Negotiable Instruments

In the case of negotiable instruments we have to consider not only the effect of the illegality as between the original parties, but the effect upon subsequent holders of the instrument. A negotiable instrument given upon an illegal transaction is like any other simple contract as between the immediate parties, and cannot be enforced unless it has passed into the hands of a bona fide purchaser for value.28 Whether it can be enforced in the latter event will depend on the circumstances. The position of such a purchaser may be shortly stated as follows:

(1) If the transaction in which the instrument was given was not illegal, but merely void, so that the instrument is based, not on an illegal consideration, but on no consideration at all, it may be enforced by one who purchased the same for value before maturity, and without notice of the want of consideration. In such a case it is to be presumed, prima facie, that the holder paid value, and had no notice of want of consideration.80

26 Fitch v. Jones, 5 El. & Bl. 245. See, also, Thacker v. Hardy, 4 Q. B. Div. 685. Bee "Contracts," Dec. Dig. (Key-No.) § 136; Cent. Dig. §§ 681-100.

27 Embrey v. Jemison, 131 U. S. 336, 9 Sup. Ct. 776, 33 L. Ed. 172; Harvey v. Merrill, 150 Mass. 1, 22 N. E. 49, 5 L. R. A. 200, 15 Am. St. Rep. 159; Mohr v. Miesen, 47 Minn. 228, 49 N. W. 862; ante, p. 346. Bee "Contracts," Dec. Dig. (Key-No.) § 136; Cent. Dig. §§ 6S1-700.

28 Benson v. Bawden, 149 Mich. 584, 113 N. W. 20, 13 L. R. A. (N. S.) 721. Bee "Contracts," Dec. Dig. (Key-No.) § 138; Cent. Dig. §§ 681-700.

29 Embrey v. Jemison, 131 U. S. 336, 9 Sup. Ct. 776, 33 L. Ed. 172. See "Bills and Notes," Dec. Dig. (Key-No.) § 375; Cent. Dig. §§ 971-981; "Gaming," Cent. Dig. § 44.

30 Norton, Bills & N. (3d Ed.) 327, 332; Mechanics & Traders' Nat. Bank v. Crow, 60 N. Y. 85; Harger v. Worrall, 69 N. Y. 370, 25 Am. Rep. 206; Little v. Mills, 98 Mich. 423, 57 N. W. 266. See "Bills and Notes," Dec. Dig. (Key-No.) § 575; Cent. Dig. §§ 911-981.

(2) If the transaction in which the instrument was given was illegal, unless the illegality is by force of a statute which renders the instrument absolutely void, a bona fide holder for value may enforce it. "If the legislature has declared that the illegality of the contract or consideration shall make the note void, the defendant may set up that defense, though the note be in the hands of a bona fide holder;31 but unless it has been so expressly declared by the legislature, illegality of consideration will be no defense against a bona fide holder, without notice, and for sufficient consideration, unless he obtained the note after it became due." 32 In such a case, however, the ordinary presumption in favor of the holder does not exist. Upon proof of the illegality which tainted the instrument in its inception, the holder must show that he paid value for the instrument; and even then, if it is shown that he knew of the illegality, he cannot recover.33 Most courts even hold that the burden is on the holder to show that he had no notice of the illegality.84

31 City of Aurora v. West, 22 Ind. 88, 85 Am. Dec. 413; Lagonda Nat. Bank v. Portner, 46 Ohio St. 3S1, 21 N. E. 634; Meadow v. Bird, 22 Ga. 246; linger v. Boas, 13 Pa. 601; Snoddy v. Bank, 88 Tenn. 573, 13 S. W. 127, 7 L. R. A. 705, 17 Am. St Rep. 918; Harper v. Young, 112 Pa. 419. 3 Atl. 670; Emerson v. Townsend, 73 Md. 224, 20 Atl. 984; Lucas v. Waul, 12 Smedes & M. (Miss.) 157; Faris v. King, 1 Stew. (Ala.) 255; Traders' Bank v. Alsop, 64 Iowa, 97, 19 N. W. 863. See "Bills and Notes," Dec. Dig. (Key-No.) §§ 373, 875; Cent. Dig. §§ 966-081.

32Vallett v. Parker, 6 Wend. (N. T.) 615; Town of Eagle v. Kohn, 84 I11. 292; Sondheim v. Gilbert, 117 Ind. 71, 18 N. E. 687, 5 L. R. A. 432. 10 Am. St. Rep. 23; Glenn v. Bank, 70 N. C. 191; Fuller v. Green, 64 Wis. 159, 24 N. W. 907, 54 Am. Rep. 600; Bayley v. Taber, 5 Mass. 286, 4 Am. Dec. 57; Root v. Merriam (C. C.) 27 Fed. 9C9; Crawford v. Spencer, 92 Mo. 498, 4 S. W. 713, 1 Am. St. Rep. 745; Shaw v. Clark, 49 Mich. 384, 13 N. W. 786, 43 Am. Rep. 474; Thome v. Yontz, 4 Cal. 321; Meadow v. Bird, 22 Ga. 246; Johnston v. Dickson, 1 Blackf. (Ind.) 256; Rockwell v. Charles, 2 Hill (N. Y.) 499; Knox v. White, 20 La. Ann. 326; Gordon v. Levine, 197 Mass. 263, 83 N. E. 861, 15 L. R, A. (N. S.) 243, 125 Am. St Rep. 361. But see Cunningham v. Bank, 71 Ga. 400, 51 Am. Rep. 266. See "Bills and Notes," Dec. Dig. (Key-No.) §§ 373, 375; Cent. Dig. §§ 966-981.

33Note 31, supra.

34 Norton, Bills & N. (3d Ed.) 333; Canajoharie Nat Bank v. Diefendorf, 123 N. Y. 191, 25 N. E. 402, 10 L. R. A. 676; Vosburgh v. Diefendorf, 119 N. Y. 357, 23 N. E. 801, 16 Am. St. Rep. 836; McDonald v. Aufdengarten, 41 Neb. 40, 59 N. W. 762; State Nat Bank v. Bennett, 8 Ind. App. 679, 36 N. E. 551 See "Contracts," Deo. Dig. (Key-No.) § 141; Cent. Dig. § 1760.