Argument for Chemical Bank. claim nothing because of the pledgee's negligence. In the latter case (where the party not notified would have a good defense against the pledgor, but none except lack of notice against the pledgee because of the latter's being a bona fide purchaser before maturity) the pledgor cannot take advantage of the pledgee's title, and claim a loss to himself because the pledgee might have made the money; for in such cases the pledgee's title has strength only so far as is necessary for his own protection when he enforces the note. He is a bona fide purchaser only to the extent of the balance then due him. If this balance does not equal the amount due on the collateral note, the party defending may assert his defense against the pledgor as to the residue. Dresser v. Missouri and Iowa Railway Construction Company, 93 U. S. 92; Chicopee Bank v. Chapin, 8 Met. (Mass.) 40; Williams v. Smith, 2 Hill (N. Y.), 301; Second National Bank of Cincinnati v. Hemingray, 34 Ohio St. 381. If the amount then due the pledgee exceed that due upon the collateral note, yet, if the pledgee hold other collateral securities of the pledgor which he afterward realizes, the party liable on the collateral note and paying the same is subrogated to the pledgee's right over these securities for any surplus that may ultimately arise after satisfying the debt of the pledgor to the pledgee (Farwell v. The Importers' and Traders' National Bank, 90 N. Y. 483; Matthews v. Fidelity Title and Trust Co., 52 Fed. Rep. 687); and the party liable on the collateral note to the pledgee because the latter is a bona fide holder, but not liable upon it to the pledgor, has a good cause of action against the pledgor for any money paid out by him to the pledgee upon the note (Bleaden v. Charles, 7 Bing. 246; Comstock v. Hier, 73 N. Y. 269). Hence, the receiver of the Fidelity Bank cannot claim that that bank suffered any loss by the failure of the Chemical Bank to collect the Wilshire-Lewis note due in June, if it also appears that the Fidelity Bank, or he, as its receiver, could not have recovered upon that note, had the loan of the Chemical Bank, to which it was collateral, been paid before it matured. If Wilshire and Lewis, or either of them, had a good defense Argument for Chemical Bank. against the Fidelity Bank, then quoad the loan to that bank by the Chemical Bank they or he were but sureties, and the Fidelity Bank was principal. The discharge of the surety could not affect the principal. How, then, stood the matter as between the Fidelity Bank and Wilshire and Lewis? In the hands of Harper, the note was not a valid enforceable obligation of Wilshire and Lewis. The note was not given to Harper for him to make use of as he saw fit, but it and the other notes given him in February "were to be discounted, and the proceeds placed to the credit of Wilshire, Eckert & Co., to be used as occasion might require from time to time, to margin the deals that Mr. E. L. Harper was then carrying through the firm of Wilshire, Eckert & Co., in Chicago." This restriction was not observed; the notes were not discounted, but pledged for a loan to the Fidelity Bank; and, though Harper embezzled the money loaned, it does not appear that any of it was placed to the credit of Wilshire, Eckert & Co., or was used to margin deals made by Harper through them. It is clear, therefore, that the notes were not used in the manner nor for the purpose for which they were given. The agreement upon which the accommodation was given was broken. Ordinarily a surety (and an accommodation party is naught else) may stand upon his agreement; any deviation will effect his discharge. Nevertheless, in favor of the free circulation. of negotiable instruments, many courts have held, and probably the weight of authority now is, that there are some deviations which are so immaterial as regards the purpose of the accommodating party's agreement that they afford no defense. The decisions do not agree as to the exact line which separates material from immaterial deviations. The subject is discussed in Bigelow's Bills and Notes (2d ed.), pp. 453, 456, in 1 Daniel on Negotiable Instruments (4th ed.), $$ 790-794, and in 3 Randolph on Commercial Paper, §§ 1803, 1804. While many cases hold that, if the real purpose for which the accommodation was given was merely to extend credit generally to the person accommodated, it is not a fraudulent diversion if he uses the paper to effect this purpose in a different manner from Argument for Chemical Bank. that contemplated when he obtained the accommodating signature, yet the decided weight of authority, as well as of reason, is that if this was not the sole purpose of the accommodating party, and his expressed intention in giving the accommodation was that it should be used in a specified way, then any other use of the paper without the consent of the accommodating party will be a fraudulent diversion, and will release him except as against the claims of purchasers for value, before maturity, without notice of the diversion, or of those claiming under such purchasers. Illustrations and applications of this principle will be found in the following cases: Smith v. Knox, 3 Esp. 46; Evans v. Kymer, 1 B. & Ad. 528; The Adams Bank v. Jones, 16 Pick. 574; Chicopee Bank v. Chapin, 8 Met. (Mass.) 40; Brown v. Taber, 5 Wend. 566; Wardell v. Howell, 9 Wend. 170; Small v. Smith, 1 Denio, 583; Comstock v. Hier, 73 N. Y. 269; Benjamin v. Rogers, 126 N. Y. 60; Cozens v. Middleton, 118 Penn. St. 622; Manufacturers' Bank v. Cole, 39 Maine, 188; Hidden v. Bishop, 5 R. I. 29; Maitland v. Citizens' National