refer to but few authorities, and those of recent date in this court. In Wilson v. Railroad Co., 120 N. Y. 145, 24 N. E. 384, 17 Am. St. Rep. 625, it was stated, as a general rule, "that one who receives from an officer of a corporation the notes or securities of such corporation, in payment of, or as security for, a personal debt of such officer, does so at his own peril. Prima facie the act is unlawful, and, unless actually authorized, the purchaser will be deemed to have taken them with notice of the rights of the corporation." It was also held in that case that the purchaser of a promissory note, purporting to have been issued by a corporation, who made the purchase under circumstances which devolved upon him the duty of inquiry as to its validity, assumes the risk, by failing to inquire, of proving that the facts he could have discovered, had he made inquiry, would have protected him. In Gerard v. McCormick, 130 N..Y. 261, 29 N. E. 115, 14 L. R. A. 234, an agent, who had charge of certain premises known as the "Glass Buildings," deposited the rents collected by him to the credit of a bank. account kept in his name as "Agent, Glass Buildings." Without authority he gave a check on this account, signed by him as "Agent, Glass Buildings," in payment of his own debt. The check was paid, and, upon the trial of an action brought five years afterwards to recover the amount thereof, there was no evidence of bad faith on the part of the defendant who took the check, except that afforded by the check itself and the nature of the debt. The court held that the form of the check was sufficient to indicate to the defendant the existence of an agency, and to put him on inquiry as to the agent's authority to so use the money. In deciding the case, the court said: "We think that the form of the signature to the check was sufficient to put the payee on inquiry as to the right of the agent to pay his personal debt out of the fund. The buildings and the bank were both well known, were in the same city, and very near to the place where the check was received by the defendant, and, had an inquiry been made at the bank or at the buildings, it would have been ascertained that the account was held by William Boswell, not as owner, but as agent for these plaintiffs. In case a person having notice that money or property is held by another in a fiduciary capacity receives it without inquiry from the agent, in satisfaction of his personal debt, the sum or property so received may be recovered by the true owner, unless the agent was authorized to so dispose of it." In Cheever v. Railroad Co., 150 N. Y. 59, 67, 44 N. E. 701, 34 L. R. A. 69, 55 Am. St. Rep. 646, the paper was regular on its face, and this fact protected the plaintiff; but the court, referring to "a case where an officer of a corporation makes the corporate obligation payable to himself, and then attempts to deal with it for his own benefit," said: "When paper of that character is presented by the officer or agent of the corporation, it bears upon its face sufficient notice of the incapacity of the officer or agent to issue it."

* * *

In the case at bar the appearances were not deceptive, but suggested the true state of affairs, which worked a fraud on the plaintiff. * * * In the case now before us the question of notice is supreme. The checks, when read in the light of the facts known to the defendant, were notice to him that he was apparently accepting money from one to whom it did not belong, and this cast upon him the duty of inquiring into the matter so as to see whether the facts were in accord with the appearances; for, if they were, he knew that he could

not honestly take the checks. The judgment appealed from should be affirmed, with costs.

FILLEBROWN et al. v. HAYWARD et al.

* * *

(Supreme Judicial Court of Massachusetts, 1906. 190 Mass. 472, 77 N. E. 45.) Action by Charles B. Fillebrown and others, as trustees in bankruptcy of the Cable Rubber Company, against Kezia W. Hayward and another. From a decree in favor of defendants, complainants appeal. BRALEY, J. * * * The question, however, of most consequence remains for consideration. * * * After the period of service had expired to which reference already has been made, the defendant having resigned her offices as treasurer and director sold her stock in the corporation to one Cable, who then was not only treasurer and president, but with the acquiescence of the directors also acted as manager of the corporation with a general control of its affairs. Upon the purchase of this stock he made a large money payment, and gave his promissory notes for the balance, so divided that one of them should mature at the beginning of each month for a period of five years. It was undisputed that upon these notes as they severally matured at least the sum of $13,000 was paid by checks drawn by him from time to time on the treasury of the corporation. The books of account disclose in detail the number and amount of these checks, and a balance was always struck by crediting as expense a lump sum sufficient to offset the debit items. In his dealings with the defendant, although in a few instances when he caused the checks to be made payable to the order of the bookkeeper who indorsed them either to himself or to the defendant, and upon one occasion when the check was made payable directly to her order, this course of dealing was uniformly followed. An examination properly conducted would have shown that when the defendant received these monthly payments as between himself and the company his account would have appeared to have been constantly overdrawn, but she had no actual knowledge of this condition of affairs, or that the money she was receiving came clandestinely from the corporation rather than lawfully from him. The plaintiffs strenuously contend that, notwithstanding this, the form of the check should have suggested to her that he was misappropriating the funds of the company, and therefore she should be charged with constructive notice that he was using corporate assets for the payment of his maturing notes.

The early doctrine on this subject, so far as it relates to negotiable paper, is found in Ayer v. Hutchins, 4 Mass. 370, 372, 3 Am. Dec. 232. * * * where it is said that circumstances which ordinarily would excite the suspicions of a reasonably prudent and careful man were sufficient to put the party receiving negotiable paper not overdue upon his inquiry as to suspicious defects or infirmity of title in the prior holder. * * * The rule thus formulated gave way later to what has been called the modern doctrine, that neither knowledge of suspicious circumstances, nor doubts as to the genuineness of the title, nor gross negligence on the part of the taker, either singly or together, were sufficient to defeat his recovery, unless amounting to proof of want of good faith. * *

*

At the time the first note of the series matured, and the first check in payment was given, St. 1898, p. 492, c. 533, commonly known as

the "Negotiable Instruments Act," now Rev. Laws, c. 73, had become operative. By section 56 of the original act, now section 73 in the revision, the common-law rule shown by these decisions relating to implied notice to the purchaser for value of negotiable paper of a defect in the title of a previous owner was codified. The plaintiffs therefore cannot recover the proceeds of the checks unless the defendant took them in bad faith, and this inquiry is a question of fact. If each check was signed by him as treasurer, this of itself was not such an affirmative representation as to indicate that he was acting in a fiduciary capacity by which his authority was restricted and limited, as authority to draw and issue checks in the name of the corporation was incidental to his office, and the holder in due course of business would receive them under a presumption that they were lawfully issued.

