He must be able to prove that he is a holder in due

course.

218. Can the holder in due course enforce payment on a forged instrument?

The one whose name was forged is not liable on the instrument and even a bona fide holder cannot enforce collection from him. The bona fide holder, however, can recover from the one who transferred the instrument to him.

219. What other defenses may operate against a bona fide holder?

The bona fide holder cannot compel an incompetent party to pay an instrument. He cannot collect a note that was given in settlement of some claim arising from a transaction forbidden by statute, as when originally given usuriously, or in settlement of debt contracted by gambling in states where gambling is prohibited. Any material alteration in an instrument will prevent the bona fide holder from collecting from the one liable for payment.

220. Can one not a holder in due course succeed to the rights of a holder in due course from whom he gets the instrument?

The New York law says: "A holder who derives his title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all parties prior to the latter."

221. When must a holder prove that he is a holder in due course?

Every holder is prima facie considered a holder in due course; but when it can be proven that the title of some prior party who negotiated the instrument was defective, then the holder must prove that he is a holder in due course or that he succeeded to the rights of a holder in due course.

222. When must demand paper be received to entitle the holder to rank as a holder in due course?

When the instrument is received at an unreasonable length of time after the date of issue, the holder will not be deemed a holder in due course.

Accommodation Paper.

223. What is accommodation paper?

When a person signs an instrument as maker, drawer, acceptor or indorser, without receiving value for so doing, he becomes an accommodation party and the paper is called accommodation paper.

224. What liability is assumed by an accommodation party?

He is not liable to the one accommodated, but he is liable to a holder for value, even though the holder knew when he took the instrument that he was an accommodation party, unless there has been an unlawful diversion of the instrument:

225. What relation exists between the accommodator and the one accommodated?

The accommodator just lends his name and credit to the other party to enable him to raise money through the better security he is thus enabled to offer. There is usually an understanding between them as to the use of the accommodation paper, and the one accommodated is supposed to pay the instrument when due. Should the one accommodated fail to pay the instrument when due, the accommodator will be compelled to pay, but he then has the right of subrogation against the one accommodated and can recover from him.

226. Should the one accommodated use the paper in an entirely different way from that agreed upon, how will the accommodator be affected?

In New York state the courts hold that the bona fide purchaser who receives accommodation paper knowing it to be such, should inquire regarding the paper and if he fail to do so and the paper is diverted, he cannot recover from the accommodation party. In most states the courts hold the opposite to be the rule.

227. What is an accommodation note?

It is one for which the maker received no value from the payee.

228. How may A accommodate B by means of a note? A may make a note in favor of B, or A may indorse a note made by B.

229. How may A accommodate B by means of a draft?

A might accept a draft drawn by B although he owed B nothing; A might draw a draft on one of his debtors for the use of B; or A might indorse a draft drawn by B.

230. Will an accommodation indorser he held liable on over due paper?

It has been held in New York that where the accommodated party transferred the paper after maturity, the accommodation indorser would not be liable to the transferee.

231. What is forgery.

Forgery.

Forgery is the fraudulently making or altering of a written instrument.

232. In what two ways may forgery be committed?

Forgery may be committed by signing the name of another without authority to do so, or by making a material alteration in an instrument, without the consent of parties liable thereon. See Nos. 227, 230, pages 41 and 42.

233. What is the effect of forgery?

The one whose name was forged cannot be compelled to pay the instrument. Where an alteration has been made and the instrument is in the hands of a holder in due course, such holder can enforce payment of the instrument according to its original tenor.

234. Can a title be acquired through a forged indorsement?

No; the one whose name was forged can claim the paper even when in the hands of a holder in due course.

For forgery of checks see Nos. 167, 168, page 73.

Lost or Stolen Paper.

235. Can a finder or thief enforce payment on the instrument in his possession?

He has no right to the paper and cannot enforce pay

ment.

236. Should the finder or thief transfer the paper, can the transferee enforce collection?

The subsequent holder in due course can enforce collection unless forgery has been committed. Where the lost or stolen instrument was originally payable to bearer or if payable to order and indorsed in blank by the payee, it can be transferred by mere delivery and the fact that the transferee found it or stole it will not prevent the holder in due course from collecting it.

237. What should the true owner do when paper has been lost or stolen?

He should notify the parties liable for payment and publish the loss or the theft as widely as possible.

238. Can the true owner collect the paper which was lost or stolen even though he cannot surrender the instrument?

He can collect it, but when there is any possibility that the one who pays him may be compelled to pay again to a bona fide holder, he must give a bond of indemnity.

239. What is the effect of an indemnity bond?

The one who signs this bond promises the payer of an instrument, which cannot be surrendered as a receipt, that he will indemnify him for any loss he may sustain through being compelled to pay again to a holder in due course. The possession of this bond will not be a defense against a holder in due course and such holder can enforce his claim unless there has been a forgery. The payer can recover from the true owner the amount of the first payment, as promised in the bond.

240. When is it unnecessary to give a bond of indemnity? When the instrument the true owner seeks to collect has ceased to exist, no bond will be necessary. When the lost or stolen instrument was payable to the order of the payec and not indorsed in blank, no bond will be necessary, be cause the payee's name must be forged before the instrument can be transferred, and even the bona fide holder. cannot collect a forged instrument.

Even in such instances the payer will feel more secure when he gets a bond and the bond is generally given.

Guaranty of Paper.

241. What is guaranty as applied to negotiable instru

ments?

Guaranty is a contract by which the guarantor promises to become responsible for the instrument if the payer fail to pay it.

242. What are two common forms of guaranty? Guaranty of payment and guaranty of collection.

243. What is the effect of a contract to guarantee payment?

By this contract the guarantor promises that if the instrument be not paid at maturity, he will become responsible for it immediately. This contract would be written on the back of a note in the following form: "For value received I hereby guarantee the payment of the within note," and signed by the guarantor.

244. What is the effect of a contract to guarantee collection?

By this contract the guarantor promises to pay the instrument only when due process of law fails to collect it from the original payer. It becomes the duty of the holder to use every available means of collecting the debt before he can collect from the guarantor. The holder must sue the debtor and get judgment against him; then, if it become impossible to satisfy the judgment, the debt will be considered uncollectible, and the guarantor must keep his contract good and pay the amount of the instrument.

This contract would be written on the back of a note in the following form: "For value received I hereby guarantee the collection of the within note," and signed by the guarantor.

245. How does a surety sign a note, and what is the effect of his contract?

The surety signs his name on the face of the note under the name of the maker and writes after it the word surety. By this contract the surety guarantees payment and may be held liable for the same if the maker fail to pay it. The surety, as well as the guarantor, should receive notice of a default in reasonable time.