Story Case

George Lake went to Hibernia, Illinois, representing himself as the agent of the National Auto Speedway Corporation, with offices in New York and Chicago. He explained to Walter Byron, a wealthy citizen of Hibernia, the great value of the stock of this corporation, which planned to build automobile race courses in many large cities. In reliance on these representations, Byron purchased one hundred shares of stock at ten dollars per share, giving his note for $800 as follows:

"$800. January 4,1915.

I promise to pay to the National Auto Speedway Corporation, or order, eight hundred dollars, in sixty days from date.

(Signed) Walter Byron."

Lake discounted this note with the Hibernia Loan and Trust Company for seven hundred dollars by indorsing the name of the Speedway Company. Before the note came due, Byron learned that he had been swindled and that the National Auto Speedway Corporation did not exist. When suit was brought on the note by the bank, Byron tried to give this as a defense. Is the defense effective?

Ruling Court Case. Lane Vs. Krekle, Volume 22 Iowa Reports, Page 399

William Henry visited Krekle and represented that he, Henry, was an agent for V. L. Vanservens. He told Krekle that Vanservens was the discoverer and inventor of a very valuable improvement for the evaporation of sorghum and was the owner of a patent therefor; that he, Henry, was selling the right for Vanservens; he exhibited a model and sought to sell an interest in the patent to Krekle. The latter agreed to purchase such interest and gave a note therefor in the following form:

"$150. June 18.

Three months after date, I, Jacob Krekle, promise to pay V. L. Vanservens, or bearer, one hundred and fifty dollars, for value received. (Signed) Jacob Krekle." Henry indorsed the note, as agent for Vanservens, to Holcomb, and Holcomb indorsed it to Lane. When the latter presented it to Krekle for payment, it was refused, and, thereupon, Lane sued upon the note. Krekle contended that he was not liable upon this note, because there was no payee; that there was no such person as Vanservens; and that the whole transaction was a fraud and swindle.

Decision: The maker of a promissory note admits the existence of a payee and his capacity to indorse the note. As against a purchaser for value without notice of such defect, the maker cannot set up the fact that there was no payee, or that he was without capacity to indorse.

Mr. Justice Dillon said: "Upon reason and principle we are clear, that, if Lane is a bona fide holder for value and without notice, the fact that the note is made payable to a fictitious person is no defense. In such case, Krekle would be estopped, as against Lane, from setting up the fact. It was Krekle who made the note. By making it payable as he did, he affirmed the existence of such person as the payee, therein named: and he should not, against a person ignorant of that fact, who may reasonably be presumed to have acted upon the part of that fact thus represented, be allowed to assert the contrary." Judgment was given for Lane.

Ruling Law. Story Case Answer

The maker of a promissory note, by his act of drawing it, admits the existence of the payee and his capacity to indorse the instrument. If the maker draws a note, payable to the order of a fictitious person, or to the order of a person who is incompetent to indorse it, as against a person who is unaware of the non-existence or incompetency of the payee, he cannot maintain such facts in order to relieve himself of liability upon the instrument. Since, by his act of drawing the note, he virtually affirms to any one who may take the instrument that it is payable to a competent and existing payee, the law will not permit him to dispute these two facts as against one who bought the instrument in ignorance thereof. Byron's defense, in the Story Case, is not valid.