231

officers to be insolvent, it will amount to a fraud on the part of the bank, and entitle the depositor to recover as on a special deposit.2 But an indorser cannot bring an action for deceit in obtaining his indorsement until he has paid the note.232 Where the maker of a note is induced to sign it by false representations, the fraud is admissible as a counterclaim in an action brought on the note.233 But it has been held that he cannot recover the note itself in an action of replevin.234

Equitable Relief.

235

§ 1811. A court of equity has jurisdiction in the case of fraud, and may order the bill to be delivered up or canceled. 236 It may also enjoin the collection of a note on account of the holder's fraud in procuring the indorsement.237 And where a note is obtained by the fraud of A., and the proceeds of it are deposited in his wife's name, and used by her, an action will lie in equity against husband and wife, although assumpsit could not be maintained against the latter.238 But an injunction will not be granted against the collection of a note on the ground of fraud upon the maker, if it is in the hands of a bona fide holder for value before maturity.239 If a note given in settlement of an account is found to contain items of fraudulent overcharge, the legal remedy on the ground of fraud is, in

231 Cragie v. Hadley, 99 N. Y. 131, 1 N. E. 537. So, Balbach v. Frelinghuysen, 15 Fed. 675, 6 N. J. Law J. 105, Nixon, J.

232 Freeman v. Venner, 120 Mass. 424. But, where the maker has paid the note to a bona fide holder, he may recover from the payee and indorser by whose fraud he was induced to execute it. Mitchell v. Finnell, 101 Cal. 614, 36 Pac. 123.

233 Norris v. Tharp, 65 Ind. 47.

224 Olson v. Thompson (Okl.) 52 Pac. 388.

235 Allen v. Davis, 4 De Gex & S. 133; Campbell v. Lynch, 6 W. Va. 17. But in Ohio such action must be brought within four years after discovery of the fraud. Loftland v. Bush, 26 Ohio St. 559.

236 Hicks v. Stephens, 15 Ill. App. 480; Platt v. Snipes, 43 Ark. 21; Magoon v. Reber, 76 Wis. 392, 45 N. W. 112. But he cannot retain the consideration in such case. City Nat. Bank of Dayton v. Kusworm, 91 Wis. 166, 64 N. W. 843; Id., 88 Wis. 188, 59 N. W. 564.

237 Deaderick v. Mitchell, 6 Baxt. (Tenn.) 35.

238 Wilson v. Scott, 3 Lans. (N. Y.) 308.

239 Dougherty v. Scudder, 17 N. J. Eq. 248.

RAND.C.P.-160

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general, sufficient; and, if so, recourse cannot be had to a court of equity.240

242

Fraud Waived.

So,

§ 1812. Where a note is signed by a surety for the accommodation of the maker, and is diverted by him, if the surety afterwards promises to pay it he cannot set up the diversion as a defense. 241 fraud in an original claim is, in general, waived by giving a note in settlement, or by a subsequent promise to pay it in consideration of time given.243 So, where an accommodation maker declares himself liable with the indorser in a proceeding in bankruptcy against the latter, he cannot afterwards disclaim his liability, and show that he had surrendered collateral on the supposition that he was not liable.244 So, if a note is given for property purchased, and an action is afterwards brought on the contract, with knowledge of the fraud, but without rescinding the contract, and making rescission impossible, it will be a waiver of defense to the note on that ground.245 So, if a note is obtained by fraud, and the holder takes judgment on the note after discovering the fraud, it will be a waiver of his right to rescind, or to sue on the original contract.246 And, where a note is given for the purchase of property, its retention will be an affirmance of the contract, and a waiver of the right to have it rescinded. 247 But, to constitute a waiver of fraud, the conduct of the party must amount to a reissue of the note, or an estoppel.248 And, if a note is

240 Dickinson v. Lewis, 34 Ala. 638.

241 Mastin Bank v. Hammerslough, 72 Mo. 274.

242 Feeter v. Weber, 78 N. Y. 334. But a mere renewal does not purge fraud. Merchants' Nat. Bank v. Tracy, 77 Hun, 443, 29 N. Y. Supp. 77. And in Ryle v. Brown, 50 N. Y. Super. Ct. 174, it was held that damages for the original fraud might be recovered, notwithstanding the note subsequently given.

243 Doherty v. Bell, 55 Ind. 205; Rindskopf v. Doman, 28 Ohio St. 516. And a fresh consideration is not necessary. Lyon v. Phillips, 106 Pa. St. 57. But see, contra, First Nat. Bank of Decorah v. Holan, 63 Minn. 525, 65 N. W. 952. 244 Draper v. Halloran, 107 Mass. 380.

245 Downer v. Smith, 32 Vt. 1. So, where the maker had made a part payment and the payee had sued the maker for deceit in the compromise for which the note was given. Dodge v. Manchester, 58 Ind. 429.

