Prior to the enactment of the Statute there was no doubt that a payee who took in good faith for value was protected against personal defences as fully as a subsequent holder.36 There is no reason to suppose that there was any intention to change this rule, nor is there any necessity for construing the section in a way to change it. Such is the weight of authority.37 But because in subsection 4, reference is made to the time the instrument was "negotiated" to the holder the courts of Iowa and Missouri, by what seems an unnecessarily technical construction, have held the payee cannot be a holder in due course.38

Section 53. [WHEN PERSON NOT DEEMED HOLDER IN DUE COURSE.] Where an instrument payable on demand is negotiated an unreasonable length of time after its issue, the holder is not deemed a holder in due course.39

Section 54. [NOTICE BEFORE FULL AMOUNT PAID.] Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount theretofore paid by him.40

further subsection: (5) "That he took it in the usual course of business."

36 Boston Steel & Iron Co. v. Steuer, 183 Mass. 140, 66 N. E. 646; 97 Am. St. Rep. 426, and cases cited, Johnston v. Knipe, 260 Pa. 504, 103 Atl. 957, L. R. A. 1918 E. 1042, and cases cited.

"Ex parte Goldberg, 191 Ala. 356, 67 So. 839, 843, L. R. A. 1915 F. 1157; Boston S. & Iron Co. v. Steuer, 183 Mass. 140, 66 N. E. 646, 97 Am. St. Rep. 426; Liberty Trust Co. v. Tilton, 217 Mass. 462, 105 N. E. 605, L. R. A. 1915 B. 144; National Investment Co. v. Corey, 222 Mass. 453, 111 N. E. 357; Brown v. Brown, 91 N. Y. Misc. 220, 154 N. Y. S. 1098; Johnston v. Knipe, 260 Pa. 504, 103 Atl. 957, 105 Atl. 705, L. R. A. 1918 E. 1042. See also Wilbour v. Hawkins (R. I.), 94 Atl. 856.

38 Vander Ploeg v. Van Zuuk, 135 Iowa, 350, 112 N. W. 807, 13 L. R. A. (N. S.) 490, 124 Am. St. Rep. 275; Long v. Shafer, 185 Mo. App. 641, 648, 171 S. W. 690; St. Charles Savings Bank v. Edwards, 243 Mo. 553, 147 S. W. 978. See also Herdman v. Wheeler, [1902] 1 K.B. 361, with which, however, cf. Lloyds Bank v. Cooke, [1907] 1. K. B. 794; Empire Trust Co. v. Manhattan Co., 97 N. Y. Misc. 694, 162 N. Y. S. 629, aff'd 180 N. Y. App. D. 891, 166 N. Y. S. 1093.

39 See infra, §§ 1171 et seq.

40 See Simmons v. Hodges, 250 Fed. 424, 162 C. C. A. 494; Central Sav. Bank v. Stotter (Mich.), 174 N. W. 142; Rosenbaum v. Roth, 164 N. Y. App. D. 617, 150 N. Y. S. 396; Baruch v. Buckley, 167 N. Y. App. D. 113, 151 N. Y. S. 853.

Section 55.-[WHEN TITLE DEFECTIVE.] The title of a person who negotiates an instrument is defective within the meaning of this act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.41

Section 56.-[WHAT CONSTITUTES NOTICE OF DEFECT.] To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.

This section states the rule supported by the great weight of authority prior to the passage of the statute. 42 To one who is disposed to put no narrower restriction on the law governing actionable negligence than is involved in the definition, “the careless doing of an act likely to cause damage and which does cause damage to another," there may seem an inconsistency in permitting recovery by one whose carelessness in purchasing the instrument has deprived the obligor of a defence which he would have had against the previous holder. Unquestionably negligence, especially if gross, when taken in

41 In the Wisconsin Act there is added at the end of the section: "And the title of such person is absolutely void when such instrument or signature was so procured from a person who did not know the nature of the instrument and could not have obtained such knowledge by the use of ordinary care." See chapters dealing with fraud, duress, mistake, illegality &c. As to the case where the signature of one of several joint makers is obtained by unlawful means, see Schmidt v. Bank of Commerce, 234 U. S. 64, 34 S. Ct. 730, 58 L. Ed. 1214.

42 Daniel, Neg. Inst., §775. See for decisions under the Statute, Elmore

County Bank v. Avant, 189 Ala. 418, 66 So. 509; Arnd v. Aylesworth, 145 Ia. 185, 123 N. W. 1000, 29 L. R. A. (N. S.), 638; Ford v. Ott (Ia.), 173 N. W. 121; Farmers' Bank v. First Nat. Bank, 164 Ky. 548, 175 S. W. 1019; Citizens' State Bank v. Johnson County (Ky.), 207 S. W. 8; Van Slyke v. Rooks, 181 Mich. 88, 147 N. W. 579; Davis v. Clark, 85 N. J. L. 696, 90 Atl. 303; Interboro Brewing Co. v. Doyle, 165 N. Y., App. D. 646, 151 N. Y. S. 325; Everding v. Toft, 82 Oreg. 1, 160 Pac. 1160; Ochsenreiter v. Block (S. Dak.), 173 N. W. 734; Scandinavian Bank v. Johnston, 63 Wash. 187, 115 Pac. 102.

connection with other matters, may be evidence of actual bad faith; 43 and only the desirability of imposing as little restriction as possible on the free transfer of negotiable instruments can justify the rule codified by the statute of allowing a holder to recover if his failure to learn of the rights or defences of others has been due to his own negligence.

