makes out a prima facie case by proving that the instrument was indorsed to him for value before maturity. Nothing else appearing, a presumption arises that he purchased the note in good faith without notice of the fraud, because it is not likely that he would give full value for a note which he believed to be fraudulent, taking the hazard upon himself, and because it would be difficult to prove good faith in any better way.1 These, at least, are the conclusions of well-considered decisions which rest, as we think, on sound reasoning, but in others the courts have indicated a more stringent rule and a disposition not to relieve the plaintiff of the burden of proof by mere proof that he gave value. Unless there were circumstances which seem to bring home to him notice of the fraud or illegality imputed, the requirement of further proof than the giving of fair value seems unreasonably harsh and exacting.

trade, upon a valuable consideration, the remark of Judge Wilde is strictly correct, and consonant with the authorities to which he refers; but if his remark is to be understood as intimating that the rule in such a case imposes any further burden upon the plaintiff than to prove he purchased and received the transfer of the negotiable paper before due, in the usual course of trade, bona fide, and upon a valuable consideration, it is not only not sustained by, but is opposed to. the authorities to which he refers."

'Harbison v. Bank, 72 Ind., 133; Kellogg v. Curtis, 69 Maine, 214; ante, $780. See Wortendyke v. Meehan, 9 Neb., 229, where holder who gave value was defeated, the circumstances being thought sufficient to put him on inquiry, and he did not deny knowledge of illegal consideration.

'Tilden v. Barnard, 43 Mich., 376, Marston, C. J.

CHAPTER XXV.

HOLDER OF BILLS AND NOTES TRANSFERRED TO HIM AS COLLATERAL SECURITY; AND HOLDER OF BILLS AND NOTES SECURED BY MORTGAGE.

SECTION I.

RIGHTS AND DUTIES OF HOLDER OF A NEGOTIABLE INSTRUMENT AS COLLATERAL SECURITY FOR A DEBT.

§ 820. Bills and notes are frequently transferred and pledged as collateral securities for debts of the pledgor, and many questions have arisen as to the rights of the various parties concerned in such transactions. And whether or not the indorsee or pledgee becomes a bona fide holder, and is protected against defences which would be available against the indorser or pledgor, is often difficult to determine. Great contrariety of opinion is found in the decisions on the subject. But by keeping in view a few wellfixed principles, we think that every case which can arise may be satisfactorily solved.

§ 821. In the first place, it should be determined whether or not the party holding the instrument has the form of the legal title. If the instrument be transferable by delivery (by being payable to bearer, or bearing an indorsement in blank), he is then its prima facie proprietor and owner. If it be payable to order and unindorsed, he then holds only the equitable title, and can not claim the rights of an indorsee.1

'See ante, § 741 et seq.

VOL. I.-49

(769)

§ 822. In the second place, if the holder be an indorsee, or a transferee by delivery of a bill or note payable to bearer, let it be ascertained whether or not he is merely the agent of the real owner or has himself an interest in the instrument; whether or not he has a bare authority, or an authority coupled with an interest. If he were only authorized

to collect the proceeds for the indorser, or transferrer by delivery, and then to apply the proceeds, to the payment of a debt due to himself, this would not give him an interest in the paper itself. It would be much the same as if he were to apply the proceeds to the payment of some other debt due from the principal; nor could he have the rights of a principal instead of agent, unless there has been an actual assignment to him. For if he is agent of the owner, any defence available against the owner is available against him, and this even in the case where the owner owes his agent more than the amount of the paper.2

§ 823. If it turn out that the holder is agent, the principal may revoke that agency at any time and recall the paper from his hands. And he can not set up then, as we have seen, any better right than his principal. The test question, then, is simply this: has there been a change in the legal rights of the parties? If so, the transfer is irrevocable without the holder's consent. If so, there has been a consideration for the transfer-either of damages to the holder, or of benefit to the transferrer. And if so, the holder is a pledgee and bona fide proprietor of the paper, and is entitled to recover upon it even against those who might have made a defence against his pledgor-at least to the extent of the debt of which the instrument is collateral security.

