CHAPTER 59

DEFENSES AGAINST HOLDER IN DUE COURSE

A. Defenses Not Available Against Holder in Due Course-Personal Defenses.

§ 471. In general.

§ 472. Payment before maturity.

§ 473. Set-off.

§ 474. Want of consideration.

§ 475. Failure of consideration and breach of contract.

§ 476. Fraud in consideration.

§ 477. Duress.

§ 478. Illegality of consideration.

§ 479. Lack of authority of agent known to payee.

§ 480. Lack of authority of partner.

§ 481. Lack of authority of corporate officer.

§ 471. (Nego. Instru., Sec. 79.) In general.

(Note: The general rule is that a holder in due course takes free from equities and defenses between the original parties. We have already emphasized the fact that the inquiry whether one is a holder in due course becomes material only when the title or right of the party from whom he acquired the paper is defective. If A makes a note to order of B and C shows up as the indorsee and owner thereof it is immaterial to A whether C acquired the paper as a gift or for value, and if for value, what value, and whether he got it before or after maturity, unless A has defenses he would have made against B. Then C must prove that he is a holder in due course in order to shut out these defenses as against him. Paper would fall short of its function as negotiable paper if it passed to purchasers subject to the adjustments between the original parties. But there are some unusual defenses that even a holder in due course is subject to.)

§ 472. (Nego. Instru., Sec. 80.) Payment before

maturity.

Case 499. Wilcox, Gibbs & Co. v. Aultman, 64 Georgia, 544.

Facts: The facts are given in the opinion.

Point Involved: Whether payment before maturity is a good defense against a holder in due course.

WARNER, CH. J.: "This was an action brought by the plaintiffs against the defendant on a draft drawn by him upon Messrs. Adams & Bareymore, payable to his own order, and endorsed by himself, for the sum of $88.70 dated January 20, 1870, and due on the 6th day of November thereafter, *. The defendant

pleaded payment.

that the

re

"It appears from the evidence plaintiffs became the bona fide holders of the draft before its maturity for a valuable consideration, ceiving the same from Lloyd & Sons. The defendant testified that in the fall of 1870 he paid the draft to Lloyd & Sons, who told him that they did not have it but would get it and send him a receipt in three days, and gave defendant a receipt in full payment of the draft.

*

when the maker of a negotiable draft or note pays it to one who has not the possession of the paper at the time of such payment, so as to enable him to take it up, but takes a receipt for the money so paid instead of taking up his draft or note, such receipt will not protect him from the payment of the draft or note, when sued by a bona fide holder thereof before due.

Question 499: M makes a note to order of P for $500 due three months after date. M pays the amount of the note to P who says he will cancel the note and send it to M. Before its maturity P sells the note to H who does not know that it has been paid. Is P's plea of payment good against H? Suppose H acquired after maturity, would it in that case be good against

§ 473. (Nego. Instru., Sec. 81.) Set off.

(Note: The party liable on a negotiable instrument cannot oppose "set offs" or counterclaims against a holder in due course.)

§ 474. (Nego. Instru., Sec. 82.) Want of consideration.

(Note: That the negotiable instrument is unsupported by consideration, is not a defense against a holder in due course. In this connection reference is made to the subject of accommodation paper, supra, Sec. 446.)

§ 475. (Nego. Instru., Sec. 83.) Failure of consideration and breach of contract.

Case 500. First Nat. Bk. v. Skeen, 101 Mo. 683.
Facts: Suit on a note reading as follows:

"$417.00

Holden, Mo., July 7, 1884.

"For value received, on or before the first day of September, 1885, the undersigned promise to pay to the order of the Springfield Engine & Thresher Company, four hundred and seventeen dollars, payable at Farmers' and Commercial Bank, Holden, Mo., with interest at eight per cent. from date until due, and ten per cent. after due. J. W. F FAUCHER, W. A SKEEN."

The pleadings set up that plaintiff was a purchaser for value before maturity by indorsement from the payees. Defendant offered evidence tending to show that the note was given for machinery on a contract of sale containing a warranty and that the consideration for which the note was given had failed.

Point Involved: Whether failure of consideration can be set up against a holder in due course.

"The decision of the foregoing point leaves little further to be said. Under the pleadings, the execution of the note and its transfer to plaintiff were admitted. When the latter produced the note, it amounted to evi

dence tending to prove that it had been acquired before maturity and for value. When plaintiff rested, defendant by his own evidence established that plaintiff had purchased the note, without notice of any failure of consideration, before maturity. Thereafter, defendant's offer to prove the failure of consideration was properly rejected. It was irrelevant to the issues made by the pleadings, in view of the facts already before the Court, as disclosed by the proofs of both parties. In that state of the case, the Court correctly directed the jury to return a verdict for plaintiff on the undisputed facts.”

Question 500: Can failure or want of consideration be set up against a holder in due course?

(See also Siegel v. Bank Case 403, supra.)

§ 476. (Nego. Instru., Sec. 84.)

ation.

Fraud in the consider

Case 501. Grooms v. Olliffe, 93 Georgia, 789.
Facts: They are stated in the opinion.

Point Involved: Whether fraud in the inducement or consideration for which the note was given is a good defense against a holder in due course. The difference between this fraud and "fraud in the procurement."

LUMPKIN, J.: "Olliffe & Co. brought suit in a Justice's Court upon a promissory note signed by Grooms, endorsed by Outland and payable to Donaldson or bearer. The defendants pleaded that the note was procured by fraud, for that it was given for the purchase of a mare sold to Grooms by one Warters, who represented that the animal was perfectly sound in every respect, when in point of fact she was, both before and at the time of purchase diseased and totally worthless, all of which was well known to Warters, who fraudulently made the representations above mentioned for the purpose of deceiving Grooms and did thus deceive him into making and delivering the note to Donaldson. [There was a statute in Georgia making "fraud in the procurement" a good

defense against every one. It was sought to make this statute of avail in the present case. The Court decides that fraud in the procurement does not mean the fraud brought out in this case.] We feel very sure that the words ("fraud in its procurement") were not intended to apply to cases of deceit, bad faith, or false representations used and made for the purpose of inducing one to enter into a contract, and to make and deliver his promissory note, knowingly and intentionally as an evidence of the same. It follows, we think, that fraud in these respects does not affect a bona fide holder for value, who obtains a negotiable promissory note before its maturity, without notice of any defect or defense. Such holder will be protected, even though the note was entirely without consideration, and was given as a result of the basest fraud, practiced upon the maker in inducing him to make the contract evidenced by the note."

Question 501: What is the difference between "fraud in procurement" and fraud in consideration or inducement? What were the facts constituting fraud in this case? Is fraud of such character a defense against a holder in due course?

§ 477. (Nego. Instru., Sec. 85.) Duress.

Case 502. Mack v. Prang, 79 N. W. 770, 104 Wis. 1. Facts: A wife executed her note and a mortgage on her separate property under threats of criminal prosecution of her husband for embezzlement. She was greatly alarmed at these threats, had several fainting spells and executed the note to save her husband from jail.

Point Involved: Whether duress is merely a personal defense available as between the parties, but not good as against a holder in due course.

WINSLOW, J.: There is some conflict in the authorities upon the question whether the defense of duress by threats can be successfully urged against a bona fide holder for value of a negotiable paper, but the better opinion and weight of authority, is that such de