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.