Story Case

Jacob Hall delivered the following bill of exchange to Edward Hilton:

"$50. February 2, 1915.

Arthur Knauf, pay to Edward Hilton, or order, fifty dollars, in thirty days from date.

(Signed) Jacob Hall." Hilton did not present this bill for acceptance, but indorsed it to Leo Kramer. Kramer held the note in his possession until March 10, 1915. When he presented it to Knauf for payment, the latter refused to pay, and Kramer then learned that Knauf was not financially responsible. Kramer now looks to Edward Hilton as indorser and Jacob Hall as drawer for payment. Have these two a good defense?

Ruling Court Case. Lenox Vs. Cook, Volume 8 Massachusetts Reports, Page 460

Joseph Cutler of Newburypoint, Massachusetts, drew a bill of exchange upon Messrs. Smith & Company, merchants in Liverpool, in favor of Joseph Hooper, payable in sixty days after sight. It was indorsed by the payee, Hooper, to Cook, and by Cook to Lenox. Lenox immediately sent it to Liverpool for acceptance by Messrs. Smith & Company. They refused to accept it; Lenox protested the bill for nonpayment, and notice of dishonor was sent as soon as possible to Cook. Suit was brought against Cook as indorser.

Decision: An indorser upon a bill of exchange or a promissory note is known as a party of secondary liability. He agrees to pay the bill to any subsequent holder who has exercised due diligence in seeking to collect it from the party of primary liability. In this case, when Cook indorsed the bill to Lenox he promised to pay, unless Messrs. Smith did pay, if Lenox exercised due diligence. The evidence showed that he exercised due diligence and he is entitled to sue Cook immediately.

By the court it was said:

"When one draws a bill of exchange, he thereby engages that the drawee shall accept the bill when presented for acceptance, as well as that the drawee shall pay it, when duly presented for payment at its maturity. When acceptance is refused by the drawee, a right of action accrues to the holder after due notice. When acceptance has been refused, he is not bound to wait and demand payment at the time the bill falls due, nor to protest the non-payment, nor to retain the bill for that purpose; but he may bring his action against all parties liable, immediately upon the refusal of the drawee to accept." Judgment was given for Lenox.

Ruling Law. Story Case Answer

A party of secondary liability is one who engages or promises to pay the instrument, in case the party of primary liability fails. His liability is not absolute, but is conditional. He promises to pay, if due diligence is used or exercised in attempting to procure payment from the party of primary liability. If the holder does not satisfy this condition of due diligence, the party of secondary liability is discharged. WTiat constitutes due diligence will be considered more in detail hereafter. In the Story Case, Kramer did not use due diligence in presenting the bill when it was due, and, therefore, he cannot now hold Hilton and Hall, parties secondarily liable.