Commercial Law Part 16

LIABILITY OF SAFE DEPOSIT COMPANIES UNDER INHERITANCE TAX LAWS.--One case in regard to the Illinois inheritance tax law indicates an imposition of some burden on the safe deposit company. The company is required to notify the Attorney-General ten days before it allows access by the representative of a deceased person to his box, and under certain circ.u.mstances the safe deposit company is required to retain, from the contents of the box, a sufficient amount to pay the tax, and is made liable if it fails to do so. This provision was held const.i.tutional by the Supreme Court of Illinois.

CHAPTER XII

Bills and Notes

HISTORY.--By the term "negotiable paper," we ordinarily mean promissory notes, bills of exchange and checks. The law governing negotiable paper originated among the customs of merchants on the continent of Europe. It was gradually introduced into England, and its principles grudgingly recognized by the common law judges. There is no branch of law where the desirability of uniformity is greater, as these doc.u.ments pa.s.s from hand to hand like money, and travel from one State to another. Naturally, our first serious attempt at uniform legislation was made in this branch of law, and in the year 1896, the Commissioners for Uniform Laws prepared and recommended for pa.s.sage the Uniform Negotiable Instruments Law.

To-day, every State, except Georgia, has pa.s.sed the Act, as well as the District of Columbia, Alaska, Porto Rico and the Philippines. For convenience in this chapter, we shall hereafter refer to this Negotiable Instruments Act as the N. I. L.

FORMS OF NEGOTIABLE INSTRUMENTS.--It is essential to carry in mind the customary form of the negotiable instruments we have just mentioned. A promissory note is defined by the N. I. L. as follows: "A negotiable promissory note within the meaning of this act is an unconditional promise in writing made by one person to another signed by the maker engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer."

[Ill.u.s.tration: SPECIMEN FORM OF PROMISSORY NOTE]

A bill of exchange is defined by the N. I. L. as follows: "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 or determinable future time a sum certain in money to order or to bearer."

A check is defined by N. I. L. as "a bill of exchange drawn on a bank payable on demand."

Other doc.u.ments may be negotiable in form, such as the ordinary bearer corporation bonds, liberty bonds, certificates of stock, and bills of lading. The principles discussed in this chapter would apply, ordinarily, to these doc.u.ments, and are discussed more in detail in the chapters devoted to them which we have already considered.

WHAT IS NEGOTIABILITY?--Negotiability has been defined as that quality whereby a bill, note, or check, pa.s.ses freely from hand to hand like currency. In fact, all of these doc.u.ments are subst.i.tutes for currency, and so far as is practicable, it is desirable that they should pa.s.s as freely as currency. Negotiability applies only to this branch of the law, while a.s.signability applies to ordinary cases of contract law.

[Ill.u.s.tration: SPECIMEN FORM OF DRAFT

Before the words "pay to" the time when the draft is due should be inserted--as "at sight" or "30 days after date"]

[Ill.u.s.tration: SPECIMEN FORM OF CHECK]

ILl.u.s.tRATIONS.--To ill.u.s.trate the difference between the two: Jones worked for the Baltimore & Ohio Railroad Co. He presented his bill of $100 to the proper official, and a check was issued by the railroad payable to the order of Jones for that amount. Jones took the check, indorsed it, and with it paid his grocery bill. The grocery man deposited the check in his bank, and was notified shortly thereafter that payment had been stopped on the check by the Baltimore & Ohio. They claimed a fraud had been committed, that Jones was overpaid $50, and, therefore, they refused to honor the check. The grocery man, having taken this check in the usual course of business, is what we term a "holder in due course." The N.I.L. defines a holder in due course as:

Section 52. "A holder in due course is a holder who has taken the instrument under the following conditions: (1) That it is complete and regular upon its face; (2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (3) That he took it in good faith and for value; (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the t.i.tle of the person negotiating it."

