sideration exists in the inception of the paper, it seems that in New York the bona fide holder may recover the full amount, no matter what amount he may give for it.1 This seems to us the true distinction in such cases. If the paper is issued in fraud without consideration, the bona fide purchaser should be limited in recovery to the amount paid with interest. But if there was an original valid consideration, or the paper was issued fairly and intentionally without consideration, then he is entitled to recover the whole amount regardless of the amount he pays.3

2

not confined to the case of accommodation paper, but extends to all cases where the paper, though in the similitude of a note, has no existence as between the immediate parties to it. This point is well shown by the case of Marvin v. McCullum, 20 Johns R., 288. On this ground it appears to me that the case of Hall v. Wilson, 16 Barb., 548, was correctly decided. . . . . It is not necessary in reaching this conclusion to disagree with such cases as Howe v. Potter, 61 Barb., 356, and Harger v. Wilson, 63 Id., 237. In each of these cases the transaction had all the elements of a contract. In Harger v. Wilson the maker of the note intentionally issued the note and put it in circulation, though induced to do so by the fraud of the payee. Here was a valid contract, though in its nature defeasible. The payee could have brought an action on the note, though the fraud might have been urged as a defence. It was properly held that the note had an inception in the hands of the payee. Such a case is plainly no authority, for the decision of one where the defence is, that the note never took effect at all, because there was no intent to deliver, and in fact no delivery."

'Howe v. Potter, 61 Barbour, 357 (1872). In this case nothing is said as to the amount reserved by the holder, but it appears to have been a full recovery upon the draft. As to the rule in Tennessee see Coliger v. Francis, 58 Tenn., 423; post, § 778, note; and Holman v. Holson, 8 Humph., 107; Petty v. Hinman, 2 Humph., 102.

'Holcomb v. Wyckoff, 35 N. J. (L. R.), 38 (1870), Depue, J., saying: "The case now before the court can not be distinguished from Allaire v. Hartshorne upon any principle founded on reason or justice. In both cases the notes were void in the hands of the original parties, and the only vitality they possessed was that which they acquired from the consideration for which they were transferred. In the one case a portion of the sum mentioned in the note being a trust for the payee, as to whom the note was void, it was manifest that for so much the plaintiff ought not to recover; in the other case, the note being equally void, the plaintiff has no equity to recover, beyond what will be indemnity for the money prepaid for it.”

'See Daniels v. Wilson, 21 Minn., 530 (1875). In this case a note for $280.79, with accumulated interest, was sold by indorsement to the holder for $150. It was without consideration. Berry, J., said: "The familiar general rule is that an indorsee of negotiable paper, for value, before maturity, without notice of any infirmity, takes it clear of all equities and defences between antecedent parties, and is, of course, entitled to full amount of the same, according to its tenor. When the original consideration of the paper is illegal or fraudulent, or it is taken as collateral security, and perhaps in some other instances, an exception to this rule has been recognized, so as to restrict the right of recovery to the consideration actually paid by the indorsee, or to the amount of the debt to which

§758a. Conflicting authorities.-There are authorities. which conflict with the doctrine of the text, and there is no doubt that some of those cited in support of it, by the courts which adopt it as sound law, are not strictly applicable as precedents. They are cases in which the holder took the paper invalid between original parties as security for a debt, and would hold the residue after discharging it as a trustee for the transferrer; and in such cases it has been properly held that as the transferrer could not himself recover, there could be no recovery as a trustee for his benefit, and therefore no recovery beyond the amount due the plaintiff.1

While we reject these cases as authoritative in support of the text, yet its conclusions seem to rest upon broad principles of equity, and to extend a just and sufficient protection to purchasers of commercial paper while not too rigorously pursuing those who have been innocently defrauded into its execution.

In Iowa, the contrary doctrine has been distinctly held in a case where a note for $150 obtained by fraud was indorsed to a purchaser for $80. Day, J., saying: "The defence that a note has been obtained fraudulently, or without consideration, does not avail against a bona fide holder. If, however, the recovery of such holder may be limited to the amount paid, it is apparent that the defence does avail, for without such defence he would recover the amount evidenced by the note." And the like view seems to have obtained in other cases, though the question as to the limitation of the amount of recovery was not particu

the paper is collateral. The defendant contends for a like exception in this case, in which it appears that the note was without consideration, and the plaintiff purchased it for less than its face. But in our opinion no such exception is admissible upon principle."

2

'Allaire v. Hartshorne, 1 Zabriskie, 663; see § 832.

Lay v. Wissman, 36 Iowa, 305 (1873). See Article in Albany L. J., vol. 18, No. 13, Sept. 28, 1878, p. 247; Vinton v. Peck, 14 Mich., 296 (1866); Campbell, J.: "The maker of a note has no concern with the amount paid for it by a bona fide holder."

VOL. I.-45

larly presented, but rather assumed not to exist, if there could be any recovery at all.1

$7586. Doctrine of U. S. Supreme Court as to amoun of recovery. The United States Supreme Court, in a recent decision, expresses itself in favor of the doctrine that the purchaser of a negotiable security before maturity, in cases where he is not personally chargeable with fraud, is entitled to recover its full amount against its maker, though he may have paid less than its par value, whatever may have been its original infirmity, and this view seems to be the settled conclusion of that tribunal.3

$758c. When notice of fraud is received after part payment. If the purchaser has paid only part of the amount agreed upon for the paper, and the contract remains unexecuted as to the residue, when he receives notice of fraud in the inception of the paper, it is clear that he can then recover only the amount which he had paid before such notice was received. As to what he pays after such notice he is not a purchaser in good faith. And if a portion of the contract be entirely unexecuted when he receives notice of the fraud, he can recover nothing."

