Sec 954

It is competent for the parties to agree that a negotiable security given by the debtor to the creditor should be held by the creditor merely as collateral security.1 It has been held, also, that a note payable on demand, as long as it remains in the creditor's hands, is to be regarded only as a collateral security, until it is proved that it was taken in satisfaction.2

Negotiable security may be taken as a mere collateral.

1 Benj. on Sales, 3d Am. ed. sec 737; Pring V. Clarkson, 1 B. & C. 14; Peacock V. Pursell, 14 C. B. N. S. 728; Welch V. Allington, 23 Cal. 322; Brown V. Olmsted, 50 Cal. 162. As to extinction of old debt by merger, see supra, sec 860.

2 Leake, 2d ed. 892; citing Fearn V. Cochrane, 4 C. B. 274.

Whether a negotiable security was given in satisfaction of a debt or only as collateral security depends upon the construction of the agreement between the parties. Benj. on Sales, 3d Am. ed. sec 729. "The debt may be considered as actually paid, if the creditor, at the time of receiving the note, has agreed to take it in payment of the debt, and to take upon himself the risk of the note being paid, or if, from the conduct of the creditor or the special circumstances of the case, such an agreement is legally to be implied. But, in the absence of any special circumstances throwing the risk of the note upon the creditor, his receiving the note in lieu of present payment of the debt is no more than giving an extended credit, or giving time for payment on a future day, in consideration of receiving this species of security. Whilst the time runs payment cannot legally be enforced, but the debt continues till payment is actually made; and, if payment be not made when the time has run out, payment of the debt may be enforced as if the note had not been given." Langdale, M. R., in Sayer V. Wagstaff, 5 BeaV. 423; and see Maillard V. Argyle, 6 M. & G. 40, Bottomley V. Nuttall, 5 C. B. N. S. 122, to same effect. See further infra, sec 956.

In Maine, "the acceptance of negotiable paper for a debt, and giving a receipt in discharge thereof, are an extinguishment of the original liability, unless the parties did not so intend." Crosby V. Redman, 70 Me. 56; Mehan V. Thompson, 71 Me. 501.

In Massachusetts, the rule "that a negotiable promissory note, given for a simple contract debt, shall be deemed a payment, is to be taken with considerable qualification..This is a presumption of fact, which may be rebutted by evidence that it was not so intended; and the fact that such a presumption would deprive the party who takes the note of a substantial benefit has a strong tendency to show that it was not so intended." Curtis V. Hubbard, 9 Met. 328. " It is well settled in this commonwealth that the law will presume that the giving of a promissory note for a simple contract debt is payment of the debt; but this is not a conclusive presumption, bat may be rebutted and controlled by proof. And in many cases it has been decided that if the debt is a note secured by mortgage, the renewal of the note, or the substitution of another note therefor, is not necessarily to be presumed a payment, so as to discharge the mortgage." Endicott, J., Dodge V. Emerson, 131 Mass. 467; citing Taft V. Boyd, 13 Allen, 84, and ditional payment; and if he neglect to present, or to give notice of dishonor to the buyer, the buyer will be discharged from liability on the bill, and the laches will operate so as to constitute the bill absolute payment for its amount."1 But, as we will see more fully, if a debtor's own immature note is taken on account of a debt, the ordinary inference is that the debt is not extinguished, but only suspended until the maturity of the note, when the creditor may elect to revert to the original debt. The note is not to be regarded as payment, unless by agreement of the parties it comes in by way of novation as a substitute for the old debt.1 And a fortiori, a promissory note not payable at a bank and not governed by law merchant will not operate as payment, in absence of agreement to that effect.2

When the paper is held merely as collateral security, the vendor's duty "is the same as if the bill had been given in concases there cited. See Melledge V. Boston Iron Co., 5 Cush. 158; Curtis V. Hubbard, 9 Metc. 327; Parham Sewing Machine Co. V. Brock, 113 Mass. 194. There is no presumption of payment where the note given is that of an agent to an undisclosed principal. Lovell V. Williams, 125 Mass. 439; and see infra, sec 956.

