action by the indorsee upon an instrument so transferred, the maker can defend by showing a want or failure of consideration;52 or if such note has been paid in whole or part by him he can set up such defense.53 And it seems to have been generally held that

Kentucky. Frazer v. Edwards, 5 53 Pa. St. 396; Clay v. Cottrell, 18 Dana, 358.

where a negotiable instrument is transferred after maturity the transferee acquires the same subject to any right of set-off which the maker had against the payee; and if the title of such an instrument is not in the person who transfers it, the transferee acquires no title against the true owner,55 but the fact that on the

action against the survivor of two makers of a joint promissory note, that unless the plaintiff succeeds in establishing a joint indebtedness, he is not entitled to recover; and where it appeared that the note was transferred after maturity, the defendant, sued as the surviving maker of such joint note, might prove payment of the note by his joint debtor, and thus defeat a recovery, although before transfer of the note to the plaintiff, he acknowledged it to be due, and promised to pay it. Mott v. Petrie, 15 Wend. (N. Y.) 317.

ferred, the maker cannot set off a demand against the payee, if at the time of transfer the payee has demands against the maker greater than the set-off. Collins v. Allen, 12 Wend. (N. Y.) 356, 27 Am. Dec. 130.

In other States the following cases are in favor of set-off as stated in the text: Mobile Bank v. Poelnitz, 61 Ala. 147; Bissell v. Curran, 69_Ill. 20; Wood v. Warren, 19 Me. 23; Robinson v. Perry, 73 Me. 168; Bond v. Fitzpatrick, 4 Gray (Mass.), 89; Wilbur v. Jeep, 37 Neb. 604, 56 N. W. 198. In New Hampshire it is held that the maker may set off a claim against the indorser unless it is shown by the holder that he took the note bona fide, and for a valuable consideration. Chandler v. Drew, 6 N. H. 469, 26 Am. Dec. 704; McDuffie v. Dame, 11 N. H. 244; Odiorne v. Woodman, 39 N. H. 541; Leavitt v. Peabody, 62 N. H. 185; Davis v. Noll, 38 W. Va. 66, 17 S. E. 791, 45 Am. St. Rep. 841.

Negotiable note may be set off.- A negotiable note held by the maker against the payee of a note in suit may be pleaded as a set-off in an action by an indorsee against the maker of the note sued on; provided the note sued on was indorsed after it became due. Sargent v. Southgate, 5 Pick. (Mass.) 312, 16 Am. Dec. 409.

In other States, see James v. Yaeger, 86 Cal. 184, 24 Pac. 1005; Cramer v. Willets, 61 Ill. 481; Reichart v. Koerner, 54 Ill. 304; McLain v. Lohr, 25 Ill. 419; Leach v. Funk, 97 Iowa, 576, 66 N. W. 768; Fidelity Loan & Trust Co. v. Hogan, 94 Iowa, 303, 62 N. W. 740; Hatch v. Dennis, 10 Me. 244; Creech v. Byron, 115 Mass. 324; Stevens v. Bruce, 21 Pick. (Mass.) 193; Baker v. Wheaton, 5 Mass. 509, 4 Am. Dec. 71; Edney v. Willis, 23 Neb. 56, 36 N. W. 300; Hardy v. Waddell, 58 N. H. 460; Cottrell v. Watkins, 89 Va. 801, 17 S. E. 328, 37 Am. St. Rep. 897, 19 L. R. A. 754. In the last case where a person executes accommodation notes in payment of his mother's debt, and the latter pays them as they mature, but 55. When title is not acquired fails to cancel them, and afterward by transferee.- Vermilye v. Adams indorses them to a third person, it Express Co., 21 Wall. (U. S.) 138, was held that the indorsee takes the 22 L. Ed. 609; Chase V. Whitnotes subject to their infirmities. more, 68 Cal. 142, 9 Pac. 942; 54. Right of set-off.- In New Woodsum v. Cole, 69 Cal. 142, 10 York it was held, in an action Pac. 331; Clark v. Sigourney, 17 upon a negotiable promissory note Conn. 511; Thomas v. Kinsey, 8 Ga. assigned after maturity, that a set- 421; Merrill v. Springer, 123 Ind. 485, off to the amount of the plaintiff's 24 N. E. 258, 8 L. R. A. 61; in the debt may be made of a demand exist- last case the plaintiff made a loan of ing against the assignor, provided it her own money, and took a note therebe such as might have been set off for payable to her son, who took it against the assignor while the note from her possession without her conbelonged to him. Driggs v. Rockwell, sent, and sold it after maturity to an 11 Wend. (N. Y.) 504. But under innocent third party for a valuable the Code, see Wiltsie v. Northam, 3 consideration; it was held that the Bosw. (N. Y.) 162. assignee took the note subject to the Where an overdue note is trans- plaintiff's equitable title, and must re

