bank, on the strength of such credit, has relinquished securities in its possession or made advances to or paid the checks of the payee, it becomes a holder for value.86

d. When lien on instrument constitutes lienor a holder for value; statutory provision.- The Negotiable Instruments Law provides that: "Where the holder has a lien on the instrument, arising "either from contract or by implication, he is deemed a holder for "value to the extent of his lien." 87 A similar provision is contained in the English Bills of Exchange Act.88 Prior to the statute, and at the present time in those States where the statute has not been enacted, there has been a conflict of authority as to whether a holder of a negotiable instrument as collateral security for a pre-existing debt is a holder for value. The cases upon this question have been cited in a previous note.8 A banker's lien would protect a bank having possession of the bills or notes of a customer to the extent of the balance due such bank from such customer;90 and a transfer of such an instrument to any other holder as collateral security for the payment of a debt due such holder from the person who transfers the note, makes the holder a pledgee and gives him a lien to the extent of the debt.91 Taking the above provision of the Negotiable Instruments Law in con

86. Market Bank v. Hartshorne, 3 Keyes (N. Y.), 137, 3 Abb. Ct. App. Dec. (N. Y.) 173; Wert v. American Exch. Bank, 44 Barb. (N. Y.) 175; Justh v. National Bank of Commonwealth, 4 Jones & S. (N. Y.) 273, affd. in 56 N. Y. 478; Coppell v. Phillipson, 57 Hun (N. Y.), 592, 10 N. Y. Supp. 901.

88. English Bills of Exchange Act, 1882, § 27, subd. 3.

89. See ante, § 50, n.

90. Brandas v. Barnett, 3 C. B. (Eng.) 531. In this case it was said that a lien generally is a mere right to hold a thing till a debt is paid, and is therefore distinct from a pledge, because the pledgee has a special propWhere a bank discounts negotiable erty in the thing pledged; but, in the paper and places the amount thereof case of a negotiable instrument, the to the credit of depositors having al- person who has the lien is the holder ready a balance to their credit, and, of the instrument with the correspondbefore notice of any infirmities, pays fore has more than an ordinary lien ing rights and duties, and he thereout on the checks of the depositors the full amount due thereon, includ- don Chartered Bank of Australia v. on an ordinary chattel. See also Loning the discount, it thereby becomes White, 4 App. Cas. (Eng.) 413; Johnan innocent purchaser for value. Fox son v. Robarts, L. R., 10 Ch. (Eng.) v. Bank of Kansas City, 30 Kan. 441, 505; National Bank v. Connecticut 1 Pac. 789; Dreilling v. First Nat. Mut. L. Ins. Co., 104 U. S. 54; Reynes Bank, 43 Kan. 197, 23 Pac. 94; United v. Dumont, 130 U. S. 354, 9 Sup. Ct. States Nat. Bank v. McNair, 114 N. C. 335, 19 S. E. 361.

87. Neg. Inst. L. (N. Y.), § 53. For same section in statutes of other States see Appendix. Section construed and applied, Brooks v. Sullivan, 129 N. C. 190, 39 S. E. 822.

486; Straus v. Tradesman's Nat. Bank, 122 N. Y. 379, 25 N. E. 372; Clark v. Northampton Nat. Bank, 160 Mass. 26, 35 N. E. 108.

91. Collins v. Martin, 1 B. & P. (Eng.) 648; Attenborough v. Clarke, 27 L. J. Exch. (Eng.) 138.

nection with the provision of section 51 thereof to the effect that an antecedent or pre-existing debt constitutes value," it would seem that the statute operates to dispose of the conflict between the authorities as to the rights of holders of negotiable instruments deposited or pledged as collateral security for the payment of an antecedent debt. It is now settled in those States which have adopted the act that a note transferred before maturity, to a holder in due course," 92 as collateral security for a pre-existing debt, is transferred for value, and the holder takes it free from defenses or set off, existing between the original parties.

e. Holder of paper transferred in payment of pre-existing debt.- Conceding that it is an established rule that an antecedent or pre-existing debt constitutes value, there can be no question but that where paper is transferred in payment of a pre-existing debt, the transferee becomes a holder for value, and takes the paper free from all defenses and equities existing between the original parties.93 In New York, it would seem to be finally settled that

