Story Case

In order to prevent action by his creditors at a time when he was temporarily unable to meet his bills, Martin Graves found it necessary to apply to his friend, John Bartlett, for assistance. Bartlett consented to indorse a note made by Graves, payable to one of his creditors, the Minnising Lumber Company, and this note was given to the lumber company upon account. It was transferred by the Minnising Lumber Company to another corporation which bought out all the business of the Minnising Lumber Company. The purchasing company, the Big Stream Company, brought suit upon the note against Bartlett, the accommodation indorser. Bartlett claimed that he should not be held liable until suit had been first brought against Graves, the maker, since it was apparent from the form of the note that it had never been held by Bartlett, but that his indorsement was merely put on to give value to the note. Is the Big Stream Company entitled to recover in spite of this fact?

Ruling Court Case. Grocers' Bank Vs. Penfield, Volume 69 New York Reports, Page 502

Penfield, the defendant in this case, made and executed two notes to one Truax, for the latter's accommodation. That is, they were drawn to Truax, but he gave no consideration for them. Truax transferred them to the Grocers' Bank as security for a precedent debt. Truax did not pay the precedent debt, and the bank brought suit upon the two notes against Penfield. the accommodation maker.

His defense consisted in the fact that, since these were only accommodation notes, they could not be enforced by the bank, because it was not a bona fide purchaser, not having paid value for them.

Decision: As between the accommodating party and the party accommodated, such a note cannot be enforced, but any transferee of the party accommodated may enforce. In this case, Truax could never have enforced the notes against Penfield, but the bank, who now has the notes, may enforce them, even though it paid no value, other than the pre-existing debt.

Mr. Justice Rapallo said in part: "Whatever confusion may have existed upon this point, we think that we may safely say, in the language of Professor Parsons, that it is universally conceded that the holder of an accommodation note, without restrictions as to the mode of using it, may transfer it either in payment, or as collateral security for an antecedent debt, and the maker will have no defense." Judgment was given for the Grocers' Bank.

Ruling Law. Story Case Answer

In the words of the Negotiable Instruments Law, which is a codification of the Law Merchant, "an accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person." As between the accommodation party and the party accommodated, the liability of the accommodation party is secondary; that is, he agrees to pay the instrument, in case the accommodated party does not. The accommodation party is liable upon such instrument to a holder for value, notwithstanding such holder at the time of taking the instrument Joiew him to be only an accommodation party. But, in case the accommodation party is compelled to pay, he has an action to recover that amount from the accommodated party.

Bartlett is an accommodation indorser. Since he is not the payee, yet has indorsed before it was issued apparent that he signed the note before it was issued by the maker and that he was never a holder of it. He is, therefore, also an "anomalous indorser," and it is a matter of business practice that an anomalous indorsement is generally given as an accommodation to the maker or to the payee, to enable him to discount the note. But because it is put there for that purpose, it must impose a liability. If the indorser were not liable, his name would not add credit to the paper. The first taker and all others have an action against the anomalous indorser; therefore, the Big Stream Company should have judgment against Bartlett.