NEGOTIABLE INSTRUMENTS
120. In General. By negotiable instruments are meant those written instruments intended to circulate as money, which by their form and nature are transferred by delivery or by indorsement and delivery. The most common negotiable instruments are promissory notes, drafts and checks. Negotiable instruments are much more commonly and extensively used than money in the transaction of business. Their function is to take the place of money. Their use arose out of the scarcity of currency and facilitates the transaction of business. Their form and nature make them more desirable and practical in many respects than money itself. Negotiable instruments may readily be traced. They may be drawn in any denomination to meet any emergency. They may be indorsed in such a manner that only the person intended by the maker to receive payment can receive payment thereon. Money, on the other hand, has no particular identity. After payment it cannot be traced, nor can mistakes in amount be corrected. If lost, payment thereon cannot be stopped. If found or stolen, its possessor may receive the benefit of it without question. Negotiable instruments were devised to meet a broad and pressing demand. Usage and custom have given them characteristics to meet this demand.
121. Negotiability. Negotiability is the power of a written instrument to circulate as money. To be negotiable, an instrument must contain language of negotiability. The common phrases of negotiability are Pay to the order of, or Pay to bearer. Any draft, promissory note, check, or bill of exchange containing the words, pay to the order of, or pay to bearer are known as negotiable instruments. If a negotiable instrument is made payable to bearer, it is transferable by delivery. The holder of it may pass it like money and the taker is entitled to receive payment of it when it is due. A negotiable instrument payable to the order of a designated person is payable upon the indorsement and delivery of the person to whose order it is made payable. For example, if a check is made payable to the order of John Smith, and John Smith desires to transfer it to John Jones, he writes his name, John Smith, on the back of the check, and delivers the check to John Jones. By this act, John Jones becomes the owner of the check, and may in turn transfer it, or cash it by presenting it to the bank on which it is drawn. If a check is made payable to John Smith or bearer, and if John Smith desires to transfer it to John Jones, he merely hands John Jones the check. No indorsement is necessary.
122. Negotiability Distinguished from Assignability. An ordinary contract or obligation not requiring personal services or discretion may be transferred by oral or written contract of assignment. For example, if B purchases a barrel of flour from A, his grocer, to be paid for in thirty days, A may assign his claim against B to C. This may be accomplished by a verbal agreement to that effect between A and C, or A may give C a written statement to the effect that he has transferred his claim against B to C. When B is notified of this assignment, he is obliged to pay C the money. If for any reason the flour was not accepted by B, or if B has a claim against A, C can recover from B only the amount B owes A. If B owes A nothing, on account of the flour being of poor quality, and not accepted for that reason, or if B has a claim for an equal amount against A, B can set up this defense against C's claim, and C can recover from B only the amount that A could have recovered against B. In other words, in case of an assignment, all defenses that were good against the assignor are good against the assignee. In case of negotiable instruments, however, the transferee who takes the instrument before maturity for value, and without notice of any defenses, has the right to recover the full face value from the maker, regardless of defenses the maker may have against the original payee. In case of assignment, notice must be given the debtor to make the title good in the purchaser. In case of negotiability, no notice to the debtor is necessary.
A negotiable instrument may be assigned. A common example is the delivery for value, of an instrument payable to order without indorsement. The purchaser takes only the rights of a seller.
123. Law Merchant. The law relating to negotiable instruments is said to be based upon the Law Merchant. By the Law Merchant, is meant the rules and customs of merchants relating to bills and notes. At an early time, various rules were recognized by the merchants trading between different countries. Drafts or bills of exchange were given and passed current as money, without notice to the debtor of the transfer. As early as the year 1200, these customs of merchants were recognized in England. At first, they were recognized only in connection with foreign bills of exchange. By foreign bills of exchange are meant bills made or drawn by persons of one country to be paid or accepted by persons of another state or country. Originally, the rules were recognized by merchants only. The courts of England recognized and enforced these rules in actions brought on foreign bills of exchange. Gradually, these rules were recognized and enforced by all the merchants of England. They were applied to inland bills as well as to foreign. Some statutes were passed, notably one making the rules of the Law Merchant apply to promissory notes. This statute compelled the general recognition of the Law Merchant. Gradually these rules were applied to all negotiable instruments by whomever used. The customs which started between merchants of foreign countries were held applicable to all persons, and became the recognized law relating to negotiable instruments. This country adopted these rules, together with the greater part of the common law of England. At the present time, most of the states have negotiable instrument codes. These codes, for the most part, are statutory enactments of the well recognized rules of common law.
The advantage of the codes, however, is to settle disputed points by express statutory enactment. The code must be interpreted by the well settled and recognized principles of the common law. The difference between the contract formed by negotiable instruments and ordinary contracts is based upon the Law Merchant. These customs are as well recognized, and are as much a part of the law as they were when originally used by the merchants of the old world six or seven hundred years ago.
