abrogates the rule permitting the defense of usury, gambling, or other consideration prohibited by statute, affecting the validity of the instrument.21 This seems doubtful at least in the States where these defenses are made such by express statutory provision, and where such statutes declare the contract or negotiable instrument affected thereby to be absolutely void. To hold that this section was intended to repeal such statutes, as far as they relate to negotiable instruments, would seem to be a forced construction and an undue recognition of a presumable legislative intent. This section does not clearly conflict with such statutes, and it is possible that they may be so construed as to both be given their full force. Without a clearer expression of a legislative intent, it seems unreasonable to hold that the declaration of the general principle in its broad terms as contained in this section works a repeal of other prior statutes in the States which have adopted the act, making absolutely void, for certain prohibited acts, contracts including negotiable instruments. c. Declaratory of the general rule. This section is declaratory of the general rule established by a long line of authorities in all the States. It has also been the rule that a bona fide holder of a negotiable instrument, for a valuable consideration, without notice of facts which impeach its validity between the antecedent parties, if he takes it under an indorsement before the same becomes due, holds title unaffected by these facts, and may recover thereon, although as between the antecedent parties the transaction may be without any legal validity.22 d. Incapacity of parties and want of authority. The want of capacity upon the part of a maker of a negotiable instrument, as in the case of infants, lunatics, and habitual drunkards, avoids For the effect of usury, gambling, and other illegal acts upon the legality of negotiable instruments ante, § 51, p. 294. see 21. See opinion of Chief Justice Alvey in the case of Wirt v. Stubblefield, 17 App. Cas. (D. C.) 283, 285. This possible effect of a change in the rule was recognized by the 22. Swift v. Tyson, 16 Pet. (U. S.) Legislature of Wisconsin in enacting 1; Goodman v. Simonds, 20 How. the Negotiable Instruments Law, since (U. S.) 343, 15 L. Ed. 934; Brown they added to this section the follow- v. Spoffard, 95 U. S. 474; Pettee v. ing exception: Except as provided Prout, 3 Gray (Mass.), 502, 63 Am. in sections 1944 and 1945 of these Dec. 778; Produce Exch. Trust Co. statutes, relating to insurance pre- v. Bieberbach, 176 Mass. 577, 58 miums, and also in cases where the N. E. 162; Bostwick v. Dodge, 1 Doug. title of the person negotiating such (Mich.) 413, 41 Am. Dec. 584; Price instrument is void under the provi- v. Keen, 40 N. J. L. 332; Reddick v. sions of section 1676 (25) of this Jones, 28 N. C. 107, 44 Am. Dec. act." 68. the instrument in the hands of a bona fide holder, and defeats an action thereon by whomsoever brought, unless it can be shown that the instrument was given for necessaries, or that the maker received an adequate consideration for it, in a transaction that was fair and reasonable on the part of the payee, and, in the case of a lunatic, that it was without knowledge by the payee of the maker's mental condition.23 But it has been held in a case where the in 23. A purchaser of negotiable paper takes it with constructive notice of all legal disabilities of the parties, such as infancy, coverture, and unsoundness of mind. McClain v. Davis, 77 Ind. 419. Infants. Judge Sharswood, in his notes to Byles on Bills (60), says: "A note may be valid as such, though it may be so circumstanced as to let in all inquiries as to its consideration in the hands even of a bona fide holder. So here, on proof that the maker is an infant, the negotiability of the instrument is at an end; but it does not cease to be a note. It may be sued on by the holder in his own name. He stands in the shoes of the original payee, and can recover whatever he would have been entitled to recover. If the note is voidable, then without ratification it cannot be sued on at all. The holder, at most, must be subrogated to the rights of the original payee, in an action against the infant in the name of the payee, or a declaration founded on the original consideration." See cases cited under chap. II, § 22. Lunacy. In 1 Parsons on Notes and Bills, 150, it is said: "To defeat a promissory note it is only necessary to prove a condition of mind which makes self-protection impossible." In