In California, where, by the provisions of the law in force, the right to proceed against a debtor by attachment was forfeited by taking such a collateral, the pledgee of a

1 2 Parsons N. & B., 42, 43; see Best v. Crall, 23 Kansas, 482.

* Solomons v. Bank of England, 13 East., 135, note; Lowndes v. Anderson, I Rose, 99.

а

negotiable instrument was held to be, by that circumstance -if none other--a holder for value, and protected against equitable defences."

We will now enter more minutely into the various ramifications which this question assumes, applying the test above stated.

§ 824. (1) In the first place, as to collateral for debt contracted at the time.—When the bill or note of a third party, payable to order, is indorsed as collateral security for a debt contracted at the time of such indorsement, the indorsee is a bona fide holder for value in the usual course of business, and is entitled to protection against equities and offsets and other defences available between antecedent partiesprovided, of course, that the bill or note transferred as collateral security is itself at the time not overdue. And the same principle applies where the collateral bill or note is payable to bearer, and is transferred to the creditor by delivery. This doctrine rests upon clear grounds. There is an evident present consideration for the transfer of the collateral bill or note; a present change in the legal rights of the parties. And the text-writers, supported by an almost unbroken train of decisions, agree that the indorsee is entitled to protection to the extent of the debt secured.? $ 825. (2) In the

In the second place, as to collateral for debt not yet due.—When the debt is not yet due and the collateral bill or note is indorsed as security and there is an agreement for delay until the collateral shall mature, such agreement by the creditor constitutes a consideration and makes him a holder for value.

1

2

Naglee v. Lyman, 14 Cal., 455; Payne v. Bensley, 8 Cal., 260.

Bowman v. Van Kuren, 29 Wis., 219; Lyon v. Ewing, 17 Wis., 70 (1863) Curtis v. Mohr, 18 Wis., 619 (1864); Jenkins v. Schaub, 14 Wis., 1; Slotts v. Byers, 17 Iowa, 303; Griswold v. Davis, 31 Vt., 390 ; Chicopee Bank v. Chapin, 8 Metc., 40; Louisiana State Bank v. Gaennie, 21 La. Ann., 551; Munn v. McDonald, 10 Watts, 270 ; Williams v. Smith, 2 Hill, 301 ; Perdon v. Jones, 2 E. D. Smith, 106; Bank of New York v. Vanderhorst, 32 N. Y., 553; Watson v. Cabot Bank, 5 Sand., 423; State Savings Associations v. Hunt, 17 Kan., 532; Mechanics' Ass'n v. Ferguson, 29 La., 549; Exchange Bank v. Butner, 60 Ga. 654; Best v. Crall, 23 Kansas, 482.

§ 825a. No presumption of agreement for delay when collateral matures later than debt secured. — If the collateral had its maturity fixed at a time later than the maturity of the debt, there would be no implied agreement for delay, because the occasion for delay would not have arisen. And the presumption would be that the indorsement of the collateral was merely intended to add by its security to the assurance that the debt would be paid. This presumption would be all the stronger if the collateral matured before the debt. And it has led to the opinion that such an indorsee would not be a holder for value. "If," says Redfield, C. J., in Atkinson v. Brooks,1 one holds a debt due six months hence, and his debtor, as a mere volunteer service, indorses a current note or bill as collateral security, the collateral being due in three months, it could not be made to appear that such transaction, before the indorsee had been at any pains in the matter, was a contract upon consideration. The prior debt not being due, the creditor could forego nothing, and the debtor receive no advantage from the transaction. And the agreement to apply the collateral upon a debt not yet due-being without consideration-would probably, in the first instance, be revocable at will; and so also as long as the parties remained in the same situation."

§ 826. This reasoning is strong, but, withal, does not seem to us conclusive. If it is the intention of the debtor to transfer the title to and property in the instrument at the time when he so makes it collateral security, we should say that the pre-existing indebtedness would be a sufficient consideration. It is well established that a transfer of a bill or note in payment of a pre-existing debt is upon a sufficient consideration if made when the debt is due, and we can see no good ground for distinguishing the two cases. When the indorsee receives title to the collateral, he has

1 26 Vt., 564 (1854); see also Bowman v. Van Kuren, 29 Wis., 218.