124. Promissory Notes. One of the most common forms of negotiable instruments is that of the promissory note. A common form of promissory note is shown in Fig. 1.
A promissory note is not necessarily a negotiable instrument. It depends upon whether it contains words of negotiability. If the note contains the words, or order, or, or bearer, or words of similar import, it is a negotiable instrument Otherwise it is not. To constitute an instrument a promissory note, it must contain certain elements. It must be signed by the party making or giving it, but it is not necessary that the signature be in any particular place. Any mark or designation intended as a signature, or by which the maker can be identified, regardless of its position on the paper, is a sufficient signature. The proper and usual method of signing negotiable instruments is at the end thereof.
Fig. 1. Promissory Note.
A promissory note must contain an unconditional promise to pay a definite sum of money, at a certain time. If the promise to pay is conditional, the instrument does not constitute a negotiable instrument. The following instrument was sued upon:
Stratham, March, 28, 1846.
Due to order of Sophia Gordon, widow, ten thousand dollars to be paid as wanted for her support. If no part is wanted it is not to be paid.
Stephen Scanmore.
Since this was not an unconditional promise to pay, the court held it not to be a promissory note.
The time of payment of a promissory note must be certain, the amount to be paid must be specified, and the instrument must be payable in money. If the instrument is to be paid in anything other than money, it is not a negotiable instrument. An instrument must be delivered, before it has a legal existence as a promissory note. The essentials of a promissory note are also essentials of any negotiable instrument. A promissory note need not be dated, nor need it state that it is given for a consideration. By its nature it imports a consideration. The party signing the note is called the maker, the party to whom it is made payable is called the payee. If the payee transfers it by indorsement, he is called the indorser, and the person to whom he transfers it is called the indorsee.
Fig. 2. Sight Draft.
125. Drafts and Bills of Exchange. The term, draft, is commonly used to designate an order from one bank or banks on another, as well as orders on third persons. Orders drawn by one person on another, payable to a third person, are known technically as bills of exchange. At present, the terms, draft, and bills of exchange are generally used interchangeably. A draft or a bill of exchange is a written order drawn by one person on another, payable to a third person, to the order of a third person, to the drawer himself or his order, or to bearer.
Fig. 3. Sixty-Day Draft, Accepted.
A common form of draft is shown in Fig. 2.
Bills of exchange or drafts are frequently made payable at a time considerably in the future. Fig. 3 is a form of sixty-day draft. This draft is presented to the drawee, J. H. Gotrochs, and if he accepts, he writes, accepted, followed by his name, across the draft. His name written on a draft is sufficient acceptance.
The party drawing a bill of exchange is called the drawer, the party to whom it is made payable is called, the drawee before acceptance, and the acceptor after acceptance. The drawee may accept by signing the instrument, by stating his acceptance on a separate piece of paper, by oral acceptance, or even by conduct making apparent his intention to accept. After acceptance of a draft or bill of exchange, the acceptor is liable to pay the bill according to its terms. He is in the position of a maker of a promissory note.
Fig. 4. Certified Check.
126. Checks. A check is an order drawn on a bank or banker. It differs in some respects from an ordinary bill of exchange. It does not have to be presented for acceptance. It is presented for payment. It presupposes funds of the drawer in the hands of the bank or banker on which it is drawn. It is payable at any time after the date fixed for maturity. It need not be presented at maturity. The maker may recover damages for failure to present promptly if he is damaged thereby. For example, if A gives B his check on the X bank, and between the date for payment of the check and the time of presentment for payment by B, the bank fails, A may recover as damages from B, the amount of his loss by reason of B's failure to present the check promptly. No days of grace are allowed in the payment of checks. In this particular, they differ from ordinary bills of exchange.
127. Certification of Checks. By certification of a check is meant a written acknowledgment on checks by an officer or authorized agent of the bank that the check will be paid when presented. In Fig. 4 is shown a common form of certification.
The words accepted or certified, written on a check by an authorized officer or agent of a bank constitute a certification. If the holder of a check has it certified he elects to hold the bank, and thereby releases the maker and prior indorsers. If the maker procures the certification he is still liable thereon. When a check is certified, the bank charges it to the account of the maker, and it then becomes a debt of the bank, regardless of whether or not the maker has funds in the bank with which to meet it. This is the reason that a maker and prior indorsers of a check are released from liability thereon when a holder has it certified. By this act, the holder elects to rely upon the bank, rather than upon maker or indorsers.
128. Bonds. Bonds may be defined to be the promissory notes of corporations, private or governmental. They are made under the seal of the corporation issuing them. At common law, a seal destroyed the negotiability of an instrument. At the present time this is not true of bonds. Private corporations often secure their bonds by a mortgage on their entire property. This is accomplished by means of a mortgage called a trust deed. The mortgage is given to a trust company, or an individual, to be held for the common benefit of all the bond holders. It is not practicable to give each bond holder a mortgage. This would be inconvenient, and some bond holders could obtain preference over others. But one trust deed, covering all the assets held by a trustee for the benefit of all the bond holders, accomplishes the purpose.