the case of McClain v. Davis, 77 Ind. 419, the court said: "Commercial paper is not an exception to the rule which permits a disaffirmance by any one who was of unsound mind at the time of becoming a party thereto. The purchaser of such paper takes with constructive notice of all legal disabilities of the parties, such as infancy, coverture, and unsoundness of mind." And in Hosler v. Beard, 54 Ohio St. 398, 43 N. E. 1040, 1045, the court said: "The paper of an insane person, however perfect in form it may be, not having the quality of negotiability within the rule of the law merchant, by reason of the incapacity of the maker, and the holder occupying no better position with respect to it than the original payee, the plea of insanity at the time of execution is as available, and has the same effect in a suit by the holder, as if the suit were by the payee." See also Wirebach's Exr. v. Bank, 97 Pa. St. 543, where it is held that the holder of an insane person's note is in no better position than the payee. In the case of Anglo-Californian Bank v. Ames, 27 Fed. 727, the court said: "He who is legally disabled to act cannot be estopp d from denying that he has acted. An estoppel creates no power; and, while in favor of a bona fide purchaser, inquiry is denied as to equities between prior parties, yet such protection does not cut off inquiry into the contractual capacity of those parties." Intoxication.- Where the maker of a negotiable note defends against a bona fide holder on the ground that he was intoxicated when he made the note, he must make out a case of complete intoxication. Where he was able to sign the note, and the next morning to remember that he had done so and for what the note was given, it was held that he had not shown a case of complete intoxication. Caulkins v. Fry, 35 Conn. 170. The court in this case draws a distinction between actions brought by the payee and actions brought by an indorsee, and says: "As against the payee the maker may avail himself of any defense which shows that the paper was either void or voidable, while as against a bona fide holder for value he can only defend by showing that the paper was void. In the latter case he is limited to those defenses which go to the essence of the contract, and, either by common law or capacity of the maker of a note was not clearly apparent, and where the indorsee acted in good faith and the transaction was such as not likely to call his attention to such incapacity, that such indorsee could recover on the note.24 If a negotiable instrument is executed by an agent within the scope of his authority, his fraudulent act will not be available as a defense in an action brought thereon against the principal by a bona fide holder for value; and where the officer of a corporation executes or nego 25 by statute, annul and avoid the contract, or which interfere with and prevent the indorsee from acquiring a legal title to the paper. Upon the same principle complete incapacity of the maker, which shows that the paper is void, is a good defense as against a bona fide holder; while partial incapacity, which, in connection with other circumstances, may show that the paper is voidable, but does not render it absolutely void, is only available as against the payee." See also Borden v. Clark, 26 Mich. 410. In Smith v. Williamson, 8 Utah, 219, 30 Pac. 753, it was held that a negotiable note, signed by the maker while in a state of intoxication, cannot be avoided in the hands of a bona fide purchaser before maturity. McSparran v. Neeley, 91 Pa. St. 17; State Bank v. McCoy, 69 Pa. St. 204, 8 Am. Rep. 246; Wright v. Waller, 127 Ala. 557, 29 South. 57, 54 L. R. A. See also 440; Page v. Krekey, 137 N. Y. 307, 33 N. E. 311, 21 L. R. A. 404. Coverture. In those States where the common-law incapacity of a married woman to contract has not been abrogated, it is held that the holder of a negotiable note of a married woman, who has taken it for value and before maturity, is liable to have pleaded against him every defense arising out of the wife's incapacity. Conrad v. Le Blanc, 29 La. Ann. 123; Voreis v. Nusbaum, 131 Ind. 267, 31 N. E. 70, 16 L. R. A. 45; Comings v. Leedy, 114 Mo. 454, 21 S. W. 804; National Bank v. Brewster, 49 N. J. L. 231, 12 Atl. 769; Loweree v. Babcock, 8 Abb. Pr. 255. 24. Shoulters v. Allen, 51 Mich. 529, 16 N. W. 888. 