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MAITLAND v. The Citizens' NATIONAL BANK OF BALTIMORE.
with Maitland, Jr., in regard to the collateral security required by the bank, and as for what that security was really given ; and in the evidence offered in corroboration, instead of consisting of a similar narrative of the facts to that testified to, the mere general statements or conclusions of the witness are given, that the note of the defendant was to be held as collateral security for all drafts discounted by the bank and remaining unpaid, whether prior or subsequent to the date of the note. This may have been the witness's conclusion at the time, founded upon a state of facts quite dissimilar to those proved by him, and which, if those facts had been stated, might have rather tended to impeach than corroborate his evidence. We think, therefore, that there was error in the ruling on the exception to the admissibility of this evidence.
We come now to the main questions involved in the case, and they arise upon the prayers offered by the parties, plaintiff and defendant. And in considering the questions thus presented, it must be borne in mind throughout, that the note sued on was made purely as an accommodation note, — was indorsed to the plaintiff simply as collateral security, and that the right of recovery thereon is maintained by the plaintiff only in respect to the amounts due from the indorsers on the debts for which the note was intended as security. With respect to these propositions there is no controversy.
The controverted questions raised by the prayers, particularly those of the defendant, which were rejected, are : 1st. Whether an indorsee of a negotiable promissory note, made for the accommodation of the indorser, taking the note in good faith, as collateral security for an antecedent debt, and without other consideration, is entitled to the position of holder of such paper for value, and therefore not affected by the defence of the want of consideration to the maker; 2d. To what extent, if at all, is the indorsee and holder of the note affected by the fact that the note was made and delivered to the payees, to be used as collateral security only for certain debts, and the payees, disregarding the purpose for which the note was made and delivered to them, pledged it as security for other debts, in addition to those contemplated by the maker; and 3d. Upon whom is the onus of proof, as to the debts protected by the security, and the amount for which the plaintiff is entitled to recover, under the circumstances of the case.
1. As a general proposition, we think it may be affirmed, as the result of all the well considered cases upon the subject, that it is no defence that the note sued on was known to the plaintiff to be an accommodation note between the maker and the payees, provided the plaintiff took the note for value, bonâ fide, before it was due. The reason is, as stated by Mr. Justice Story, in his work on Promissory Notes, sec. 194, that the very object of every accommodation note is to enable the payee, or other party accommodated, by sale or negotiation, to obtain a free credit and circulation of the note ; and this object would be wholly frustrated, unless the purchaser, or other holder for value, could hold such a note by as firm and valid a title as if it were founded in a real business transaction. In deed, the parties to every accommodation note hold themselves out to the public, by their signatures, to be absolutely bound to every person who may take the same for value, to the same extent as if that value were
MAITLAND v. THE CITizens' NATIONAL BANK OF BALTIMORE.
personally advanced to them, or on their own account, and at their request. And according to the doctrine laid down by Judge Story, every person is within the rule, and entitled to the protection of a bona fide holder for value, who has received the note in payment of a precedent debt, or has taken it as collateral security for a precedent debt, or for future as well as past advances. This latter proposition, to the full extent here stated, is maintained by Judge Story in his work on Bills, sec. 192, and in his work on Promissory Notes, sec. 195, and is supported by the citation of many authorities, both English and American.
The principle thus stated by Judge Story, so far as it asserts that a party who receives a negotiable note simply as collateral security for a precedent debt is entitled to protection as holder for value, has, it is true, been controverted in some quarters; and the cases in which the principle has been repudiated, or its correctness denied, have been pressed upon the court in the argument of the present case. But the reasoning of those cases does not convince us of the correctness of the conclusions maintained by them.
The leading American case upon this subject is that of Swift v. Tyson, 16 Pet. 1. In that case the supreme court of the United States, by Mr. Justice Story, stated fully the grounds upon which the principle rests, that he who receives a negotiable instrument, as a promissory note, in payment of, or as collateral security for, a precedent debt, without other consideration, is a holder for value, within the rule of protection against antecedent equities. In the course of the opinion, the court said : “ It becomes necessary for us, therefore, upon the present occasion, to express our own opinion of the true result of the commercial law upon the question now before us. And we have no hesitation in saying, that a preëxisting debt does constitute a valuable consideration, in the sense of the general rule already stated, as applicable to negotiable instruments. Assuming it to be true (which, however, may well admit of some doubt from the generality of the language) that the holder of a negotiable instrument is unaffected with the equities between the antecedent parties, of which he has no notice, only where he receives it in the usual course of trade and business for a valuable consideration, before it becomes due; we are prepared to say, that receiving it in payment of, or as security for, a preëxisting debt, is according to the known usual course of trade and business. And why, upon principle, should not a preëxisting debt be deemed such a valuable consideration ? It is for the benefit and convenience of the commercial world to give as wide an extent as practicable to the credit and circulation of negotiable paper, that it may pass not only as security for new purchases and advances, made upon the transfer thereof, but also in payment of, and as security for, preëxisting debts. The creditor is thereby enabled to realize or to secure his debt, and thus may safely give a prolonged credit, or forbear from taking any legal steps to enforce his rights. The debtor also has the advantage of making his negotiable securities of equivalent value to cash. . But establish the opposite conclusion, that negotiable paper cannot be applied in payment of, or as security for, preëxisting debts, without letting in all the equities between the original and antecedent parties, and the value and circulation of such securities must be essentially diminished, and the debtor driven to Vol. II.)
