Summary
In Chester v. Dorr, 41 N.Y. 279, the court decided that an accommodation indorser, without consideration, of a promissory note, is not liable to a transferee of the note after maturity, although such transferee paid a full consideration; for the reason that it cannot be supposed that such an indorser intends to give the note currency by the loan of his credit for a period longer than it is to run according to its terms.
Summary of this case from Bacon v. HarrisOpinion
Cause argued September 28th, 1869
Decided December 21st, 1869
Elisha W. Chester, the respondent in person.
Benjamin D. Silliman, for the appellant.
Mr. Justice STORY, in his Treatise on Promissory Notes, section 178, thus states the difference between the legal effect of the transfer of a promissory note, before and after maturity: "If the transfer is made before the maturity of the note, to a bona fide holder, for a valuable consideration, he will take it free of all equities between the antecedent parties, of which he has no notice.
If the transfer is after the maturity of the note, the holder takes it as a dishonored note, and is affected by all the equities between the original parties, whether he has any notice thereof or not. But, * * it is not to be understood, by this expression, that all sorts of equities existing between the parties, from other independent transactions between them, are intended; but only such equities, as attach to the particular note, and as between those parties, would be available to control, qualify or extinguish any rights arising thereon."
The learned author gives this as the final conclusion, from the numerous cases cited by him, an examination of which shows, that it is only after some difference of opinion that it has come to be deemed settled. Or, as Mr. CHITTY says, of the opinion of BULLER and ASHURST, JJ., in Brown v. Davis (3 T.R., 80), expressed, when Lord KENYON doubted its broad extent, "this latter opinion is now the law." That opinion was to the effect, "that where a note is overdue, that alone is such a suspicious circumstance, as makes it incumbent on the party receiving it, to satisfy himself that it is a good one, otherwise much mischief might arise." "If a note indorsed, be not due at the time, it carries no suspicion whatever on the face of it, and the party receives it on its own intrinsic credit. But if it is overdue, though I do not say that, by law, it is not negotiable, yet, certainly it is out of the common course of dealing, and does give rise to suspicion. * * Generally, when a note is due, the party receiving it, takes it on the credit of the person who gives it to him."
The foundation of the rule, which distinguishes commercial paper from ordinary common law choses in action, is in harmony with the law thus stated; the holder of the former is protected against any inquiry into its previous history, and is warranted in giving it full faith, according to its tenor, because commercial convenience and the importance of the free and unembarrassed use of commercial credits required it; and on this, the mercantile customs, which ripened into the law merchant, were founded. These reasons, however, could have no application to paper which had been dishonored. The credit it was adapted to invite, is spent, and the very fact of dishonor, is inconsistent with the purposes which the rule was intended to subserve.
The rule is simple and convenient of application, is in no sense inconsistent with the usefulness of negotiable paper for the purposes for which it is intended, and, as it seems to me, is a just security against mischief and fraud.
In the terms, in which it is above stated, it includes the defence of want of consideration, whenever that renders the note invalid in the hands of him who holds it, when it becomes due. Such want of consideration is an inherent defect in the contract itself. Or, in the language of the rule, attaches to the note itself, in the hands of one for whose accommodation a note is made, and does not, like a set-off or other collateral matter apart from the note, arise out of an independent transaction.
But the same learned writer, above referred to, states that the mere fact that an accommodation note has been indorsed after it became due, does not of itself, without some other equity in the maker, defeat a recovery by the indorsee. (Story, § 194.) And Mr. Chitty states that it has been so decided. The cases of Charles v. Marsden (1 Taunt., 224); Sturtevant v. Ford (4 Mann Gr., 101); 4 Scott, 608, and Caruthers v. West (11 2 B., 143), are in support of the proposition.
These are the cases, upon the authority of which the present case was decided below.
I am constrained to say, that I am not satisfied that such an exception to the rule is either just, or called for by any principle, nor am I at all convinced by the reasons assigned for the exception.
That the maker or indorser of a note for the accommodation of another should be held to the terms of his own indorsement according to their just interpretation, I fully agree. That one who receives such paper before maturity, should not be affected by the mere fact that it was made or indorsed without consideration, I equally agree. That when a party lends his note or indorsement to another without restriction as to its use, he authorized the negotiation thereof in any manner which may serve the convenience, or credit of the borrower may be conceded.
From this latter concession it is argued, that such a lending of one's name is furnishing a continuing guarantee of the payment of the note, irrespective of its terms as to time of payment, and is therefore binding whenever it is transferred, and however long after it has become payable and been dishonored. That the absence of express restriction warrants the inference, that the making or indorsement was to enable the borrower to use it whenever thereafter it suited his pleasure, and so "enforcing its payment is in accordance with the object for which the note was, as matter of accommodation, made or indorsed;" and in the discussion in England, it has been suggested, that supposing an accommodation acceptance to remain in the hands of the party accommodated, it may be treated as giving authority by implication to use it thereafter, as his convenience or needs may require.
In respect to the last suggestion, two observations are pertinent; first, it begs the question, for assuming the rule to be that he who receives a note or bill, after dishonor, acquires no better title to recover thereon, than he has, from whom it was received; then there is no reason why the accommodation maker or indorser should not treat the note in the hands of the borrower, after maturity, as functus officio, and mere waste paper. And, second, how is the maker or indorser, in such case, to withdraw his note or indorsement? Is he to be driven into a court of equity, and to praying out an injunction, to prevent a subsequent transfer? I think not. Take the present case; the note itself was the property of the holder at its maturity (Myers), and was a valid note, in his favor against the maker. The indorsement of the defendant (the appellant's testator) was material as a transfer of title, although, being made for Myers' accommodation, it could not be enforced against such defendant as indorser. I cannot agree, that it was incumbent on the defendant, to go into a court of chancery to compel Myers to suffer a writing of the words, "without recourse," or an equivalent expression, as a qualification of such indorsement.