Registered bonds are registered on the books of the corporation issuing them, and in case of transfer the transfer is noted on the books of the company. Other bonds contain coupons, or small promissory notes for certain amounts representing the installments of interest payable at certain times. These coupons may be cut from the bond and sold as promissory notes, or they may be cut at maturity and returned for payment.
| No. 1. | $1000.00 |
| United States of America, | |
| State of Ohio. |
Know all men by these presents that the village of X, in the county of Cuyahoga and state of Ohio, acknowledges itself to owe, and for value received hereby promises to pay to bearer, the sum of $1000.00 in lawful money of the United States of America, on the second day of January, 1920, together with interest thereon at the rate of 5% per annum payable semi-annually on the second day of July, and second day of January of each year, as evidenced by the coupons hereto attached, until the principal sum is paid. Both principal and interest are payable at the City Trust Co., Cleveland, Ohio, on the presentation and surrender of this bond, and the coupons hereto attached as they respectively mature.
This bond is issued for the purpose of improving a street of the village of X, from the C. B. Railway to Rocky River by constructing and laying water mains with all necessary connections thereon, under and by authority of Sections 1536-281, and Sec. 2835 of the revised statutes of Ohio, and under and in accordance with resolutions of the council of the village of X, Ohio, adopted Nov. 4, 1908, and Dec. 2, 1908.
It is hereby certified that all proceedings relating to this bond have been in strict compliance with said laws, statutes and resolutions, and all other statutes and laws relating thereto, and that the faith, credit, and revenues, and all real and personal property in the village of X, Ohio are hereby pledged for the payment of principal and interest hereof at maturity.
This bond is one of a series of bonds of like date and effect, but of different amounts and maturities amounting in the aggregate to $3700.00.
In witness whereof, the village of X has caused this bond to be signed by the mayor and clerk of said village, and the corporate seal of said village to be hereunto affixed, and the facsimile signature of the mayor and clerk of said village to be affixed to the attached coupon this second day of January, 1909.
D. B. X._______________________
Mayor.
[SEAL.]
X. Y. Z._______________________
Clerk.
Form of Municipal Coupon Bond.
| On the second day of July,1909, the village of X promises topay the bearer at the City TrustCo., Cleveland, Ohio, twenty-fivedollars, being 6 months' intereston its bond. No. 1 dated Jan. 2, 1909. | On the second day of January,1910, the village of X promises topay the bearer at the City TrustCo., Cleveland, Ohio, twenty-fivedollars, being 6 months' intereston its bond. No. 1 dated Jan. 2, 1909. |
| D. B. X.______________ | D. B. X.______________ |
| Mayor. | Mayor. |
| X. Y. Z.______________ | X. Y. Z.______________ |
| Clerk. | Clerk. |
| On the second day of July,1910, the village of X promises topay the bearer at the City TrustCo., Cleveland, Ohio, twenty-fivedollars, being 6 months' intereston its bond. No. 1 dated Jan. 2, 1909. | On the second day of January,1911, the village of X promises topay the bearer at the City TrustCo., Cleveland, Ohio, twenty-fivedollars, being 6 months' intereston its bond. No. 1 dated Jan. 2, 1909. |
| D. B. X.______________ | D. B. X.______________ |
| Mayor. | Mayor. |
| X. Y. Z.______________ | X. Y. Z.______________ |
| Clerk. | Clerk. |
Interest Coupons Attached to Municipal Bond.
Similar coupons follow for payment at intervals of 6 months until maturity of bond in 1920.
129. Collateral and Judgment Notes. Banks frequently require borrowers to sign collateral notes. These instruments are promissory notes, with an added agreement to the effect that certain collateral security is given the payee by the maker as security for the note. Such security is usually certificates of stock, bonds, other promissory notes, or chattel property. The collateral note contains a stipulation that upon default, the payee may sell the collateral. The following is a common form of collateral note used by banks:
| $5,000.00 | Cleveland, Ohio, Dec. 26, 1908. |
Six months after date, I promise to pay to the order of the Fictitious Bank at its banking rooms in Cleveland, Ohio, the sum of Five thousand dollars for value received, with interest at the rate of 6% per annum. I have deposited with said bank as collateral security for the payment of this note the following property; 20 shares of stock of the Columbia Sewing Machine Co., par value $100.00 each, 2 diamond rings, 1 warehouse receipt of the City Storage Co., covering household furniture valued at $3,000.00. The value of this property is now $5,600.00. It is agreed that the payee, or his assigns, may have the right to call for additional security at any time it considers this collateral security insufficient, and on failure of the maker of this note to furnish additional security to satisfy the holder of this note, the note may be deemed payable at once at the holder's option. The holder shall also have power to accept substitutes for this collateral. Should the maker violate any of the conditions of this note, or fail to pay it when due, the holder shall have the power to sell the collateral or any substitute given therefore, at private or public sale, at any time without notice to anyone, and after deducting all legal expenses connected with the sale, and after paying the note, shall return the balance to the maker.