A holder in due course, then, would be ent.i.tled to collect the full $100 from the Baltimore & Ohio. This check is governed by the law of negotiability with the result which we have just indicated. Now change the facts a trifle. Jones presented his bill to the same officer of the Baltimore & Ohio as before. The officer says that checks are made out regularly on the first of the month. It was the fifteenth, and Jones did not feel able to wait until the first of the next month. He went to a friend and told him of his claim against the Baltimore & Ohio, and said: "I will a.s.sign this claim to you for $95, and then you can present the a.s.signment, which I will draw up and sign, to the Baltimore & Ohio on the first of the month, and get the $100." His friend agrees and advances the money. When he presents the written a.s.signment to the proper officer on the first of the month, he is told that the railroad has discovered that Jones' claim was really good for only $50, and that is all they will pay. Although his a.s.signment reads for $100, he can collect only $50. This ill.u.s.tration is governed by the law of a.s.signability, which applies to practically all contracts, apart from commercial paper. Under the rules of a.s.signability, a person can a.s.sign no better claim than he has, or, as is sometimes said, the a.s.signee stands in the shoes of the a.s.signor. Jones really had a claim of only $50 against the Baltimore & Ohio, although he claimed it was $100. He could a.s.sign no more than he really had. These two ill.u.s.trations show the great difference in the result of the application of the two principles, negotiability and a.s.signability.

THE FORMAL REQUIREMENTS OF NEGOTIABLE PAPER.--There are certain formalities which all negotiable paper must have. It must be in writing, and signed by the proper person. No form of writing is specified in the Act, and lead pencil, or even slate pencil, is as good as ink, except that in the two latter cases the ease with which these forms of writing may be altered makes them most undesirable for use. But there is no law requiring the use of ink.

MUST CONTAIN A PROMISE.--Every negotiable instrument must contain words of negotiability. These words are, "to order," "to bearer," "to holder"

or their equivalent. "I promise to pay John Jones, $100," and signed "John Smith," is a promissory note, but not a negotiable promissory note, because it lacks the words to "order" or "bearer," and is a doc.u.ment which would, therefore, pa.s.s by the law of a.s.signability rather than the law of negotiability. In taking negotiable paper, therefore, it is always important to see whether these words are present. If they are not, the holder will lose the peculiar advantage and rights which the holder in due course acquires by the law of negotiability. A promissory note must contain a promise and a bill of exchange must contain an unconditional order. An I.O.U. for $100 signed "John Jones" is not a promissory note, because there is no promise contained in such a doc.u.ment.

UNCONDITIONAL PROMISE.--All negotiable doc.u.ments must be payable without reference to any contingency. A note reads: "I promise to pay to the order of John Jones $100 when I attain my twenty-second birthday" and is signed by John Jones, now twenty-one. That is not a good note because the person may not live to be twenty-two. Even if he lives to become twenty-two the note is still non-negotiable, for when it was made the contingency existed. A bill of exchange, regular in form, but adding the expression, "If the Republicans win the next congressional election,"

is not negotiable. The one exception, as it might appear at first sight, is a negotiable doc.u.ment reading: "I promise to pay to the order of William White six months after death," etc. Such a promise is not contingent. Death will arrive at some time, although it may be uncertain just when. In the other ill.u.s.trations the republicans might not win the congressional election, and the person might not become twenty-two.

Again, all commercial paper must be made payable in money. "I promise to pay to the order of John Jones $100 worth of tobacco," is not negotiable. "I promise to pay to the order of John Jones $100 and fifty pounds of tobacco" is not negotiable. In both cases, the medium of payment is something other than money.

INCEPTION OF THE INSTRUMENT AS AN OBLIGATION.--In our discussion of contracts, we made the statement that a legal intention to make a contract was necessary. The same is true in commercial paper. A man must intend legally to issue a negotiable instrument in order to be liable on one as maker or drawer. Thus, in the case of Walker v. Ebert, 29 Wis.