25. Agency. If the principal authorize his agent to fill up a blank note or bill over his signature, he will be liable to a bona fide holder for any misuse of such authority. And this is so though it be shown that the person to whom a blank instrument had been intrusted had no authority at all to fill up the blank (Fullerton v. Sturges, 4 Ohio St. 529; Decatur Bank v. Spence, 9 Ala. 800), or that the agent's authority was limited to a certain sum, which he had exceeded; or that he was only authorized to use the paper for a particular purpose, and had fraudulently converted it to a different purpose. Putnam v. Sullivan, 4 Mass. 45. See 2 Parsons on Notes and Bills, 110. See also Holden v. Durant, 29 Vt. 184. to execute notes in the name and for If an agent be authorized generally the benefit of his principal, and he executes notes in his principal's name for the fraudulent purpose of raising money for his own use, such notes will, nevertheless, be binding upon the principal, in the hands of a bona fide holder. 2 Parsons on Notes and Bills, 108, citing North River Bank v. Ay3 Hill (N. Y.), 262; Stinback mar, V. Bank of Virginia, 11 Gratt. (Va.) 269; Newland v. Oakley, 6 Yerg. (Tenn.) 489. In the case of Mechanics' Bank v. 66 N. Y. & N. H. R. Co., 13 N. Y. 599, 631, the court said (per Comstock, J.); It is obvious, upon a moment's reflection, that negotiability can impart no vitality to an instrument executed under a power where the agent has exceeded his actual or presumptive authority. Whoever proposes to deal with a security of any kind appearing on its face to be given by one man for another, is bound to inquire whether it has been given by due authority, and if he omits that inquiry he deals at his peril." As to authority of agents see ante, chap. II, § 29. tiates commercial paper for the benefit of the corporation and in the regular course of its business, the want of authority upon the part of such officer will not be an available defense as against a bona fide holder who had no knowledge of such defect.26 Nor will a corporation be permitted to set up as a defense in an action upon a note by a bona fide holder that it had no power to execute a note for the purpose for which it was given,27 provided it has power to execute a note for any purpose, or the nature of its business is such as to warrant the presumption that it had such power. e. Conditions and agreements between original parties.- A collateral contemporaneous agreement, providing that the note should not be paid in the event that an executory contract which was the consideration of the notes should not be performed, does not defeat the negotiability of the note in the hands of an indorsee, 26. Want of authority of corporate officer not a defense. Ir win v. Bailey, Fed. Cas. No. 7,079, 8 Biss. (U. S.) 523; Bird v. Daggett, 97 Mass. 494; Merchants' Bank v. McColl, 6 Bosw. (N. Y.) 473; Exchange Bank v. Monteath, 26 N. Y. 505; National Park Bank v. GermanAm. Mut. Warehousing Co., 21 Jones & S. (N. Y.) 367. In National Spraker Bank V. Treadwell Co., 80 Hun (N. Y.), 363, 30 N. Y. Supp. 77, it was held that the fact that a promissory note was not signed by the defendant's treasurer, in accordance with the by-laws, constitutes no defense to an action on a note in the hands of a bona fide holder, the corporation having received the benefit of the proceeds. See also Grant v. Treadwell Co., 82 Hun (N. Y.), 591, 31 N. Y. Supp. 702. But in Davis v. Rockingham Investment Co., 89 Va. 290, 15 S. E. 547, it was held that one who takes a note by indorsement from an officer of a corporation does so at his peril, and though he pays value for the note in good faith, without notice of want of authority in the officer, he acquires no title to the note as against the corporation. Corporate paper payable to officer. It is a general rule that when an officer of a corporation makes a corporate obligation payable to himself, and it is presented by him for nego 28 tiation, it bears upon its face sufficient notice of the incapacity of the officer to issue. Hanover Bank v. American Dock Co., 148 N. Y. 612, 43 N. E. 72; Bank of New York V. American Dock Co., 143 N. Y. 559, 30 N. E. 713; Gerard v. McCormick, 130 N. Y. 261, 29 N. E. 115. But this rule does not apply to corporate notes regularly issued by an officer, so far as appeared from their face, to a stranger and by him transferred to a firm of which the officer was a member and for which he acted as agent in procuring the loan for which the notes were pledged as security. Cheever v. Pittsburgh, etc., R. Co., 150 N. Y. 59, 44 N. E. 701. 27. As to accommodation paper in hands of bona fide holder see Mechanics' Banking Assn. v. N. Y. & S. WhiteLead Co., 35 N. Y. 505; Florence R. & Imp. Co. v. Chase Nat. Bank, 106 Ala. 364, 17 South. 