Story Case

Courtney Montgomery gave his nephew a promissory note as a Christmas present. The note was executed as follows:

"$100. December 25, 1914.

I, Courtney Montgomery, will pay Harold Montgomery, or his order, one hundred dollars, in thirty days.

(Signed) Courtney Montgomery." Harold signed his name on the back of the instrument and sold it to William Snow for $95. When Snow attempted to collect on the instrument, Montgomery, the uncle, refused to pay, on the ground that it was given without any consideration coming from Harold Montgomery. Is this a good defense?

Ruling Court Case. Merchants' National Bank Vs. Shaw, Volume 101 United States Reports, Page 557

On November 11, 1874, Norvell & Company, of St. Louis, sold to the bank their draft for $11,947,43, drawn upon Kuhn & Brother, of Philadelphia. By way of security Norvell & Company indorsed to the bank an original bill of lading for 170 bales of cotton, which they had shipped Kuhn & Brother, in payment of which the draft had been drawn. On the same day Norvell & Company forwarded to Kuhn & Brother the duplicate bill of lading. The Merchants' National Bank forwarded the draft with the original bill of lading attached, to the Bank of Philadelphia for presentment. When presented, Kuhn & Brother accepted the draft, but stole the original bill of lading and substituted the duplicate. Kuhn & Brother pledged the bill to Miller & Company for a loan. Miller & Company, with consent of Kuhn & Company, sold the cotton to Shaw. Shaw was a bona fide purchaser without notice of the theft by Kuhn & Brother.

This action was brought by the Merchants' National Bank against Shaw for the wrongful taking and conversion of the cotton. Shaw contended that, by virtue of a certain statute which declared that bills of lading were negotiable, he received good title to the cotton.

Decision: Although the statute declares that bills of lading are negotiable by indorsement and delivery, it does not follow that all consequences incident to the indorsement of bills and notes before maturity ensue, or are intended to result from such negotiation. The rule, that a bona fide purchaser of a lost or stolen bill or note, indorsed to him or payable to bearer, is not bound to look beyond the instrument, has no application to the case of a lost or stolen bill of lading. Mr. Justice Strong said: "What is negotiability? It is a technical term derived from the usages of merchants and bankers, in transferring, primarily, bills of exchange and, afterwards, promissory notes. At Common Law, no contract was assignable, so as to give an assignee a right to enforce it by suit in his own name. To this rule, bills of exchange and promissory notes, payable to order or bearer, have been exceptions, made such by adoption of the Law Merchant. They may be transferred by indorsement and delivery, and such a transfer is negotiation. It is a mercantile business transaction, and the capability of being thus transferred, so as to give the indorsee a right to sue on the contract in his own name, is what constitutes one part of negotiability."

The other characteristic of complete negotiability is the right which it gives the transferee of an instrument to enforce its face value, although that right may not have existed in the transferor.

The statute in question gives the transferee of the bill of lading the right to enforce it in his own name, but he takes only that right which his transferor could convey. Therefore, the instrument is only quasi-negotiable - Miller & Company did not take anything from Kuhn & Brother, therefore none was sold to Shaw. Judgment was given to the bank.

Ruling Law. Story Case Answer

The business of the country is done largely by means of commercial paper, and the interest of commerce requires that a bill or note, fair on its face, shall be as easily transferred as a government bond, and as freely as money. Negotiability is the characteristic whereby a bill or note passes from hand to hand like money, so as to give the last taker the right to collect the instrument in the amount which it purports to represent free from defenses which might exist in favor of the obligor as against prior holders. Statutes in some states, as the Ruling Court Case shows, have made bills of lading negotiable to the extent that title to the property a bill represents can be passed by the delivery of the bill. But bills of lading are not usually completely negotiable because the purchaser does not take more property than the vendor had the actual right to sell, which may be less than the face of the bill. In the Story Case, we have an illustration of a good promissory note which Snow acquired free of the defense existing against Harold Montgomery. Snow can collect on the instrument.