SECTION II.

HOW FAR THE LAW OF SET-OFF IS APPLICABLE TO NEGOTIABLE

INSTRUMENTS.

§ 1435. The doctrine of set-off has but a limited application to negotiable paper, it being a distinguished characteristic of negotiable securities that when they have passed into the hands of third parties for value, no set-off admissible in pleadings between original parties is available. Between the original parties, however, or parties between whom there is a privity that is, between maker and payee, drawer and acceptor, indorser and immediate indorsee a set-off may be pleaded to negotiable securities as well

as to any other kind.

§ 1435a. Set-off is not an equity; purchaser of overdue negotiable instrument not subject to set-off that would apply to his transferrer. -The rule that a party taking an overdue bill or note takes it subject to the equities to which the transferrer is subject, does not extend so far as to admit set-offs which might be available against the transferrer. A set-off is not an equity; and the general rule stated is qualified and restricted to those equities arising out of the bill or note transaction itself,53 and the transferee is not subject to a set-off which would be good against the transferrer, arising out of collateral matters.54

§ 1436. English doctrine. This is the English rule on the subject. In a leading case, where the set-off existed at the time of the transfer, Bayley, J., said: "This was an action on a promissory note made by the defendant, payable to one Fearn, and by him indorsed to the plaintiff after it became due; for the defendant it was insisted that he had a right to set off against the plain

53. Galliher v. Galliher, 10 Lea, 24; Barnes v. McMullins, 78 Mo. 260; Cutler v. Cook, 77 Mo. 388; Drexler v. Smith, 30 Fed. 958, citing the text. Armstrong, Recr. v. Warner, 49 Ohio St. 376, 31 N. E. 877; Davis v. Noll, 38 W. Va. 66, 17 S. E. 791, 45 Am. St. Rep. 871, note, citing text. 54. Chitty on Bills (13th Am. ed.) [*220], 251; Story on Bills, § 220; Story on Notes, § 178; Byles on Bills (Sharswood's ed.) [*353], 529. See also Edwards on Bills, 260; 2 Parsons on Notes and Bills, 603, 604. See chapter XXI, on Transfer by Indorsement, § 725 et seq., vol. I; Wilbur v. Jeep, 37 Nebr. 604, 56 N. W. 198; Gemmell v. Hueben, 71 Mo. App. 291: Harrisburg Tr. Co. v. Shufeldt, 31 C. C. A. 190, 87 Fed. 669, citing text. Contra, Merchants' Exch. Bank v. Fuldner, 92 Wis. 415, 66 N. W. 691; Jones v. Piening, 85 Wis. 264, 55 N. W. 413.

tiff's claim a debt due to him from Fearn, who held the note at the time when it became due. On the other hand, it was contended that this right of set-off, which rested on the Statute of Set-off, did not apply. The impression on my mind was, that the defendant was entitled to the set-off; but on discussion of the matter with my Lord Tenterden and my learned brothers, I agree with them in thinking that 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." 55 In a subsequent case, where it was averred that the indorsee received the bill with notice of the set-off, it was held that it could not be pleaded against him.5 And in a more recent case it was held that the right of an indorsee of an overdue bill to sue the acceptor was not defeated by the existence of a debt due from the drawer to the acceptor, and notice by the latter to the drawer before indorsement, of his election to set off the amount against the bill; and that the indorsee was not affected by the right of set-off between the acceptor and the drawer, although the bill was indorsed. without value, and for the purpose of defeating the set-off.57

56

§ 1437. American doctrine. In the United States there is a conflict of decisions. In some of the States the English rule, excluding set-offs which existed at the time of the transfer of the overdue paper, is followed.58 In others such set-offs are admitted.59 But it seems to be the uniform ruling everywhere, that, although the paper be transferred after maturity, no set-offs between antecedent parties, which arose after the transfer, will be available

