In order to be a holder in due course, a transferee of negotiable paper must give value.
(1) Giving value necessary only in case one seeks to qualify as holder in due course.
While it is true that a negotiable instrument which is unsupported by any consideration is not enforceable by the immediate holder and is not enforceable by any one except a holder in due course, it is nevertheless true that if it is in its creation based upon good consideration, no consideration is necessary to support an executed transfer where a gift is intended. In other words if A owes B $100 on a promissory note, he might as well pay it to C as to B and it is immaterial whether C gave B any value for it if C has the legal title to it. A holder of an enforceable note or bond or check may give it away to another. But if A has defenses against B upon the note, then it becomes very material whether C gave value (as also material whether he got it before it was overdue or whether he had notice). He is subject to such defense unless he gave value.
(2) What constitutes value.
The negotiable instruments law provides that value is any consideration that will support a simple contract, but as applied to negotiation of an existing contract this needs explanation and qualification. Executory promises to pay or to deliver value are good consideration in the law of contracts, and are good to support commercial paper, but a holder in due course is one who has not only agreed to pay or deliver, but who has paid or delivered money or property to the party from whom he acquired the paper.
Example 37. A note made by A to order of P is indorsed by P to H who agrees to send P the value thereof. There is sufficient consideration here to support a contract, and if no reason appears why H should not pay P, P can enforce the contract, but until H has actually paid P, H is not a holder is due course.83
Example 38. Bank credits H with a check drawn by M on another bank, there being enough in H's account to cover check if dishonored. Bank is not a holder in due course.84 But if the bank honors checks drawn on such fund, it has given value.
It has been held, however, that giving one's own note or check, is giving value; and certainly any actual detriment sustained is value within the rule.
(3) Less than face of instrument may be value.
One may be a holder in due course although the value he has given be less than the amount of the instrument. This is clearly true where the value given is not money. But even if it be money it need not be of the amount of the instrument. A $1000 note might sell for $500, and the purchaser protected as having given value.85 But whether this might prevent him from being a purchaser in good faith is another question. Where there is much discrepancy the question of good faith becomes pertinent as we shall see under the next section. And, of course, we assume here that there is a defense for, if one owes $1000 on a note the holder may sell it for $100 (or make a present of it) if he chooses. There is no injury done to the debtor.
83. See paragraph (4) in this section.
84. Citizen's State Bank v. Cowles, 180 N. Y. 346; Warman v. First Nat. Bk., 185 111. 60.
85. Lassas v. McCarty, 47 Ore. 474, 84 Pac. 77.
The law provides86
"Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount theretofore paid by him."
We shall hereafter see that if a person is a holder in due course he can recover the full amount of the instrument purchased although he gave less than that amount. In the section just quoted we find an apparent inconsistency in the law. It has been expressed as follows:
"Suppose a note for $200 against which the maker has an equity of fraud as against the payee. It is sold by the payee for $150 to the plaintiff, a bona fide purchaser without notice upon terms of payment of $100 cash and $50 a month. Within the month, plaintiff is notified of the equity. How much should plaintiff recover of the maker? The section says $100, thereby depriving plaintiff of the benefit of his bargain. On the other hand, suppose plaintiff had paid the whole consideration of $150 before receiving the notice. In this case plaintiff under section 57, recovers $200, the full amount of the note, thus receiving the benefit of his bargain."87
This apparent inconsistency is probably better so on the whole consideration though not strict logic. The case would not usually rise, and though one loses the benefit of his bargain he is not absolutely out of pocket.
86. Nego. Instru. Law, SEC. 54.
87. Brannan, The Negotiable Instruments Law, 3rd Ed., p. 178.