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.
If A buys a note from B, and gives to B A's own note therefor, A is holder for value of the note transferred by B,1 even if B was the agent of the real owner of the note without authority to sell, if A did not know this and if A's note is in the hands of a bona fide holder.2
If a bank gives its certificate of deposit for a negotiable instrument, and such certificate is transferred to a bona fide holder,3 or is paid by the bank after it is transferred to such bona fide holder,4 the bank is a bona fide holder of the negotiable instrument for which such certificate of deposit was given. If the bank has not paid its certificate of deposit and such certificate is not transferred to a bona fide holder,,it is said that the bank is not a holder for value of the negotiable instrument for which such certificate was given.5It has, however, been said without reference to negotiation or payment of the certificate of deposit, that a bank which gives an interest-bearing certificate of deposit, which is due in a specified time, becomes a holder for value of the negotiable instrument for which such certificate of deposit was given.6
If A has given his check to B in exchange for an instrument which is payable to B, A becomes a bona fide holder,7 even though A could stop payment upon his check after he learns of defects in the check which B transferred to A.8 One who has accepted a check in good faith as payee may enforce payment against the maker, even though such payee has on hand a deposit belonging to an indorser of such check exceeding the amount of such check.9 The payee is not bound to apply such deposit to the payment of the check for the protection of the maker even though it learns.
5 Kelso v. Ellis, 224 N. Y. 528, 121 N. E. 364.
1 Simmons v. Hodges, 250 Fed. 424.
2 Wilson v. Denton, 82 Tex. 531, 27 Am. St. Rep. 908, 18 S. W. 620.
3 Elmore County Bank v. Avant, 189 Ala. 418, 66 So. 509; White v. Wad-hams, - Mich. - , 170 N. W. 60.
4 Elmore County Bank v. Avant, 189 Ala. 418. 66 So. 509.
5 Armstrong v. Walker, - Ala. - , 76 So. 280.
6 Neill v. Central National Bank, - Ala. - , 78 So. 73.
7 Matlock v. Scheuerman, 51 Or. 49, 17 L. R. A. (N.S.) 747, 93 Pac. 823; Miller v. Marks, 46 Utah 257, 148 Pac. 412.
8 Matlock v. Scheuerman. 51 Or. 49, 17 L. R. A. (N.S.) 747. 93 Pac. 823; Miller v. Marks, 46 Utah 257, 148 Pac. 412.
9 Camas Prairie State Bank v. New man, 15 Ida. 719, 21 L. R. A. (N.S.), 703. 99 Pac. 833.
after it has advanced money on such check, that the check was given to enable the maker to borrow money with which to pay a gambling debt to such indorser.10 One who has taken a check in good faith and for value is not bound to enforce such check against the indorser in order to protect the maker,11 even if he discovers that such check was given in payment of a gambling debt.12