92. Holders in due course, what constitutes, see post, § 73, p. 359, and Neg. Inst. Law (N. Y.), § 91. For same section in statutes of other States see Appendix.

equities between the original and antecedent parties, and the value and circulation of such securities must be essentially diminished, and the debtor driven to the embarrassment of mak93. Pre-existing debt as valuable ing a sale thereof, possibly at a ruinconsideration.-In the case of Swift v. ous discount to some third person, and Tyson, 16 Pet. (U. S.) 1, 10 L. Ed. 865, then by circuity to apply the prothe numerous cases cited bearing upon ceeds to the payment of his debts. this subject in the New York courts What, indeed, upon such a doctrine, were considered. We quote as follows would become of that large class of from the opinion of the court in this cases where new notes are given by case: "And why, upon principle, the same or by other parties, by way should not a pre-existing debt be of renewal of security to banks in lieu deemed such a valuable consideration? of old securities, discounted by them, It is for the benefit and convenience of which have arrived at maturity? the commercial world to give as wide Probably more than one-half of all an extent as practicable to the credit and circulation of negotiable paper, that it may pass not only as security for new purchases and advances made upon the transfer thereof, but also in payment of, and as security for, preexisting debts. The creditor is enabled thereby to realize or secure his debt, and thus may safely give a prolonged credit, or forbear from taking any legal steps to enforce his rights. The debtor also has the advantage of making his negotiable securities of equivalent value to cash. But establish the opposite conclusion that negotiable paper cannot be applied in payment of or as security for pre-existing debts, without letting in all the

bank transactions in our country, as well as those in other countries, are of this nature. The doctrine would strike a fatal blow at all discounts of negotiable securities for pre-existing debts." See also the following cases: Alabama.- Maybury v. Morris, 62 Ala. 113.

Arkansas. Tabor v. Nat. Bank, 48 Ark. 454, 3 S. W. 805.

California.- Sackett v. Johnson, 54 Cal. 107.

Illinois. Mix v. Nat. Bank, 91 Ill. 20, 33 Am. Rep. 44; Saylor v. Daniels, 37 Ill. 331, 87 Am. Dec. 250.

Maine.- Homes v. Smyth, 16 Me. 177, 33 Am. Dec. 650; Norton v. Waite, 20 Me. 175.

where a pre-existing debt has been actually and absolutely extinguished in consideration of the transfer of negotiable paper, the transferee is a holder for value within the rule protecting such holder against prior equities.94

$ 55. Accommodation paper.

66

66

66

a. Statutory provision.— The Negotiable Instruments Law provides that: "An accommodation party is one who has signed an instrument as maker, drawer, acceptor, or indorser, without re"ceiving value therefor, and for the purpose of lending his name 66 to some other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party." The same provisions are contained in the English Bills of Exchange Act, which is declaratory of the common law.9 b. Nature and object.- An accommodation note or bill within the meaning of the law merchant is one which is made or accepted not upon a consideration, but for the purpose of enabling the payee or holder to raise money on credit. Where a note is signed by

Missouri.- Hodges v. Black, 76 Mo.

537.

New Jersey.-Armour v. McMichael, 36 N. J. L. 92; Allaire v. Hartshorne, 21 N. J. L. 665, 47 Am. Dec. 175.

North Carolina.- Reddick v. Jones, 28 N. C. 107.

North Dakota.- Dunham v. Peterson, 5 N. D. 414, 67 N. W. 293.

Pennsylvania.- Bardsley v. Delp, 88 Pa. St. 420.

a

Texas. Herman v. Gunter, 83 Tex. 66, 18 S. W. 428, 29 Am. St. Rep. 632. 94. Taking paper as collateral, or in payment of debt.- Mayer v. Heidelbach, 123 N. Y. 332, 25 N. E. 416. See also Coddington v. Bay, 20 Johns. (N. Y.) 637, where it was held that, to constitute an indorsee of negotiable paper holder for value, so as to exclude the equities of antecedent parties, it is sufficient that the transfer should be valid as between the indorser and indorsee, but, in addition, the latter must have relinquished some right, incurred some responsibility, or parted with value, upon the credit of the paper at the time of the transfer.