(Signed)
John Smith.
A judgment note contains a provision that upon default of payment, any attorney at law may appear in court and take judgment thereon by presenting the note, without observing the formalities of an ordinary suit at law. This kind of a note is also called a cognovit note. The following is a common form of judgment note:
| $100.00 | Boston, Dec. 8, 1909. |
One year after date, I promise to pay to the order of John Jones the sum of one hundred dollars with interest at 6%, and I hereby authorize any attorney at law in the United States to appear before any Justice of the Peace, or in any court of record, after this note is due, and waive the service of summons, and confess judgment against me in favor of the holder of this note for the amount which shall then be due and unpaid thereon, together with interest and costs.
(Signed)
Thos. Thomas.
130. Certificates of Deposit. It is customary for banks to issue customer's receipts showing that a deposit of a certain amount has been made by the customer, which will be held for payment of the receipt upon presentation. These receipts ordinarily are made payable to the customer's order, and circulate like money. They are, in effect, the promissory notes of the bank issuing them. They differ from promissory notes in that banks require a special deposit of its customers before issuing them. Banks issuing such receipts are supposed to hold these deposits as a special fund with which to pay the certificate when presented. The following is a common form of certificate of deposit:
—THE PEOPLES BANK OF CHICAGO—
We hereby certify that John Jones has deposited $1,000.00 in this bank, for which this certificate is issued, and which will be paid to the order of John Jones in current funds of this bank when presented.
The Peoples Bank of Chicago,
| June 23, 1909. | By A. Z. Marshall, Cashier. |
The payee of this certificate of deposit may indorse and transfer it. The holder may collect the amount by presenting the certificate to the bank.
131. Requisites of Negotiable Instruments. Certain elements are recognized, by long usage, as being necessary to constitute an instrument a valid negotiable instrument. The instrument must contain words of negotiability, such as or bearer, or order, or words of similar meaning. The instrument must contain a specific promise to pay a certain sum of money at a definite time. The instrument must designate an ascertainable person to whom, or to whose order the money is payable. The instrument must be signed and delivered. It is not necessary that a consideration be stated in the instrument, although in a suit between the original parties, failure of consideration is a defense. For example, if A gives B his promissory note for one hundred dollars ($100.00) payable to B's order, and A received no benefit for giving the note, if B sues A thereon, A may plead that he received no consideration for the note. This would be a complete defense to A. If, however, C purchased the note from B before it was due, paying value for same, and having no notice of its being given without consideration, A could be compelled to pay it to C or his successors. It is not necessary that a negotiable instrument be dated. It is proper, however, and good business policy to date all negotiable instruments. The signature need not be at the bottom of the instrument. This, however, is the proper place for the signature.
I. O. U. $500.00
(Signed) John Jones, is not a promissory note. It is not a promise to pay at a definite time or to a definite person. It is a mere acknowledgment of indebtedness.
132. Parties to Negotiable Instruments. By usage and custom, parties to negotiable instruments are given certain well recognized names. The name of the party to whom a promissory note is made payable is always called the payee. When the payee transfers a negotiable instrument by indorsement, he is called the indorser, and the party to whom he indorses the note is called the indorsee. Indorsers and indorsees are designated as first, second, third, etc., indorsers or indorsees according to their position on the instrument.
The maker of a draft is called the drawer. The one to whom it is given is called the payee. The one on whom it is drawn is called the drawee. After acceptance, the drawee is called the acceptor. The rights and liabilities of these parties are discussed under separate sections.
133. Rights and Liabilities of a Drawee. The term, draft, is sometimes used to designate orders made by one bank on another. For example, A in Cleveland, purchased of his Cleveland bank a New York draft, or an order by the Cleveland bank on a New York bank, payable to the order of A. Technically, orders on persons are bills of exchange, but the term draft, has come to be applied both to orders of one bank on another and to orders of one person on another. In this work the term, draft is applied to both kinds of orders. A drawer is a person who makes a draft on another. It is usually payable to the order of a third person. It may be made payable to the bearer or to the order of the drawer, himself. A drawer enters into a conditional contract. By becoming a drawer, he agrees to pay the bill of exchange or draft, if the payee presents it without delay, and in case of non-payment, or non-acceptance, if notice is promptly given him of this fact. In case the draft is a foreign one, that is, made payable or to be accepted, in a different state or country from which it is drawn, it must be protested by the payee to enable him to hold the drawer. A draft is protested by being presented by a notary public, who, by formal written instrument, declares the refusal of the drawee to accept. Protest is discussed more at length under a separate section. In case these conditions are complied with, and the drawee does not accept the bill or pay the bill after acceptance, the payee may hold the drawer. After the formalities above enumerated are observed by the payee or holders of a draft, if the draft is dishonored, that is, not accepted, or paid by the drawee, the payee may sue the drawer, whose liability is similar to that of the maker of a promissory note.
