to a bona fide holder, and afterwards taken up by a surety who brings suit against the maker, his title relates back to that of the bona fide purchaser, and is not subject to a set-off against the payee acquired after notice of the transfer.196

Defenses against Collateral-Nonnegotiable Paper.

§ 1884. In general, the assignee of mortgages or other securities collateral to negotiable paper takes the collateral subject to equities, although the paper secured is not so.197 But in some states the collateral is regarded as negotiable also, and not subject to equities existing in favor of the mortgagor.198

But this construction will not be extended to exclude claims adverse to one another, made by different note holders secured by the same collateral; 199 nor to the statutory right of action given to the creditors of a corporation against its stockholders; nor even to

200

quired after notice of transfer (Code Proc. § 806). Harrisburg Trust Co. v. Shufeldt, 31 C. C. A. 190, S7 Fed. 669.

196 Lewis v. Faber, 65 Ala. 460.

197 Bacon v. Abbott, 137 Mass. 397; Olds v. Cummings, 31 Ill. 188; White v. Sutherland, 64 Ill. 181; Haskell v. Brown, 65 Ill. 29; Bryant v. Vix, 83 Ill. 11; Towner v. McClelland, 110 Ill. 542; Miller v. Larned, 103 Ill. 570; Bouligny v. Fortier, 17 La. Ann. 121; Butler v. Slocomb, 33 La. Ann. 170; Securities Co. v. Talbert, 49 La. Ann. 1393, 22 South. 762; Baily v. Smith, 14 Ohio St. 396; Dearman v. Trimmier, 26 S. C. 506, 2 S. E. 501. So, as to collateral chattel mortgages. Oster v. Mickley, 35 Minn. 245, 28 N. W. 710.

198 Carpenter v. Longan, 16 Wall. 271; Gould v. Marsh, 1 Hun (N. Y.) 566; Gabbert v. Schwartz, 69 Ind. 450; Duncan v. Louisville, 13 Bush (Ky.) 385; Helmer v. Krolick, 36 Mich. 371; Barnum v. Phenix, 60 Mich. 388, 27 N. W. 577; Cox v. Cayan (Mich.) 76 N. W. 96; Spence v. Railway Co., 179 Ala. 576; Thompson v. Maddux (Ala.) 23 South. 157; Hart v. Adler, 109 Ala. 467, 19 South. 894; Hagerman v. Sutton, 91 Mo. 519, 4 S. W. 73; Mayes v. Robinson, 93 Mo. 114, 5 S. W. 611; First Nat. Bank of Mauch Chunk v. Rohrer, 138 Mo. 369, 39 S. W. 1047; Borgess Inv. Co. v. Vette, 142 Mo. 560, 44 S. W. 754. So, Swett v. Stark, 31 Fed. 858, declining to follow the rule of the state courts in an Illinois case. And see Humble v. Curtis, 160 III. 193, 43 N. E. 749. So, as to collateral vendor's lien, Pullen v. Ward, 60 Ark. 90, 28 S. W. 1081; or, collateral chattel mortgage, Myers v. Hazzard, 50 Fed. 155. And see Bailey v. Seymour, 42 S. C. 322, 20 S. E. 62, where the question was as to estoppel by recital in a collateral mortgage merely.

199 Nashville Trust Co. v. Smythe, 94 Tenn. 513, 29 S. W. 903. 200 Close v. Potter, 155 N. Y. 145, 49 N. E. CS6.

corporation bonds which are negotiable in form, but are held as collateral with an unindorsed note.201 Further discussion of the negotiable features of mortgages and other collateral securities is found in works bearing upon the special subject.202

Nonnegotiable paper, although transferred for value, is subject to all equities.203 But it is sometimes made subject by statute only to such set-offs as are acquired before notice of transfer.204

Defenses against Bona Fide Holder.