* * *

* * *

While the defendant may be held to have known that by purchasing her stock Cable had acquired control of the corporation, there does not appear to have been any reasonable ground for an assumption on her part that its business under his management was not profitable, or had been impaired and then ruined, until the company's assignment for the benefit of its creditors was announced. Before her retirement for at least two years they had been mutually engaged in conducting its business affairs, and neither during this period, or after her withdrawal, is it shown that there was anything in his conduct indicating to her that he was dishonest or incompetent. There was therefore no reason why she should not have retained her confidence in him, and, even if her former experience had made her familiar with the duties of the office which he held, it could be found that she received the checks without realizing the possible fact that, notwithstanding their form, they were drafts upon the funds of the company in payment of her own debt. It is more than probable that as note after note matured and payments were thus made she gave no thought to the general transaction, except to get her pay; but, if so, she still may have inferred that the money so appropriated was in payment of his own salary, or otherwise was being lawfully withdrawn. * * * But while she may have been incautious and unsuspecting, where others more accustomed to mercantile affairs might have been mistrustful, there is no evidence that at any time she was possessed of any knowledge of what undoubtedly to a certain extent was an embezzlement on his part, or, having doubts as to how he obtained the money, she deliberately decided for her own advantage not to make any inquiries to ascertain why instead of paying with checks drawn on a bank account of his own, or in money, he used checks issued by him as treasurer, though if such conduct had been shown, then it might be inferred that she ignored significant facts with a purpose not to know anything more, and this would have been enough to indicate that, suspecting something was wrong, she intended to avoid the effect of the evidence. * But having taken before maturity for a valuable consideration negotiable paper which was regular upon its face, without knowledge of any defect in the title, even if there might have been some circumstances which would have raised doubts in the mind of a more prudent person, the defendant's right to retain the proceeds of the checks cannot be divested without proof that she knew, or in the face of facts sufficient to put her upon inquiry purposely refrained from knowing of the fraud of Cable, although, if obliged to bring suit upon them,

*

*

after evidence had been introduced in defense that they had been fraudulently issued, the burden would have remained upon her to prove that she was a holder in good faith and for value. * Decree affirmed.

* *

SECTION 5.-PAYEE MAY BE A HOLDER IN DUE

COURSE

The preceding sections have shown that a holder, in order to acquire the advantages of being a holder in due course, must have taken the instrument (1) for value; (2) before maturity; and (3) in good faith. The question is sometimes presented as to whether the payee who fulfills all of these conditions may be a holder in due course. In the great majority of cases the payee cannot fulfill all three of these requirements, because the payee will know of the defense possessed by the person with whom he dealt. If the payee obtained an instrument by fraud, or without consideration from the maker, clearly the payee cannot be a holder in due course, for he is not a taker in good faith. But it is possible to find a situation where the payee does fulfill all three requirements, and the new question then arises as to whether it is possible for the payee to be regarded as a holder in due course. It is possible to argue that no person can be a holder in due course unless such person acquired title from a holder. The payee does not acquire title from a holder. The answer to this question all depends on whether or not a payee can be regarded as a holder, because section 52 of the Negotiable Instruments Law provides that a holder in due course is a holder who has taken the instrument under the conditions which we have heretofore analyzed. The following sections of the act are involved:

Section 191, clause 7. "Holder" means the payee or indorsee of a bill or note, who is in possession of it or the bearer thereof.

This section seems to put an end to the problem, for it expressly says that the payee is a holder. But we have already been made. familiar with the situation, which frequently arises in the law, that the apparent meaning of one section of a statute may be cut down or even expanded by other sections of the same act or of a different act, and we have that situation here.

. The first of the two sections which may affect the meaning of the word "holder," as defined in section 191, is as follows:

Section 16. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting or indorsing, as the case may be; and in such case the delivery may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the instru

ment. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.

This section makes the defense of "no delivery" available between immediate parties and remote parties other than holders in due course. May the payee be a holder in due course so that the defense of "no delivery" or of conditional delivery of a completed instrument cannot be made successfully against him?

To be a holder in due course one must be a holder. A payee is a holder by section 191. But section 16 states that the defense of "no delivery" or of "conditional delivery" is available between immediate parties. Therefore our inquiry narrows down to this: Is the payee one of the immediate parties spoken of in section 16? If so, section 16 controls section 191 to this extent. This problem is taken up in the case following.

There is a second type of situation, wherein it is not altogether clear whether a payee is or is not a holder in due course. This question, which is also discussed in the case immediately following, concerns instruments which were incomplete at the time they were intrusted by the maker or drawer to some person for delivery to the payee. Suppose, for illustration, that the drawer of a check inserts the name of a payee, signs his name as drawer, and leaves the amount blank, and intrusts the instrument to the agent of the drawer and authorizes this agent to fill up the instrument for a specified amount. Then suppose the agent so intrusted with the instrument fills up the instrument for an amount in excess of the authority given, and such agent delivers the instrument to the payee, obtains the money and fraudulently converts it. May the payee recover the full amount from the drawer-assuming, of course, that the drawer was successful in stopping payment at the drawee bank. This question involves section 14 of the Negotiable Instruments Law, which provides as follows:

Where an instrument is wanting in any material particular, the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.