heisk. (Tenn.) 806.

40 Wilson Sewing-Mach. Co. v. Spears, 50 Mich. 534, 15 N. W. 894; First Nat. Bank v. Sollenberger, 1 Lancast. Law Rev. (Pa.) 75. 41 PEACOCK v. RHODES, 2 Doug. 633, Moore Cases Bills and Notes, 1; Spooner v. Holmes, 102 Mass. 503, 3 Am. Rep. 491; Birdsall v. Russell, 29 N. Y. 220; Evertson v. National Bank of Newport, 66 N. Y. 14, 23 Am. Rep. 9.

42 Trustees of Union College v. Wheeler, 61 N. Y. 88.

43

whom he buys. The holder of a chose in action cannot alienate anything but the beneficial interest he possesses." It is a question of power or capacity to transfer to another, and that capacity is to be exactly measured by his own rights. This is undoubtedly the law in England and in New York, though in many of the states of the Union the great authority of Chief Justice Kent has prevailed to limit the equities to those existing between the original parties, and does not extend them to those existing in favor of third parties. The technical or theoretical reason of the rule is that given by Judge Story." "Every assignment of a chose in action is considered in equity as in its nature amounting to a declaration of trust and to an agreement to permit the assignee to make use of the name of the assignor in order to recover the debt, or to reduce the property into possession." This theory leads to the conclusion that the action by the assignee must be precisely commensurate with that of the assignor, as it must be in his name, and on the supposition that, for the purposes of the action, he is still the owner.

WORDS OF NEGOTIABILITY

8. The instrument must contain express words of negotiability, although there is no set form of such expression. It is enough if the intention of the parties to make it negotiable can be fairly construed from the terms of the contract.* 45

48 Warner v. Whittaker, 6 Mich. 133, 72 Am. Dec. 65; Seligman v. Ten Eyck's Estate, 49 Mich. 104, 13 N. W. 377; Shotwell v. Webb, 23 Miss. 375; Howell v. Medler, 41 Mich. 641, 2 N. W. 911; Ayres v. Campbell, 9 Iowa, 213, 74 Am. Dec. 346; Timms v. Shannon, 19 Md. 296, 81 Am. Dec. 632; State Mut. Fire Ins. Co. v. Roberts, 31 Pa. 438; Cary v. Bancroft, 14 Pick. (Mass.) 315, 25 Am. Dec. 393; Harwood v. Jones, 10 Gill & J. (Md.) 404, 32 Am. Dec. 180; Scott v. Schreeve, 12 Wheat. 605, 6 L. Ed. 744.

44 Story, Eq. Jur. § 1040.

45 But see p. 25, note 68, infra. See, also, note 2, supra.

9. The usual form of making an instrument negotiable is making it payable either

(a) To order, or

(b) To bearer.46

It is the purpose of these sections to explain what form. of words, when they occur in an order or promise to pay money, makes that order or promise a negotiable one; or, in other words, what are the indicia of negotiability. As has been said, negotiability is the peculiar theory of the law merchant, and the law merchant has as its source the usages of trade, which have been recognized and formulated into rules of law by the courts, and sometimes declared, and even modified, by statute.

The first question, then, is, what indicia are declared by the statutes to confer negotiability upon orders or promises to pay money? These indicia consist in the first place. in certain words or phrases created by and appearing in the statute itself. The statute of Anne, for example, declares, in words, that "all notes whereby one doth promise to pay to any other person, his order, or unto bearer, shall be assignable or indorsable over as inland bills of exchange, according to the custom of merchants." 47

In very many states these words of the statute of Anne, or words quite similar to them, have been re-enacted. In some states, in addition to the foregoing phrases, specified in the statute of Anne, peculiar phrases are essential to negotiability. In some states negotiability has been limited. to notes containing the words "without defalcation and discount." 48 In Alabama " only bills of exchange and promissory notes payable in money at a bank, or private banking house, or other place of payment expressed, are made negotiable, and governed by the law merchant; other con

49

46 N. I. L. § 1, subd. 4; McMullen v. Rafferty, 89 N. Y. 456; Cromwell v. Hewitt, 40 N. Y. 491, 100 Am. Dec. 527. See p. 35, note 14, infra.

47 Goodwin v. Robarts, L. R. 10 Exch. 337, Johns. Cas. Bills & N. 3.

48 See Rand. Com. Paper, § 86.

49 Code 1886, §§ 1756, 1757.

tracts in writing being assignable subject to defenses.50 In Indiana 1 promissory notes, to be negotiable independent of equities, must be payable to order or bearer at a bank in Indiana. In Kentucky 52 only such promissory notes as are made payable and negotiable at a bank incorporated by the state law, and are indorsed and discounted by such bank or some other bank in Kentucky, are nego tiable like foreign bills of exchange; all other bills and notes are assignable subject to defenses.53 And to determine whether an instrument contains the quality of negotiability, we must first turn to the statute of the state, and, if there appear upon the face of the instrument the phrases authorized by the statute, then, other things being equal, the instrument is negotiable. And, as appears hereafter, except in the case of a restrictive indorsement, an instrument once stamped by the original parties with the character of negotiability in most cases cannot be deprived of this characteristic, but remains so despite the subsequent agreement or conduct of the parties transferring it.

While it is unquestioned that bills and notes, correct in other respects, drawn in the words of the statutes, are negotiable, those words are not the only forms of words which will confer negotiability. Some express words are, however, necessary to confer this quality. A note in words, "8 months after date, we promise to pay G. H. $275, for value received," was held not a negotiable note,

50 See Oates v. First Nat. Bank, 100 U. S. 239, 25 L. Ed. 580. 51 Horner's Rev. St. § 5506.

52 St. § 483.

53 St. § 474. It is impossible in a work of this character to enumerate or discuss the various statutory provisions peculiar to different states. They are collected in Rand. Com. Paper, §§ 96, 128, 174. In many states such provisions have been repealed by enactment of the Negotiable Instruments Law.

54 Maule v. Crawford, 14 Hun (N. Y.) 193. See, also, Robinson v. Brown, 4 Blackf. (Ind.) 128; Fernon v. Farmer's Adm'r, 1 Har. (Del.) 32; Yingling v. Kohlhass, 18 Md. 148; Barriere v. Nairac, 2 Dall. 249, 1 L. Ed. 368; Whitwell v. Winslow, 134 Mass. 343; American Exch. Bank v. Blanchard, 7 Allen (Mass.) 333; Fawsett v. National Life Ins. Co. of United States, 97 Ill. 11, 37 Am. Rep. 95; Lowy v. Andreas, 20 Ill. App. 521.