In due course, as above defined. Personal defenses.
If one pays the sum or any part thereof owing, but not due, on paper which he fails to take up or upon which he falls to see that the proper indorsement is made, and such paper Is acquired by a holder in due course such defense Is not good as against him.
One who purchases a negotiable instrument for value, before it is overdue, without notice that it has been paid in whole or part, may enforce it against the maker or drawer notwithstanding such payment. The defense is not good against him. It is the duty of one paying paper before due to take it up, or to see that the payment made is indorsed upon it.
One cannot set off claims against a holder In due course which he could have asserted against his transferor.
The law customarily allows a person when sued to set off against the plaintiff counter demands which he may have, and which may go to reduce the plaintiff's judgment or defeat it. But this right cannot be availed of in an action on a note by a holder in due course.
sec. 71. want or failure of consideration.
If the consideration for which an instrument was given, fails, or if there was no consideration, the defense thereof cannot be made against a holder in due course.
The lack of consideration is a good defense between the original parties. So a total failure of consideration will go to defeat the claim and a partial failure will go to reduce it. But such defenses are cut off by a transfer to a holder in due course. The reasoning here is similar to that which applies in sections 69 and 70.
This defense is unavailing against a holder in due course. See illustration in section one. This sort of fraud does not prevent the holder from knowing that he has executed the very instrument which is sued upon, but concerns, rather, the inducement or consideration for signing that instrument. Thus one by fraudulent representations induces me to buy a worthless patent right for which I give him my note for $100. In this case the fraud goes to the consideration or inducement, and not to the nature of my act. In connection with this section, read section 81.
When an instrument is payable to bearer has heretofore been indicated. It may then pass from hand to hand without indorsement. There is no means, therefore, by which one who purchases it, may discover the fact of its non-delivery or theft, as in the case of an instrument which cannot be negotiated without indorsement. Accordingly if such an instrument is stolen the thief may give a good title to an innocent purchaser for value before maturity. So, where one is not actually a thief, yet the instrument was never meant to be delivered, the want of delivery cannot be set up against the innocent purchaser.
Where a signed instrument is delivered in incomplete form with authority to fill up the blanks above the signature and the holder in due course is not aware of its incomplete character when delivered, the fact that the Instrument was completed in excess of the actual authority affords no defense as against such holder.
One putting forth an instrument which he has signed with a blank therein to be thereafter filled, cannot complain against a holder in due course that the blank was filled in excess of the authority. This is most reasonable for if one entrusts another with an instrument which he has signed and in which he has left blanks, he who made abuse of authority possible, ought to suffer rather than an innocent party who relied on an instrument apparently good. If such holder knows that the instrument was incomplete, he is, we have found, put upon notice as to the actual authority.
The Illegality of consideration constituting a defense to the instrument as between the parties cannot be set up against a holder in due course, except In certain cases where the law declares the instrument absolutely void because of such Illegality.
Some forms of illegality, as we will hereafter note, make an instrument absolutely void, no matter into whose hands it comes. But otherwise the illegality of a transaction out of which the instrument arose cannot be made a defense against a holder in due course.
If the note is usurious and the usury is not apparent on the face of the instrument, usually the defense of usury cannot be made against the holder in due course.
The effect of charging a greater rate of interest than that which is stated by law as being the highest rate which may be contracted for, differs in different jurisdictions. In some it operates, when made a defense, as a forfeiture of all interest, or some like penalty, but it renders the contract void only in a few states. The principal can usually be recovered. A purchaser of a usurious note upon which the usury appeared would take subject to such defense. If it did not appear, he usually would not be affected by it, unless the law declared that usury makes an instrument entirely void.
Against the Innocent purchaser for value the lack of authority of the corporate officer to execute the particular instrument purporting to bind the corporation, cannot be set up, if such officer had apparent authority to bind the corporation upon negotiable paper for legitimate purposes.
If an officer of a corporation has actual power to bind the corporation upon negotiable paper, or has apparent power so to bind it, by signing, indorsing, or accepting paper in its behalf, for its legitimate corporate purposes, then an innocent purchaser for value of an instrument signed, indorsed, or accepted apparently in behalf of such corporation, has a right to assume that the particular instrument held by him expresses a real obligation of the corporation and is not subject to the defense of lack of authority. But if there was no real or apparent authority on the part of such officer to bind the corporation on negotiable paper, then an innocent purchaser for value could not hope to hold the corporation.
One Modica, as Vice-President of the American Building Loan & Investment Society, accepted a draft in the name of that corporation, drawn upon it by one Montgomery. The acceptance of the draft was evidently for the purpose of enabling Montgomery to raise funds for his own purposes, and the acceptance was clearly beyond the real authority of Modica, as Montgomery of course knew. It appeared however that Modica was the managing officer of the corporation and that similar drafts, drawn by Montgomery had been accepted and paid by the corporation. The purchaser of this draft knew of these previous dealings and relying thereon, gave value for the draft. The court in deciding that the actual lack of authority existing in this particular instance could not be set up against the holder in due course, said:
"We are of opinion that, under the law of its creation, the American Building Loan & Investment Society had power to execute negotiable paper. The rule is well established that corporations authorized to do a particular business, unless especially denied the power, have implied authority to contract debts in the legitimate transactions of the business authorized; and the right to contract debts, it is the equally well settled American rule, carries with it the power to give negotiable notes or bills in payment or security for the debts, unless that power is expressly denied (Citing authorities.) * * *
"The power of the society to execute notes or bills for the various purposes suggested being conceded and there being no ground for questioning the authority of Modica as Vice President to sign the name of the society to such obligations, executed in the regular course of business, the case comes within the rule that, when a corporation has power "under any circumstances," as some of the cases say, and certainly when it has power under ordinary circumstances, or in the usual course of its business to execute negotiable obligations, the bona fide purchaser of a particular obligation has a right to presume that it was executed under circumstances which gave the requisite authority."37
37. Grommes et al. v. Sullivan, 81 Federal Reporter, 418.
If a partnership Is trading in character, or if not being a trading concern, it adopts the practice of issuing commercial paper, a holder in due course relying on its character or its custom, can hold the firm on paper signed in the partnership name by a partner, though he exceeded his authority.
About the same rule applies in this case, as has been applied in the case of corporations. The partnership is bound by the act of the partner in issuing negotiable paper in its name, though he exceeded his actual authority, and though the party to whom the paper was issued could not because of his knowledge of the lack of authority recover thereupon, if the instrument comes to the hands of a holder in due course; provided it is a buying and selling company, in which each partner has apparent power to bind the partnership for partnership purposes, or though not being a buying and selling partnership it has adopted a practice of issuing negotiable paper, upon which the present holder relies. The present holder in due course can assume that the paper in question was issued in the scope of the firm business.
The following partnerships have been held "non-trading:" partnerships of attorneys, physicians, farmers, hotel keepers, laundrymen, livery stable keepers, printers and publishers, miners; or any partnership whose main business is not to buy and sell.