As to the other reason, it is even less satisfactory, because it proceeds, I think, upon an entire misconstruction of the act of making or indorsing a note for the accommodation of another. Its purpose and object, is to obtain credit for such other, or to enable him to do so. The very terms of the note declare the credit it is intended to procure, that is to say, until the maturity of the note. Within that range, the making or indorsement being unrestricted as to its use, the borrower may use it as his exigencies require, and a transferee may receive it in reliance upon the undertaking which is imported by its terms.
But the very term of payment, contained in the note, imports that the accommodation party undertakes that the note shall be paid at its maturity; and that he who then holds the note, shall have recourse to him, if it be not then paid. Where the accommodation (as in the present case) is by indorsement, that is the precise contract, viz., that the note shall be paid at maturity, and not that it shall be paid at any future time. If the note be not paid at maturity, the contract is broken, and if he, who then holds it, can recover thereon, then his right of recovery may be transferred to another; and the recovery of the latter will be, not because the accommodation indorser undertook that the note should be paid to him, or should be paid at some date after it was due, but because a valid cause of action, existing in favor of the holder at maturity, has been transferred to him.
It is not according to the intent or meaning of an indorsement for another's accommodation, to say that the indorser intends to give the use of his credit for any other period than that limited in the note. Or that such an indorsement imports authority to use it, when that period has elapsed.
One may be willing by indorsement, to guarantee the solvency of another for sixty days, or for six months, and yet he would wholly refuse to do so for a period of two years. And accordingly, when such accommodation is given, it is a most material circumstance that the time during which the borrower is at liberty to obtain credit on the note, is fixed by the limitation of the time of payment therein.
I deem the just view of the subject to be, that when a note has become due and is dishonored, the rights and responsibilities of the parties thereto, are fixed. The note then loses the chief attribute of commercial paper. It is no longer adapted to the uses and purposes for which such paper is made, and in respect of which it is important that it should circulate freely. And thereafter, he who takes it, takes it with knowledge of its dishonor, with obvious reason to believe, that there exists some reason why it was not paid to the holder; and takes it with just such right to enforce it as such holder himself has, and no other.
In thus stating my views, I am not insensible of the apparent authority for the decision made below, but I am also aware that the judges in England have not been at all agreed on the subject, and have expressed doubt of the correctness of the decision in Charles v. Marsden, upon which the other two cases above referred to were decided. The cases, largely collected in the notes to Chitty in the recent edition, warrant, I think, the dissatisfaction I have expressed.
No case in this State has called for a decision of the question; and yet in Brown v. Mott (7 J.R., 361), and in Grant v. Ellicott (7 Wend., 227) the case of Charles v. Marsden is refered to without disapprobation, and the proposition derived therefrom is stated; but in neither was the point now raised before the court, for in neither did it appear, that the plaintiff took the note after it became due.
And that in other States in this country, such an exception to the general rule first above stated is repudiated, see Brown v. Hastings (36 Penn., 285); Britton v. Bishop ( 11 Vt., 70); Odiorne v. Howard ( 10 N.H., 343); Cummings v. Little ( 45 Maine, 183); Vinton v. King ( 86 Mass., 4 Allen, 563); Kellogg v. Barton ( 94 Mass., 12 Allen, 527). And the general proposition, that he who takes a note when overdue, takes it subject to all defences inherent in the note, or arising out of any agreement with the holder, expressed or implied, and relating thereto, or in another form, that such an indorsee obtains no greater or other rights than his indorser had in it at the time of the indorsement, has been stated as law in cases almost without number. It will, perhaps, suffice to refer to two from the Supreme Court of the United States. Andrews v. Pond (13 Pet., 79), says of the indorsee of a dishonored bill. "If he chooses to receive it; he takes it with all the infirmities belonging to it; and is in no better condition than the person from whom he received it." ( Fowler v. Brantley, 14 Pet., 321.) "A note overdue, or bill dishonored, is a circumstance of suspicion to put those dealing for it afterward on their guard, and in whose hands it is open to the same defences it was in the hands of the holder when it fell due. After maturity, such paper cannot be negotiable `in the due course of trade,' although still assignable." See also Foley v. Smith (6 Wallace, 492).
In my own opinion, the just rule, and the rule resting on the soundest principle, requires us to reverse. The supposed exception to the general rule rests on neither reason, nor as I think on authority, certainly not in this country.
It was suggested by the counsel for the respondent, that as matter of fact, the defendant's indorsement was not without consideration, and for the accommodation of Myers, who held the note at maturity.
The finding of the referee on that subject is conclusive in this court; and that finding is, that the indorsement was made without consideration at Myers' request, and to enable Myers to use the notes. This is but a statement that the defendant indorsed the notes for the accommodation of Myers. It was so treated in the court below, and it is an unwarranted assumption to say, that possibly the defendant had some other inducement to indorse the notes, in order that the plaintiff might accept the notes, and give credit to the maker thereof, who was his debtor.
MURRAY, J., also read an opinion for reversal.
GROVER, LOTT, JAMES and DANIELS, JJ., concurred for reversal.
MASON, J., thought the law settled in this State in favor of the plaintiff, by the cases (7 Johns'., 361; 7 Wend., 227; and 1 Hill, 513), and was for affirmance.
HUNT, Ch. J., was also for affirmance. He did not approve of construing the defendants' contract as conditioned upon transfer before due.
Judgment reversed.