Mere illegality of the consideration in which the instrument originated does not affect it in the hands of a holder in due course. But where a statute, expressly or by necessary implication, declares the instrument to be void, it is void even in the hands of such holder. Cochran v. German Ins. Bank, 9 K. L. R., 196; Farmers' & Drovers' Bank v. Unser, 13 K. L. R., 965; Bohon's Assignee v. Brown, 101 Ky., 357; 19 K. L. R., 540; 41 S. W., 273. Examples of such void instruments in Kentucky are those which violate the statute concerning champerty and maintenance, gambling (including dealings in "futures"), contracts for the sale of public offices, illegal conspiracies, commonly called "trusts," sales of articles and rights by peddlers (Ky. Stats., sections 209, 211, 1955, 3741, 3918, 4223). The illegality of a part only of the consideration vitiates the whole contract, except in case of usury, where the contract is void only as to the excess of interest above the legal rate (Ky. Stats., section 2219). Brown v. Langford, 3 Bibb (6 Ky.) 500; Burgen v. Straughan, 7 J. J. M. (30 Ky.) 583; Gardner v. Maxey, 9 B. M. (48 Ky.) 90; Kimbrough v. Lane, 11 Bush (74 Ky.) 556. It is doubtful whether or not this section has changed the law in Kentucky as to negotiable instruments of the kind mentioned. In Wirt v. Stubblefield, 17 App. Cas. D. C., 283, it was held that the section changed the law of the District of Columbia, which was the same as that in Kentucky, as to a note given for a gambling debt in the hands of a holder in due course, the court saying: "We know, moreover, that the great and leading object of the act, not only with Congress, but with the large number of the principal States of the Union that have adopted it, has been to establish a uniform system of law to govern negotiable instruments wherever they might circulate or be negotiated. It was not only uniformity of rules and principles that was designed, but to embody in a codified form, as fully as possible, all the law upon the subject, to avoid conflict of decisions, and the effect of mere local laws and usages that have hitherto prevailed. The great object sought to be accomplished by the enactment of the statute is to free the negotiable instrument, as far as possible, from all latent or local infirmities that would otherwise inhere in it to the prejudice and disappointment of innocent holders as against all the parties to the instrument professedly bound thereby. This clearly could not be effected so long as the instrument was rendered absolutely null and void by local statute. But, notwithstanding the strength of these arguments and the clear language of the section, there is great force in the objection that the statutes declaring such instruments void are founded on what the Legislature has for many years deemed to be sound public policy; and that in statutes or revisions condensing or in general re-stating the former law no change is presumed, except by imperative implication (Endlich Interpretation of Statutes, 127-205; Sutherland on Statutory Construction, section 156). An indorser, however, of such an instrument is liable thereon to a holder in due course, since by his indorsement he warrants the validity of the instrument. (Section 66.) (b) Hunt v. Armstrong, 5 B. M. (44 Ky.) 400; McNamara v. Jose, 28 Wash., 461; 68 P., 903. This provision has probably changed the law of Kentucky as to the amount of recovery by an indorsee from his immediate indorser, or by a payee from a drawer who has parted with the bill for less than the legal rate of discount. The statute treats the indorsement or transfer, not as a loan of money, but as the sale of a chattel with a warranty of its value at a future time. See Daniel, Neg. Inst. (5th Ed.) sections 767, 768, Norton, B. & N., 170-176, 244. Formerly in Kentucky an indorsement made on a discount at more than the legal rate of interest was treated as importing per se a direct usurious loan or a shift to evade the law against usury and the amount of recovery by the indorsee from his immediate indorser was limited to the money paid for the indorsement and legal interest thereon. Metcalf v. Pilcher, 6 B. M. (45 Ky.) 529; Pilcher v. Banks, 7 B. M. (46 Ky.) 551. Where the transaction between indorsee and indorser is in fact a loan of money at an usurious rate, the excess over the legal rate can not be recovered. See section 54 as to the effect of notice received by the purchaser before he has paid all of the consideration. § 58. When Subject to Original Defenses.