Putnam's Handy Law Book for the Layman

Negotiable Paper. - By negotiable paper is meant paper that can be sold and transferred. The law on this subject is now regulated by a statute that is nearly uniform in almost all the states of the Union. The courts are constantly applying it, and in doing so are putting their meaning or interpretation on the words of the statute. Thus far they have looked with quite similar eyes, and no serious differences have arisen.

The statute declares that a promissory note must be in writing and signed by the maker or drawer; that it must contain an unconditional promise or order to pay a certain sum of money on demand, or at a fixed future time to order or to bearer. And if the note is addressed to a drawee he must be named or indicated with reasonable certainty. A note may be written payable with interest or by stated installments, or with exchange, or with costs of collection, or an attorney's fee in case payment shall not be made at maturity.

[184]An unqualified order or promise to pay is unconditional within the meaning of the law even though it indicates a particular fund from which it is to be paid, or a statement of the transaction on which the note is based. Thus the indorsement of the words "per contract" on the back of a note written at the time of its execution does not affect its negotiability.

A note payable at a fixed future time may be at a fixed period after date or sight, or on or before a fixed future time specified therein, or on or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. A note that is payable on a contingency is not negotiable, and the happening of the event does not cure the defect. Likewise a note which contains an order or promise to do any act in addition to the payment of money is not negotiable. To this rule, though, are some exceptions. Thus a note may be negotiable that authorizes the sale of collateral securities that have been delivered to the holder if the note is not paid at maturity. But a note stating that the title to property for which it is given shall remain in the payee, and that he shall have the right to declare the money due and take possession of the property whenever he may deem himself insecure "even before the maturity of the note," is not negotiable.

Again, the validity and negotiable character of a note is not affected by the fact that it is not dated, or does not specify the value given or the place where it is drawn, or the place where it is payable, or bears a seal, or designates a particular kind of current money in which payment is to be made. Furthermore, a note is payable on demand when it is thus stated, or is payable at sight or on [185]presentation. Also an overdue note accepted or indorsed is regarded as payable on demand, so far as the maker is concerned.

A note may be drawn payable to the order of a specified person, or to him or his order, or it may be drawn payable to the order of a payee who is not the maker, drawer or drawee, or it may be drawn payable to the order of the drawer or maker, or to the drawee, or to two or more payees jointly, or to one or some of several payees, or to the holder of an office for the time being.

Again, a note is payable to the bearer when it is thus expressed, or to a person named therein or bearer, or when it is payable to the order of a fictitious or non-existing person, and the fact is known to the person making it so payable, or when the name of the payee does not purport to be the name of any person, or when the only or last indorsement is an indorsement in blank. On one occasion funds were deposited in a bank in the name of a federal disbursing agent under treasury regulations that "any check drawn by a disbursing office upon moneys thus deposited must be in favor of the party by name to whom payment is to be made and payable to order." The disbursing officer fraudulently drew checks payable to fictitious payees and cashed them under forged indorsements of the fictitious payees' name. The court held that the checks were not payable to bearer and that the bank was not protected in paying them.

A note is not invalid for the reason only that it is ante dated or post dated, provided this is not done for an illegal or fraudulent purpose. The person to whom it is delivered acquires the title from the date of delivery. If a note expressed to be payable at a fixed period after the date is issued undated, or [186]the acceptance of such a note is ante dated, the holder may insert the true date of issue or acceptance. Nor does the insertion of the wrong date avoid the note in the hands of a regular subsequent holder. More generally, when a note is wanting in any particular material, the holder or possessor has the authority to complete it by filling up the blanks. This authority extends to every incomplete feature of the note and may be used for inserting the date, amount, name of the payee, and time and place of payment. When authority is conferred on another to fill blanks it must be strictly followed. If a note is drawn payable with interest at the rate of __ per cent, it draws interest at the legal rate, although the blank is not filled. The presumption that a note was completed before it was signed and not afterwards does not arise in a note written in several inks and by different hands. And the purchaser of a note with an unfilled blank is put on inquiry respecting the authority of a person entrusted with an incomplete note. Thus A signed blank forms of notes and left them with his attorney, but with no authority to complete and issue them until instructed. The attorney filled them up without further instructions and issued them to a person who knew they had been signed, that the attorney had a Power of Attorney to act for A, but did not attempt to read or otherwise ascertain its terms. A was not prevented from denying the validity of the notes. In another case a person who signed a number of notes in blank as to date, payee and amount, and left them in his desk in his office, whence they were stolen, filled in and indorsed to B for value before maturity and without notice of any defects, was nevertheless not liable on them. When therefore an incomplete instrument has not [187]been delivered it cannot be completed and negotiated without authority, and if it is, it is not a valid contract in the hands of any holder as against the person whose signature was placed thereon before delivery.