94, the defendant, a German, unable to read and write English, was induced by the payee to sign an instrument, in the form of a promissory note, relying on the false statement that it was a contract appointing the defendant agent to sell a patent right. It was held that the defendant was not liable. The instrument, though complete in form, was not the defendant's note and the plaintiff acquired nothing by his purchase of the paper.

ILl.u.s.tRATION.--We must contrast this with another situation. Suppose I hand you a paper with a promissory note printed on it, complete in every detail except your signature. I ask you to sign it. You sign the paper, without reading it over or knowing what it is, and give it back to me. I then transfer it to a person who takes it for value, in good faith, etc., or who is, in other words, a holder in due course. The question is, are you liable on such a doc.u.ment? The answer is, "Of course, you are." You may say, "I did not intend to sign a promissory note." The law answers you by saying, "You were careless in signing something which you did not read over, and one is presumed to intend the consequences of his own careless acts." Our German was in a different situation. He was not careless. He could not read English and was obliged to rely upon someone to tell him what the doc.u.ment was, and, granting that he used due care in selecting a responsible person to explain to him the nature of the doc.u.ment, he had done all the law required. Had he been imposed upon, on several previous occasions, by the same person who told him what the doc.u.ment was, and in spite of that, had relied on him to explain this doc.u.ment, then, undoubtedly, the court would have held otherwise and he would have been liable on the ground that he must have intended the consequences of his negligent acts, he being deemed negligent when he trusts a person who had not only misrepresented things to him but had actually defrauded him several times.

DELIVERY.--A note found among the maker's papers, after his death, imposes no obligation either upon him or upon his estate. In other words, in addition to the intentional signing of the doc.u.ment, to complete its validity, there must also have been what we call delivery.

This is a pa.s.sing out of the possession of the maker or drawer, of the doc.u.ment, into the hands of some third party. Delivery may be made in three ways: (1) By intention; (2) By fraud; (3) By negligence.

A VALID DELIVERY NECESSARY.--I hand you my promissory note and you take it. That, of course, is an intentional delivery. You tell me that you have a fine watch which I decide to buy, and I give you my promissory note in payment. Afterwards, upon examining the watch, I find that it is worthless and entirely different from your description. You have secured the note from me in that case by fraud, or there is, as we say, a delivery procured by fraud. I am sitting on a bench in Central Park, and I take out of my pocket a completed promissory note and look at it and place it upon the bench. When I leave I forget it and it stays there until someone comes along and picks it up. That is a delivery by negligence. All these forms of delivery are valid, making the doc.u.ments good, some in the hands of all parties, others in the hands of the holder in due course only. The N. I. L. is so clear upon this matter that reference must be made to sections 15 and 16. For this reason both of these sections are reproduced here in full:

Section 15. "Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery."

Section 16. "Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting or indorsing, as the case may be; and in such case the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved."

DISTINGUISHING FEATURES.--It is very important to distinguish between these two sections. Let us take for ill.u.s.tration the famous case of Baxendale v. Bennett, 3 Q.B.Div. 525. Here the defendant wrote his signature as acceptor on several printed blank forms of bills of exchange and left them in a drawer of his desk. The blanks were stolen, filled out, and negotiated to the plaintiff, an innocent purchaser. It was held that the plaintiff could not recover. The reason for this decision is that the doc.u.ment was incomplete and as the Act says: "Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery." On the other hand, if I leave in my safe, checks which I have signed and made out in full and they are payable to bearer, although a thief breaks in and steals the checks from the safe, those doc.u.ments will be valid in the hands of a holder in due course.

The reason here is that although there has been no delivery, either by intention or by fraud or by negligence, nevertheless, the Negotiable Instruments Act has extended this theory of delivery, even further than the law went before the Act was pa.s.sed, and says that when the doc.u.ment is in the hands of a holder in due course, a delivery is conclusively presumed.