face of the instrument it is overdue is notice of a defective title sufficient to put the transferee on inquiry.56 It has been held that where there is an equity directly attaching to the bill or note itself, in the nature of a claim of right or title to the instrument, such equity may be asserted by a third party, not a party to the instrument, against an indorsee after maturity.57 But the infirmities, equities, or defenses which can be set up against an instrument in the hands of an indorsee after maturity must have existed and attached thereto prior to its transfer,58 nor can the maker avail himself of equities and defenses which are not connected with, and did not arise from, the note or transaction upon which the note is based.59 The holder of an overdue bill or note is not affected by

Mohr v.

turn it to her. Eversole v. Maull, 50 the indorsement thereon.
Md. 95; Julian v. Calkins, 85 Mo. Byrne, 135 Cal. 87, 67 Pac. 11.
202; Ford v. Phillips, 83 Mo. 523;
Walker v. Wilson, 79 Tex. 185, 15
S. W. 402; Smith v. Lawson, 18 W.
Va. 212, 41 Am. Rep. 688.

In New York it has been held that a promissory note past due and dishonored, and which has been protested for nonpayment, although it passes by delivery, and an action may be maintained upon it by the holder, subject to the equities of the parties thereto, cannot be said to pass in the usual course of trade and business; the holder takes it in the light of an assignee of the person from whom he receives it, rather than as an indorsee according to the usage of trade; and he, therefore, takes just such title and no other, as his assignee had to it at the time of the transfer. Farrington v. Park Bank, 39 Barb. (N. Y.) 645. 56. Kernohan v. Durham, 48 Ohio St. 1, 26 N. E. 982, 12 L. R. A. 41; Hinckley v. Union Pac. Ry. Co., 129 Mass. 60; Fisher v. Leland, 4 Cush. (Mass.) 456; Barker v. Valentine, 10 Gray (Mass.), 341; Flint v. Flint, 6 Allen (Mass.), 34; Scott v. Kokoma Bank, 71 Ind. 445; Clarke v. Dederick, 31 Md. 148; Kellogg v. Schnaake, 56 Mo. 137; Marsh v. Marshall, 53 Pa. St. 396; Foley v. Smith, 6 Wall. (U. S.) 492, 18 L. Ed. 839.

57. Kernohan v. Durham, 48 Ohio St. 1, 26 N. E. 982, 12 L. R. A. 41; Wilbur v. Jeep, 37 Neb. 604, 56 N. W. 198. But an indorsee after maturity does not take subject to the equity of a third person which does not appear from an inspection of the note or

58. Equities arising after transfer. -Robinson v. Lyman, 10 Conn. 30, 25 Am. Dec. 52. In this case it was held that an agreement made by the makers and payee of a note while it is in the latter's hands, that sums paid by the former on certain notes of the latter might be applied on the note in question, may be set up against an indorsee after maturity; but a similar agreement made after the matured note had been transferred is not an equity attaching to the note while in the payee's hands, and is not available against the transferee. See also Stockbridge v. Damon, 5 Pick. (Mass.) 223; Baxter v. Little, 6 Metc. (Mass.) 7, 39 Am. Dec. 707; First Nat. Bank v. Security Nat. Bank, 34 Neb. 71, 51 N. W. 305, 33 Am. St. Rep. 618; Sawyer v. Cutting, 23 Vt. 486; Davis v. Noll, 38 W. Va. 66, 17 S. E. 791, 45 Am. St. Rep. 841.

