Lancaster National Bank v. Taylor

Foster, J. The rule that the indorsee of a negotiable promissory note, who has taker, it before maturity for value and [22] without notice of any want of consideration or other defect rendering it void in its inception, can enforce it against the maker, notwithstanding it was valueless in the hands of the original payee, is founded upon the custom of merchants and the statute of 3 & 4 Anne, c. 9. It is an exception to the general rule of the common law; according to which a written promise can be enforced only in the name of the party to whom it is made, and, if it has been assigned, although the assignee is allowed to bring an action upon it in the name of his assignor yet he has no greater rights than the assignor possessed, and the instrument remains subject to every defence that would have existed if no assignment had taken place. The ordinary rule applies to all notes which are not negotiable, and to all negotiable notes which are not duly indorsed for value before maturity. A note not negotiable may be assigned and transferred like any other chose in action, but can be sued only in the name of the payee, and is liable to every defence existing against him. A negotiable note not -transferred until it is overdue may be sued in the name of the indorsee, but as to defences must be treated precisely like one not negotiable. And a negotiable note which is transferred before maturity, but not indorsed until afterwards, in our opinion can stand on no better footing. Whoever receives it takes a contract which upon its face shows that it is subject to every defence that could have been made be tween the original parties. There is no custom of merchants in favor of such an assignee, and no rule of law by which he is entitled to greater rights than the payee. If the contract was originally invalid for want of consideration or other cause, so will it be in any other hands into which it passes before the legal title is transferred by regular indorsement. No such indorsement having been made before the note is overdue and dishonored, any subsequent one takes effect only from its date. There is no doctrine known to the mercantile law, by which it can relate back to the time of the equitable transfer, and place the assignee in the same position as if he had been before maturity the holder of the note for value. It is true a distinction between negotiable and unnegotiable [23] notes has been recognized in regard to the set-off allowed by statute, and, where a negotiable note was transferred for value before it was dishonored, but not indorsed till afterwards, a previously existing set-off of a distinct demand against the payee was not allowed to prevail. Ranger v. Cary, 1 Met. 369. The set-off of distinct demands is a matter regulated by statute, and not a common law defence. And the court carefully limit the application of their opinion, saying that “ here is no question of want or failure of consideration of this note; no offer to prove payment of it; but the defendants rely on an account filed in offset.” This case is therefore no authority against the conclusion to which we are conducted by applying the elemen tory principles of the law merchant. The facts in the present action show that the defendant intrusted to Butterick his signature to a blank note, with authority to write over it a note of one hundred dollars for the benefit of one Henry; that Butterick fraudulently filled up the note now in suit so as to make it one for the sum of a thousand dollars payable to his own order, and passed it to the Lancaster Bank in payment of a former note, that is, for a valuable consideration. But Butterick did not then indorse the note; and it remained in the hands of the bank unindorsed till after its maturity. At a later date, when the note was overdue and the bank had notice of all these facts, Butterick did indorse it. Undeniably, if he had done so originally, the defendant would have been liable. Having placed it in the power of Butterick to perpetrate such a fraud, the injury caused by the defendant’s own negligence must have been borne by himself, and not by the bank, which was in no fault and guilty of no want of due care. But the defendant is liable only upon and to the extent of the contract which was written, and not for one which might have been but was not made. The bank saw fit to take the note, which purported to be in favor of Butterick, without requiring .lira to indorse it. They therefore took it subject to any defence which might be made to an action in Butterick’s name. And the subsequent indorsement does not improve their position. When the note came into the hands of the bank payable to the [24] order of Butterick and not indorsed by him, the very form of the instrument gave notice that no one could bring an action upon it except in the name of Butterick, and that it was subject to every defence affecting its original validity which could have been made to it while it continued in bis hands. There is a recent English case in which this identical question has been determined by eminent judges, of great experience and authority in mercantile law. A check or sight draft, obtained by fraud from the defendant by one Griffiths, was transferred for a valuable consideration to the plaintiff, before dishonor and with no notice to him of the fraud. But the actual indorsement of the paper was not made till the instrument was dishonored and the plaintiff had notice of its fraudulent origin. On this state of facts, Erie, C. J., said: “ The intention, no doubt, was, that - the plaintiff should take the instrument as indorsee ; but the indorsement was omitted, and whilst it was in the hands of the plaintiff without being indorsed it was as if it had been an ordinary chattel that had passed by an equitable and not by a legal assignment. All- the rights, therefore, that the plaintiff had at that time at law were such as Griffiths had, and no more. Then Griffiths, having defrauded the defendant of the bill, could have no right to it as against the defendant. The law relating to negotiable instruments is, that the fact of delivery gives to the person who takes the instrument a title which is good as against all the world, notwithstanding there may be some defect in the title of him from whom the bill is taken, provided it is taken by indorsement for value and without notice of the fraud which constitutes the defect in title. Now the title which the plaintiff gained on the delivery of this instrument was not like that which he would have obtained on the delivery of a negotiable instrument not requiring indorsement ; it was yet incomplete, but capable of being perfected by indorsement. Before he had obtained the indorsement he was not within the rule of law I have mentioned; and when he did obtain it he had notice that he could not gain any title to the bill on account of the fraud practised ón the drawer.” In the same case, Willes, J., said: “ The general rule of law is, Nemo [25] dot, qui non habet; but in the case of negotiable instruments, in order that they may circulate freely, and that persons may not on every occasion be put to the trouble of inquiring into their origin and the transactions between the original parties to the bill, there is an exception to the above rule, and a person taking a bill during its currency, for value, and without notice of any fraud perpetrated by him from whom he takes it, is entitled to sue any person whose name is on the bill, notwithstanding that the person against whom he brings his action was originally defrauded of that bill. It is necessary, however, that the bill should have been indorsed to the holder and taken " by him during its currency, and not after it became due; for a person who takes a bill in any manner after it has become due takes it subject to all the equities between the antecedent parties. The person who claims the benefit of this law relating to bills of exchange must prove that he is entitled to do so; he must show that he took the bill by indorsement for value and without notice of fraud. This is a doctrine of the law merchant in favor of those who have acquired by their diligence a complete title. The plaintiff has failed to show that he has done so, and cannot now recover upon it.” ' Whistler v. Forster, 14 C. B. (N. S.) 248. In the opinion of a majority of the court, these citations express with fulness and accuracy the rule, and the limitations of the rule, of the law merchant, which gives to the bond fide indorsee for value before maturity of a negotiable instrument a better title and a more complete right of action than the original payee of the instrument may have possessed. The learned judge at the trial having proceeded upon a different view of the law, the Exceptions are sustained.