134. Rights and Liabilities of Acceptor. The person to whom a draft is directed is called the drawee or acceptor. When a draft is presented to the drawee, he may accept it by writing accepted thereon, or he may accept by writing his consent in a separate instrument, such as a letter, or by sending a telegram, or he may accept orally or by his conduct. After a drawee has accepted a draft, he is bound by its terms. He must pay the amount mentioned in the draft. After acceptance, his liability is similar to that of the maker of a promissory note. Sometimes an acceptor does not accept in the exact terms of the draft. He may change the time or place of payment, or attach conditions to the bill or draft. This amounts to a refusal on his part to accept the bill, which will entitle the payee to refuse the qualified acceptance and by giving proper notice to the drawer hold the drawer by reason of non-acceptance by the drawee. If, however, the payee chooses to accept the qualified acceptance of the drawee, he may do so, but by this act he releases the drawer and all prior indorsers from liability thereon.
135. Rights and Liabilities of Maker. Maker is the term applied to the person who originally makes and signs a promissory note. By this act, he agrees to pay at maturity, to the original payee, or to whomever the note has been indorsed or properly transferred, the amount named in the note. The maker of a note is liable absolutely and unconditionally. While it is customary for the holder of a note to present it to the maker at maturity for payment, this is not necessary unless a place of payment is stipulated in the note. The holder may commence suit against the maker at maturity without presenting the note for payment. If the note contains indorsements, the note must be presented to the maker, and if payment is refused, to enable the holder to hold the indorsers liable, notice of the fact must be given the indorsers. If the note is payable at a particular place, as for example, a bank, the holder must present the note at the bank at maturity, or not be able to collect interest thereafter, if the maker proves that he had funds there sufficient to pay the note at maturity. If the maker has been damaged other than by loss of interest, by failure to present a note at a bank when made payable, he may collect damages therefor from the holder.
136. Blank Indorsement. A negotiable instrument, if payable to bearer, may be transferred by delivery. If payable to the order of the payee, it may be transferred by indorsement and delivery. By indorsement is meant the writing the name of the payee upon the back of the negotiable instrument. Indorsement may be made in various forms, depending upon the purpose for which made, and the kind of liability the indorser is willing to undertake, or the kind or degree of liability which he wishes to avoid. The most common kind of indorsement consists of the payee's writing his name only on the back of the instrument. A negotiable instrument with blank indorsement is shown in Fig. 5.
Fig. 5. Promissory Note with Blank Indorsement.
If X. X. Crumby desires to transfer the note to anyone, he signs his name on the back thereof, as indicated in the illustration. This is called a blank indorsement, and makes the note payable to bearer. The note now passes as currency without further indorsement. Subsequent holders may indorse the note if they so desire, or are so required. If the back of a negotiable instrument becomes filled with indorsements, a paper may be attached to carry further indorsements. Such a paper is called an allonge.
137. Indorsement in Full. A holder of a negotiable instrument, not desiring to make it payable to bearer, may indorse it by making it payable to some particular person or to the order of some particular person, followed by his signature. This does not destroy the negotiability of the instrument, but prevents anyone but the person to whom it is indorsed, or such person's indorsees, from securing payment of the instrument. This is not true if the instrument is payable to bearer, or if it has been indorsed in blank. Such instruments are payable to bearer, and circulate as money without requiring further indorsement. If subsequently indorsed in full, only those subsequent holders can hold the indorser in full, who can trace their title through him.
Fig. 6. One Form of
Indorsement in Full.
Fig. 7. Another Form of
Indorsement in Full.
Fig. 6 is an indorsement in full of X. X. Crumby. By this indorsement, only John Jones, the person to whom he indorses, may obtain payment of the note. If John Jones indorses the note in blank, that is, signs his name to it, the note becomes payable to bearer, and passes like money, without further indorsements.
Fig. 8. Indorsement without Recourse.
By the indorsement, Fig. 7 which is also an indorsement in full, X. X. Crumby becomes liable as indorser to John Jones only, and not to anyone to whom John Jones may indorse the paper. X. X. Crumby's indorsement does not contain the words "or order." The face of the note, however, contains the words "or order," which makes the note negotiable. X. X. Crumby's indorsement to John Jones, although not containing words of negotiability, does not destroy the negotiability of the note. John Jones may indorse the note in blank, or in full. The only effect of X. X. Crumby's omitting words of negotiability from his indorsement is to limit his primary liability as an indorser to John Jones.
138. Indorsement without Recourse. Frequently, the holder of a negotiable instrument is unwilling to assume any primary liability by transferring a negotiable instrument which he possesses. He may desire to transfer the right he has in the instrument, without becoming liable thereon. He may do this by indorsing it without recourse.
Fig. 9. Indorsement for Collection and for Deposit.
