car between Chicago and Omaha, the endorser never received the notice. Can the endorser be held for the note?

9. B was the holder of a draft that had been accepted by C. Before the maturity of the draft C became insolvent, a fact which was known to the drawer and all of the endorsers. The insolvency being a matter of common knowledge to all of the parties the holder did not take any steps to fix the liability of the parties. He did not demand payment or give any notice of dishonor. Can he hold the drawer and the endorsers, or any of them liable for the amount of the draft?

10. A draft endorsed by C and held by D is dishonored. E who is not an agent of D, but a stranger to the entire transaction, informs C that the draft has been dishonored. Is this notice sufficient to hold C as an endorser?

11. A drew a draft on B, who is under no obligation to accept it and has in no way intimated that he would do so. The draft was presented to B for his acceptance and he refused to accept it. C, the payee did not give the drawer any notice of the dishonor of the draft. Is the drawer discharged from liability?

12. C endorsed a note, "I waive protest and notice. C." The holder demanded payment on the day before maturity, which was refused. The holder sued C as an endorser. C set up the defense, that there was not a proper presentment for payment, and that he had received no notice of dishonor. Is this a good defense?

CHAPTER XXIII

BONA FIDE HOLDER

254. Negotiable paper imports consideration. As between the immediate parties to a negotiable instrument-parties between whom there is privity of contract-the only superiority of a draft or note over any other evidence of debt is that on its face it implies a consideration. As between parties who are not immediate, i.e., maker and endorsee, there are many other points of superiority than that of consideration, provided the endorsee or holder be what is termed a "bona fide holder."

255. What constitutes a bona fide holder. Rule: To constitute a person a bona fide holder he must have taken the paper (1) in good faith; (2) for a valuable consideration; (3) before maturity; (4) in the usual course of business; and (5) without any notice of any defects. A purchaser of a negotiable instrument under these circumstances takes it free from all equities that exist between the preceding parties.

For example, if the note or draft was without consideration originally, or if the consideration had failed, or if the paper had been paid, and not taken up, and even though it was originally obtained by fraud, theft or robbery, such a purchaser could recover, while between immediate parties, as the maker and payee, if there were no consideration or the consideration had failed, or the note had been obtained from the maker by fraud, theft or robbery, the payee could not recover from the maker. Thus it is that a bona fide holder may acquire a much better title than the party from whom it was received. We shall briefly consider each of the elements named.

256. Bona fide. This means in good faith, as distinguished from mala fide (bad faith).

C, the holder of a note, transferred it by endorsement to D for value. D knew that C had obtained the note by fraud, but was not a party to it. D is not a bona fide holder.

257. Valuable consideration. Any consideration which is sufficient to support a simple contract.

258. Before maturity. The fact that a draft or note is overdue should lead one to inquire why the holder himself does not collect.

Rule: A purchaser after maturity gets no better title than the party from whom it was bought.

In order, therefore, to take it free from the equities that exist between immediate parties it must be bought before the maturity of the paper.

A draws a draft on B payable to his own order. B accepts the draft subject to a certain condition then verbally agreed to. A endorses the draft after maturity to C. C takes the draft subject to the aforesaid condition, although he had no actual notice of it. Had C taken the draft before maturity, then he would have taken it free from the condition.

259. Usual course of business. "In the ordinary and usual course of business" means transferring the paper according to the usages and customs of commercial transactions.

A transferee, without endorsement, when the instrument requires an endorsement, does not take it in the ordinary course of business.

A note is made payable to C, or order. C transfers the note without endorsement to D. D is not a bona fide holder, because he did not receive it in the usual course of business. It required an endorsement to transfer the title.

260. Without notice. Rule: A bona fide holder must be without notice of dishonor or of any fraud or defect of title or of any other fact which impeaches its validity in transferer's hands.

D, the holder of a draft, endorsed in blank, transferred it to E for value. E suspects that D had obtained the draft by a false representation, and consequently makes no inquiries. As a matter of fact, D stole the draft. E is not a bona fide holder; he is affected with notice.