The rule in New Jersey and New York, differing widely from the above, is thus stated by Van Fleet, V.-C, in Wildrick V. Swain, 34 N. J. Eq. 170: "The proposition is quite elementary that the acceptance of the promissory note of a debtor, for a precedent debt, will not operate as a discharge or satisfaction of the debt, unless it is agreed that such shall be its effect. In Schanck V. Arrowsmith, 1 Stock. 323, Chancellor Williamson declared that the principle was firmly established that the taking of an additional or other security, of inferior or equal degree, would not ipso facto discharge a lien which attached by reason of an original security. He further said: 'If the original security is actually cancelled, or the lien created by it formally released, of course no resort can be had to it. It is always a question of intention, sometimes to be ascertained by the legal construction of written instruments, and sometimes by the circumstances of the case.' The New York adjudications go one step further in protecting the right of the creditor to his original cause of action. It is there held that the acceptance by a creditor of a new promise from his debtor to pay a preexisting debt affords no defence whatever to a suit on the original cause of action, even if the creditor expressly agrees that the new promise shall operate as a satisfaction of the old. And the reason assigned for refusing to give legal efficacy to the promise of the creditor is, that it has no consideration to support it, being a mere nudum pactum. Frisbie V. Larned, 21 Wend. 452; Cole V. Sackett, 1 Hill, 516; Waydell V. Luer, 5 ib. 448; S. C. on error, 3 Den. 410; Rice V. Dewey, 54 Barb. 455." And see Putnam V. Lewis, 8 Johns. 389; Conkling V. King, 10 Barb. 372; and discussion in Smith's L. C. 7th Am. ed. 620 et seq.

In Pennsylvania the rule was thus stated in 1881, by Mercur, J. (Hunter V. Moul, 12 Rep. 605): "The mere acceptance from a debtor of his own note, or the note of a third person, in case of an antecedent indebtedness, is not a payment of the indebtedness. In the absence of a special agreement, it must be considered as a conditional payment, or as collateral security. The debtor continues liable for his own debt in the event of a failure of payment of the note thus given or transferred. Leas V. James, 10 S. & R. 307; M'Ginn V. Holmes, 2 Watts,' 121; Weakly V. Bell, 9 ib. 273; Mclntyre V. Kennedy, 5 Casey, 448; Brown V. Scott, 1 P. F. S. 357; League V. Waring & Co., 4 Norris, 244.

"When the transfer of a note is a conditional payment, it is necessary to inquire what the true condition was, and, if not fulfilled by the person accepting it, what injury, if any, has resulted from the breach. The cases are not in harmony as to the effect of a failure to present the note of a third person and give notice of its dishonor, when no injury therefrom has resulted to the debtor. We shall not attempt to review them. Great regard must be had to the character of the transaction.

If the debtor indorse the note, a more stringent rule prevails as to notice than if he transferred it by delivery only. When the guaranty is absolute that a specific act shall be done by another, it was said in Vinal V. Richardson, 13 Allen, 521, demand and notice need not be averred, although the want of them may be a defence on the ground of negligence to the extent of the resulting injury. One who has merely guarantied it, but whose name is not on the bill or note, is not in general entitled to notice of non-payments. Chitty on Bills, 498. If the bill or note be given as collateral security, and the party delivering it were no party to it, either by indorsing or transferring by delivery when payable to bearer, but merely caused it to be drawn, indorsed, or delivered by a third party as security, or has merely guarantied the payment, it has been considered that he is not, within the custom of merchants, a party to it so as to be entitled to strict regular notice, nor discharged from his liabilities, by the neglect of the holder to give him such notice, unless he can show by express evidence, or by inference, that he has sustainad loss by omission. Ibid. 441.

"The guarantor of a note does not stand in the same situation as parties to it. His obligation is in the nature of an insurance of the debt, and there is no need of the same proof to charge him as if he were an indorser. The necessity of demand in order to charge the indorser is solely grounded on the custom of merchants, and applies only to actions against the indorser or the bill itself. It does not apply when the guarantor is not an indorser. Gibbs V. Cannon, 9 S. & R. 199; Overton V. Tracey, 14 ib. 311; M'Lughan V. Bo-vard, 4 Watts, 308. The law is clearly stated in 2 Parsons on Notes and Bills, 184, where it is said if paper be transferred by delivery only as security for a pre-existing debt, and it is dishonored while in the hands of the transferee, it affects in no way the debt it was intended to secure. Upon dishonor of the paper it is not necessary to give him notice thereof as an indorser, but the debtor may show in defence any injury he has sustained by the actual laches of the creditor. Nor does the fact that the collaterals were exchanged for other securities, which were ultimately found worthless, change the liability, unless it is further shown that a loss resulted to the owner of the collaterals by reason of such exchange. Girard Ins. Co. V. Marr, 10 Wr. 504." As to rule where negotiable paper is taken in payment of goods, see infra, sec 956.

1 Benj. on Sales, 3d Am. ed. sec 737, citing Peacock V. Pursell, 14 C. B. N. S. 728; Hazard V. Wells, 2 Abb. N. C. 444.