MAITLAND v. The Citizens' National BANK OF BALTIMORE.
the embarrassment of making a sale thereof, often at a ruinous discount, to some third person, and then by circuity to apply the proceeds to the payment of his debts.”
The principle thus asserted in Swift v. Tyson' appears to have been sanctioned and followed by the courts in many of the leading commercial states of the Union, as in Massachusetts, Connecticut, New Jersey, California, Illinois, Indiana, Missouri, Louisiana, South Carolina, Rhode Island, and Vermont, as will be seen by reference to the judicial reports of those states. 6 Cush. 469; 1 Allen, 502; 98 Mass. 303; 29 Conn. 475; 37 Ib. 205; 1 Zabr. 665; 14 Cal. 94; 36 mil. 490; 1 Carter, 288 ; 38 Mo. 49; 18 Louisiana Ann. 222; 11 Rich. 657; 5 R. I. 515; 7 Ib. 550; 26 Vt. 574. While, on the other hand, the courts of New York, and those of some of the other states, following the case of Bay v. Coddington, 5 John. Ch. R. 56; S. C. 20 John. 637, have held that it is not sufficient to protect the note in the hands of the holder that he received it merely as collateral security for a preëxisting debt, or even as nominal or conditional payment of such debt, unless he had given some new consideration for it; that a note so taken is not received or negotiated in the usual course of trade. But Chancellor Kent, who gave the opinion in Bay v. Coddington, and which, upon the same reasons assigned by the chancellor, was affirmed in the court of errors, while stating the law in the text of his Commentaries, vol. 3, p. 81, in accordance with that opinion, has appended a note, in which he said he was inclined to concur in the decision of Swift v. Tyson as the plainer and better doctrine. .
Subsequently, the doctrine has been mooted in the supreme court of the United States, upon the theory that the case of Swift v. Tyson did not call for the decision of the broad and comprehensive question, whether the holder of a negotiable note, received simply as collateral security for a preëxisting debt, should be regarded as a holder for value, and, if received bona fide, protected against antecedent equities. In the case of Goodman v. Simonds, 20 How. 343, the question was much discussed, and though the facts of that case did not require the expression of a direct opinion upon the subject, yet it is not difficult to perceive the inclination of the court in favor of the principle of their former decision ; as they take care to fortify it by showing that it is in accordance with the decisions in England, and in many of the states of this country. In the later case of McCarty v. Roots, 21 How. 432, 439, which arose on the indorsement of an accommodation bill, and where the defendant pleaded that the bill had been delivered to the plaintiff by the indorser as collateral security for a preexisting liability of the indorser, and for no other consideration, upon demurrer to the plea, and the demurrer being sustained by the court below, the supreme court held the demurrer properly sustained, and expressly declare that the delivery of the bill to the plaintiff as collateral security for a preëxisting .debt, under the decision of Swift v. Tyson, was legal, and consequently the plaintiff was entitled to recover. The principle therefore may be taken to be established in the supreme court, and indeed, in the entire federal jurisdiction of the country, — as upon commercial questions the state adjudications are not accepted by the federal courts as binding rules of decision.
In this state there has been no decision of the appellate court, going [No. 6.
MAITLAND v. The Citizens' National Bank of BALTIMORE.
to the extent of maintaining fully the doctrine of the cases in the supreme court, to which we have referred. In the case of the Cecil Bank v. Heald et al. 25 Md. 563, this court held that a bonâ fide holder of negotiable paper for value, without notice, will be protected against the antecedent equities existing between the original parties, and that such holder is entitled to protection where he has received the paper in payment of an antecedent debt, regarding such debt as a valuable consideration; and the case of Swift v. Tyson was so far approved, as it declared that the receiving of negotiable paper in payment of a preëxisting debt is according to the known usual course of trade and business. The court however declined expressing any opinion upon the rights of a holder of a negotiable instrument received by him as security for a preëxisting debt.