Bank of Baltimore, 40 Maryland, 540; Johnston v. May, 76 Indiana, 293; Clinton Bank of Columbus v. Ayres, 16 Ohio, 282; Knox County Bank of Mount Vernon v. David Lloyd's Administrators, 18 Ohio St. 353; Fowler v. Brantly, 14 Pet. 318; Quebec Bank of Toronto v. Hellman, 110 U. S. 178. In Reed v. Trentmann, 53 Indiana, 438, and possibly in some other cases, it was said in substance that the object in view by the accommodating party, when other than a mere loan of credit, must either be specific, as the settling of a particular debt, or be one where the accommodating party has an interest in the application of the purchase money, so as to make a different application a fraudulent diversion. This seems to me an illogical and untenable limitation of the rule, if by "interest in the application" is meant a financial or pecuniary interest; for, as the accommodating party is a mere giver, he may condition his gift on other things than mere advantage to himself. But it is not necessary for me to stop to discuss that point, for the use to be made of the accommodation, as specified here, falls within the narrowest limitation of the rule. Argument for Chemical Bank. Wilshire was a partner in Wilshire, Eckert & Co., brokers through whom Harper was carrying on deals on margins in Chicago; that is, the credit of Wilshire, Eckert & Co. was plighted for these deals, Harper being the undisclosed principal. When, therefore, Wilshire gave his accommodation paper to Harper to discount and deposit the proceeds to the credit of Wilshire, Eckert & Co., to be used to margin these deals, he was directly and pecuniarily interested in having the paper used in that way, and a diversion of it would be a palpable fraud upon him, and would release him as to one having notice of the fraud; and as Lewis, as indorser, was but a surety for Wilshire, the release of the latter would release the former also. Uniontown Bank v. Mackey, 140 U. S. 220. That the pledging of the paper as collateral security for a loan to the Fidelity Bank was a diversion, releasing Wilshire and Lewis, is manifest; and if the matter had stopped here, probably opposing counsel would have nothing to say, for up to that time neither the Fidelity Bank nor any one else except the Chemical Bank had paid any value for the paper; so that even if it be assumed that the Fidelity Bank was a holder of the paper by transfer from Harper, the paper was worthless in its hands, altogether aside from any question of fraudulent diversion. But it will doubtless be contended that the embezzlement by Harper of the loan made by the Chemical Bank to the Fidelity Bank in some way altered the situation; that is to say, that after Wilshire and Lewis had once been released as against all but the Chemical Bank, their obligation could be restored without their consent by a crime committed by Harper against the Fidelity Bank. Stated in that way (and I cannot see how it can fairly be stated otherwise), the proposition is as absurd as it is novel. But the proposition may be tested in another manner, and the element of criminality altogether eliminated. The Fidelity Bank either did or did not obtain a transfer from Harper of the legal title to the paper before that title passed to the Chemical Bank. If it did, it gave no value therefor, and acquired no rights as against Wilshire and Lewis. If it did not obtain Argument for Chemical Bank. it before, it never has obtained it, for that title has always since continued in the Chemical Bank. Whatever rights the Fidelity Bank may have obtained by anything done since the loan by the Chemical Bank cannot be more than equities, and can give it no claim as against Wilshire and Lewis, for the owner of an equity merely cannot recover from an accommodation party. He is merely an assignee of a chose in action not negotiable by the law merchant, and acquires no greater rights than those of his assignor. Muller v. Pondir, 55 N. Y. 325; Risher v. Smith, 131 U. S., Appendix, clvi. ; Cowdrey v. Vandenburgh, 101 U. S. 572; Osborn v. McClelland, 43 Ohio St. 284; Whistler v. Forster, 14 C. B. N. S. 248; Lancaster National Bank v. Taylor, 100 Mass. 18; Haskell v. Mitchell, 53 Maine, 468. It may be contended, however, that possibly Harper anticipated the action of the Chemical Bank, and effected his embezzlement or loan from the Fidelity Bank before the latter had been credited with the same amount by the Chemical Bank; and that if this were so, this fact, coupled with the pledge of the paper by Harper as vice-president, would make out a transfer by Harper individually to the Fidelity Bank, and a payment of value by the latter, prior to the time the legal title passed to the Chemical Bank. It would be a sufficient response to such argument, if made, to say that it is not tenable upon the evidence; but a final and conclusive answer thereto is that whatever title the Fidelity Bank may have obtained to these notes, and whenever it was acquired, and whatever value was paid therefor, it was all with notice of the fraudulent diversion of the notes from their destined purpose. It will be observed that whatever rights the Fidelity Bank may claim were derived only and solely through transactions by Harper as its vice-president, with Harper individually; that is to say, the bank through its agent dealt with that agent individually. Under these circumstances the law has been settled for almost two hundred years that the principal is chargeable with notice of whatever knowledge his agent may have had of the rights of third persons in the subject-matter of the contract, and of whatever fraud the agent may be |