THE HOLDER IN DUE COURSE.—As we have seen, the distinguishing feature of the law of commercial paper is negotiability as distinguished from assignability. The principles of negotiability are designed very largely for the protection of the person whom we call the holder in due course. It is essential then to bear in mind the condition under which a person becomes such. Section 52 of the Act defines a holder in due course as follows:
Section 52. "A holder in due course is a holder who has taken the instrument under the following conditions: (1) That the instrument is complete and regular upon its face; (2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (3) That he took it in good faith and for value; (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it." Section 57 defines what the rights of this holder in due course are:
Section 57. "A holder in due course holds the instrument free from any defect of title of prior parties, and free from defences available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon."
It is clear, then, that by this section, the Act means that the holder in due course takes free of personal defences, although he does not take free of absolute defences. It simply remains for us to consider briefly what is meant by a personal defence and what is meant by an absolute defence. We have already illustrated this in one of our cases where the note was a present. In this case, there was no consideration for the note. The boy to whom it was given could not recover, whereas when he transferred it to an innocent third party, a holder for value, he could recover. Thus we say, failure of consideration is a personal defence. Again, some person steals my check book, fills out a check, and forges my name. The check is then taken and finally gets into the hands of a person who is strictly a holder in due course. He could not recover on it, however, because forgery is a real defence. That is, no one can hold me liable on my forged check. The ordinary illustration of real or absolute defences are infancy, lunacy, illegality and sometimes fraud. Other defences are generally personal defences and do not affect the holder in due course. To put it another way, a real defence is good against the whole world; a personal defence is available only against such as are not holders in due course.
LIABILITY OF PARTIES.—The parties primarily liable on negotiable documents are, on a note, the maker; on a bill of exchange, the acceptor; and on a check, the drawer. The liability of these three parties is most concisely stated in Sections 60, 61, 62, as follows:
Section 60. "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."
Section 61. "The drawer by drawing the instrument admits the existence of the payee, and his then capacity to indorse; and engages that on due presentment the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder."
Section 62. "The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits: (1) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and, (2) The existence of the payee and his then capacity to indorse."
INDORSERS' LIABILITY.—We have not yet considered the question of the liability of persons who transfer negotiable documents. Indorsements may be made, as we have said, in two ways: either by indorsing the document, or if it is payable to bearer, by delivering it without indorsement. The liability of these two parties is stated in the Negotiable Instruments Act in Sections 65 and 66 in the following language:
Section 65. "Every person negotiating an instrument by delivery or by a qualified indorsement, warrants: (1) That the instrument is genuine and in all respects what it purports to be; (2) That he has a good title to it; (3) That all prior parties had capacity to contract; (4) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provisions of subdivision three of this section do not apply to persons negotiating public or corporation securities other than bills and notes."