Personal Defenses

(1) Fraud, whereby the defendant was induced to execute the instrument;

(2) Duress;

(3) Want or failure of consideration;

(4) Illegality, unless the contract is declared void by statute;

(5) Payment, or renunciation or release, before maturity;

(6) Discharge of party secondarily liable by discharge of prior party.

128-131.

Notice and Bad Faith.

Presumption and Burden of Proof-Order of Proof.

WHAT CONSTITUTES

122. To constitute a purchaser of a negotiable instrument a purchaser for value without notice, the purchase must be:

(a) For a valuable consideration.

(b) Without notice of facts which impeach its validity between antecedent parties.

It remains in this chapter to examine consideration and notice, the two other elements of bona fide title yet undiscussed. The purchaser, in order to entitle him to the immunities of negotiability, must be both a holder for value,2

1

1 As in the case of a transfer of real or personal property, a purchaser takes subject to equities, if at the time when he gets in the legal title he has not paid value or has had notice. See supra, p. 266; section 191, N. I. L. Section 49, N. I. L., provides: "Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferror had therein, and the transferee acquires, in addition, the right to have the indorsement of the transferror. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made." Offenstein v. Weigandt, 89 Kan. 739, 132 Pac. 991 (N. I. L.); Witt v. Campbell Lakin Sug. Co., 66 Or. 144, 134 Pac. 316 (N. I. L.); Elgin City Banking Co. v. McEachern, 163 N. C. 333, 79 S. E. 680 (N. I. L.). Compare Seibold v. Ruble (Okl.) 137 Pac. 696; Carstensen & Anson Co. v. Wright, 25 Idaho, 492, 138 Pac. 830 (N. I. L.); Clement v. Saratoga Holding Co. (Sup.) 145 N. Y. Supp. 628 (N. I. L.). A maker or drawer in possession of an instrument payable to himself and not indorsed by him is not a

2 See note 2 on following page.

and also a holder without notice.3 Both of these factors must concur in his holding. A purchaser for value may or may not be a purchaser without notice. A purchaser

holder within the meaning of this section. Market & F. Nat. Bank v. Ettenson's Estate, 172 Mo. App. 404, 158 S. W. 448 (N. I. L.).

2 A holder for collection, who holds the instrument in trust to turn over the proceeds to a prior holder, who was subject to equities, cannot recover on the instrument, since to permit a recovery by him would result only in a circuity of action. Ordinarily such a holder pays no value for the instrument, and this furnishes an additional reason for denying recovery, since he is not then a holder in due course. See Schneider v. Johnson, 161 Mo. App. 375, 143 S. W. 78 (N. I. L.); Third Nat. Bank v. Exum, 163 N. C. 199, 79 S. E. 498; Stones River Nat. Bank v. Lerman Milling Co. (Ala. App.) 63 South. 776. Section 37, N. I. L., provides: "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." The wording of this section does not show clearly the nature of the rights of the indorsee for collection and has resulted in some confusion. In Smith v. Bayer, 46 Or. 143, 79 Pac. 497, 114 Am. St. Rep. 858 (N. I. L.), the action was by the holder of a note, to whom it was indorsed (in terms on the face of the note) for collection, against the maker. The answer alleged payment to the indorser of the note for collection, after the indorsement to the plaintiff. The plaintiff's reply alleged that he was, prior to its indorsement to him, owner of a two-sevenths interest in the note. On the trial the court admitted evidence that the plaintiff had paid value for and owned two-sevenths of the note. The trial court charged the jury that any settlement made by the defendant with the payee after the indorsement would not be a defense against the plaintiff's two-sevenths interest. Judgment on a verdict for the plaintiff was reversed, the court giving as a reason for its decision that parol evidence is not admissible to vary the terms of a written contract. But as between the indorser for collection and the indorsee it is clear that parol evidence would be admissible to show that the indorsee was to collect only part of the note for such indorser. Nor can the decision be sustained on the ground that the written words "for collection" on the face of the note were a representation to third persons that the indorsee was trustee for the indorser of the entire proceeds. Assuming that there was such a representation made by the bank holding the note for collection, there is nothing in the principal case to show a reliance

3 See note 3 on following page.

without notice irrespective of the rights he may acquire upon transfer, cannot overcome equities if he has paid no value. In the former case it makes little difference that the holder took the instrument and paid its face for it; in

upon such misrepresentation by the defendant in making the payment to the indorser for collection, who did not have the instrument in his possession. See Bank of Baraboo v. Laird, 150 Wis. 243, 136 N. W. 603 (N. I. L.). The decision in the principal case, therefore, seems erroneous. A fortiori, such a decision is erroneous where, at the time of the indorsement for collection, the indorsee is trustee of the entire prospective proceeds of the obligation for the indorser, but subsequently and before payment by the maker to the payee indorser, pays the indorser the face value of the note in return for his equity. For this reason the case of Williams, Deacon & Co. v. Shadbolt, 1 Cababé & Ellis, 529, seems to have been incorrectly decided.