55. Burrough v. Moss, 10 B. & C. 558, 5 Moody & R. 296; Chitty, Jr., on Bills, 1481.

56 Whitehead v. Walker, 10 M. & W. 696; Davis v. Noll, 38 W. Va. 66, 17 S. E. 791, 45 Am. St. Rep. 841, note.

57. Oulds v. Harrison, 28 Eng. L. & Eq. 524.

58. Davis v. Miller, 14 Gratt. 8 (the court seems to favor the English rule); Annon v. Houck, 4 Gill, 332; Hughes v. Large, 2 Barr, 103; Epler v. Funk, 8 Barr, 468; Clay v. Cottrell, 6 Harr. 413; 2 Rob. Pr. (new ed.) 252, 253. See ante, vol. I, § 725; Weader v. First Nat. Bank, 126 Ind. 111, 25 N. E. 887.

59. Peabody v. Peters, 5 Pick. 1; Braynard v. Fisher, 6 Pick. 355; Grew v. Burditt, 9 Pick. 265; Pettee v. Prout, 3 Gray, 502; Shirley v. Todd, 9 Greenl. 82; McDuffie v. Dame, 11 N. H. 244; Martin v. Trowbridge, 1 Vt. 477; McKenzie v. Hunt, 32 Ala. 494; Bond v. Fitzpatrick, 4 Gray, 89; Nixon v. English, 3 McC. 549; Perry v. Mays, 2 Bailey, 254; McDonald v. MacKenzie, 24 Oreg. 573, 14 Pac. 866, citing the text. In this connection, see citation of authorities on this question in note to case reported in 23 L. R. A. 327.

against the indorsee." In some of the States this question is settled by express statute on the subject. In New York, for instance, the statute admits set-offs existing at the time of transfer of the overdue note or bill.61

The right to plead an equitable set-off is a personal privilege of the principal, and does not extend to the surety, unless the defense amounts to total want or failure of consideration."

60. Davis v. Miller, 14 Gratt. 8. Moncure, J., said on this subject: "Whatever conflict of authority there may be upon the question whether the equities subject to which an indorsee takes an overdue note, embrace set-offs in favor of the maker against the payee, existing at the time of the indorsement, I have been able to find no case in which it was held, or even said, that set-offs between those parties, arising or acquired after the indorsement, even though without notice thereof, are good against the indorsee. On the contrary it was expressly decided in Baxter v. Little, 6 Metc. (Mass.) 7, that they are not." Shaw, C. J., in his able opinion, said: "A note does not cease to be negotiable because it is overdue. The promisee by his indorsement may still give a good title to the indorsee. Notes or other matters of set-off acquired by the defendant against the promisee after such transfer cannot be given in evidence in defense to such note, although the maker had no notice of such transfer at the time of acquiring his demand against the promisee. The indorsee of a note overdue takes a legal title; but he takes it with notice on its face that it is discredited, and, therefore, subject to all payments, and offsets in the nature of payment. The ground is, that by this fact he is put upon inquiry, and, therefore, he shall be bound by all existing facts of which inquiry and true information could apprise him; but these could only apprise him of demands then acquired by the maker against the payee." Wyman v. Robbins, 51 Ohio St. 98, 37 N. E. 264; Henderson v. Johnson, 22 Tex. Civ. App. 381, 55 S. W. 35.

61. Edwards on Bills, 260. The point was considered doubtful (outside of the statute) in Miner v. Hoyt, 4 Hill, 193, 197; Patterson v. Wright, 64 Wis. 292, citing the text.

62. Osborn v. Bryce, 23 Fed. 177. But see Armstrong, Recr. v. Warner, 49 Ohio St. 376, 31 N. E. 877. In this case held, the plaintiff, as surety, is entitled, in equity, to have set-off against his liability as acceptor of the draft, the amount due his principal on the deposit account with the bank. Following the general principle announced in the text, in Kentucky it has been decided that where one is the surety of a solvent principal on a note to a bank which has assigned for the benefit of creditors, and the assets of which are insufficient to pay its creditors in full, he has no right to have the amount of his deposit which he had with the bank at the time of its assignment, set off against the note on which he is surety. The effect of that would be to permit him to collect his claim against the bank in full, while the other creditors would only get their pro rata. See New Farmers' Bank's Trust v. Young, 100 Ky. 683, 39 S. W. 46. See Storts v. George, 150 Mo. 1, 51 S. W. 489.