59. Defenses, etc., must be connected with note, etc.-In Burroughs v. Moss, 10 B. & C. (Eng.) 558, the court said: "The indorsee of an overdue bill or note is liable to such equities only as attach on the bill or note itself, and not to claims arising out of collateral matters;" and in the same case Bayley, J., said: "The cases have not yet gone the length of establishing that such a set-off not arising out of the bill or note transaction, can be made available against an indorsee, even when the bill or note is overdue, at the time of the indorsement." See also Robertson v. Breedlove, 7 Port. (Ala.) 541; Fairchild v. Brown, 11

the equities and defenses existing in favor of the maker or drawer against intermediate holders.60

A promissory note past due and dishonored, although it passes by delivery and may be sued on by the holder, subject to the equities of the parties thereto, cannot be said to pass in due course of business.61 Where an overdue negotiable instrument is transferred, the transferee is bound to inquire as to the existence of defenses thereto, and is

Conn. 26; Shipman v. Robbins, 10 Iowa, 208; Annan v. Houck, 4 Gill (Md.), 325, 45 Am. Dec. 133; Barnes v. McMullins, 78 Mo. 260; Cutler v. Cook, 77 Mo. 388; Crawford v. Johnson, 87 Mo. App. 478; Hughes v. Large, 2 Pa. St. 103; McAlpin v. Wingard, 2 Rich. L. (S. C.) 547; Armstrong v. Noble, 55 Vt. 428.

62

Favorite v. Lord, 35 Ill. 142; Perry v. Mays, 2 Bailey (S. C.), 354.

Effect of statute.- This rule seems to have been changed by statute in many of the States, as in Minnesota where it has been held under Gen. Stat. 1878, chap. 66, § 27, that an overdue bill or note is placed upon the same footing as any other chose In Indiana it is held that by the in action, and that a purchaser of an law merchant, where a note is over- overdue draft takes it subject to any due when indorsed, matter of set-off set-off arising out of an independent due from the payee, not arising out transaction against an intermediate of the note transaction, cannot be holder, if such set-off could have been claimed against the indorsee, though asserted against such holder while the set-off was due to the maker whilst the drafts belonged to him. Le Due the payee held the note. Hankins v. v. First Nat. Bank, 31 Minn. 33, 16 Shoup, 2 Ind. 342. And it has also N. W. 426. See also Downing v. Gibbeen held that a claim arising out of son, 53 Iowa, 517; Hill v. Shields, 81 an independent transaction, and for N. C. 250, 31 Am. Rep. 499; Wyman which a merely nominal consideration v. Robbins, 51 Ohio St. 98, 37 N. E. has been paid, is not available as a 264. set-off against a promissory note in the hands of an indorsee in good faith and for value, or even in the hands of a mere equitable assignee. Proctor v. Cole, 115 Ind. 15, 17 Ñ. E. 189.

In New York the question of setoff by a maker of a negotiable promissory note or bill of exchange transferred after maturity is settled by section 502, subdivision 2 of the Code of Civil Procedure, which is as follows: (2) "If the action is upon a negotiable promissory note or bill of exchange, which has been assigned to the plaintiff after it became due, a demand existing against a person who assigned or transferred it, after it be came due, must be allowed as a counterclaim, to the amount of the plaintiff's demand, if it might have been so allowed against the assignor, while the note or bill belonged to him." Other States have similar statutes.

60. Vinton v. Crowe, 4 Cal. 309; Hayward v. Stearns, 39 Cal. 58;

61. Farrington v. Park Bank, 39 Barb. 645.

"In the usual course of business" according to the customs and usages of commercial transactions,"

means

and a purchaser of negotiable paper after maturity is not within the definition. Wood v. McKean, 64 Iowa, 16, 19 N. W. 817; Woodsum v. Cole, 69 Cal. 142, 10 Pac. 331.