3"Bona fide holder," "innocent indorsee," "bona fide holder without notice and for value," "purchaser in the usual course of business," "purchaser in due course," "holder in due course," "purchaser without notice," are terms indifferently and synonymously, though loosely, applied to what is in this section termed "the purchaser for value without notice." The Negotiable Instruments Law, like the English Bills of Exchange Act, uses the term "holder in due course." "The act has substituted the term 'holder in due course' for the cumbrous equivalent 'bona fide holder for value without notice': and its synonyms 'bona fide holder,' 'innocent holder,' etc." Chalm. Bills Exch. (4th Ed.) 89. Section 52, N. I. L., provides: "A holder in due course is a holder who has taken the instrument under the following conditions: (1) That it is complete and regular upon its face; (2) that he became a holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (3) that he took it in good faith and for value; (4) 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." A payee may be a holder in due course within the meaning of this section. Thus the innocent payee of a note altered by the maker after an irregular indorser had signed and before delivery to the payee is a holder in due course and can recover against such indorser according to the original tenor of his indorsement. Thorpe v. White, 188 Mass. 333, 74 N. E. 592 (N. I. L.). See page 322, supra. See, also, Hathaway v. Delaware County, 185 N. Y. 368, 78 N. E. 153, 13 L. R. A. (N. S.) 273, 113 Am. St. Rep. 909 (N. I. L.); Brown v. Miller (Idaho) 125 Pac. 981 (N. I. L.). Compare St. Charles Savings Bank v. Edwards, 243 Mo. 553, 147 S. W. 978 (N. L. L.); Jones v. Citizens' State Bank, 39 Okl. 393, 135 Pac. 373.

the latter, that he took the instrument in the truest faith.* In the present chapter we shall consider the questions: What consideration is necessary to make the holder a purchaser for value, and how far "antecedent" or "pre-existing" indebtedness is sufficient; what constitutes notice; and, lastly, what presumptions of evidence attach to a negotiable bill or note in the hands of a bona fide holder upon trial.

VALUE

123. Value, as a consideration for transfer, means any legal consideration sufficient to support a contract. 124. A bill or note transferred as collateral security for an existing indebtedness is in most jurisdictions held to be transferred for value.

"Value" in the term "purchaser for value" means "either money or money's worth." It may be cash paid out. It may be goods given. It may be rights surrendered. It may be liabilities incurred. Anything which men in business call "property," anything for which a court, on some one being deprived of it, would award damages, is value; and the purchaser who gives it in exchange for a bill or note is a purchaser for value, or a purchaser for a valuable consideration."

4 Northampton Nat. Bank v. Kidder, 106 N. Y. 221, 12 N. E. 577, 60 Am. Rep. 443; Weaver v. Barden, 49 N. Y. 286.

52 Ames Cas. Bills & N. p. 867.

Under this provision it Robertson v. U. S. Live Thus, where a time note

6 N. I. L. § 25, provides in part: "Value is any consideration sufficient to support a simple contract." has been held that a promise is value. Stock Co. (Iowa) 145 N. W. 535 (N. I. L.). is transferred as conditional payment of a debt of the transferror to the transferee, the promise not to sue on the original debt before default on this note is value. Mohlman Co. v. McKane, 60 App. Div. 546, 69 N. Y. Supp. 1046 (N. I. L.); Hamilton Machine Tool Co. v. Memphis Nat. Bank, 84 Ohio St. 184, 95 N. E. 777 (N. I. L.); Griswold, Hallette & Persons v. Davis, 125 Tenn. 223, 141 S. W. 205 (N. I. L.). And under section 25, N. I. L. such a transfer must be held to have been for value, although the instrument transferred in conditional payment is a demand instrument. This seems NORT.B.& N.(4TH ED.)-27