Every contract on a negotiable note is incomplete and revocable until its delivery. As between the immediate parties, and also a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by the authority of the party making, drawing, accepting or indorsing as the case may be. The delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property of the note. But where the note is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him is conclusively presumed.

When the language of a note is ambiguous the following rules of construction are applied: (a) if there is a discrepancy between the words and figures in expressing the amount, the words control, if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount; (b) if the note provides for paying interest without specifying the date from which it is to run, the interest runs from the date of the note, if this is undated, from the issue of it; (c) if not dated a note will be considered as dated from the time of issue; (d) if there is a conflict between the written and printed provisions, the former will prevail; (e) if it is doubtful whether the instrument is a bill or note, the holder may elect which it shall be; (f) it is not clear in what capacity the person making the note intended to sign he is to be deemed an indorser; (g) when a note containing the words "I promise to [188]pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

The signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose, and the authority of the agent may be established as in other cases of agency. If, however, one signs as agent without disclosing his principal, he is personally liable. Thus, a husband signed a note in his own name without adding more. As he had disclosed no principal, he was personally bound, and his wife, for whom he claimed to have signed the note, was not liable. The maker of a note added to his signature, "Pastor of St. Frances' church." This was regarded as his personal note, all besides his name were words merely of description. A person signed a note thus: "Estate of William R. Clark by William R. Clark, Jr., Trustee." As he was not authorized to borrow on behalf of the trust and give a note as trustee, he was individually liable notwithstanding the form of the note.

Where the signature is forged or made without the authority of the person whose signature it purports to be it is wholly inoperative. Thus A cashed a number of drafts and checks payable to B's order on a forged indorsement of B's name by B's bookkeeper, who appropriated the money to his own use. Nevertheless, B recovered the amount of the drafts and checks from A, nor was his negligence in not examining the bookkeeper's books or accounts a good defense. In another case before a note was delivered to and accepted by the payee, A, whose name appeared on the back, was shown the note who said, "Everything is all right." Afterward he resisted payment on the ground of forgery. As the payee was induced to take the note on A's [189]statement of its genuineness, he could not escape payment.

Every negotiable note is deemed to have been issued for a valuable consideration, and every person, whose signature appears thereon, to have become a party for the value. An accommodation party is one who has signed the note as maker, drawee, acceptor or indorser without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the note to a holder for value, though the latter knew he was only an accommodation party.

What is meant by negotiating a note? By transferring it in a way whereby the transferee becomes the holder or owner. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by indorsement and delivery. An indorsement may be either special or in blank; and it may also be either restrictive, or qualified, or conditional. A special indorsement specifies the person to whom, or to whose order the note is payable. An indorsement in blank specifies no indorsee, and a note thus indorsed is payable to bearer and may be negotiated by delivery. The holder may convert a blank indorsement into a special one by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. By a qualified indorsement the indorser becomes a mere assignor of the note, and is made so by adding to his signature the words "without recourse," or others of similar import. Such an indorsement does not impair the negotiable character of the note. When a note is payable to the order of two or more payees or indorsers who are not partners, all must indorse unless the one indorsing has authority to [190]indorse for the others. Again, where a note is drawn or indorsed to a person as cashier or other fiscal officer of a bank or corporation of which he is the officer, it may be negotiated by either the indorsement of the bank or corporation or by the indorsement of the officer. And where the name of a payee or indorser is wrongly designated or misspelled he may indorse the note as therein described, adding, if he thinks fit, his proper signature. The holder may at any time strike out any indorsement which is not necessary to the title. When this is done, he and all subsequent indorsers are thereby relieved from liability on the note.