720; Tod v. Kentucky Union Land Co., 57 Fed. 47. And, generally, see Willmarth v. Crawford, 10 Wend. (N. Y.) 341; Commercial Bank v. St. Croix Mfg. Co., 23 Me. 280; Genesee County Sav. Bank v. Michigan Barge Co., 52 Mich. 438, 18 N. W. 206; Auerbach v. Le Seuer Mill Co., 28 Minn. 291, 9 N. W. 199, 41 Am. Rep. 285; Lehigh Valley Coal Co. v. West Defere Agricultural Works, 63 Wis. 45, 22 N. W. 831. 28. Blunt v. Walker, 11 Wis. 334, 78 Am. Dec. 709; Wright v. Pipe Line Co., 101 Pa. St. 204, 47 Am. Rep. 701, 29 though he had notice of such agreement." If, however, a breach of the collateral agreement had occurred to the knowledge of the indorsee when he took the note he would not be protected in his right to recover.30 As has been said by Judge Parsons: "Knowledge on the part of the holder, at the time he took the note, that it was not to be paid on a specified contingency, is not sufficient to defeat his right to recover, although the contingency had then happened, if he was ignorant of that fact." 31 It has been held 29. Breach of collateral agreement. Rep. 513; First Nat. Bank v. CompoIn New York it was held in Board Co., 61 Minn. 274, 63 N. W. the case of Davis v. McCready, 17 N. 731; Donovan v. Fox, 121 Mo. 236, 25 Y. 230, 72 Am. Dec. 461, that the S. W. 915; Jennings v. Todd, 118 Mo. breach of an executory contract which 296, 24 S. W. 148, 40 Am. St. Rep. formed the consideration for the ac- 373; Haines v. Dubois, 30 N. J. L. ceptance of a bill of exchange, is not 259; Mishler v. Reed, 76 Pa. St. 76; a defense in whole or in part, against Rice v. Ragland, 10 Humph. (Tenn.) indorsees who took the bill for value, 545, 53 Am. Dec. 737; Heffron v. with notice of the contract but without Cunningham, 76 Tex. 312, 13 S. W. notice of the breach. See also Trades- 259; Dixon v. Dixon, 31 Vt. 450, 76 men's Nat. Bank v. Curtis, 167 N. Y. Am. Dec. 129. 194, 60 N. E. 429, where it was held Reason for rule.-As has been stated that the right of a bank to enforce by Macfarlane, J., in the case of Jenthe liability of the acceptor of drafts nings v. Todd, 118 Mo. 373, 24 S. W. discounted by it is not affected by its 148, 40 Am. St. Rep. 373: "A great knowledge that the consideration part of the improvement of the therefor was a promise to deliver coal county, and of business generally, is in the future instead of an actual de- carried on with money raised by the livery, where the drafts were dis- discount of notes given upon executory counted for value before maturity, contracts, and if the maker could be and before a breach of the agreement allowed to defend against such notes, for the delivery of the coal. Maas v. in case of a breach of contract, on the Chatfield, 90 N. Y. 303; Cameron v. ground that the indorsee, though in Chappell, 24 Wend. (N. Y.) 94; Dowe other respects bona fide, had knowlv. Schutt, 2 Den. (N. Y.) 621; Har- edge of the transaction out of which beck v. Craft, 4 Duer (N. Y.), 122; the note grew, all confidence in such Adams v. Blancan, 6 Rob. (N. Y.) notes as negotiable paper would be 334; Metropolitan Bank v. Engel, 66 destroyed and such business would be App. Div. (N. Y.) 273, 72 N. Y. Supp. paralyzed. By making and delivering 691. a negotiable note the maker is held to intend that it may be put in circulation and that no defenses against it exist. In purchasing such note no inquiry as to the consideration is required. If a failure of consideration occur, the maker must look to the payee for indemnity.” In other States the following cases are in point: Calm v. Dooley, 105 Fed. 836; Goodrich v. Stanley, 23 Conn. 79; Kinkel v. Harper, 7 Colo. App. 45, 42 Pac. 173; Wooten v. Inman, 33 Ga. 41; Hodges v. Nash, 141 Ill. 391, 31 N. E. 151; Strough v. Gear, 48 Ind. 100; Goldthwait v. Bradford, 36 Ind. 149: Graff v. Logue, 61 Iowa, 704, 17 N. W. 171; Skinner v. Church, 36 Iowa, 91; Frank v. Quast, 86 Ky. 649, 6 S. W. 909; Gano v. Finnell, 13 B. Mon. (Ky.) 390; Wait v. Chandler, 63 Me. 257; Carrier v. Sears, 4 Allen (Mass.), 336, 81 Am. Dec. 707: Patten v. Gleason, 106 Mass. 439; Miller v. Ottoway, 81 Mich. 196, 45 N. W. 665, 21 Am. St. 30. Miller v. Ottoway, 81 Mich. 196, 45 N. W. 665, 21 Am. St. Rep. 513; Wagner v. Diedrich, 50 Mo. 484; Coffman v. Wilson, 2 Metc. (Ky.) 542; Sutton v. Beckwith, 68 Mich. 303, 13 Am. St. Rep. 344; Bowman v. Van Kuren, 29 Wis. 218, 9 Am. Rep. 554. 31. 1 Parsons on Notes and Bills, 261. And see First Nat. Bank v. Anderson, 55 Ann. Div. (N. Y.) 570, 67 N. Y. Supp. 434. |