signed the note.185 And a threat of suicide by a husband is not duress upon the wife.18

Fraud in Inception.

§ 1806. The fraud that renders a bill or note void may be either in its inception or in its subsequent transfer. If the paper is originally obtained by fraud, or for a fraudulent consideration, it will be a legal defense.187 Thus, it will be void if given for a pretended sale of goods.188 So, if a signature is written on a blank sheet for future use as an address, and a note is afterwards fraudulently writ ten over it, it will not be binding on the pretended maker,189 even in the hands of a bona fide holder.1 190 If a note is given in escrow for a certain bond to be delivered, and the payee obtains it by fraudulently substituting another bond, he cannot recover on it.191 So, where one agrees to become a surety on a note in payment for certain purchases, and another debt is fraudulently inserted in the note, it will be voidable as to the amount so added.1 But it is no defense that the holder bought certain notes, and commenced several actions on them, with a design to harass and oppress the maker.1 It is not of itself a fraud that the maker was insolvent at the time, if the note was given in good faith for a valid debt.194 And even

185 Seymour v. Prescott, 69 Me. 376.

192

193

186 Remington v. Wright, 43 N. J. Law, 451, affirming 41 N. J. Law, 49. 187 Galusha v. Bank, 1 Hun (N. Y.) 573. E. g. by false entries making the defendant appear to be indebted to the plaintiff. Barber v. Kerr, 3 Barb. (N. Y.) 149. Or by misrepresentation of the payee's identity. Bergmann v. Salmon, 79 Hun, 456, 29 N. Y. Supp. 968. Or by fraudulent reissue of bonds that have been paid. Board of Education v. Sinton, 41 Ohio St. 504. As to fraud in consideration, see $$ 489, 549, supra. And by fraudulent warranty, see § 548, supra.

188 Nichols v. Baker, 75 Me. 334. Or for a genuine sale which the purchaser did not intend to pay for. Nichols v. Baker, 75 Me. 334. And the defense is available without an offer to rescind the note if the damages equal the whole face of the note. Kelly v. Pember, 35 Vt. 183.

189 Wilson v. Miller, 72 Ill. 616.

190 Nance v. Lary, 5 Ala. 370.

191 Boone v. Queen, 2 Cranch, C. C. 371, Fed. Cas. No. 1,643.

192 Clopton v. Elkin, 49 Miss. 95.

193 Bragg v. Raymond, 11 Cush. (Mass.) 274.

194 Savage v. Ball, 17 N. J. Eq. 142.

where the officers of a bank, knowing it to be insolvent, receive deposits from persons ignorant of its condition, charging and remitting such deposits at customary intervals, irrespective of their collection, the bank will not be liable for uncollected drafts as a special deposit, and they cannot be recovered as such against its receiver. 195 But it has been held to be a fraud for an insolvent bank to receive checks deposited, when contemplating immediate suspension and insolvency.196 But one who purchases a bill in good faith from a branch bank, after the principal bank had failed without his knowledge, can only prove as a general creditor against such bank, and cannot recover the payment made by him as on a void sale.1 197

Fraud in Transfer.

§ 1807. Fraud in the sale of collateral and in the application of the proceeds is admissible as a defense.198 So, if the payee misappro priates a note given as a renewal to take up another note, which the maker is afterwards obliged to pay, he may set up the defense against the payee.199 So, if paper is fraudulently disposed of by one with whom it was deposited for safe-keeping, it is a good defense against a party with notice.200 But, if the maker of a note puts it into the hands of an agent to sell and raise money on it, he cannot set up against a bona fide holder a misappropriation of the proceeds by the agent.201 And, in general, the maker is not discharged by the mere fact that the note was fraudulently transferred by the payee.2

202

195 People's Bank v. Frelinghuysen, 8 N. J. Law J. 295. On the other hand, the receiver of an insolvent bank cannot appropriate (as the proceeds of its own drafts, under the national bank act) a special deposit of drafts purchased of a depositor whose account was overdrawn, although the cashier acted as agent of the seller and purchased as executor. Tuttle v. Frelinghuysen, 38

