There are some defenses good even against a holder in due course. They are called real defenses. They are, at least generally, defenses of an unusual character, not those going to the merits of a transaction, but rather to its nature as a legal act. The policy of the law of commercial paper requires that a purchaser (holder in due course) be unaffected by any defenses between the immediate parties; but the policy of the law in other fields runs at times counter to those considerations and exerts a pressure that causes the negotiable principle to yield. In this chapter the so-called real defenses are considered.
Personal incapacity to contract is a defense good against any holder.
An insane person117 or a minor118 can plead his defense against even a holder in due course.
Forgery is a real defense.
Very clearly a person can set up that an instrument sued on is not an instrument made by him or by his authority; but there may be elements of estoppel.119
117. Hosier v. Beard, 54 Ohio State 398.
118. Morton v. Steward, 5. 111. Ap. 533.
119. Ehrler v. Braun, 120 111. 503
That the instrument has been materially altered is a defense that can be set up against a holder in due course; unless the alteration was made possible by the careless manner in which the instrument was drawn. But a holder of an altered instrument may recover on it according to its original tenor.
(1) Material alteration a real defense.
If a material alteration is made with guilty intent, it amounts to a forgery, and the same rules apply as in the section above. If not made with guilty intent yet still purposely it is nevertheless an alteration and the maker cannot be made liable upon the instrument as changed.
The alteration must be material in order to give the promissor any defense. The statute declares that "Any alteration which changes: 1. The date; 2. The sum payable, either for principal, or interest; 3. The time or place of payment; 4. The number of the relations of the parties; 5. The medium or currency in which payment is to be made; or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration."120
(2) Material alteration by filling in uncancelled blanks.
If the maker of the paper leaves uncancelled spaces, so that alteration by filling in is thereby made easy or perhaps even suggested thereby, a line of cases holds that the maker is estopped to set up the alteration as against an innocent holder, while another line takes the opposite view. See following examples:
120. Nego. Instru. Act, SEC. 125.
Example 53. Suit was brought upon a promissory note purporting to be made by defendants and reading as follows:121
"$1300. Kewanee, Illinois, Oct. 4, 1897.
One year after date I promise to pay to the order of ourselves thirteen hundred dollars at Kewanee, 111. Value received, with interest at the rate of seven per cent per annum.
(sd.) L. Silverman,
H. Clay Merritt." Indorsed on back:
"L. Silverman. H. Clay Merritt."
Boyden & Son, paid $1300 for the note, acquired it before maturity and had no notice of any alteration. The defense was based on two theories: (1) That the note as originally delivered contained the figures "$100" in the margin, and the words "one hundred dollars" in the body of the note, and that the figures "$100" were altered to read "$1300," and the word "one" before "hundred" was erased, and the word "thirteen" inserted in its stead; or that the word "one" was not in the body of the note, but that there was a blank space in which the word " thirteen " had been inserted.
The court in the course of its opinion said: "First, If the note was altered by (the first method) then the alteration amounted to a forgery and appellant is not liable on the note, even though appellees were bona fide purchasers thereof for value without notice or knowledge of the change. If the amount named in the note is raised by erasing what is written, such alteration is a material one, and the note is thereby vitiated so as to become void. * * * Where a note is complete at the time when it is signed by the maker, its subsequent alteration by raising the amount thereof through obliteration of the same by the use of any chemical process, or other ingenious device, without the knowledge or consent of the maker, will discharge him from liability upon the note. * * * (The court found this theory unsupported by the evidence.)
121. Merritt v. Boyden, 191 111. Rep. 136; accord, Garrard v. Hadden, 67 Pa. 82; Scotland Co. Nat. Bk. v. O'Connell, 23 Mo. Ap. 165; Hackett v. First Nat. Bk., 114 Ky. 193; Isnard v. Forres, 10 La. Ann. 103.