261. Apparent exception. There is an apparent exception to this rule. It is stated by Hon. Judge Chalmers thus: "A holder who derives his title to a draft through a bona fide holder

for value without notice has all the rights of such bona fide holder against the acceptor and all prior parties, although he himself may have given no value, and may be affected with notice." The following will illustrate the rule:

C, a partner in a firm, fraudulently endorses the firm's draft to D in payment of a private debt. F knows of the fraud, but is not a party to it. D endorses the draft to E, who takes it for value and without notice, making him a bona fide holder. E endorses it to F. F, although he had notice of the fraud, acquires E's rights. He can sue all the parties to the draft. The reason for the rule is that if it were otherwise it might destroy the rights of a bona fide holder to negotiate the instrument. Thus, F might have been the only person to whom E could have sold the draft; if so, and he could not have given him a good title, it would greatly destroy the valuable rights and privileges of a bona fide holder.

262. Defenses available against a bona fide holder. There are certain defenses which the maker or acceptor may set up and defeat the payment of a note or draft even in the hands of a bona fide holder.

Rule: The maker or acceptor is not liable to a bona fide holder when the instrument is shown to be void by reasons of:

1. Incapacity of parties, i.e., when the maker or acceptor is an infant, a married woman, or a lunatic, etc.

2. Some statute law declaring the contract utterly void because of illegal consideration.

3. Want of consent to the contract by the party sought to be bound.

There is want of consent when the signature is forged, or paper materially altered, or the signature affixed or paper delivered under duress. Neither is the maker bound on a note passed into circulation which is stolen when incomplete (contra, when complete), nor when the note is constructed over his signature.

Suppose B, an infant within three months of attaining his majority, accepts a draft drawn on him for necessaries, or gives his note for the same purpose, payable one month after date. The infant thereby incurs no liability on the draft or note, because of his incapacity to contract. A gave his note to B for an illegal consideration, which the statute declares

to make the contract void. B endorses it to C, a bona fide holder, for value and without notice. C cannot recover of A, but he can of B.

C having found a piece of paper on which B's signature was written constructs a note over the signature. C endorses the note to D, a bona fide holder. D cannot recover of the maker, because he never gave his consent to the contract. The same rule applies to forgery. No person is liable on an instrument to which his signature has been forged, and no right or title can be derived through a forged signature.

C, the payee of a note, endorses it in full to D. D loses the note and it is found by E. E, in order to negotiate the note, forges D's signature as endorser, and then, in turn, endorses it to F, a bona fide holder. Facquires no title to the note; he cannot enforce payment against any of the parties thereto, and should the maker or any endorser pay him the payment would be invalid.

QUESTIONS

1. What constitutes a bona fide holder?

2. What is a valid consideration?

3. What is meant by the "usual course of business?"

4. What are the defenses that are available against a bona fide holder? 5. Give an illustration of a case where the holder is not a bona fide holder.

CASES

(GIVE REASONS FOR YOUR ANSWERS)

1. B accepts a draft drawn by A for $100.00, which is the agreed price of two bales of cotton to be delivered to B by A. A delivered only one bale. A endorsed the draft to C, a bona fide purchaser. C sued B. B set up as a defense that there was a failure of consideration. Is this a good defense?

2. By means of fraudulent representations B induced A to execute two notes in B's favor, one for $500.00 and the other for $300.00. B in the due course of business endorsed the $500.00 note to C. At the maturity of the notes C sued A on the $500.00 note, and B sued A on the $300.00 note. Has A any defense against either of the notes?

3. A removed a flyleaf from B's book and constructed a promissory note over B's signature. A then endorsed the note to C a bona fide holder. At maturity C sued B on the note. Can C recover?

4. A gave B his note for $1,000.00 in consideration that B should murder C. In the due course of business the note came into the hands of D, a bona fide holder. Can D recover the amount of the note from A?

5. A note payable to John Smith, or order was lost through his carelessness. It was found by another party by the name of John Smith who endorsed it to D, a bona fide purchaser. Can D recover of the maker?