CONSIDERATION.--Another essential in the inception of the instrument is consideration. We have already discussed this topic in the chapter on contracts. We made the statement at the beginning of this chapter that the law of negotiable paper came from the continent of Europe and was grudgingly received by the courts of England. The law of negotiable paper on the continent of Europe did not have any idea of consideration, and this is one reason why the law was reluctantly admitted to the English common law and explains the reason now why we have the doctrine of consideration in negotiable paper. It would not be safe for the student to accept all we have said in regard to consideration in the chapter on contracts and apply it to negotiable paper. The difference is at once apparent when you read Sections 24 and 28 of the Negotiable Instrument Act which read:

Section 24. "Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value."

Section 28. "Absence or failure of consideration is a matter of defence as against a person not a holder in due course."

So, we see, that in the general law of contracts, consideration is absolutely essential to a binding contract but in the law of negotiable paper, consideration is not absolutely essential except when you are dealing with the immediate parties. An ill.u.s.tration will explain this. I wish to make you a present on your next birthday which is January 12.

To-day, September 15, I give you my promissory note due on your birthday for $50. This is to be my present to you. You take the note and then hold it until your birthday arrives and I do not pay it. Then you sue me on the note. You cannot recover anything because there was no consideration for the note and the absence of consideration is a perfectly good defence between you and me, whom the law calls the immediate parties. But, suppose, instead of doing this, you had kept the note about six weeks and then had taken it to your bank and asked them if they would discount the note for you and they had done so, taking it in absolutely good faith. They know me to be a responsible party, so they are willing to accept my promissory note. They knew you and they presumed that you had taken the note for a valuable consideration although, as a matter of fact, it was a gift to you. Under the circ.u.mstances, the bank is a holder in due course and when the note becomes due, if I do not pay, the bank will sue me and will collect from me because, as the Act says, "the failure of consideration is a matter of defence as against any person not a holder in due course." But the bank is a holder in due course.

ACCEPTANCE OF BILLS OF EXCHANGE.--The holder of a bill of exchange will take it, soon after receiving it, to the drawee, the person upon whom it is drawn, for his acceptance. The drawee will accept it by writing across the face of it "Accepted," signing his name and perhaps adding "Payable at the First National Bank." A form of bill of exchange, duly accepted, will be found elsewhere in this chapter. The Act provides that the acceptance must be in writing and signed, either on the doc.u.ment itself or on a separate piece of paper attached to the doc.u.ment. As soon as the drawee accepts the bill, he then becomes known, not as the drawee but as the acceptor and he is the party primarily liable on the bill, that is, he a.s.sumes responsibility for its payment. The holder has a right to demand an acceptance for the full amount of the bill and may refuse to take an acceptance for a less amount. It is not always possible for the drawee to know whether he has sufficient funds to justify an acceptance, and so the Act gives him twenty-four hours within which to make up his mind. During that time the holder is obliged to wait without taking any further action. Just as a conditional promise to pay money is not a good promissory note, just so a conditional acceptance is not looked upon as an acceptance which a party is obliged to take. There are, however, occasionally times when a person is willing to take a conditional acceptance. For example, I hold a bill of exchange for $1,000. There are three or four indorsers upon it and I take it to the drawee to have him accept. He will not accept for more than $500.

Now I feel that the drawer and all of the indorsers are financially irresponsible and I would rather have the acceptance of the drawee for $500 than nothing. I am willing to take it. The question comes up as to the effect of this upon the other parties, the drawer and the indorsers.

The Act covers that fully and it is important that it be kept in mind:

Section 142. "The holder may refuse to take a qualified acceptance, and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged from liability on the bill, unless they have expressly or impliedly authorized the holder to take a qualified acceptance, or subsequently a.s.sent thereto. When the drawer or indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder, or he will be deemed to have a.s.sented thereto."