It is not necessary, however, in order to subject a holder to a defence that he should have known the particular nature of the defence; it is enough that he had notice that there was something wrong.44 But one who has notice that the consideration for a negotiable instrument was an executory promise is not thereby deprived of the status of a holder in due course unless he also has notice that the promise has been broken. 44

Since under section 52 (1), the instrument must have been "regular on its face" in order to constitute a purchaser a holder in due course, statements on the instrument itself showing that a negotiation is necessarily improper charge a holder with notice without reference to whether he did or did not draw correct inferences from the statements, as, for example, where an instrument is payable to trustees, 45 or an instrument made or indorsed by a trustee, executor, member of a firm, officer of a corporation or other fiduciary as

43 McNight v. Parsons, 136 Ia. 390, 113 N. W. 858, 22 L. R. A. (N. S.) 718, 125 Am. St. Rep. 265; Link v. Jackson, 158 Mo. App. 63, 139 S. W. 588; Kipp v. Smith, 137 Wis. 234, 238, 118 N. W. 848.

44 Paika v. Perry, 225 Mass. 563, 114 N. E. 830; Ozark Motor Co. v. Horton (Mo. App.), 196 S. W. 395.

44 Piedmont Carolina Ry. Co. v. Shaw, 223 Fed. 973, 138 C. C. A. 227; Phoenix Safety Inv. Co. v. Michaels (Ariz.), 176 Pac. 587; McNight v. Parsons, 136 Iowa, 390, 113 N. W. 858, 22 L. R. A. (N. S.) 718, 125 Am. St. Rep. 265; Marx v. Frey, 137 La. 948, 69 So. 757; Black v. Bank of Westminster, 96 Md. 399, 54 Atl. 88; Hakes v. Thayer, 165 Mich. 478, 131 N. W. 474; Security Trust &c. Co. v.

Gleichman (Okl.), 150 Pac. 908; German-American Bank v. Wright, 85 Wash. 460, 148 Pac. 769. But see contra, Heard v. Shedden, 113 Ga. 162, 38 S. E. 387; Sumter County State Bank v. Hays, 68 Fla. 473, 67 So. 109. The question is identical in substance with that involved in the discussion whether a note which recites an executory promise as consideration is negotiable (see supra, § 1137, n. 14), namely: Does a recital or knowledge of such consideration compel inquiry whether the promise has been broken?

45 Ford v. Brown, 114 Tenn. 467, 88 S. W. 1036, 1 L. R. A. (N. S.) 188; Dollar Savings &c. Co. v. Crawford, 69 W. Va. 109, 70 S. E. 1089, 33 L. R. A. (N. S.) 587.

such is taken in payment of an individual debt of the signer. 46

§ 1158. Absolute and personal defences.

The statute does not mark out, as clearly as it might, the sharp distinction between absolute and personal defences; though unquestionably, under the statute as before its enactment, the law distinguishes between a situation where there is only apparently but not really a negotiable obligation, and a case where there is an actual negotiable obligation but for some equitable or personal reason it should not be enforced.

If the signature of a maker to a negotiable instrument is forged, though he has apparently entered into a negotiable obligation, in fact he has not. If, however, he has been induced by fraudulent misstatements to sign such an instrument, he has actually entered into a negotiable obligation, though it is unjust to enforce it in favor of the fraudulent payee. On the forged note nobody can recover against the apparent maker. On the fraudulent note the payee, if a party to the fraud, could not recover, but a holder in due course could. It may then be said that forgery is an absolute or real defence while such fraud as that given in the illustration is a personal or equitable defence, or, briefly, an equity. No equitable defence is available against a holder in due course. This distinction between absolute or real defences on the one hand and personal defences or equities on the other hand, is fundamental in the law of negotiable instruments. All the defences in question, whether absolute or personal, would be available in case of non-negotiable contracts, and, therefore, in regard to such contracts, there is not the same importance in distinguishing the two classes of defences. Though most of these defences are dealt with in other parts of this book with reference to their application to contracts generally, yet they may conveniently be summarized here. Prior to the enactment of the Negotiable Instruments Law, the following defences to an obligation were absolute or real, and still remain so unless section 57 of the Act requires a different result:

First The lack of genuineness of the signature. This may be due to forgery or it may be due to lack of authority on the part of an agent who made the signature on behalf of another; Second-Fraud or duress of some kinds;

Third-Lack of title, as where a holder claims through a forged indorsement;

Fourth-Bankruptcy of the holder;

Fifth-Legal incapacity as of a minor, an insane person, and in some jurisdictions as to some matters-a married woman;

Sixth-Illegality of certain kinds;

Seventh-The legal discharge of the instrument or the obligation in question.