62. Overdue note circumstance of suspicion. In the case of Fowler v. Brantly, 14 Pet. (U. S.) 318, 321, 10 L. Ed. 473, the court said: "A note overdue or a bill dishonored, is a circumstance of suspicion, to put those dealing for it afterward on their guard; and in whose hands it is open for the same defenses as it was in the hands of the holder when it fell due. After maturity, such paper cannot be negotiable in the due course of trade,' although still assignable." See also Frazer v. Edwards, 5 Dana (Ky.), 538; Davis v. Bradley, 26 La. Ann. 555; Chappell v. Allen, 38 Mo.

chargeable with knowledge of all equities in favor of the maker.63

e. Holder in good faith and for value.-A holder of a negotiable instrument is not a holder in due course unless he took the instrument in good faith.* The words "good faith," as used in this connection, refer only to the acts of the indorsee.65 If a negotiable instrument is obtained for a valuable consideration and before maturity, the holder is protected in its acquisition unless it can be shown that it was obtained in bad faith.66 We have already considered what constitutes a valuable consideration.67

f. Notice of infirmity or defect.-A holder in due course must have taken the instrument without notice of any infirmity in the instrument or defect in the title of the person negotiating it.68 This subject is further considered under the section of the Negotiable Instruments Law declaring what constitutes a notice of an infirmity in the instrument or a defect in the title.69 It is an established rule, independent of statute, that one who takes com

213; Diamond v. Harris, 33 Tex. 634; Earp v. Richardson, 81 N. C. 5.

Overdue check. The date of a check is prima facie evidence of the time it was made and had its inception; and, if found in the hands of the payee or a third person for a considerable time (in this case fourteen months) after its date, it will be deemed to be discredited, and the party taking it is put upon inquiry, and, in the absence of explanation, takes subject to any defense existing as between the payee and drawee. Cowing v. Altman, 71 N. Y. 435.

And in the case of Laber v. Steppacher, 103 Pa. St. 81, it was held that the retention of a check, without presentation for payment, for a considerable time after its date, will cast discredit upon it, and one who then its date, without notice or inquiry, But the mere fact that a person receives a check two or three days after its date, without notice or inquiry, does not necessarily subject him to the objections which the maker could have made against it in the hands of the payee.

63. In New York the leading case is that of Chester v. Dorr, 41 N. Y. 279, where it was held that when a note has become due and dishonored, the rights and responsibilities of the parties thereto are fixed. The note then

loses the chief attribute of commercial paper, and thereafter he who takes it, takes it with knowledge of its dishonor, with obvious reason to believe that there exists some reason why it was not paid to the holder, and takes it with just such rights to enforce it as such holder himself has, and no other.

Among other cases holding this principle are: James v. Yaeger, 86 Cal. 184, 24 Pac. 1005; Williams v. Nicholson, 25 Ga. 560; Comstock v. Draper, 1 Mich. 481, 53 Am. Dec. 78; Hilton v. Britton, 9 N. J. L. 120.

If an accommodation note is transferred after it is dishonored, the indorsee has implied notice of the character of the paper. Cummings v. Little, 45 Me. 183.

64. Neg. Inst. L. (N. Y.), § 91(3). 65. Hangen v. Sunwal, 60 Minn. 367, 62 N. W. 398; Helmer v. Krolick, 36 Mich. 373. In the latter case it was held that the motives and interests of the seller of negotiable paper are unimportant in determining the rights of the buyer. Only the buyer's good faith is in question.

66. Barnum v. Phoenix, 60 Mich. 388, 27 N. W. 577.

67. See ante, chap. IV, § 50. 68. Neg. Inst. L. (N. Y.), § 91(4). 69. Neg. Inst. L. (N. Y.), § 95. See post, § 75, p. 368.