~marge~ FACTS
SUBJECT: promissory note prepared by Barnet Cohen on 18 Dec 1906: worded as follows: “Six months and five days date I promise to pay the order of myself five hundred dollars at 16-1/2 Carmine St. Value received.”
-Said note was delivered to Jacob Jormack.
-At the time of making said note, and prior to its delivery to Horowitz, Louis Wollowitz indorsed it w/ intent to charge himself as first indorser. Thereafter and before maturity, Jormack indorsed the note to Horowitz for value.
-Horowitz presented the note for payment. Unpaid, he filed suit in court.
-Defendants [C, J, and W] set up the defense that the note was tainted with usury in its inception, and was therefore null and void.
ISSUE
WON an indorser may raise the defense that note is void for usury
HELD: NO.
-It is not necessary to pass upon the question of the availability to the maker of the defense of usury as against HIDCs, because defendants herein were sued in their capacity, not as makers, but as indorsers of the note in question.
-Sec116, US law (Sec 66, NIL): Every indorser who indorses w/o qualification warrants to all subsequent holders in due course: xxx (b) that the instrument is, at the time of his indorsement, valid and subsisting.”
-Under the language of the statute, as applied by the decisions in Packard v Windholz and Lennon v Grauer, it must be held that in indorsing the note the defendant warranted its validity, and he cannot be heard now to assert that it is void for usury, any more than for forgery or any other cause.
-It is an established rule that the obligation of an indorser is a new and independent contract, separate and distinct from that evidenced by the note.
INGALLS V MARSTON 121 Me. 182, 116 Atl. 216 (1922)
~anton~ FACTS
PROMISSORS: Herbert L. Marston, Almeda E. Marston
INDORSERS: Howard W. Smith and Walter H. Foss, but they signed at the note’s inception, hence the issue whether they are mere indorsers or co- promissors.
PAYEE: Ingalls
-Herbert L. and Almeda E. Marston signed the note on its face.
-Howard W. Smith and Walter H. Foss placed their signatures on the back of the note at its inception, and before the delivery to the payee, Ingalls (plaintiff).
-The first instalment was not demanded of the makers, Herbert and Almeda (at maturity), and notice of dishonor was not given o Smith and Foss.
Plaintiff’s Claim: All four were original promissors, and therefore liable.
Defendants’ Comment: Smith and Foss were merely indorsers, and therefore free from liability because of want of demand and notice.
ISSUE
WON Smith and Foss became original promissors when they signed the instrument on its back.
HELD: NO
Ratio Nature of liability must be expressly stated in instances where the instrument was signed other than on its face.
Reasoning
-Before the enactment of the NIL, the law was firmly settled in states by judicial decisions, that one who signed his name on the back of a note at its inception was a joint or joint and several makers with who signed on the face, so far as necessity for demand and notice of non-payment was
concerned. The passage of the NIL abrogated this rule of commercial law.
-Sec. 63, NIL: A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity. -Smith and Foss placed their signatures, not on the
face (as makers), but on the back—meaning “other than makers”—and they did not indicate by any words, appropriate or otherwise, any intention to be bound in some other capacity. -However Ingalls seeks to differentiate between
regular and irregular indorsers. According to him, regular endorsers are entitled to have demand made to the maker first, with due notice of dishonour given to him (indorser). Such right is not available to irregular indorsers. This interpretation however would revert the law back to the time before the NIL was enacted.
-Sec. 64, NIL: Where a person not otherwise a party to an instrument, place thereon his signature in blank before delivery he is liable as an indorser, in accordance with the following rules:
(1) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties.”
In the present case the note was made payable to the order of a third person, and therefore this section applies, and these irregular indorsers were made liable to the payee Ingalls and to all other subsequent parties. But their liability is that of “indorsers” as the section unequivocally provides. These necessarily imply the inherent elements of demand and notice of dishonor.
Disposition Smith and Foss are not liable as makers, but only as indorsers, which requires prior demand and due notice.
WEST RUSTLAND TRUST CO V HOUSTON 104 Vt. 104, 158 Atl. 69, 80 ALR 664 (1932)
~jonas~ FACTS
-The note in suit is a promissory note, signed by defendant Buck, an employee of the Buck Lumber Company, as MAKER then INDORSED by defendant Houston. This note is a renewal of another note, also signed by Buck as maker & indorsed by Houston, which was delivered to plaintiff bank as collateral security for the indebtedness of the Buck Lumber Company to it. -Buck testified that before the note was signed, he
had a talk with F.L. Jones, treasurer of the plaintiff bank. Jones told him that the bank examiner was expected to visit the bank very soon, & that he wanted a new note, to be held by the bank as collateral, as he thought that the indebtedness of the Buck Lumber Company to the bank was larger than the bank examiner would like. Jones explained that he was afraid not to have some extra collateral to show the examiner, & that the note would be held only until the examiner had examined the books & then returned to either of the defendants. Houston testified that he spoke with Buck about signing the note in suit, & he was told the purpose of the note, after which he signed it.
-NOTE: the bank examiner is sent by the commissioner of banking & insurance to oversee & inspect banks in order to protect the public interest.
-The receiver of the plaintiff bank (it appears the bank was subsequently placed in receivership) brought an action to recover from the defendants, as makers. The trial was by jury, and at the close of the evidence, a verdict was directed for plaintiff. The defendants excepted to the direction of the verdict & to the judgment thereon.
ISSUE/S
1. WON defendants are bound on the note
2. WON the liability of the defendants is primary & absolute
HELD 1. YES
Ratio If the note was given to plaintiff bank merely as a semblance of collateral security, the result was to effect a scheme to deceive the bank examiner. If so, it was an illegal transaction, and it is against public policy to permit defendants to rely upon it as a defense. In such circumstances, the defendants are bound as the face of the note discloses.
Reasoning Transactions with banks are affected with an unusual public interest. It is of public importance that all dealings with banks be conducted with integrity & honesty.
2. YES
Ratio Under the Uniform Act, one who takes a negotiable note as collateral to secure a pre- existing debt takes for value, even though no independent consideration is given. An accommodation party cannot claim the benefit of being treated as a surety as against a holder for value, but is liable as if he were financially interested in the transaction. It follows that the liability of the defendants on the note is primary & absolute and that there was no error in the direction of a verdict against them.
Reasoning Under the Negotiable Instruments Act, the previous rule to the effect that, if a holder for value knew a party had signed for accommodation only he must be treated as a surety, has been abolished. An accommodation party is now primarily & absolutely liable on the instrument to a holder for value.
Sec. 25 provides that “xxx an antecedent or pre- existing debt constitutes value xxx”
Sec. 27 provides that “xxx where the holder has a lien on the instrument, xxx he is deemed a holder for value to the extent of his lien xxx”.
GOODMAN V GAUL