§ 1885. In general, a bona fide purchaser of commercial paper for value before maturity takes clear of all equities between the original or intermediate parties.205 In Massachusetts the statute renders the indorsee of a demand note subject to all defenses existing against the payee, except such as arise after notice of the transfer.206 Georgia it is provided that a bona fide holder shall be protected from all defenses except forgery, fraud in procurement of the paper, and gaming or immoral or illegal consideration.207

201 Thomson-Houston Electric Co. v. Capitol Electric Co., 56 Fed. 849.

202 See Jones, Mortg. c. 19.

In

203 Graham v. Wilson, 6 Kan. 489; Gaines v. Bank (Ky.) 39 S. W. 438. E. g. fraudulent diversion, Rawlings v. Fisher, 24 Ind. 52; Farmers' & Mechanics' Bank v. Hathaway, 36 Vt. 539; or satisfaction, Shade v. Creviston, 93 Ind. 591; or set-off, Herod v. Snyder, 48 Ind. 480; First Nat. Bank of New Windsor v. Bynum, 84 N. C. 24; Havens v. Potts, 86 N. C. 31; Wetter v. Kiley, 95 Pa. St. 461; or fraud, Wickham v. Grant, 28 Kan. 517; Kastner v. Pribilinski, 96 Ind. 229. So, as to the acceptance of a draft in negotiable form by a building and loan association having no such power. Towle v. Investment Co., 78 Fed. 688. 204 IOWA (Code, § 3044); TEXAS (Rev. St. arts. 309, 311); VIRGINIA (Code, §§ 2860, 2861); WEST VIRGINIA (Code, c. 99, §§ 14, 15).

205 Blair v. Rutherford, 31 Tex. 465; Bremmerman v. Jennings, 60 Ind. 175; Cook v. Norwood, 106 Ill. 558; Gardner v. Maxwell, 27 La. Ann. 561; Taylor v. Bowles, 28 La. Ann. 294; Holden v. Clark, 16 Kan. 346; Morrison v. Fishe!, 64 Ind. 177; Thompson v. Gibson, 1 Mart. N. S. (La.) 150. And this is expressly proved by statute in COLORADO (Mills' Ann. St. § 250).

206 MASSACHUSETTS (Pub. St. c. 77, § 14); Spring v. Lovett, 11 Pick. 417; Aldrich v. Stockwell, 9 Allen, 45. But this does not permit a defense, which could not have been set up against, because he was also one of the makers and could not sue his co-makers. Thayer v. Buffum, 11 Metc. 398.

207 GEORGIA (Civ. Code, § 3694). And notes were subject to defenses in ARKANSAS until 1873, Worthington v. Curd, 22 Ark. 277, unless the note contained the words "without defalcation," Woodruff v. Webb, 32 Ark., 612.

In Indiana, promissory notes payable at a bank in the state of Indiana are put upon the footing of foreign bills of exchange, as we have seen.208 As to other (nonnegotiable) notes and bills of exchange and bonds, defenses available to the maker against the payee before notice of transfer, or to a remote indorser against his indorsee, are admissible against the plaintiff indorsee.209

The Negotiable Instrument Law now in force in several states provides somewhat ambiguously that a bona fide holder holds free from any defect of title of prior parties, and free from defenses available to prior parties among themselves.210 This language seems to be copied in part from the British Bills of Exchange Act.211

In Mississippi, in notes and bills transferred by indorsement or assignment, the defendant has "the benefit of all want of lawful consideration, failure of consideration, payments, discounts, and set-offs made, had, or possessed against the same previous to notice of assignment, in the same manner as though the suit had been brought by the payee." This statute applies to notes negotiable by the law merchant or by statute,2 ,213 and is not waived by a waiver of "all defenses." 214 But it does not apply to instruments payable to bearer, and transferable by delivery,215 or payable in another state; 216 nor to accommodation paper.217

" 212

208 See § 128, supra.

209 INDIANA (Horner's Rev. St. $$ 5503-5505).

"Whatever defense or set

off the maker of any such instrument had before notice of assignment against an assignor or against the original payee, he shall have also against their assignee" (§ 5503). The indorser "shall have any defense which he might have had in a suit brought by his immediate assignee" (§ 5504).