246 Ricker v. Adams, 59 Vt. 154, 8 Atl. 278.

247 Harrington v. Lee, 33 Vt. 249.

248 Wurster v. Reitzinger, 5 Ill. App. 112.

void as against public policy (e. g. for abuse of criminal process), the illegality cannot be waived.249 A promise of payment, without knowledge of the circumstances, will not be a waiver.250 On the other hand, a delay after the discovery of the forgery of a deed for which the note was given, pending an action brought to recover the land, and unsuccessfully defended, will not bar a defense to the note on a suit brought for its rescission.251 In Pennsylvania, the words "without defalcation" will not prevent the maker from setting up that the note was obtained by fraud.252 But the payee of a note given for insurance premiums may be defeated by misrepresentations made by his agent as to the members of the board of directors, although he had given a receipt for the note providing for repayment in case it was not binding. 253

Fraud-How Pleaded.

§ 1813. Where a bill or note has been obtained by fraudulent representations, the fact must be specially pleaded.254 So, the fact that a stamp was fraudulently omitted.255 But the pleading need not state the particular facts which constitute the fraud.256 Under a plea of payment the defendant cannot set up that he was fraudulently prevented from bidding at the foreclosure sale of a collateral mortgage.257 So, under a plea denying an indorsement, he cannot set up

249 Shenk v. Phelps, 6 Ill. App. 612.

250 Mackay v. Holland, 4 Metc. (Mass.) 69.

251 Nealon v. Henry, 131 Mass. 153.

252 Commercial & Farmers' Bank v. Patterson, 2 Cranch, C. C. 346, Fed. Cas. No. 3,056.

253 Penn Mut. Life Ins. Co. v. Crane, 134 Mass. 56. So, if payment is made in good faith by the indorsee through fraud of the payee and indorsee, it will estop the payee from recovering against the maker. Alexander v. Rollins, 14 Mo. App. 109.

254 Miller v. Finley, 26 Mich. 249. And it can only be proved on notice to the plaintiff. Beltzhoover v. Blackstock, 3 Watts (Pa.) 25. In Maryland it has been held necessary to deny in such pleas that the plaintiff is a bona fide holder. Banks v. McCosker, 82 Md. 518, 34 Atl. 539. But not so in Indiana. First. Nat. Bank of Huntington v. Ruhl, 122 Ind. 279, 23 N. E. 766. 255 Campbell v. Wilcox, 10 Wall. 421.

256 McClintick v. Johnston, 1 McLean, 414, Fed. Cas. No. 8,700. And see Woollen v. Whitacre, 73 Ind. 198; Woollen v. Wise, Id. 212.

257 Torrey v. Fenton, 130 Mass. 329.

that it was fraudulently diverted.258 But, when the defendant sets up in his plea the release of a note, the plaintiff may show that the release was obtained by fraud, without a special replication.250

Fraud-How Proved.

261

§ 1814. The burden of proving the fraud is on the party averring it.200 And fraud will not necessarily be presumed because the note. is larger in amount than the debt for which it was given. Whether the circumstances amount to fraud is a question for the jury.262 And parol evidence is admissible to show the facts constituting the alleged fraud,2 263 and even, it has been held, to show other similar transactions.264 So, prior conversations have been admitted as evidence. of fraud,2 265 as well as the admissions of a deceased maker to the effect that the note was made for a different purpose.266

The availability of the above defenses and others, as affected by matter of estoppel on the defendant's part, or by the character of the plaintiff as a bona fide purchaser for value before maturity, will be considered in a later chapter.

258 Hayes v. Caulfield, 5 Q. B. 81.

259 Lyon v. Manning, 133 Mass. 439.

260 Ecton v. Harlan, 20 Kan. 452. Although the purchaser knew the note was given for a patent right. Miller v. Finley, 26 Mich. 249. So, where he alleges fraud in the application of a collateral mortgage. Wadsworth v. Glynn, 131 Mass. 220.

261 Hughes v. Shull, 33 Kan. 127, 5 Pac. 414.

262 Earl of Bristol v. Wilsmore, 1 Barn. & C. 514, 2 Dowl. & R. 755.

263 Lime Rock Bank v. Hewett, 50 Me. 267; Kirkham v. Boston, 67 Ill. 599; Hartman v. Shaffer, 71 Pa. St. 312.

264 Nichols v. Baker, 75 Me. 334.

265 Van Buskirk v. Day, 32 Ill. 260.

266 Overton v. Hardin, 6 Cold. (Tenn.) 375.

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§ 1815. Defenses of the third class include such as modify the original contract by a new agreement or extension, or discharge it by satisfaction, release, or set-off. An agreement made between the holder of a note secured by mortgage, and the holder of another and prior mortgage, providing for the cancellation of the latter, constitutes an intermediate equity, and is not such a modification of the original contract as can be set up against a subsequent holder.1 So, where the debt of the principal maker is assumed by the surety, who gives

1 Crosby v. Tanner, 40 Iowa, 136.