"The second theory of the defense * * * was that, when he signed and endorsed the note, there was a blank space before the word 'hundred' and that this blank space was subsequently filled by inserting the word 'thirteen' therein without the knowledge or consent of the appellant. * * * When the maker of the note has, by careless execution of the instrument left room for an alteration to be made by insertion without defacing the instrument or exciting the suspicion of a careful man, and the instrument by reason of the opportunity thus afforded is subsequently filled up with a larger amount than that which it bore at the time it was signed, the maker will be liable upon it as altered to any bona fide holder without notice." (This left the contention that the marginal figures had been altered to be disposed of. For even though the makers of the note were negligent as to the body of the note, the marginal figures must have been erased and changed.) As to that the Court said: "The marginal figures have been held to be not part of the instrument, but to be intended merely as a convenient index, and as an aid to remove ambiguity or doubt in the instrument itself. The alteration or erasure of the marginal figures is an immaterial alteration and will not affect the rights of the holder of the instrument."
For these reasons the Court gave a decision in favor of the holder in due course.
The other view is as follows:121a
"Whenever a party in good faith signs a complete promissory note, however awkwardly drawn, he should, we think, be equally protected from its alteration by forgery in whatever mode it may be accomplished; and, unless, perhaps, it has been committed by some one in whom he has authorized others to place confidence, as acting for him, he has quite as good a right to rest upon the presumption that it will not be criminally altered, as any person has to take the paper on the presumption that it has not been; and the parties taking such paper must be considered as taking it upon their own risk, so far as the question of forgery is concerned, and as trusting to the character and credit of those from whom they receive it and of the intermediate holders."
(3) Check protection.
It is well in order to secure against alteration to use devices rendering change difficult. Various devices are used, calculated to prevent check raising. It cannot be said as a matter of law, that it is necessary to use these, but, on the other hand, their use is very desirable, especially where many checks are written, and especially,
121a. Holmes v. Trumper, 22 Mich. 427, 7 Am. Rep. 661; accord, National Exch. Bk. v. Lester, 194 N. Y. 461, Greenfield Sav. Bk. v. Stowell, 123 Mass. 196; Knoxville Nat. Bk. v. Clark, 51 la. 264; Critten v. Chem. Nat. Bk., 172 N. Y. 219.
again, if they are written by agents. One must, as we have said, use all due caution to prevent check raising. If he uses such caution he is not liable for subsequent alterations and those who recognize such check after its alteration are the losers. Now he may show that he was not careless if he may show that he adopted every precaution, and that every check made out by him or his employees must pass through a certain process. In such a case also, the bank may more readily detect a forgery and the depositor may in such a case more readily charge it with negligence in case it fails to recognize the forgery. Also in examining returned vouchers, the drawer may the more quickly and surely discover the tamperings, so as to report them to the bank.
(4) Right to recover on altered instrument according to original tenor.
The uniform act provides that where an instrument is altered and has come into the hands of a holder in due course, although the alteration is a good defense against him, he may yet recover on the instrument according to the original tenor.
The fraud whereby one is induced to execute, accept or indorse a negotiable instrument under the impression that he is performing some other act with an entirely different legal effect, gives rise to a defense good against every one, unless one is by his negligence estopped to set up the fraud.
If one is fraudulently prevailed upon to attach his signature to a negotiable instrument, with the understanding that he is really signing some altogether different paper, he can set up his defense against even a holder in due course provided he was not negligent. It being the duty of every one to read what he signs, a failure to read would ordinarily constitute such negligence that the party would be estopped to set up his defense against the holder in due course. But there are rare cases in which this would not be true. So if by any trick or device another paper than the one read is substituted, a defense could be made as against even a holder in due course.122
The fraud here discussed differs from that discussed above in section 85 in that the fraud there goes to the consideration or inducement and not to execution. The party in the other case signs just what he intended to sign. In such case a true bona fide holder has a good title. Here he has none if there was no negligence.
By statute in many jurisdictions it is declared that if an instrument is founded upon certain illegal considerations, as for instance, a gambling consideration, it shall be utterly void. In such cases the instrument is of no effect even in the hands of an innocent purchaser for value.
If the statute declares the instrument void, it becomes so to all purposes and can give no rights to any one. The chief case in which an instrument is declared void as to everyone is the case of an instrument executed as a part of a gambling transaction.123
122. First Nat. Bk. v. Hall, 160 la. 218.
123. Alexander v. Hazelrigg, 123 Ky. 677, 97 S. W. 353.