N. J. Eq.. 12.

196 Fisse v. Dietrich, 3 Mo. App. 584. And see § 1810, infra.

197 In re Oriental Bank, 28 Ch. Div. 643.

198 Howard v. Ames, 3 Metc. (Mass.) 308.

199 Honeycut v. Strother, 2 Ala. 135.

200 Marston v. Allen, 8 Mees. & W. 494.

201 Lingg v. Blummer, 88 Pa. St. 518.

202 Kinney v. Kruse, 28 Wis. 183. And see §§ 694, 800, supra.

On the other hand, if a bill is indorsed for a certain purpose to A., he cannot appropriate it to a debt due him from the indorser, and hold the acceptor liable upon it.203 And if an agent, to whom a note is given to procure a discount, misappropriates it to a debt due himself, he will be liable to the principal, as though he had procured the discount.2 204 And where one makes a note and delivers it to B., and it is given by him to another party to get it discounted and pay the proceeds to B.'s creditor, A., for whose benefit it was originally made, and he diverts it to another purpose, and the maker is afterwards obliged to take it up, he may recover in trover for breach of trust against the party to whom it was originally delivered, although the note has been returned to his possession.205

Fraud on Other Party.

§ 1808. It is no defense for the maker of a note to show that the indorsement was procured by fraud on the indorser, 206 even against a party who had notice of such fraud. 207 But, where the drawer of a check proves that it has been obtained by fraud upon the indorser, the burden is thrown on the holder to show that he got it in good faith and for value.208 In like manner, an indorser cannot set up that the note was obtained from the maker by duress.209 who has indorsed a note for the maker's accommodation, without notice of fraud, may set up duress on the maker's part as against a payee with notice.210 Where a firm note is given for a partner's debt, in fraud of another partner, and its execution in the firm name is relied on by a surety who signs it afterwards, the surety will not

203 Delauney v. Mitchell, 1 Starkie, 439.

204 Oughton v. West, 2 Starkie, 321.

205 Murray v. Burling, 10 Johns. (N. Y.) 172.

But one

206 Carrier v. Sears, 4 Allen (Mass.) 336; Combes v. Chandler, 33 Ohio St. 178.

207 Prouty v. Roberts, 6 Cush. (Mass.) 19.

208 Merchants' Exch. Nat. Bank v. New Brunswick Sav. Inst., 33 N. J. Law, 170.

209 Bowman v. Hiller, 130 Mass. 153. Or fraud upon the maker. Watson v. Chesire, 18 Iowa, 202. And see § 756, supra.

210 Griffith v. Sitgreaves, 90 Pa. St. 161.

be discharged.211 So, a guarantor may set up that the note was ob tained from his principal by fraud.212

The acceptor, who pays a bill and brings suit against the drawers, cannot be defeated by the fraud of one drawer upon the other.213 So, the maker of a note cannot set up in his own defense a fraud practiced by the indorser upon his creditors, although the maker is one of them.214 And the maker cannot set up, even against a holder with notice, that the note was made with fraudulent intent on the part of the maker and payee to defeat the payee's creditors.2

Fraud by Other Party.

215

§ 1809. Where the signature of one of the makers is obtained under a promise to release him after a certain estate is settled, he will still be liable on the note, and the concealment of such arrangement will therefore not render the note invalid.216 So, the acceptor of a bill cannot set up against the payee a fraud on the drawer's part.217 Neither can one maker set up against the payee a fraud practiced upon him by his co-maker,218 the payee having no knowledge of such fraud.2 219 So, a maker who signs for the payee's accommodation can

211 Hagar v. Mounts, 3 Blackf. (Ind.) 57, 261. But the purchaser under a foreclosure cannot set up the duress of the mortgagor. West v. Miller, 125 Ind. 70, 25 N. E. 143. So, a surety signing with notice of the duress of his principal cannot set it up in his own defense. Graham v. Marks, 98 Ga. 67, 25 S. E. 931. And see § 918, supra. But the defrauded partner may set up such defense. Lerch Hardware Co. v. First Nat. Bank (Pa. Sup.) 5 Atl. 778.

