Section 49. Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires, in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course the negotiation takes effect as of the time when the indorsement is actually made.

Clearly, the transferee of unindorsed paper payable to the order of the transferor, such transferor not being a holder in due course, is not a holder in due course, because the section states that the transferee acquires "such title as the transferor had therein"; that is, the transferee acquires only the rights of his transferor and not greater rights. Had he taken by indorsement, then, if he bought for value, before maturity, and in good faith, he would have been a holder in due course. As stated above, this transaction is apt to arise through oversight; but it is seen that it is decidedly to the interest of the transferee to see to it that the instrument is duly indorsed to him, so that he will be properly guarded against defenses of the maker or drawer. The section does go on to give to such a transferee the right to have such indorsement, but it may take considerable time to convert his right into an actuality. The right to have a thing and the actual possession of it are very different. It is to be noticed that, if at any time before the transferee actually obtains the indorsement, notice should come to the transferee of the existence of a defense possessed by the maker, drawer, or acceptor as against the payee, such knowledge prevents the transferee from becoming a holder in due course, because the section states that the negotiation takes effect "as of the time when the indorsement is actually made." Up until that time the transferee has only such rights as his transferor had.

The second question then arises: May the transferee of unindorsed paper payable to the order of a transferor who was a holder in due course, be a holder in due course? Section 49 speaks of such person as a transferee. He is not referred to as a holder. We have already seen that only those persons may be holders in due course who are holders, as that term is defined in the act. The answer to the above question depends, on the question whether such a person can be deemed a holder under section 191 which defines a holder as the "payee or indorsee of a bill or note who is in possession of it or the bearer thereof." Perhaps such a transferee is not an indorsee because an indorsee is a person who acquires possession by negotiation. But is it possible to urge that, although a transferee is not a holder and therefore is not technically a holder in due course, such a transferee has all the rights of a holder in due course?

SMITH V. NELSON LAND & CATTLE CO.

(United States Circuit Court of Appeals, Eighth Circuit, 1914. 212 Fed. 56, 128 C. C. A. 512.)

CARLAND, Circuit Judge. These are appeals from a judgment rendered in an action brought by the Cattle Company against George H. Smith et al., for the purpose of having certain promissory notes, a mortgage securing the same, and assigments of certain land contracts and certificates executed for the same purpose canceled. Smith filed a cross-bill, asking to have the amount for which he held the notes, mortgage, contracts, and certificates as security ascertained, and a sale of the security to satisfy the same. The trial court granted the relief prayed by Smith as to one note of $1,600, and canceled four other notes of $3,350 each as prayed by the Cattle Company. The facts which determine the correctness of the ruling below appear from the record as follows: November 19, 1907, the Cattle Company, by Fred P. Nelson, president, and Gust A. Nelson, secretary and treasurer, Celia M. Nelson, and Hugo E. Nelson executed and delivered to E. H. Luikart five promissory notes. * * *The Cattle Company was a corporation, and signed the notes before delivery without any consideration therefor passing to it. Luikart, the payee of the notes, for value received indorsed and delivered the notes in due course to Roy C. Smith and Albert Anthes, doing business under the firm name of Anthes & Smith. * * *

The mortgage was duly assigned by Luikart to Anthes & Smith, and the land contracts and certificates transferred to them by delivery. Subsequent to the indorsement of the notes to Anthes & Smith, but before maturity, they were transferred by them to the defendant and cross-complainant, George H. Smith, in part payment of an antecedent debt owing to Smith by Anthes & Smith. The mortgage, land contracts, and certificates were also transferred with the notes. The note for $1,600, due November 19, 1908, was indorsed to George H. Smith in blank by Anthes & Smith. None of the other notes were indorsed by them. * *

*

Upon the foregoing facts the Cattle Company claims that the execution of the notes by it as an accommodation maker, without consideration, was ultra vires and void, and that the invalidity of the notes for the above reason can be urged against George H. Smith, the present owner and holder of the same, for the reason that * * * George H. Smith is not a holder in due course. The trial court decided ** * as to the remaining four notes that George H. Smith was not a holder in due course, because they were not transferred to him by indorsement, and therefore were void in his hands for want of power in the Cattle Company to execute the same. * *

*

*

It remains to inquire as to the rights of George H. Smith. * We think that. if George H. Smith must stand on the character of his own title, and cannot claim protection by virtue of the title of Anthes & Smith, then the ruling of the trial court as to the other four notes was right. An indorsee of negotiable paper in due course may obtain a better title than his indorser, and in that event may stand upon such title; but is it necessary that he be an indorsee in order to claim the title of a transferror, who was an indorsee in due course? In other words, cannot George H. Smith, although the notes were transferred to him by delivery, use the Anthes & Smith title to insulate the ultra

vires attack of the Cattle Company? Does not the transferee for value of negotiable paper obtain whatever title his transferror had, irrespective of the mode of transfer? As we have heretofore said, these notes are Kansas contracts; and, if there are statutes of that state which determine the legal position of the holders thereof, they must be enforced. [Court here quotes section 49.]

