This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
The time at which notice must be given to the holder, in order to be operative, depends on the time at which the holder has paid value for the instrument, in whole or in part.1 One who holds a note as collateral before notice and buys it after notice,2 or who has made some advances before notice and other advances after notice,3 does not take as a bona fide holder as to what he pays after notice. One who has paid for a negotiable instrument by giving his own negotiable instrument, which has been transferred to a bona fide holder, takes for value.4 If, however, he has paid his own note to his original payee after notice of defects in the indorsed note, he does not hold the latter note for value.5
This rule has been carried into the Negotiable Instruments Law, which provides: "Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount theretofore paid by him."6Such a statute is intended to protect the maker only, and not the payee by whom it has been acquired by fraud.7