CHAPTER XLV.

EXCHANGE AND RE-EXCHANGE; AND DAMAGES, UPON DISHONORED NEGOTIABLE PAPER.

SECTION I.

NATURE OF DAMAGES, AND OF EXCHANGE.

§ 1438. Statutory enactments. In the United States the whole subject of re-exchange and damages has been very much simplified by the enactment of statutes establishing fixed amounts of damages in lieu of re-exchange; and even previous to statutory provisions on the subject, mercantile custom had, in some of the States, prescribed fixed rates of damages equally as effectually. Immemorial usage, at an early day, allowed ten per cent. as damages in lieu of re-exchange on bills drawn in Massachusetts on England, and returned protested, and twenty per cent. on the like bills drawn in New York.2 In England it seems that a similar rule was adopted in the commerce between England and the East Indies, to allow a certain per cent. in particular cases in lieu of re-exchange, but it was merely conventional as between parties agreeing to it. Such custom, however, would not apply in the absence of an agreement, express or implied, to allow re-exchange.*

In 1700 a statute was passed in the Colony of Pennsylvania allowing twenty per cent. on bills drawn upon England or any part of Europe; and, in 1743, Rhode Island adopted one of similar purport.

Now every State has recognized the convenience and utility of regulating the matter by statute, and their codes contain ample provisions on the subject. But they lack uniformity, and, consequently, in transactions between the States there is great diversity in the rights and liabilities of parties. It has been thought that

1. Grimshaw v. Bender, 6 Mass. 157.

2. Hendricks v. Franklin, 4 Johns. 119.

3. Auriol v. Thomas, 2 T. R. 52.

4. Williams v. Ayres, 3 App. Cas. 82 (1877). See post, § 1446.

5. Francis v. Rucker, Amb. 672.

6. Brown v. Van Braum, 3 Dall. 344.

Congress has a right to prescribe fixed rates of damage, under the clause of the Constitution authorizing it to regulate commerce between the States. But no action has been taken by that body.

"9

8

§ 1439. These statutory damages are not given as a penalty for drawing without authority, but as commutation for interest, damages, and re-exchange. "It is, in truth," says Gibson, C. J., "a liquidation of the damages, not by the parties, but by the law fixing the compensation for the loss beforehand, to save time and litigation; and if damages need not be specially laid where there is no statute on the subject, as they certainly need not be in England, no rule of pleading requires them to be laid in their liquidated form.' The damages given by statute constitute as much a part. of the contract as the interest.10 But, while they are now universally fixed in amount by statute, the whole theory from which they are derived springs from the right of the holder to indemnity for dishonor of the bill, which was formerly worked out through the doctrine of re-exchange. And it is still necessary to a thorough understanding of the subject of damages that the rules of the law merchant respecting exchange and re-exchange should be held in view.

§ 1440. Function of bills of exchange, and the nature of exchange. -The very name of the instrument, "Bill of Exchange," indicates the office which it so frequently performs, that of exchanging a debt in one place or country for a debt in another place or country. When a person in one place or country owes money to a party in another place or country, he does not in general discharge the debt by transmitting the money, which would involve risk and expense, but purchases from some banker, or other person who has money due him at the place where he has the amount to pay, a bill drawn for that amount upon the banker or such other person's debtor. This bill is drawn payable to the purchaser's creditor, or to himself, and indorsed by him to his creditor, as he sees fit, and when presented to and paid by the drawee it extinguishes the original debt. The facility with which such

7. Mr. Verplanck's report to House of Representatives, March 22, 1826; Edwards on Bills, 750; Sedgwick on Damages, 274; 1 Parsons on Notes and Bills, 654.

8. Bangor Bank v. Hook, 5 Greenl. 174; Allen v. Union Bank, 5 Whart. 420; Lenning v. Ralston, 23 Pa. St. 137.

9. Lloyd v. McGarr, 3 Barr, 474.

10. Bank of the United States v. United States, 2 How. 711.