CHAPTER XIV.

EQUITIES.

§ 1. BONA FIDE HOLDER FOR VALUE.

EQUITIES, as we have seen, imply the existence of a contract, the contract, because of such defences, being defeasible between the parties to the equities and all others standing in their shoes,' but binding in favor of bona fide holders for value. This is, indeed, the great field of bona fide holders for value, the field in which the rights of such holders stand out conspicuously as the most favored known to the law. It is here that the law merchant appears in its strongest colors and in its most striking contrast to the common law. It is negotiability that affords the coloring and the contrast.

The first thing to be grasped is the meaning of the term 'bona fide holder for value.' The term is one of deliberately chosen use, each part of it having a characteristic meaning, and each part being necessary to give the party the paramount rights above mentioned; though where it is not important to make any distinction, either part of the expression is often used for the whole. So other expressions, such as 'holder in due course of trade,' are used as the equivalent of bona fide holder for value. But to enable the holder to occupy the most favored position, he or some one before him must have been both a bona fide holder and a holder for value. What, then, constitutes one a bona fide holder, and what a holder for

§ 2. BONA FIDE HOLDER: NOTICE: NEGLIGENCE.

The term 'bona fide holder,' properly speaking, means a holder without knowledge or notice of any equities which could be set up against a prior holder of the instrument. Absence of knowledge or notice of the defence, when the paper was taken, is the essential thing in the matter of bona fides. Notice calls for very special explanation.

In other departments of law notice may be either absolute or constructive. The contrast to constructive notice is usually put as actual notice; but that is an objectionable designation; it naturally suggests, and indeed is commonly used and understood to mean, knowledge.1 that leaves too much for constructive notice; it leaves much to that kind of notice which is not constructive' at all, as, for example, notice by the public registry. And if notice by the registry be called actual notice, then actual notice is used in inconsistent senses: in one sense it means knowledge; in another, something short. of knowledge.

The term 'absolute notice' creates no such confusion; it does not suggest or mean knowledge at all. It means the kind of notice which in and of itself is notice; the registry, for example, is notice in and of itself, the statute makes it so, and it is, therefore, absolute notice; taking a negotiable bill or note after maturity is in and of itself notice (of equities, if any exist), the law merchant makes it so, and hence it is absolute notice. Whether there is knowl edge or not in these cases is immaterial.

'Constructive notice' is a very different thing both in manifestation and in effect. It arises from facts put

1 As a matter of fact, actual notice' in the law of bills and notes means knowledge; but it were better to say that the plaintiff had knowledge, than that he had actual notice.

ting one upon inquiry; a person has been put upon a trail. The trail must be followed, but if followed with proper diligence, there is an end of the notice altogether, whatever the result. The notice attaches, in other words, only when the trail is not taken up and diligently followed, that is, when there is negligence. In still other words, and dropping the figure, it is a case of knowledge of a preliminary fact or set of facts which would suggest to the average man the existence of some ulterior fact of importance; the preliminary fact puts him upon inquiry concerning the probable, ulterior fact. If he does not pursue the inquiry suggested, or if he pursues it faithlessly rather than faithfully, he is fixed with notice of it; he stands as if he knew it. Thus, a man about to buy a horse hears of a fact which would suggest to a man of average intelligence that possibly another may have a lien upon the animal. Now if that man buys the horse without making any inquiry in regard to the possible lien, he will buy it with notice if any lien in fact exists; on the other hand, if he makes diligent inquiry, and his suspicion is entirely removed, he takes title free from the defect though in point of fact there was a lien.

Absolute notice, as we have seen, is part of the law of bills, notes, and cheques; and it was at one time supposed that constructive notice by putting upon inquiry and negligence was also part of the same law, and in some States it is to this day. For example: The plaintiff, a banker, is indorsee of a bill of exchange, accepted by the defendant, and now sued upon. The bill, indorsed in blank, was offered to the plaintiff for discount by an entire stranger to him. The plaintiff makes no inquiry of the stranger concerning his title or right to the bill, and discounts it. The stranger had found the bill, and had no right to it except as finder. The plaintiff (by some authorities) cannot recover, having constructive notice that the stranger had

no right to the bill; it was the plaintiff's duty, the bill being offered by a stranger, to make inquiry, and he was guilty of negligence in failing to make it.1

Such was the rule as laid down in England in the year 1824, and maintained there until the year 1836, when it was overturned. The rule of 1824 was never quite satisfactory, and it was finally declared, in 1836, in effect, that this doctrine of constructive notice, by way of negligence, being a bar to the demand of a holder who had paid value, and was not otherwise affected with notice, was unsuited to the law merchant as applied to bills and notes; and the contrary was now firmly and finally laid down. Negligence only, even though gross, was and still is in England held insufficient to defeat the claim of one whose right to recover is otherwise perfect; nothing short of bad faith will suffice to subject him to the equities which the defendant seeks to set up.2 And that has long been the prevailing rule in this country, the most of our courts which had at first accepted the earlier doctrine, having, since 1836, abandoned that doctrine for the one just stated. For example: The plaintiff is an indorsee for value of a bill of exchange now sued upon, which was purchased by him in good faith, in point of fact, and the defendant is acceptor thereof. At the trial the following instruction was given to the jury: 'If such facts and circumstances were known to the plaintiff as caused him to suspect, or would have caused one of ordinary prudence to suspect, that the drawer had no interest in the bill, and no authority to use the same for his own benefit, and by ordinary diligence he could have ascertained these facts,' the plaintiff could not recover. The instruction was erroneous; nothing short of bad faith

1 Gill. Cubitt, 3 Barn. & C. 466; Sturgis 2. Metropolitan Bank, 49 Ill. 220, 227; Merritt & Duncan, 7 Heisk 156.

2 Goodman v. Harvey, 4 Ad, & E. 870.

would overcome the plaintiff's demand, and the plaintiff need not show the absence of bad faith.1

Proof of bad faith will subject the plaintiff to equities, if such exist; and bad faith may be shown, for instance, by evidence that he had suspicion that the prior holder's title was somehow tainted or defective, and still went forward and purchased the instrument, closing his eyes to the facts and not making inquiry.2 To that extent the doctrine of constructive notice, a term which may cover cases of bad faith as well as of negligence, obtains in the law of bills, notes, and cheques, and to that extent only, except in the few States in which the courts still adhere to the English doctrine of 1824.

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Between knowledge and absolute notice of equities, there appears to be no difference having any legal significance; either, of itself, will prevent one from being, in oneself, a bona fide holder. So far as it may be helpful to distinguish between the two, one may be said to have knowledge of that which one may testify to in court directly as a fact, including that of which one cannot so testify only because of some special reason of a personal or peculiar nature (e. g., what has passed between husband and wife or in any other confidential relation creating privilege); while absolute notice may be said to

1 Goodman v. Simonds, 20 How. 343; L. C. 415. 'Putting upon inquiry' is a term still used occasionally, from force of habit; but the cases will generally be found to be cases of absolute notice or bad faith. What settles the incorrectness of it in relation to other cases is that negligence will not defeat the claim of one to being a bona fide holder.

2 Jones v. Gordon, 2 App. Cas. 216, 228.

'Notice' is often used in the sense of knowledge, in connection with equities. Goodman v. Simonds, 20 How. 343; L. C. 415, 428. Secus of its use in connection with dishonor, knowledge there is not the same thing as notice. Ante, p. 110.