The case of Miller v. The Farmers' f Mechanics' Bank of Carroll Co. 30 Md. 392, has been relied on by the counsel of defendant, as maintaining a doctrine somewhat at variance with that maintained in Swift v. Tyson. But we are not of that opinion. The case of Miller v. The Bank was the ordinary case of a bank asserting its lien upon securities in its hands for the payment of balances due from its customers. According to the law of the land, the bank, a kind of factor in pecuniary transactions, was entitled to a lien upon all the securities for money of its customers in its hands for its advances to such customers, in the ordinary course of business, without reference to the true ownership of such securities, if the bank was without knowledge upon the subject; Davis v. Bowsher, 5 T. R. 488 ; Collins v. Martin, 1 B. & P. 648; Barnett v. Brandao, 6 M. & Gr. 630; and the question was, whether the bank had received the note from its customer, in its usual course of dealing, without notice of the true ownership, and whether any credit had been given on the faith of it.
There being then no adjudication in the state to restrict the application of the principle as maintained in the decisions of the supreme court to which we have referred, we have no hesitation in giving to it our full approval; believing it to be supported by reason, and the usual and ordinary course of dealing in the commercial community, as well as by a decided preponderance of judicial authority. Indeed so well established is the principle, as applicable to accommodation paper, that we find Mr. Parsons, in his work on Notes and Bills, 1 vol. p. 226, stating that it is universally conceded that the holder of an accommodation note, without restriction as to the mode of using it, may transfer it, either in payment, or as collateral security for an antecedent debt, and the maker will have no defence. See also Lord v. Ocean Bank, 20 Penn. St. 384.
Applying the principle just stated to the case before us, and there can be no doubt of the sufficiency of the consideration for the transfer of the note to the plaintiff, whether it was as collateral security for a preëxisting or a contemporaneous debt, or to secure future discounts or advances, or all combined. In either case, the consideration would be valuable in the sense of the rule which protects the holder of negotiable paper, and the plaintiff be entitled to the full benefit of the security, unless mala fides, or notice of such facts as will impeach its title to the note be shown. And this brings us to the consideration of the second question raised by the prayers of the defendant.
2. The defendant himself proved that the note was furnished the payees
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Vol. II.] MAITLAND v. The Citizens' National Bank of BALTIMORE. (No. 6. to be used as security for the two drafts of the 10th of January, 1872, and any subsequent drafts that might be discounted by the plaintiff for the payees in the note, and for that purpose only; and consequently the payees exceeded their authority in the use of the note, if they did in fact pass it to the plaintiff as collateral security for prior discounts as well as those on the 10th of January, and any that might subsequently be made. But the question is, who is to bear the consequence of this excess of authority? Plainly, we think, not the plaintiff, unless it be shown that the note was taken by it with knowledge of the fact that the payees had exceeded their authority in the use of the note. If the fact of such knowledge be established, then, clearly, the plaintiff would be affected by it, and could have no right to recover except for amounts due on the discounts for which the note was authorized to be pledged. With such knowledge of the excess of authority, or misappropriation by the payees, the plaintiff in taking the note would have acted in bad faith, and having so acted would be liable to have its title to the note effectually impeached. It is a general proposition, laid down in all the authorities upon the subject, that, while it is no defence to an action by an indorsee for value against the maker of an accommodation note, who has received no consideration, that at the time the plaintiff took the note he knew it was such accommodation paper, yet, if he received it of a person who held it for a particular purpose, and was therefore guilty of a breach of duty in appropriating it to a different purpose from that intended, and the plaintiff at the time was aware of the fact, he cannot recover as against such maker of the note. Byles on Bills, 128; Stoddart v. Kimball, 6 Cush. 469; Small v. Smith, 1 Denio, 583. But if the defendant seek to impeach the plaintiff's title by alleging notice of the fraud or breach of duty by the payees, it is for him to prove it; as the transfer of a negotiable instrument before its maturity raises the presumption of the want of notice of any defence to it; and this presumption prevails until overcome by proof. Carpenter v. Longan, 16 Wall. 271.
In this case, in order to make the defence effectual, on the ground of the want of authority in the payees to pledge the note for past discounts, there should have been such proof as would have justified the conclusion that the plaintiff, through its agents or officers, had actual knowledge of the limited purpose for which the note was made, and, consequently, of the excess of authority by the payees in applying it to a different purpose. Nothing less than proof of knowledge of such facts would meet the requirement of the defence. The plaintiff was not bound to make inquiry, and mere negligence, however gross, not amounting to wilful and fraudulent blindness, while it may be evidence of mala fides, is not the same thing. Goodman v. Harvey, 4 Ad. & Ell. 870; Uther v. Rich, 10 Ad. & Ell. 784; Com. of Farmers' National Bank. v. First National Bank, 30 Md. 11, 26. The question whether the plaintiff had such knowledge or not, was one of fact for the jury. Goodman v. Simonds, 20 How. 366. But, upon a careful examination of the record, we think the court below entirely correct in instructing the jury, as was done by granting the plaintiff's second prayer, that there was no evidence before them, legally sufficient, from which they could find that the plaintiff had such knowledge or notice of the excess of authority by the payees of the note. And al
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