*

The last clause of section 49 has no application to the question now under discussion, for there never was any indorsement of the four notes in question by Anthes & Smith; and counsel for George H. Smith are not claiming that he was an indorsee in due course, but that under the first clause of this section * * * George H. Smith obtained whatever title Anthes & Smith had. The last section does not read: "But a holder in due course who derives his title through a holder in due course and who is not," etc. Such language would be entirely useless, for if the holder was a holder in due course, he would be fully protected in any event. The law was enacted in order to protect all holders of whatever character of negotiable paper, providing they derive their title to the same from a holder in due course. Anthes & Smith were holders in due course, free from any defect of title of prior parties, and free from defenses available to prior parties among themselves, and could have enforced payment of the notes for the full amount thereof against all parties liable thereon. * * Being such holders when they transferred the notes to George H. Smith for value without indorsing them, the transfer vested in George H. Smith such title as Anthes & Smith had. * ** This provision of the law negatives the idea that there can be no transfer except by indorsement, for the reason that the law declares what title a transferee shall acquire, when it is transferred to him without indorsement. It is true section 58 uses the word "holder" in describing the persons who shall derive their title to negotiable instruments from a holder in due course; and counsel for the Cattle Company urge the proposition that George H. Smith was not a holder under the provisions of section 2 of the Negotiable Instruments Law of Kansas. That section provides as follows: "Definitions and meaning of terms. In this act, unless the context otherwise requires: * * * 'Holder' means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof."

The same section provides that the word "bearer" when used in the act means the person in possession of a bill or note which is payable to bearer. It is claimed that George H. Smith was not the bearer of the notes because they were not payable to bearer, and that he was not a payee or indorsee for the reason that he was not named as payee in the notes and they are not indorsed to him. It will be noticed, however, that the law only provides that these definitions shall apply unless the context of any particular portion of the law otherwise requires. To decide that the word "holder" as used in the first part of the last clause of section 58, hereinbefore quoted, does not include a transferee like George H. Smith, who received the notes in question from Anthes & Smith without their indorsement, would be inconsistent with the first clause of section 49, above quoted, for that section provides that where a holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as transferror has therein. This section simply uses the words "transfer" and "transferee," and in no way declares that a transferee

shall also be a holder within the definition of section 2, above mentioned. We, therefore, think, within the language of said section 2, that the context of sections 49 and 58 require that the word "holder" used in the beginning of the last clause of section 58, should be held to include any transferee of negotiable paper.

The result of what we have said is that we are of the opinion that George H. Smith has the same title to the four notes in controversy that was possessed by Anthes & Smith, by virtue of the statutes of Kansas, and that, possessing such title, he is entitled to enforce payment of the same against the Cattle Company. We have thus far considered the question last discussed with reference to the statutes of Kansas, and we think our interpretation of the same is in line with the decision of the Supreme Court of Kansas in Underwood v. Fosha, 89 Kan. 768, 133 Pac. 866; and we think the weight of authority, independent of statute, is in favor of the views hereinbefore expressed.

* *

The case of First National Bank v. McCullough, 50 Or. 508, 93 Pac. 366, 17 L. R. A. (N. S.) 1105, 126 Am. St. Rep. 758, is relied upon by counsel for the Cattle Company. This case may be said to be contrary to the views hereinbefore expressed. It has been reported in 17 L. R. A. (N. S.) 1105, and an interesting note accompanies the report of the case, in which the annotator does not agree with the conclusion reached in the case cited.

We place our decision upon the statutes of Kansas as construed by the Supreme Court of that state, and as we construe them. We cannot see how the ruling thus established can work any injustice. The Cattle Company could not have avoided the notes on the ground of ultra vires in the hands of Anthes & Smith, and they are in no worse position now than they would have been if Anthes & Smith still owned them.

The decree below is reversed, and the cause is remanded, with directions to dismiss the original bill at the costs of the complainant and to enter a decree in favor of the cross-complainant, George H. Smith, as prayed for in his cross-bill, and that he also recover his costs.

2. Defenses and Claims of Ownership Not Available Against Holders in Due Course.

3.

Defenses and Claims of Ownership Available Against Holder in Due Course.

4. Right of the Drawee to Recover Money Paid to the Holder under

Mistake.

5. Right of the Drawee with Respect to Instruments Payable to the Order of a Fictitious Payee.

6.

7.

8.

Relation of the Drawee Bank to the Drawer.

Rights and Liabilities of Parties with Respect to Acceptances and Payments for Honor.

Bills in a Set.

SECTION 1.-INTRODUCTION

A complete definition of a negotiable instrument would concern. itself with two matters: (1) Operative facts; and (2) their legal effect. The statement that a particular written instrument is negotiable means that certain facts operate to produce other facts. Both of these groups of facts must, to some extent, be considered simultaneously. Practically, however, it is impossible to do this effectively, consequently the emphasis is thrown first upon one group, and then upon the other. Not until both groups of facts have been examined intensively is it possible to obtain a reasonably complete knowledge of the real meaning of a rule of law. In Chapter I we were interested in the question: What facts will operate to make an instrument negotiable? But we were not concerned, except secondarily with the question: What are the various legal effects produced by such an instrument? In Chapter II the emphasis was thrown upon some of the legal effects of negotiability. Chapter III was an examination into the detail facts which render a holder of a negotiable instrument a holder in due course, but the nature of the rights acquired by the holder in due course were adverted to only incidentally. The present chapter and Chapter V following are concerned with the inquiry into the nature and extent of the rights acquired by the holder in due course, the most important consequence of negotiability. In this chapter the question is: What rights are acquired against parties. primarily liable on the instrument-the maker and acceptor? In the next chapter the question is: What rights are acquired against parties secondarily liable on the instrument, the drawer and indorsers? The chief problem is to determine the rights of the holder in due course against parties primarily and secondarily liable, although we shall also be inquiring into the rights against the same parties by holders not in due course. That the liability