It was said, in the case of Phoenix

97

96

Ins. Co. v. Church, 81 N. Y. 218, 222, that, "in accordance with this principle, and upon grounds which are entirely obvious and satisfactory, it has been frequently held that when a creditor takes from his debtor the note of a third person before maturity, in good faith, in payment of, or as collateral security for, a debt, and, in consideration thereof, gives up collateral securities held therefor, he becomes, to the extent of the collateral surrendered, a holder for value of the paper, and takes it free from the defenses of antecedent parties." Citing Bank of Salina v. Babcock, 21 Wend. (N. Y.) 499; Essex County Bank v. Russell, 29 N. Y. 673; Park Bank v. Watson, 42 N. Y. 490; Chrysler v. Renois, 43 N. Y. 209.

95. Neg. Inst. Law (N. Y.), § 55. 96. English Bills of Exchange Act, 1882, § 28.

97. Pollard v. Huff, 44 Neb. 892, 63 N. W. 58. See also Story on Promissory Notes, § 194.

Accommodation paper is such as is made, accepted, or indorsed by one party for the benefit of another, without consideration; it represents a loan

one person for the accommodation of another without solicitation or for the benefit of the payee, the mere fact that there was no consideration as to him does not make him an accommodation maker.98 The object of an accommodation paper must be a loan of credit to the accommodated party. 99

c. Revocable until negotiated.- An accommodation note has no validity until it has passed into the hands of a third person for value, and until negotiated, the maker of the instrument may revoke the agreement.' The death of the accommodation party before the delivery of the instrument is a revocation, and a person becoming possessed of such instrument with knowledge of its accommodation character cannot recover thereon against the estate of the deceased party.2

d. Unauthorized diversion.- Where an accommodation note is delivered without restrictions as to its use, the person for whose benefit it was made may either negotiate it outright, or as collateral for his individual note. The proceeds of such a note may be applied in payment or security of an antecedent debt. It is not a diversion of an accommodation note given to a payee to enable him to get money at a particular bank, that he procures such

4

of credit. Carpenter v. Nat. Bank, knowledge of the previous death of 106 Pa. St. 170. The fact that the the maker, and without notice of its payee requests certain persons to sign accommodation character, may recover so that he can negotiate a note is not on it against the maker's estate, even of itself sufficient to render such sign- if the indorser, for whose accommoers accommodation makers. Altman dation it was made, put it in circulav. Anton, 91 Iowa, 612, 60 N. W. 191. tion fraudulently as against the 98. Capitol City State Bank v. Des maker. Moines Cotton Mill Co., 84 Iowa, 561, 51 N. W. 33. 99. Dunn v. Weston, 71 Me. 270, 36 (N. Y.) 476, affd. in 51 N. Y. 637. Am. Rep. 310.

The exchange of promissory notes between parties, although made for their mutual benefit and convenience, does not constitute either of them accommodation parties. Whittier v. Eager, 1 Allen (Mass.), 499.

1. Second Nat. Bank v. Howe, 40 Minn. 390, 42 N. W. 200, 12 Am. St. Rep. 744; Tufts v. Shepard, 49 Me. 312; Macy v. Kendall, 33 Mo. 164; Smith v. Wycoff, 3 Sandf. Ch. (N. Y.) 77.

2. Smith v. Wycoff, 3 Sandf. Ch. (N. Y.) 77.

In the case of Clark v. Thayer, 105 Mass. 216, it was held that one who takes a promissory note in good faith, for value, before it has matured, with

3. East River Bank v. Butterworth, 30 How. Pr. (N. Y.) 444, 45 Barb.

4. Cole v. Saulpaugh, 48 Barb. (N. Y.) 104. See also Dunham v. Gilbert, 29 N. J. L. 521; Brooks v. Hay, 23 Hun (N. Y.), 372; Continental Nat. Bank v. Crosby, 48 Hun (N. Y.), 621, 1 N. Y. Supp. 256; Graf v. Smith, 62 Hun (N. Y.), 621, 16 N. Y. Supp. 892.

In the case of Agawam Bank v. Strever, 18 N. Y. 502, it was held that "where the makers of a note signed by them for the accommodation of others delivered to the latter, it is an inference of law, in the absence of any further evidence of authority or restriction, that they for whose accommodation it was made may put it to any use for their benefit of which it is capable."