By either of the indorsements, (Fig. 8) the one in blank, or the one in full, Jos. Rundy, transfers his interest in the note to John Jones, and does not become liable thereon as an indorser. It is not quite accurate to say that an indorser without recourse has no liability as an indorser. He impliedly warrants the signatures preceding his own to be genuine, and that the parties making them had legal capacity to sign. The implied liabilities of an indorser are discussed under a separate section.
Fig. 10. Promissory Note with Anomalous Indorser.
139. Indorsement for Collection or Deposit. A holder of a negotiable instrument may transfer it for the purpose of collection, thereby making the transferee his agent, for the purpose of carrying out his will, and thereby destroying the negotiability of the instrument. This prevents another from taking the note free from the claim of the original indorser.
Either of the indorsements in Fig. 9 destroys the further negotiability of the note. The indorsers are authorized to collect the note for Arthur Hinde. They are not authorized to transfer the note, except for the purpose of collecting it for Arthur Hinde.
140. Anomalous Indorser. Sometimes, a party writes his name upon the back of a negotiable instrument outside the chain of title. That is, he writes his name thereon, before the payee indorses it. This is for the purpose of adding security to the note.
In this case, Fig. 10, John Arthur signs the note outside the chain of title. He places his name thereon for the purpose of adding security thereto. He is liable on his indorsement to the payee, A. Aldrich, and to the indorsees of A. Aldrich. In some jurisdictions he is liable as a guarantor, in some as a surety, but in most as an ordinary indorser. The liability of a surety and guarantor is discussed in the section on Suretyship.
141. Liability of an Indorser. By placing his name on the back of a negotiable instrument for the purpose of passing title, a person becomes liable on an implied contract. If his indorsement is in blank, or payable to the order of the indorsee, he is liable to any innocent purchaser for the value, without notice. If made payable to a particular person, he is liable only to that person. The implied liability of an indorser has been said to be as follows: "I hereby agree by the acceptance by you of title to this paper, and the value you confer upon me in exchange, to pay you, or any of your successors in title, the amount of this instrument, providing you, or any of your successors in title, present this note to the maker on the date of maturity, and notify me without delay of his refusal to pay. And I warrant that all the parties had proper capacity and authority to sign, and that the obligation is binding upon each of them. And I will respond to the obligations created by these warranties, even though you do not demand payment of the maker at maturity or notify me of default."
142. Forgery and Alteration of Negotiable Instruments. An act by which a negotiable instrument is materially and fraudulently changed and passed or attempted to be passed, is a forgery. The act may consist of fraudulently writing another's name on a negotiable instrument, or changing a name already on a negotiable instrument, or changing the figures, date, rate of interest, or in fact any act of counterfeiting or materially altering a negotiable instrument. Forgery makes the instrument void. The forger, or those who purchase from him, obtain no rights against the party wronged. As to the party whose name or whose instrument is forged, the instrument is void. For example, A has B's valid note for one hundred dollars ($100.00) and changes the note by erasing one hundred dollars ($100.00) and substituting five hundred dollars ($500.00) and sells the note to C. C can recover nothing from B. A, by indorsing the note to C, warrants the genuineness of the note and is liable on his indorsement to C. Neither A nor C can recover even one hundred dollars ($100.00) from B. The instrument has been rendered void by the forgery, and courts will recognize no liability of B thereon.
A negotiable instrument altered in any material respect is void. If fraudulently made, it is regarded as a forgery. If innocently made, the instrument is still void, but the wronged person is liable for the original consideration. If A gives B his promissory note for one hundred dollars ($100.00) with interest at 6%, and B carelessly, but not fraudulently, writes 8% thereon instead of 6%, B cannot recover on the note at all. But he can recover from A one hundred dollars ($100.00) with interest at 6% on the debt for which the note was given. Any alteration of a negotiable instrument which changes the liability of the parties thereto, amounts to a material alteration. Changes in the rate of interest, the name of an indorser, the date, the place, time or manner of payment is a material alteration and renders the instrument void. If the alteration is made by a stranger, a person not a party to the instrument, it does not constitute a material alteration. The instrument may be restored to its proper form and recovery be had thereon.
143. Fraud and Duress. Fraud has been defined to be "a false representation of a material fact, made with knowledge of its falsity or in reckless disregard whether it be true or false, with the intention that it should be relied upon by the complaining party, and actually inducing him to rely and act upon it." Fraud is a defense to a party to a negotiable instrument as against the person inducing it, but not as against subsequent innocent purchasers. A offers to sell B a diamond ring for five hundred dollars ($500.00) assuring him that the diamond is genuine. Relying upon this false statement of A, B takes the ring and gives A his promissory note for five hundred dollars ($500.00) payable to A's order. The ring proves to be paste. A cannot recover on the note from B. If, however, before it is due, A sells the note to C, who pays value for it without notice of the fraud, C can force B to pay the note.
Duress is actual or threatened violence sufficient under the circumstances to compel a person to act against his wishes. In connection with negotiable instruments, duress is treated as the same kind of a defense as fraud. It is a complete defense as against the guilty party, but is not available as against an innocent purchaser.
