2. Rights of the Holder Against the Unqualified Indorser. 3. Rights of the Holder Against the Qualified Indorser and the Transferor by Delivery. 4. Rights of the Holder Against the Accommodation Indorser. 5. Rights of the Holder Against the Restrictive Indorser. 6. Rights of the Holder Against the Drawer. SECTION 1.-INTRODUCTION In this chapter we are dealing with the rights of the holder, both holders in due course and holders not in due course, against parties secondarily liable on the instrument. There are five situations to be taken into consideration: (1) What are the rights of the holder against the unqualified indorser; that is, one who has negotiated either by special or blank indorsement? (2) What are the rights of the holder against the qualified indorser, the transferor by delivery; that is, one who has indorsed "without recourse," or has transferred an instrument merely by delivery. (3) What are the rights of the holder against the accommodation indorser; that is, one who is a surety for a principal debtor? (4) What are the rights of the holder against the restrictive indorser? (5) What are the rights of the holder against the drawer? It should be borne in mind that the whole matter of real and personal defenses is applicable to suits between the holder and secondary parties just as it is between the holder and parties primarily liable; that is, if B. induces A., by fraud, to indorse an instrument to him, or if it is negotiated by A. to B. as a gift, C., a holder below B. who fulfills all the requirements of a holder in due course as regards A. may hold A. free from all personal defenses which A. had against B., the party with whom he dealt. On the other hand, all real defenses which A. had against B., may be set up against C. This phase of the liability of indorsers is not again presented in this chapter; that is, this chapter, except incidentally, is not concerned with the similarities of liability between primary and secondary parties, but to the differences in the nature and extent of the liability between these two sets of parties. SECTION 2.-RIGHTS OF THE HOLDER AGAINST THE UNQUALIFIED INDORSER The liability of an unqualified indorser is a double liability—the one, conditional; the other, unconditional. The conditional liability is to pay the holder if the instrument be dishonored after due presentment and due notice of dishonor. This liability is on the instrument itself. The unconditional liability is not upon the instrument, but is an extrinsic liability. This liability arises from the fact that the indorser, in addition to his contract of indorsement, is a vendor of personal property, and as such impliedly warrants the truth of certain facts. The following section of the act defines the conditional liability of the unqualified indorser: * * N. I. L. Section 66. (2) Every indorser who indorses without qualification * engages that on due presentment, the instrument shall be accepted or paid or both as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. The fact of indorsement, either in blank or special, is an offer to each subsequent holder of the instrument, which offer is automatically accepted by each successive holder. The above section. prescribes the terms and legal effect of this contract. The parties. may enter into any kind of contract which they agree upon, but unless they manifest their intention by appropriate words on the instrument the contract of indorsement as defined in the above section governs. The liability of the indorser is a contractual liability on the instrument. While the indorser's liability is on the instrument, his obligation may be, and frequently is, much broader than the obligation of the party primarily liable thereon, for the reason that the indorser contracts to pay the amount called for by the instrument to the holder. The indorser is liable to subsequent holders, whatever the reason may be for non-payment by the party primarily liable thereon. Even where such primary party possesses a real defense, the holder has a right to demand payment from any prior unqualified indorser. The liability of the unqualified indorser is, however, a conditional liability. The duty of the indorser to pay does not arise until the conditions precedent specified in the above section occur. His duty to pay arises when and only when the holder has made a due presentment for payment, and has given due notice of dishonor, and in some cases, has duly protested the instrument. What constitutes a due presentment for payment, due notice of dishonor and protest, is the subject of the next chapter. The principles of the preceding chapters which determine who are holders in due course, and which define the defenses which are and which are not available against holders in due course, are likewise applicable to suits between an indorser and a subsequent indorsee. The immediate indorsee from an in dorser may or may not be a holder in due course as regards his indorser. Usually an indorsee will not be a holder in due course. as regards his indorser, though he will usually be a holder in due course as regards all indorsers prior to his indorser, as regards the drawer and the parties primarily liable on the instrument—the maker or acceptor. An indorser, whose liability has become fixed by due presentment, due notice of dishonor, and due protest, may avail himself of all personal defenses as against any subsequent holder who is not a holder in due course as regards himself. As regards all subsequent holders, who are holders in due course as regards the indorser, such indorser may defeat liability only by establishing a real defense of his own. To be available, the defense must be real as to him. The indorser cannot set up defenses, either real or personal, which belong to the maker, drawer, acceptor, or to any other party prior to him. The unconditional liability of the indorser, which arises, not from his contract of indorsement, but from the fact that he is a seller of property, is defined in the following section: N. I. L. Section 66. Every indorser, who indorses without qualification, warrants to all subsequent holders in due course: (1) That the instrument is genuine and in all respects what it purports to be; (2) that he has good title to it; (3) that all prior parties had capacity to contract; (4) that the instrument is at the time of his indorsement valid and subsisting. Subsection (4) probably includes everything specified in subsections (1) and (3), and, re-phrased, subsections (1), (3), and (4) mean that the unqualified indorser warrants to subsequent holders in due course that the party or parties primarily liable on the instrument possess no defenses, either real or personal, that would be available as against such holder. Subsection (2) is a warranty that the chain of title has not been broken by the forged indorsement of the payee or any special indorsee. The indorser, therefore, is