The holder of a negotiable note may sue thereon in his own name; and payment to him in due course discharges it. Who is a holder in due course? One who holds a note on the following conditions: (a) that it is complete and regular on its face; (b) that he became the holder before it was overdue and without notice that it had been dishonored; (c) that he took it in good faith and for value; (d) that at the time of its negotiation to him he had no notice of any infirmity in the note or defect in the title of the person negotiating it. A note therefore, providing that any delinquency in the payment of interest "shall cause the whole note to immediately become due and collectable" is made overdue by the maker's failure to pay the interest when due, and a subsequent taker cannot be a holder in due course.

To constitute notice of an infirmity in a note or defect in the title of the person negotiating it, the person to whom it is negotiated must have had such actual knowledge of the infirmity or defect that his action in taking the note amounted to bad faith, but merely suspicious circumstances are not enough to put a prudent man on inquiry.

[191]On the other hand if the purchaser does suspect and fails to investigate, lest a defense be disclosed to the maker of the note, he is not a purchaser in good faith. The maker of a note engages that he will pay it according to its terms and admits the signature of the payee and his capacity to indorse, and engages that on due presentation the draft will be accepted or paid or both, according to its terms, and that if it is dishonored, and the needful proceedings in consequence are taken, he will pay the amount. A person placing his signature on a note otherwise than as maker, drawer or acceptor is deemed to be an indorser unless he clearly indicates his intention to be bound in some other way. The Negotiable Instruments Act fixes the liability of a person who is not a party to a note, and who indorses it before delivery. The law was in great confusion before this act established a definite rule. Such a person is now liable as indorser in accordance with the following rules: (a) if the note is payable to the order of a third person, he is liable to the payee and to all subsequent parties; (b) if payable to the order of the maker or drawer, or if payable to bearer he is liable to all parties subsequent to the maker or drawer; (c) if he signs for the accommodation of the payee he is liable to all parties subsequent to the payee.

Presentment for payment is not necessary in order to charge the person primarily liable on a note, but if it is payable at a mentioned place and he is able and willing to pay it there at maturity, such action is equivalent to a tender of payment on his part. Presentment for payment, of course, is needful to charge the drawee and indorsers. When the note is not payable on demand, presentment must be made on the day it falls due. When it is [192]payable on demand, presentment must be made within a reasonable time after its issue. This rule does not apply to all bills of exchange. Thus unreasonable delay in presenting a check will discharge the indorser whether such delay is a cause of loss to him or not. Likewise a certificate of deposit payable on demand must be presented for payment within a reasonable time after its issue in order to hold the indorser. "The usage of trade or business includes the usage of banks relating to presentment of checks for payment. It is sufficient diligence to charge an indorser if a check on the bank in another place is forwarded through various banks for collection in accordance with the regular usage of the business, although presentment might have been more promptly made if a more direct course had been taken." Presentment for payment must be made by the holder or by some person authorized by him to receive payment, at a reasonable hour on a business day and at a defined place, and to the person primarily liable thereon. And if he is absent or inaccessible then to any person who is at the place where presentment is made. If a note is payable at a bank the payor has until the close of banking hours to pay it, and if, before the close of the bank day, he deposits money enough to pay it a demand earlier in the day is premature. Delay for presenting a note for payment is excused where the delay is caused by circumstances beyond the holder's control, and he is in no way negligent. Nor need presentment for payment be made when after using reasonable diligence it cannot be made, or where the drawee of a bill is a fictitious person, and lastly where presentment, express or implied, has been waived.

Every negotiable note is payable at the time [193]fixed therein. When the day of maturity falls on Sunday or a holiday, the note is payable on the next succeeding business day. Notes falling due on Saturday are to be presented for payment on the next succeeding business day, except that notes payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday.

When the note is payable at a fixed period after the date, after sight, or after the happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run, and includes the date of payment. And where a note is made payable at a bank it is equivalent to an order to the bank to pay it for the account of the principal debtor thereon. In accordance with the notation on the margin of a note the holder sent it for collection to a bank which held, as a special deposit, the maker's money. The cashier at maturity notified the maker who directed the cashier to pay the note. The cashier said "All right, your note is paid." The note was regarded as paid.