144. Lost or Stolen Negotiable Instruments. The primary function of negotiable instruments is to circulate like money. If a negotiable instrument is indorsed in blank, or made payable to bearer, it may circulate without further indorsement. If such a negotiable instrument is lost or stolen, and purchased before maturity by an innocent party, the maker is liable thereon. For example, if A makes a promissory note payable to bearer, and it is stolen by B from A's possession, and sold for value to C, an innocent party, C may collect the note from A. If A makes a promissory note payable to the order of B, and B indorses it in blank, that is, writes his name only, on the back thereof, and it is stolen from B's possession by C and sold by C to D, who purchases it innocently and for value, D may collect the note from A. This is the principal distinction between negotiable instruments and ordinary contracts. If the thief changes the instrument in any material way, or is obliged to forge someone's name to pass it, this constitutes a forgery and no recovery can be had thereon.
145. Real and Personal Defenses to Negotiable Instruments. Defenses to negotiable instruments are usually classified as real and personal. If they are good only against a particular person, they are said to be personal. If they are good as against everyone, they are said to be real. If the instrument is forged, given by an infant, a person under legal age, is illegal—for example given for a gambling contract made illegal by statute—or has been materially altered, it is void, regardless of who holds it. These defenses are called real defenses. If the instrument is lost or stolen, and purchased by an innocent party, if given by reason of duress or fraud, or if there is no consideration, the defense is good only as against the guilty party. These defenses are called personal defenses.
146. Consideration. A consideration is usually defined to be something beneficial to the party making a promise, or something detrimental to the party to whom a promise is made. Every ordinary contract must be supported by a consideration. Negotiable instruments differ from ordinary contracts in that they are made to circulate like money. In order that they may circulate like money the maker is not permitted in some instances, to assert that the instrument lacks consideration. As between the immediate parties to a negotiable instrument, there must be a consideration. The maker may successfully defend against an action based thereon for this reason. If, however, the instrument has passed before due, to an innocent purchaser for value, the maker cannot refuse payment on the ground of no consideration. In case of a negotiable instrument, consideration is presumed. Consideration need not be stated in the instrument. It amounts to a defense, only as between immediate parties. If A gives B his promissory note payable to B's order, with the understanding that B is not to use the note, but is to show it to C, his grocer, for the purpose of obtaining credit, and B endeavors to collect the note from A, A may successfully defend on the ground of no consideration. If, however, B sells the note to D before it is due, and for value, D, not knowing there is no consideration, can collect the note from A.
147. Presentment and Acceptance of Drafts. Drafts payable at sight, or after sight, must be presented to the drawee for acceptance. This is for the reason that the time of payment of such drafts is uncertain. If a draft of which presentment is necessary, is not presented for acceptance, the drawer and indorsers are discharged. Presentment for acceptance must be made to the acceptor within a reasonable time after receipt by the payee or indorsee. What consitutes reasonable time for presentment depends upon the circumstances connected with each particular case. Presentment for acceptance is made by exhibiting the bill for acceptance to the person upon whom is it drawn. Presentment for acceptance may be made by the payee, or his indorsee, and may be made to the drawee, his authorized agent or legal representative. Presentment may be made either at the person's place of business, or at his residence. If made at his place of business, it must be made during business hours. It cannot lawfully be made after noon on Saturdays, nor can it be made on Sundays or legal holidays. Acceptance may be indicated by writing accepted or words to that effect on the bill, by a separate writing to that effect, or by oral agreement of the drawee. If the bill contains a stipulation not requiring acceptance, this is called waiver of acceptance, and the bill need not be presented for acceptance. If acceptance is refused, or not made for any reason, anyone may accept the bill. This is called acceptance for honor, or acceptance supra protest. The liability of an acceptor for honor is that if the bill is presented to the drawee at maturity for payment and refused, and notice thereof given the acceptor for honor, the latter will pay it.
A bill or draft payable at a definite time or date need not be presented for acceptance. For example, if a bill is drawn payable December 23, 1909, it need not be presented for acceptance. The time of payment is certain, and if presented for payment on December 23, and dishonored, notice of non-payment to the drawer and prior indorsers is sufficient to enable the payee to hold them liable. If, however, the bill is payable at sight, or three days after sight, or any time after sight, it must be presented for acceptance to fix the date of maturity, If a bill is not paid by the acceptor after acceptance, notice must be given the drawer and prior indorsers by the holder, to enable him to hold the drawer and prior indorsers liable. This is sufficient in case of an inland bill. In case of a foreign bill, one drawn on a person, or made payable to a person in another state or country from the drawee, formal protest must be made in case of non-payment or non-acceptance. Protest is a formal act of a notary public. This is explained under a separate section.