210 COLORADO, CONNECTICUT, FLORIDA, VIRGINIA (§ 57), MARYLAND (§ 76), and NEW YORK (§ 96).

211 Bills of Exchange Act, § 38. "mere personal defenses available," etc. 212 MISSISSIPPI (Ann. Code, § 3503).

213 Brown v. Bank, 62 Miss. 754.

214 Union Nat. Bank v. Fraser, 63 Miss. 231.

215 Craig v. Vicksburg, 31 Miss. 216; Stokes v. Winslow, Id. 518; Mercien v. Cotton, 34 Miss. 64; Winstead v. Davis, 40 Miss. 785. Or payable to the maker's order and indorsed by him in blank. Bank of Winona v. Wofford, 71 Miss. 711, 14 South. 262.

216 Emanuel v. White, 34 Miss. 56; Coffman v. Bank, 41 Miss. 212; Harrison v. Pike, 48 Minn. 46.

217 Meggett v. Baum, 57 Miss. 22.

Defenses as to Capacity-Authority.

218

§ 1886. Where a bond or other negotiable instrument is executed by a corporation without legal authority, it may set up such defense even against a bona fide holder.2 And this is true where the statute authorized the giving of such bond, but did not comply with the constitutional requirements, and was therefore ineffectual.219 But, where a corporation note is executed under a sufficient apparent authority, it will be valid in the hands of a bona fide holder.220 Other defenses, going to show that no valid contract was ever made because of the parties' legal incapacity, are admissible against all holders where they are not waived or barred. Thus, it may be shown that the maker was an infant,' 221 or a lunatic,222 or a married woman, without statutory authority to bind herself.223 But the maker can

218 Bissell v. Kankakee, 64 Ill. 249; Williamson v. Keokuk, 44 Iowa, 88; Anthony v. Jasper Co., 4 Dill. 136, Fed. Cas. No. 488, affirmed in 101 U. S. 693; Bank of Chillicothe v. Dodge, 8 Barb. 233. And see § 343, supra. 219 South Ottawa v. Perkins, 94 U. S. 260. But not if authorized by law, but actually issued for unconstitutional purposes. Kerr v. Corry, 105 Pa. St. 282. So, it cannot set up mere noncompliance with a by-law as to manner of execution. National Spraker Bank of Canajoharie v. George C. Treadwell Co., 80 Hun, 363, 30 N. Y. Supp. 77.

220 Genesee Co. Sav. Bank v. Michigan Barge Co., 52 Mich. 438, 18 N. W. 206: Lehigh Val. Coal Co. v. West Depere Agricultural Works, 63 Wis. 45, 22 N. W. 831. So, if it was issued without authority, Pittsburg, C., C. & St. L. Ry. Co. v. Lynde, 55 Ohio St. 23, 44 N. E. 596; or in violation of its foreign charter, Ellsworth v. Railroad Co., 98 N. Y. 553, reversing 33 Hun, 7. And see § 334, supra. So, although it was accommodation paper, Farmers' Nat. Bank of Valparaiso v. Sutton Mfg. Co., 3 C. C. A. 1, 52 Fed. 191; American Trust & Savings Bank v. Gluck, 68 Minn. 129, 70 N. W. 1085; Jacobs Pharmacy Co. v. Southern Banking & Trust Co., 97 Ga. 573, 25 S. E. 171; Marshall Nat. Bank v. O'Neal, 11 Tex. Civ. App. 640, 34 S. W. 344; or in other respects ultra vires, Clifton Forge v. Brush Electric Co., 92 Va. 289, 23 S. E. 288.

221 Howard v. Simpkins, 70 Ga. 322.

222 Moore v. Hershey, 90 Pa. St. 196; .Hosler v. Beard, 54 Ohio St. 398, 43 N. E. 1040.

223 Kenton Ins. Co. v. McClellan, 43 Mich, 564, 6 N. W. 88; Linderman v. Farquharson, 101 N. Y. 434, 5 N. E. 67; Waterbury v. Andrews, 67 Mich. 281, 34 N. W. 575; Comings v. Leedy, 114 Mo. 454, 21 S. W. 804. But see, contra, Perkins v. Rowland, 69 Ga. 661; Laster v. Stewart, 89 Ga. 181, 15 S. E. 42. And see § 294, supra.

not set up, against a bona fide indorsee, that the payee had no authority to transfer a note.2

224

Want of Consideration.