$759. When there is usury established as between indorser and indorsee of a bill or note, the indorsee can not sustain action against the indorser, because the contract is void. But it is held by some authorities that he may sue prior parties, tracing title through his indorser, because, in so far as it transfers title, it is an executed contract; and as a party claiming a stolen horse could recover him from

1Bailey v. Smith, 21 Ohio St., 396 (1863); Mathews v. Rutherford, 7 La. An., 225, quoted for this doctrine, was a case of accommodation paper, and not of paper obtained by fraud.

3

2 Cromwell v. County of Sac, 96 U. S. (6 Otto), 60 (1877).

R. R. Companies v. Schutte, 103 U. S. (13 Otto), 118, 145, Waite, C. J., (1880).

'Dresser v. Misso., etc., R.R. Co., 93 U. S. (3 Otto), 95; Hubbard v. Chapin, 2 Allen, 328; Lay v. Wissman, 36 Iowa, 309.

Crandell v. Vickery, 45 Barb., 156; § 789a.

the thief, although in proving it to be his proving it to be his property it appears that he acquired title under a usurious bargain, so the holder may prove his right to recover the amount due from those not implicated in the usury. By other authorities. the doctrine is denied; but it seems to us sound, though the views expressed against it are weighty."

§ 760. Right to trace title through usurious indorsements. The authorities also differ upon the question whether or not a subsequent indorsee, who is not a party to the usury, may recover against parties prior to it, tracing title through the indorser who was a party to it. The difficulty may be avoided by such subsequent indorsee striking out the usurious indorsement, and all subsequent indorsements, where there is an indorsement in blank prior to the usury, under which he might then deduce title and enforce payment. But this may not be practicable, or not desirable; and the better opinion, as it seems to us, is, that the holder without notice may sue and recover against all the parties save the indorser, from whom the usury was exacted. As to him, in so far as his contract is an assurance for the payment of money, it can not be enforced. But, nevertheless, in so far as it evidences the fact that he has transferred the legal title, it seems to us that the indorsement would be sustained as valid for that purpose, upon the ground that the object and spirit of the statute would be subserved,

1

Armstrong v. Gibson, 31 Wis., 66 (1872); Collier v. Nevill, 3 Dev., 31; Knights v. Putnam, 3 Pick., 185, Wilde, J.: "It is manifest that the maker of a note is not affected by a usurious agreement between the indorser and indorsee. He is liable on his contract, and it is immaterial to him whether the action be brought in the name of the indorser, or that of the indorsee. But I hold further that the transfer of a note on a usurious consideration is neither void nor voidable. So far as the indorsement operates as a transfer of the note, it is an executed contract, and the statute against usury is not applicable. It only applies to the implied promise or guaranty of the indorser, which, being an executory contract, may be avoided. But in no case can an executed contract be set aside on the plea of usury. It is not, however, necessary to insist on this distinction for the purpose of sustaining the present verdict. It is sufficient for this purpose that the transfer is voidable only, and that it is not competent for the defendant, he not being a party to the transfer, to avoid it." See post, § 764, notes. Lloyd v. v. Keach, 2 Conn., 175; Nichols v. Pearson, 7 Pet., 103. Story on Notes, § 190; 2 Parsons N. & B., 431.

2

8

ties" (who had become bankrupt); "but the vendee is still entitled to have an article answering the description of that which he bought. Here he bought as a foreign bill what turns out not to be a foreign bill, and therefore valueless. Common justice requires that he should have back the price." Lord Campbell, C. J., said: "This is not a case in which an article answering the description by which it is sold has a latent defect, but one in which the article is not of the kind which was sold. I think, therefore, that the money paid for it may be recovered, as paid in mistake of facts."

§ 733. So, where the defendant sold as Guatemala bonds, in 1836, bonds which had been repudiated by the Government of that State in 1829, because unstamped, and which were valueless, it was held that the price should be refunded, Tindal, C. J., saying, that the contract was for real Guatemala bonds, and that the case was just as if the contract had been to sell foreign coin, and the defendant had delivered counters instead. And that "it is not a question of warranty, but whether the defendant has not delivered something which, though resembling the article contracted to be sold, is of no value." 1

So where the holder of a note transferred it without indorsement, and it was void for usury as between original parties. "In this case," said Comstock, J., "the defendant held a promissory note which was void, which he had himself taken in violation of the statutes of usury. When he sold the note to the plaintiffs, and received the cash therefor, by that very act he affirmed, in judgment of law, that the instrument was sustained, so far at least as he had been connected with its origin." In another case, Davis, P. J.,

1

Young v. Cole, 3 Bing. N. C., 724.

* Delaware Bank v. Jervis, 20 N. Y., 228; Webb v. Odell, 49 N. Y., 583; Littauer v. Goldman, 16 N. Y. S. C. (9 Hun), 232 (1876); Challiss v. McCrum 22 Kansas, 157.