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of the supposed maker. For the purpose of setting on foot or pursuing this inquiry, it is immaterial that the supposed instrument is negotiable in form, or that it may have passed to the hands of a bona fide holder for value. Negotiability in such cases presupposes the existence of the instrument as having been made by the party whose name is subscribed; for, until it has been so made and has such actual legal existence, it is absurd to talk about a negotiation, or transfer, or bona fide holder of it, within the meaning of the law merchant. That which, in contemplation of law, never existed as a negotiable instrument, cannot be held to be such; and to say that it is, and has the qualities of negotiability, because it assumes the form of that kind of paper, and thus to shut out all inquiry into its existence, or whether it is really and truly what it purports to be, is petitio principii - begging the question altogether. to use a homely phrase, putting the cart before the horse, and reversing the true order of reasoning, or rather preventing all correct reasoning and investigation, by assuming the truth of the conclusion, and so precluding any inquiry into the antecedent fact or premise, which is the first point to be inquired of and ascertained. For the purpose of this first inquiry, which must be always open when the objection is raised, it is immaterial what may be the nature of the supposed instrument, whether negotiable or not, or whether transferred or negotiated, or to whom or in what manner, or for what consideration or value paid by the holder. It must always be competent for the party proposed to be charged upon any written instrument to show that it is not his instrument or obligation. The
principle is the same as where instruments are made by persons having no capacity to make binding contracts; as, by infants, married women, or insane persons; or where they are void for other cause, as, for usury; or where they are executed as by an agent, but without authority to bind the supposed principal. In these and all like cases, no additional validity is given to the instruments by putting them in the form of negotiable paper."
§ 104. Defenses not available against holder in due course. On the other hand, any defense which does not go to the existence of the negotiable instrument as such, but merely shows that the instrument came into existence as a result of conduct on the part of the payee which makes it unjust and inequitable for him to enforce it, is not available against an innocent purchaser for value. Examples of such defenses are given in $ 100, above. The N. I. L. enumerates them and states the position of a purchaser for value as follows:
Sec. 55. The title of a person who negotiates an instrument is defective within the meaning of this act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to fraud.
Sec. 57. A holder in due course holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon.
$ 105. Existing instrument must be acquired by holder in due course. Not only must there be a valid instrument in existence, but it must have been transferred to the plaintiff, before he can claim to be an innocent purchaser. For example, Pilkington secured possession of a draft payable to Casey, or order. Pilkington forged Casey's signature as an indorsement on the instrument and delivered it to a bank, which paid value in good faith. Casey sued the bank and recovered the proceeds of the draft which had been paid to the bank. The forged indorsement did not transfer the instrument and the bank did not become the owner of it (13). For the same reason, one who purchases a note from an agent of the payee, who is not authorized to indorse and transfer it, is not protected because of his innocence. The unauthorized indorsement was not the indorsement of the payee, and ownership could not be acquired without the payee's indorsement. The doctrine of purchase for value allows one to exercise the rights which have been acquired by him, but that is all.
§ 106. Purchase of instrument must be in good faith and without notice of defenses. If one purchases a bill or note, knowing of the defense which the acceptor or maker has against his transferor, there is no reason in justice why the defense should not be good against him also. On the contrary, there is every reason why the defense should be available against him. It was his own folly that he paid value for the instrument. In consequence, the purchaser is not protected unless he purchased in good faith and without notice of defenses.
(13) Casey v. Pilkington, 83 N. Y. App. Div. 91.
§ 107. Actual notice. The question, whether the purchase was in good faith and without notice, generally is a question of actual good faith and actual knowledge. No matter how careless or stupid the purchaser, or how suspicious the circumstances, if he can convince the court or jury that he had no knowledge of the defense, and did not wilfully shut his eyes to the means of knowledge at hand, he is entitled to the position of a holder in due course. In other words, gross negligence on the part of the purchaser, in buying under the circumstances, is not equivalent to bad faith and real knowledge. This rule was thus stated by a learned English judge in a case before the House of Lords:
“I think, however, it is now settled that, if value is given for a bill, it is not enough to show that there was carelessness, negligence, or foolishness in not suspecting that the bill was wrong, when there were circumstances which might have led to such suspicion. All these are matters which tend to show that there was dishonesty in not doing it; but they do not in themselves furnish a defense to an action on a bill of exchange. I take it that it is necessary to show, whether in the case of a party who is solvent and sui juris, or as against the estate of a bankrupt, that the person who gave value (whether great or small) for the bill was affected with notice that there was something wrong about it when he took it; but he need not have had notice of what the particular wrong was. If a man, knowing that a bill was in the hands of a person who had no right to it, should think that perhaps the holder had stolen it, when in truth the latter had obtained it by false pretences, I think he would be taking it at his peril. But such evidence of carelessness or blindness might, with other evidence, be good evidence upon the question, which appears to be the real one, whether he knew that there was something wrong in the bill. If he was (so to speak) honestly blundering and careless, he would not be disentitled to recover; but if it appeared that he must have had a suspicion of something wrong, and that he refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his secret mind: 'I suspect there is something wrong, and if I ask questions it will be no longer suspecting, but knowing, and then I shall be unable to recover,' I think that is dishonesty” (14).
The N. I. L. states the rule as follows:
Sec. 52. A holder in due course is a holder who has taken the instrument under the following conditions:
4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.
Sec. 56. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.
§ 108. Constructive notice. The rule stated above is the general one, but it is limited by the doctrine that the
(14) Jones v. Gordon, L. R. 2 Appeal Cases, 616.