When a negotiable note has been dishonored by non-acceptance or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to whom such notice is not given is discharged. A written notice need not be signed and an insufficient notice may be supplemented by verbal communication. Nor does misdescription of the note vitiate the notice unless the party to whom the notice is given is in fact misled thereby. The notice may be in writing or merely oral, and may be given in any terms which sufficiently identify the note and indicate that it [194]has been dishonored by non-acceptance or non-payment. It may be delivered personally or through the mails. Where the parties to be notified are partners, notice to any one of them is notice to all even though there has been a dissolution. But notice to joint parties who are not partners must be given to each of them, unless one of them has authority to receive the notice for the others.

When the person giving, and the person who is to receive notice reside in the same place, it must be given within the following times: (a) if given at the place of business of the person who is to receive notice this must be done before the close of the business hours on the day; (b) if given at his residence it must be given before the usual hours of rest on the day following; (c) if sent by mail it must be deposited in the post office in time to reach him in usual course on the day following. If the parties reside in different places the notice must be sent within the following times: (a) if sent by mail it must be deposited in the post office in time to go by mail the day following the day of dishonor, or if there be no mail at a convenient hour on that day by the next mail thereafter; (b) if given otherwise than through the post office then within the time notice would have been received in due course of mail if it had been deposited in the post office had it been deposited in the post office as above described.

If a party had added an address to his signature the notice must be sent to that address, if he has not, then the notice must be sent as follows: (a) either to the post office nearest to his place of residence or to the post office where he is accustomed to receive his letters, or if he lives in one place and has his place of business in another, notice may be [195]sent to either place, or if sojourning in another place, the notice may be sent there. In any event if he receives the notice within the time specified, it will satisfy the law.

Of course notice may be waived; sometimes, also, it is quite impossible to give notice; whenever this happens the law does not require notice to be given.

Something should be added concerning alterations that are made occasionally in negotiable instruments. Any alteration which changes the date, the sum payable either of principal or interest, the time or place of payment, the number or the relations of the parties, the medium or currency in which payment is to be made, or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect is a material one and ought not to be made. To add the words "with interest," with or without a fixed rate, is a material alteration. But the insertion by the payee of the words "interest" after the making of a note by authority of maker will not vitiate it. And if a note had the clause, "interest at __ per cent," the insertion of the legal rate would not be a material alteration since the legal import would not be changed.

The position of a writing on a note is not important, for the effect of the contract is to be gathered from the four corners of the paper. The general rule is, if a memorandum written on an instrument in the margin or at the foot is made before or at the time of its execution, it is considered a part thereof, and if it affects the operation of the terms of the body of the instrument it is a material part. It follows that words written by a party on the margin of an instrument after its execution and delivery, [196]constitute an alteration if intended to affect the terms of the instrument and would have such effect if they were there when the instrument was executed.

A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time a certain sum of money to order or bearer. A bill of itself does not operate as an assignment of the funds in the hands of the drawee available for its payment, nor is the drawee liable on a bill until he accepts or agrees to pay it. An inland bill is one drawn and payable within a state. Any other is a foreign bill.

An indorsed promissory note and an accepted bill are very much the same thing, and that is why the law always treats of both together. The maker of a note incurs the same obligations as the acceptor of a bill, both are the parties primarily liable thereon, and the indorser of a note and the drawer of a note are both secondarily liable on proper notification of the failure of the primary parties to pay, as we have learned. The payees in both cases are the same. The acceptance of a bill is the signifying by the drawee that he has assented to the drawer's order, and must be in writing. An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who on the faith thereof receives the bill for value. The drawee is allowed twenty-four hours after presentment to decide whether or not he will accept the bill; but the acceptance, if given, dates from the day of presentation. Furthermore, an acceptance may be qualified as to time, acceptance of payment in part only and in other ways. [197]When a foreign bill is not accepted it must be protested, which must specify the time and place of presentment, and other particulars, and is usually made by a notary public, though this can be done by other persons.

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