212 Putnam v. Schuyler, 4 Hun (N. Y.) 166.

213 Kimbro v. Bullitt, 22 How. 256.

214 Wood v. Steele, 65 Ala. 436. So, though the note was obtained by the payee to be transferred to his creditors on their agreement to release him and discharge his bail, the maker not being privy to such agreement. Mack v. Clark, 1 Metc. (Mass.) 423.

215 Winton v. Freeman, 102 Pa. St. 366.

216 State v. Overturf, 16 Ind. 261.

217 Gray v. Bank, 29 Pa. St. 365. Bingham, 118 N. Y. 349, 23 N. E. 180.

But see, contra, Goshen Nat. Bank v.

218 Fulford v. Block, 8 Ill. App. 284. So, the principal maker cannot set up the fraud of the surety as against the payee. First Nat. Bank of Chelsea v. Fitts, 67 Vt. 57, 30 Atl. 697.

219 Vass v. Riddick, 89 N. C. 6. Especially if he is estopped by his own negligence. Anderson v. Warne, 71 Ill. 20.

not set up against an indorser, who signed in the same way, that his signature was obtained by the payee by fraud.220 And, where a bank gives its note for money borrowed, the subsequent misapplication of the proceeds by its officers will not relieve it from liability.22: And, in general, it is no defense that the defendant's signature was obtained by threats of a third person, which are not chargeable to the payee.222 On the other hand, a fraudulent agreement between one of the makers and the payee will relieve the other maker from liability to the payee.223 And the maker may set up the fraud of the payee's agent in an action brought by him, although the payee had no knowledge of it.224

Rescission for Fraud-Recovery.

§ 1810. A contract may be rescinded for fraud within a reasonable time after its discovery.225 And, if a note is given for goods purchased, the vendor may rescind the contract for fraud, and bring an action of trover for the goods, without previous notice of nonpayment of the note; 226 or without a previous surrender of the note, which may be held as evidence of the transaction; 227 it being sufficient, if the note is offered for surrender at the time of the trial.228 Fraud may be set up as a defense at law to a bill or note.22 So, if one is induced to pay a note by false representation that he had signed it as surety, he may recover the payment made.2 And if one in good faith deposits drafts for collection in a bank which is known by its

230

220 Laubach v. Pursell, 35 N. J. Law, 434. 221 Donnell v. Bank, 80 Mo. 165. And see § 392, supra. 222 Fairbanks v. Snow, 145 Mass. 153, 13 N. E. 596. 223 Mitchell v. Donahey, 62 Iowa, 376, 17 N. W. 641. 224 Aultman v. Olson, 34 Minn. 450, 26 N. W. 451; Tagg v. Bank, 9 Heisk. (Tenn.) 479.

And see $424, supra.

225 Cummings v. Henry, 10 Ind. 109; Higgins v. Hayden (Neb.) 73 N. W. 280. But mere countermand of payment is not a rescission. Ex parte Jones, 77 Ala. 330.

226 Alexander v. Dennis, 9 Port. (Ala.) 174.

227 Dayton v. Monroe, 47 Mich. 193, 10 N. W. 196.

228 Nichols v. Michael, 23 N. Y. 264.

229 Penn Mut. Life Ins. Co. v. Crane, 134 Mass. 56; Wilson v. Cromwell,

1 Cranch, C. C. 214, Fed. Cas. No. 17,799; Terry v. Taylor, 64 Iowa, 35, 19 N. W. 841.

230 Lewellen v. Garrett, 58 Ind. 442.