148. Time of Payment and Days of Grace. A negotiable instrument is payable at the time mentioned in the instrument. If a negotiable instrument is payable a stipulated time after date, and the instrument bears no date, its date is the time it was delivered. The term month, is held to mean calendar month, and not a certain number of days. If a note is dated February 6th, and is payable thirty days after date, it matures March 6th. When a negotiable instrument is payable a specified number of days after date, the time is counted by excluding the day on which the instrument is given, and including the final day stipulated. Negotiable instruments may be made payable on demand of the payee or holder. Such paper is payable at the option of the holder. It is sometimes called paper payable on call. Negotiable instruments may be made payable on or before a certain day. These instruments are valid negotiable instruments. They really mature at the day fixed in the instrument, but may be paid at any time after delivery at the option of the payee or holder. According to the Law Merchant, three days were allowed the party liable on a bill or note to make payment, in addition to the time fixed for payment. These were called days of grace. In the majority of the states, days of grace have been abolished by statute. When not abolished by statute, days of grace are still allowed.
149. Innocent Purchaser for Value Without Notice. The feature that distinguishes negotiable instruments from ordinary contracts is that negotiable instruments may be transferred in such a manner that the transferee receives the instrument free from certain defenses which are good against the transferror. For example, one who purchases another's rights under an ordinary contract takes the exact position of the transferror. Any defenses good against the seller are good against the purchaser. However, a purchaser for value before maturity of negotiable instrument, who has no notice of any defenses to the instrument, takes it free from all but real defenses. Real defenses are infancy of the maker, forgery, material alteration, and illegality. But such a defense as fraud, want of consideration, duress, or any except a real defense is not available against an innocent purchaser for value without notice. An innocent purchaser for value without notice, of a negotiable instrument, is also called a bonâ fide holder, or a holder in due course. A person who purchases a negotiable instrument showing defects or defenses on its face, cannot claim to be a bonâ fide holder. A person who purchases negotiable instruments after maturity, takes them subject to all defenses good against the seller. Such a purchaser is not a bonâ fide holder.
150. Presentment for Payment of Negotiable Instruments. So far as the maker or acceptor of negotiable instruments is concerned, in the absence of a place for payment stipulated in the instrument, a negotiable instrument does not have to be presented for payment. As a matter of practice, however, negotiable instruments are presented to the maker and acceptor at their places of business or at their residences for payment at maturity. In order to hold indorsers, however, a negotiable instrument must be presented to the maker or acceptor at maturity, and, in case of failure to pay, notice must be given indorsers, else they are relieved from liability. When a place for payment is specified in a negotiable instrument, presentment at that place is sufficient. When no place of payment is designated in the instrument, presentment to the maker or acceptor personally, wherever he may be found, or at his residence or place of business is sufficient.
151. Notice of Dishonor and Protest. When a negotiable instrument has been presented to a maker or acceptor for payment, and payment has been refused, the holder should notify the drawer, if the instrument is a bill of exchange or draft, and the indorsers, no matter what the form of the negotiable instrument, of the fact of dishonor. If such notice is not given, the acceptor or indorsers are discharged from liability. This notice should be given by the holder of the paper, or his agent, within a reasonable length of time after dishonor. The notice may be given by a verbal notification, by the delivery of written message, or by mailing notice to the residence or place of business of the indorsers or drawer. Everyone whom a holder desires to hold liable, must be notified in case of dishonor. If a drawer of a bill or an indorser of a note waives notice of dishonor by so stipulating in the instrument, notice as to them is unnecessary. In case of an inland bill, mere notice in writing mailed to their usual address, or actual notice is sufficient. By inland bill is meant one made payable, or to be accepted in the same state or country where drawn. In case of a foreign bill of exchange, or one made payable, or to be accepted, in a state or country other than where made or drawn, notice of dishonor must be by protest. This is true of notice to the drawer for failure of a drawee to accept, as well as for failure of an acceptor to pay. Protest is a formal declaration of a notary public, an officer recognized by all countries as authorized to administer oaths. Technically, only bills of exchange need be protested. By practice, however, promissory notes and checks are protested as well.
152. Certificate of Protest. The following is a common form of protest:
| State of Ohiobr Cuyahoga Co. | SS |
I, John Arthur, a notary public, having been duly appointed and sworn, and residing at Cleveland, Cuyahoga Co., Ohio, do certify that on the 10th day of December 1909, I presented the annexed promissory note for payment at the City Trust Co., where same is made payable, and that I did this at the request of the State Trust Co., and that payment was refused. I further certify that I did protest, and I do now publicly protest against the maker, indorsers, and all others concerned, for all costs and damages connected with the failure to pay this instrument. I certify that I am not interested in any way in this instrument. I further certify that I have this day deposited in the Post Office at Cleveland, Ohio, notices of this protest, signed by me as notary public, and addressed to the following persons. (Names and addresses of persons connected with the instrument.) In testimony whereof I have hereto affixed my signature and seal of my office, this 10th day of Dec., 1909.
John Arthur,
Notary Public.
Notary
Seal.