not promising to pay the amount called for by the instrument, in the event that the holder is unable to obtain payment from the primary party. He assumed this liability by his conditional engagement. The indorser as a vendor is merely promising that, if there is no legal liability on the party primarily liable to the holder, then and only then will the indorser be liable on his warranty; that is, the indorser, as a vendor of property, warrants that the holder is legally entitled to a judgment against the primary party. He does not warrant that the judgment will be paid. It is important to notice that these warranties against real and personal defenses are imposed upon the indorser, irrespective of his knowledge as to their existence. To summarize: The unqualified indorser finds himself in this position: (1) If any subsequent holder fails to obtain payment because of the insolvency or wrongful refusal of the primary party to discharge his legal duty to the holder, the indorser will be under a legal duty to pay the holder, if there has been a due pre sentment for payment, and if due notice of dishonor were given to the indorser. (2) If the holder fails to obtain payment because the primary party possessed a defense, either real or personal, which under the circumstances, was available as against the holder, then the indorser will be under a legal duty to pay the holder, even though there has been no due presentment and due notice of dishonor. A holder's right to sue a former owner of the instrument on his warranties is not conditioned upon his making a due presentment for payment and giving due notice of dishonor, as is the right of the holder against an indorser upon his contract of indorsement. Neither is it necessary for the holder to wait until maturity of the instrument in order to sue former owners upon warranties. The warranty, if broken at all, is broken at the time of delivery. Suit may then be brought, although the date of maturity of the instrument has not yet arrived. SECTION 3.-RIGHTS OF THE HOLDER AGAINST THE QUALIFIED INDORSER AND THE TRANSFEROR BY DELIVERY Two questions are here presented: (1) What is the form of a qualified indorsement? (2) What is its legal effect? The qualified indorsement is defined as follows: N. I. L. Section 38. A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser's signature the words "without recourse," or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. In form, therefore, the qualified indorsement is a blank or special indorsement, with the added words "without recourse" or words of similar import. The legal effect of the indorsement is stated in part in section 38, by the declaration that such an indorser is "a mere assignor of the title to the instrument"; that is, such an indorser is not liable upon any contract of indorsement because he expressly negatives the special engagement of the unqualified indorser, by the use of the words "without recourse." He is but a vendor of property, or rather he is a vendor of a bundle of legal rights which he possessed against prior parties. Section 38 imposes no liability upon the qualified indorser. The qualified indorser is, however, under some liability, just as the vendor of any property is under a liability to his vendee. The following cases represent the state of the common law with reference to the nature and extent of the liability of the indorser "without recourse" and of the transferor by delivery. CHALLISS v. McCRUM. (Supreme Court of Kansas, 1879. 22 Kan. 157, 31 Am. Rep. 181.) BREWER, J. On December 4, 1871, plaintiff in error loaned one Edward A. Ege $250, and took his note therefor in the sum of $265, payable to Richard Probasco or bearer, and secured by mortgage. Long after its maturity, and in 1876, several payments having been made thereon in the meantime, plaintiff in error sold the note for its then face value to defendant in error. At the time of such sale he indorsed it: "Without recourse. W. L. Challiss." McCrum sued on the note. Ege plead usury. The plea was sustained and McCrum recovered $229.90, less than the face value of the note, for which sum he brought this action. A demurrer to the petition was overruled, and this ruling is now presented for review. Can the action be sustained? Of course no action will lie on the indorsement, for by his written contract Challiss expressly declines to assume the liabilities of an indorser. If sustainable at all, it must be as against him as a vendor, and not as an indorser, and upon the doctrine of an implied warranty. The theory of the defendant in error is that every vendor of a bill, bond, or note impliedly warrants that it is what it purports on its face to be, the legal obligation of the parties whose names appear on the instrument, and that the character of the indorsement, or the lack of an indorsement, in no manner affects this implied warranty. * It is clear that the character of the indorsement cuts no figure in the question; as stated, no action will lie on it. But, further, the restriction is only as to his liability as indorser, and in no manner affects his relation to the paper as vendor. An unqualified indorsement is the assumption of a conditional liability. The indorser becomes a new drawer, and is liable on the default of the drawee. "Without recourse" does away with this conditional liability. It leaves the indorsement simply as a transfer of title, and the indorser liable only as vendor; yet it leaves him a vendor and divests him of none of the liabilities of a vendor. It makes the transaction the equivalent of a delivery of paper payable to bearer, and transferable by delivery. * * * Independent, therefore, of any matter of indorsement, what implied warranty is there in the transfer of a promissory note? Two things are clear under the authorities: First, that there is an implied warranty of the genuineness of the signatures; and, second, that there is no warranty of the solvency of the parties. But in the case at bar the signature of the maker was genuine. The objection is that it was never his legal obligation to the full amount for which it purported to be. How far is there any implied warranty in this respect? A reference to some of the leading cases will throw light upon this question. * * * * * * * * In Lobdell v. Baker, 3 Metc. (Mass.) 469, it appeared that the owner of a note procured the indorsement of a minor and then put the paper in circulation. He was held liable to a subsequent holder. Chief Justice Shaw, delivering the opinion of the court, says: "Whoever takes a negotiable security is understood to ascertain for himself the ability of the contracting parties, but he has a right to believe without inquiring, that he has the legal obligation of the contracting parties appearing on the bill or note. Unexplained, the purchaser of such a note has a right to believe, upon the faith of the security itself, that it |