NEGOTIATION.--If negotiable paper is a subst.i.tute for money, it follows that its most distinguishing characteristic is the fact that it may be transferred from one owner to another. This transfer is made in one of two ways. It may be by operation of law, or by act of the parties. By operation of law, we refer to such a case as where a person dies and his commercial paper then becomes the property of his administrator or executor. In other words, the law transfers the paper to the deceased person's legal representative. The other case, the transfer by the act of the parties is, of course, the ordinary case and the one we shall consider here. The sections in the Negotiable Instruments Act which discuss this matter are so clear that we can do no better than insert them in full at this time:

Section 30. "An instrument is negotiated when it is transferred from one person to another in such a manner as to const.i.tute the transferee the holder thereof. If payable to bearer it is negotiated by delivery; if payable to order it is negotiated by the indors.e.m.e.nt of the holder completed by delivery."

Section 31. "The indors.e.m.e.nt must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indors.e.m.e.nt."

Section 32. "The indors.e.m.e.nt must be an indors.e.m.e.nt of the entire instrument. An indors.e.m.e.nt which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue."

NEGOTIATION BY INDORs.e.m.e.nT.--Reference should be made to the several kinds of negotiation by indors.e.m.e.nt. We have first the blank indors.e.m.e.nt. There the person to whom the doc.u.ment is payable simply writes his name on the back in the same way as it appears on the front.

That is, if John Jones is the payee, he writes his name across the back of the instrument "JOHN JONES." Next, there is the special indors.e.m.e.nt.

John Jones, in this case, is the payee and wishes to transfer the note to John Wanamaker. He writes across the back, "pay to the order of John Wanamaker" and signs his name, JOHN JONES. A restrictive indors.e.m.e.nt is one where the further negotiation of the instrument is limited or restricted altogether. For example, the payee writes across the back "Pay to the order of John Jones only." That restricts the further negotiation of the instrument. Another form that is commonly used is in depositing checks in the bank in your own account; usually you indorse "for collection" and sign your name, or you indorse "for deposit only"

and sign your name. This form of indors.e.m.e.nt simply const.i.tutes the bank your agent to make collection, but not for any other purpose except that the Act now authorizes a bank to begin suit to collect on a doc.u.ment indorsed in that way. Another form of indors.e.m.e.nt, known as the qualified indors.e.m.e.nt, is frequently used in the case where you wish to indorse without incurring the usual liability of the indorser. This is done by adding under your name the expression "without recourse." This does not mean, as is commonly supposed, that you are free from all liability as an indorser. We shall refer to this later.

THE HOLDER IN DUE COURSE.--As we have seen, the distinguishing feature of the law of commercial paper is negotiability as distinguished from a.s.signability. The principles of negotiability are designed very largely for the protection of the person whom we call the holder in due course.

It is essential then to bear in mind the condition under which a person becomes such. Section 52 of the Act defines a holder in due course as follows:

Section 52. "A holder in due course is a holder who has taken the instrument under the following conditions: (1) That the instrument is complete and regular upon its face; (2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact; (3) That he took it in good faith and for value; (4) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the t.i.tle of the person negotiating it." Section 57 defines what the rights of this holder in due course are:

Section 57. "A holder in due course holds the instrument free from any defect of t.i.tle of prior parties, and free from defences available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon."

It is clear, then, that by this section, the Act means that the holder in due course takes free of personal defences, although he does not take free of absolute defences. It simply remains for us to consider briefly what is meant by a personal defence and what is meant by an absolute defence. We have already ill.u.s.trated this in one of our cases where the note was a present. In this case, there was no consideration for the note. The boy to whom it was given could not recover, whereas when he transferred it to an innocent third party, a holder for value, he could recover. Thus we say, failure of consideration is a personal defence.

Again, some person steals my check book, fills out a check, and forges my name. The check is then taken and finally gets into the hands of a person who is strictly a holder in due course. He could not recover on it, however, because forgery is a real defence. That is, no one can hold me liable on my forged check. The ordinary ill.u.s.tration of real or absolute defences are infancy, lunacy, illegality and sometimes fraud.