The title of a transferee of negotiable paper involves the two-fold inquiry, (1) whether the party liable on such paper had any defense, and if so what defense, against any prior party, and (2) whether the present transferee is a holder in due course of trade.
It has heretofore been indicated that a transferee of negotiable paper may take a better title than had his transferor; that the transfer of negotiable paper by way of negotiation defeats the right of the maker of the paper to make certain defenses, but does not defeat him of the right to make others; and in the present chapter we shall inquire in detail concerning such transferee's title. We shall assume, first, that the paper in question is negotiable; second, that some prior party has a defective title, that is to say, that some defense could be made against him by the party or parties liable on such instrument; and third, that the present transferee acquired the paper by way of sufficient negotiation (indorsement or delivery) and not by way of assignment. We shall assume the defect of title in a prior party, that is to say the existence of some defense to which he would be subject, because otherwise our inquiry would lose its pertinence. If the party or parties apparently liable on an instrument have no defense to make against any prior party, the present holder has the admittedly good and sufficient title of such prior holders, no matter whether he acquired title in due course or not. In other words, though a transferee in order to shut off certain defenses that could have been made against prior parties, must be, as we shall find, a holder in due course, that is to say, a purchaser, in good faith, for value, and before maturity, yet if there are no defenses to be made against any one, these things become unessential. Thus the holder may in such case acquire the paper after maturity, or for no value, that is to say, as a gift, but no point can be made of this unless there was a defense that could have been made against the transferor.
Making these assumptions let us first inquire, under what circumstances a transferee can claim to be entitled to all the peculiar advantages of a purchaser of negotiable paper, in other words, who is a holder in due course, and secondly to what defenses he is not, to what defenses he is, subject