225

§ 1887. In general, the maker cannot set up against a bona fide holder an original want of consideration for the paper; or that the consideration was an illegal one; 226 or that the note was given for the payee's accommodation; 227 or that the original consideration had failed.228

224 City Bank of New Haven v. Perkins, 29 N. Y. 554. Or the indorsee not authorized to purchase. Oneida Bank v. Ontario Bank, 21 N. Y. 490; Wolke v. Kuhne, 109 Ind. 313, 10 N. E. 116. And see §§ 244, 271, 390, 1866, supra.

225 Goddard v. Lyman, 14 Pick. (Mass.) 268; Robertson v. Williams, 5 Munf. (Va.) 381; McKenua v. Dowdall, 8 Ir. C. L. R. 70; Daniels v. Wilson, 21 Minn. 530; Battalora v. Earth, 25 La. Ann. 318; Harrison v. Pike, 48 Miss. 46,-as to a Louisiana note; Hardie v. Wright, 83 Tex. 345, 18 S. W. 615; Henertematte v. Morris, 101 N. Y. 63, 4 N. E. 1; Blue Valley Lumber Co. v. Smith, 48 Neb. 293, 67 N. W. 159; Proctor v. Baldwin, 82 Ind. 370. But it will be available as to excess over debt secured to a bona fide pledgee. Brown v. Callaway, 41 Ark. 418. And see §§ 557-559, supra.

226 Robertson v. Coleman, 141 Mass. 231, 4 N. E. 619; Ferriss v. Tavel, 87 Tenn. 386, 11 S. W. 93.

227 Arbouin v. Anderson, L. R. 1 Q. B. 498; Pitts v. Foglesong, 37 Ohio St. 676; Bank v. Rider, 58 N. H. 512; Atkinson v. Brooks, 26 Vt. 569; Montross v. Clark, 2 Sandf. (N. Y.) 115; Lathrop v. Morris, 5 Sandf. (N. Y.) 7; National Bank of Republic v. Young, 41 N. J. Eq. 531, 7 Atl. 488; Peirce v. Butler, 14 Mass. 303; Macy v. Kendall, 33 Mo. 164; Bank v. Anderson, 32 S. C. 538, 11 S. E. 379; Hall v. Bank, 133 III. 234, 24 N. E. 546; Estes v. Bank, 62 Ark. 7, 34 S. W. 85. So, the nonperformance of an executory contract constituting the consideration. Fink v. Chambers, 95 Mich. 508, 55 N. W. 375; Anderson v. Bank, 98 Mich. 543, 57 N. W. 808; Porter v. English, 17 App. Div. 432, 45 N. Y. Supp. 182. And see § 476, supra.

228 Mobile Sav. Bank v. Board of Sup'rs of Oktibbeha Co., 22 Fed. 580; Powers v. Ball, 27 Vt. 662; Bremmerman v. Jennings, 61 Ind. 334; Morris v. White, 28 La. Ann. 855; Bullock v. Wilcox, 7 Watts (Pa.) 328; Munn v. MeDonald, 10 Watts (Pa.) 270; Mornyer v. Cooper, 35 Iowa, 257; Kline v. Spahr. 56 Ind. 296; Murphy v. Lucas, 58 Ind. 360; Eichelberger v. Bank, 103 Ind. 401, 3 N. E. 127; Fisk v. Miller, 63 Cal. 367; Miller v. Pollock, 99 Pa. St. 202; Union Bank v. Crine, 33 Fed. 809; Evans v. Hardware Co. (Ark.) 45 S. W. 370; Kelly v. Smith, 1 Metc. (Ky.) 313; Blackmer v. Phillips, 67 N. C. 340. But see, contra, under the MISSISSIPPI statute (Code, § 3503), as against an indorsee, Etheridge v. Gallagher, 55 Miss. 458; Robertshaw v. Britton, 74