—In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable (a). But a holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter (b).* Eaton and Gilbert, Com. Paper, 387, 87 N. W., 190. (a) Black v. First Nat. Bank, 96 Md., 399; 54 A., 88; Lester v. Given, 8 Bush (71 Ky.) 360; Greenwell v. Haydon, 78 Ky., 332; Cline v. Templeton, 78 Ky., 550; Greer v. Bentley, 19 K. L. R., 1251; 43 S. W., 219. The defenses are not confined to those which are attached to the instrument. In Kentucky they include any defense, discount or set-off which the defendant has and might have used against the original obligee, or any intermediate assignor, before notice of the assignment. Ky. Stats., section 474. Cf., Civil Code, section 19.) (b) Feland v. Stirman, 15 K. L. R., 271. Cf., section 26. § 59. Who Deemed Holder in Due Course; Burden of Proof.-Every holder is deemed prima facie to be a holder in due course (a); but when it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as a holder in due course (b). But the last-mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title (c). Eaton and Gilbert, Com. Paper, 391. Norton, B. & N., 309, 335. (a) Sutherland v. Mead, 80 N. Y. S., 504; 80 App. Div., 103; Bryan v. Harr, 21 App. D. C., 190; Rice v. Hogan, 8 Dana (38 Ky.) 136; *In the Wisconsin Act "duress" is inserted after "fraud," and "such holder" is substituted for "the latter." Byrne v. Schwing, 6 B. M. (45 Ky.) 204; Crosthwait v. Misener, 13 Bush (76 Ky.) 543; Hargis v. Louisville Trust Co., 17 K. L. R., 218; 30 S. W., McCarty v. Louisville Banking Co., 100 Ky., 4; 18 K. L. (b) Mitchell v. Baldwin, 84 N. Y. S., 1043; Breckinridge v. Moore, 3 B. M. (42 Ky.) 636; David v. Merchants' Nat. Bank, 103 Ky., 586; 20 K. L. R., 263; 45 S. W., 878. The burden of proof can not be shifted except where the allegations in defense are of facts which would render the instrument sued on void from the beginning. McCarty v. Louisville Banking Co., supra. That the payee is described as trustee does not let in defenses against a holder in due course. Prather v. Weissiger, 10 Bush (73 Ky.) 117-126. When the evidence shows that the holder of a check accepted in payment of a pre-existing debt of his immediate assignor knew that it had been originally delivered on a condition which had not been fulfilled, and that payment had been stopped, the question whether he was a holder in due course is for the jury. Groh's Sons v. Schneider, 68 N. Y. S., 862; 34 Misc. N. Y., 195. (c) Thus, if A. makes a note to B. and C. gets possession of it and fraudulently negotiates it to D., the fraud of C. is no defense to A. when sued on the note by D. ARTICLE V. LIABILITIES OF PARTIES. Section 60. Liability of maker. 61. Liability of drawer. 62. Liability of acceptor. 63. When person deemed indorser. 65. Warranty; where negotiation by delivery, 66. Liability of general indorsers. 67. Liability of indorser where paper negoti able by delivery. 68. Order in which indorsers are liable; parol evidence. 69. Liability of agent or broker. § 60. Liability of Maker.-The maker of a negotiable instrument by making it engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse (a). Eaton and Gilbert, Com. Paper, 399. Norton, B. & N., 144. (a) A note to a foreign corporation that had not complied with the Colorado law, without doing which it could not do business in the State, is valid against the maker in the hands of a holder in due course. McMann v. Walker, 72 Pac. (Col.) 1055; Nat. Bank of Commerce v. Pick, 99 S. E. (N. D.) 63. Note.-The numbers of the sections of this article in other States than Kentucky are as follows: Arizona, 3363-3372; Colorado, Connecticut, District of Columbia, Florida, Idaho, Iowa, Massachusetts, Montana, New Jersey, North Carolina, North Dakota, Oregon, Pennsylvania, Tennessee, Utah, Virginia and Washington, 60-69; Maryland, 79-88; New York, 110-119; Ohio, 3173e-3173n; Rhode Island, 68-77; Wisconsin, 1677-1677-9. |