5

note to be discounted at another bank. To constitute an unlawful diversion of an accommodation note, it must be shown that the accommodation party was injured by the diversion of the note from its original purpose, or that the use of such note was not consistent with the agreement on which it was made. A fraudulent diversion of an accommodation paper from the purpose for which it was made is no defense against a bona fide holder for value before maturity.

e. Holders of accommodation paper transferred before maturity. Accommodation paper has all the characteristics of other commercial paper in the hands of a holder for value. The knowledge of the holder that the note was for the accommodation of some of the parties thereto is no defense, if he took the note for value before maturity. As stated in an Illinois case:10 "The don v. Boppe, 55 N. Y. 665; Holland Trust Co. v. Waddell, 75 Hun, 104; Archer v. Shea, 14 Hun, 493; Garfield Nat. Bank v. Colwell, 57 Hun, 169. In other States the following cases are in point:

5. Hay v. Jaeckle, 90 Hun (N. Y.), 114, 35 N. Y. Supp. 650; Reed v. Treutman, 53 Ind. 438.

86.

6. Rogers v. Sipley, 35 N. J. L.

7. Goodwin v. Conklin, 85 N. Y. 21. 8. When a negotiable note is made for the accommodation of a payee, and is left with him to be used in the general transaction of his business, it has no vitality while it remains in his possession; but when negotiated by him it stands on an equality with other commercial paper, and the maker is bound primarily and unconditionally for its payment. Connerly v. Planters & Merchants' Ins. Co., 66 Ala. 432.

9. Story on Promissory Notes, § 194. Knowledge of holder no defense to accommodation party. The following case are in support of this proposition:

New York. Cole v. Saulpaugh, 48 Barb. 104; Schepp V. Carpenter, 49 Barb. 542; Ogden V. Raymond, 5 Bosw. (Super. Ct.) 16, affd. in 1 Keyes, 42; First Nat. Bank of Portland v. Schuyler, 7 J. & S. (Super. Ct.) 440; Arnson v. Abrahamson, 16 Daly, 72, 9 N. Y. Supp. 514; Kruelwitch V. Meltener, 13 Misc. 342, 34 N. Y. Supp. 451; Moynihan v. MeKeon, 16 Misc. 343, 38 N. Y. Supp. 61; Nat. Bank of North America v. White, 19 App. Div. 390, 46 N. Y. Supp. 555; Citizens' Nat. Bank v. Lilienthal, 40 App. Div. 609, 57 N. Y. Supp. 567; Mechanics' Banking Assn. v. White Lead Co., 35 N. Y. 505; Gor

10. Miller v. Larned,

Alabama.- Marks V. First Nat. Bank, 79 Ala. 550.

California.- Leeke v. Hancock, 76 Cal. 126.

Colorado.- Pendleton v. Smissaert, 1 Colo. App. 508, 29 Pac. 521. Georgia.- Flournoy v. First Nat. Bank, 79 Ga. 810, 2 S. E. 547.

Illinois. Harlow v. Boswell, 15 Ill. 56; Miller v. Larned, 103 Ill. 562; Holmes v. Bemis, 25 Ill. App. 232, affd. in 124 Ill. 453, 17 N. E. 42; Hodges v. Nash, 43 Ill. App. 638.

Indiana.- Marsh v. Low, 55 Ind. 271; Beach v. State Bank, 2 Ind. 488. Iowa.- Winters v. Home Ins. Co., 30 Iowa, 172.

Maine.- Dunn v. Weston, 71 Me. 270, 36 Am. Rep. 310.

Maryland.-Maitland V. Citizens' Nat. Bank, 40 Md. 540, 17 Am. Rep. 620.

Minnesota.- Tourtelot v. Reed, 62 Minn. 384, 64 N. W. 928.

Nebraska.- Baker v. Union Stock Yards Nat. Bank (Neb.), 89 N. W. 269. New Jersey.- Duncan v. Gilbert, 29 N. J. L. 52.

North Carolina.-Norfolk Nat. Bank v. Griffin, 107 N. C. 173, 11 S. E. 1049, 22 Am. St. Rep. 868.

Pennsylvania.-Philler v. Patterson, 168 Pa. St. 468, 32 Atl. 26, 47 Am. 103 Ill. 562, 570, 571.