ion collateral is given for overaue debt, is there sement for delay until collateral matures?— when the collateral bill or note is simply indorsed the debtor to the creditor, who holds his overdue

and no express agreement is entered into, the cica whether or not the indorsee is a holder for value has been thought to turn upon the question whether or not there is an implied suspension of the prior debt until the sellateral should become due.1 If there is an agreement for forbearance of the prior debt, it is as binding when implied is when expressed in terms; and in the United States, as well as in England, the doctrine is settled that the indorsee of the bill or note of a third party, who takes it on account of a precedent debt, takes it by implication as conditional payment, and the antecedent debt is not extinguished, but suspended until the bill or note given in conditional payment has fallen due. When the new bill or note so re

2

Manning v. McClure, 36 Ill., 489.

* See chapter XXXIX, on Conditional and Absolute Payment, vol. 2, § 1269 et seq.; Blanchard v. Stevens, 3 Cush., 168 (1849). The court thought that the note was taken in payment of a pre-existing debt, but said, per Dewey, J.: “lf, however, the case had been one of a note taken as collateral security, it is difficult for us to perceive any sound reason for a different result. All of the cases, those of the New York court inclusive, concur in this, that if the party receiving the note parts with anything valuable, he is entitled to enforce the payment of the note, irrespective of the equities as between the original parties. But may you not as well show a legal consideration by showing forbearance to act as by showing an act done? A damage to the promisee is all that is necessary to show a consideration for a promise; and ought not the same rule to apply in protection of a note transferred to him? If the party had not received the note as collateral security, he might have pursued other remedies to enforce the security or payment of his debt. He might have obtained other securities or perhaps payment in money. It is a fallacy to say that, if the plaintiffs are defeated in their attempt to enforce the payment of these notes, they are in as good a situation as they would have been if the notes had not been transferred to them. That fact is assumed, not proved, and, from the very nature of the case, is matter of entire uncertainty. The convenience and safety of those dealing in negotiable paper seem to require and justify the rule that when a person takes a negotiable note not overdue or apparently dishonored, and without notice, actual or otherwise, of want of consideration or other defence thereto, whether in payment of a precedent debt, or as collateral security for a debt, the holder would have the legal right to enforce the same against the parties thereto, notwithstanding such defence might not have been effectual as between the original parties thereto." In Manning v. McClure, 36 Ill., 498, Lawrence, J. said: "It is said that the position of the indorsee, in cases of this kind, is not different from that of a general assignee for the benefit of creditors. What we have already said shows wherein, in our opinion, the difference consists. In the

ceived falls due, the creditor may bring suit upon the original debt, or upon the new bill or note, or upon both, at his election; so that the new bill or note is a collateral in any case, unless there be an express agreement of a special usage, as in some of the States, that the acceptance of the new bill or note shall, prima facie, extinguish the debt.

§ 831. When agreement for delay can not be inferred.But this implication, that the precedent debt is suspended until the maturity of the collateral bill or note, only arises in cases where the latter is equal1 or greater in. amount than the debt which it is given to secure. And therefore, where

case of a general assignment, there is no ground for presuming forbearance as one of the objects, or any implied agreement to forbear on the part of the creditors. Indeed, these general assignments are ordinarily made without the wish or knowledge of the creditors, and where the object is not fraud it is generally to secure an equal distribution of the assets. The assignee is a mere trustee, to collect what may be due the assignor for the benefit of his creditors. We have stated why, in our opinion, the equity is with the indorsee, to wit, that by the almost universal usage of the world of commerce, a transaction of this sort is understood by the parties to imply further forbearance on the pre-existing debt, and thus the indorsee is lulled into a false security by means of an instrument which the person sought to be held liable has made and put in circulation. We have only to add, that the line of decisions which we follow contributes to that stability in negotiable paper which is so important a consideration in a mercantile community. To accomplish this has been the constant tendency of judicial decisions, from the time of Chief-Justice Holt to the present day. The value of this stability to commerce is acknowledged by all courts, and by all writers upon mercantile law. It is easy to see how much it strengthens credit and facilitates the multitudinous transactions of a commercial people. We are led, then, by what we consider the equities between the parties, and by the acknowledged policy of giving stability to negotiable paper, to hold that the indorsee of such paper, before its maturity, taking it as payment or security for a pre-existing debt, and without any express agreement, shall be deemed a holder for a valuable consideration, in the ordinary course of trade, and shall hold it free from latent defences on the part of the maker." See also Worcester National Bank v. Cheney, 87 Ill., 602, approving the text. Contra, Bowman v. Van Kuren, 29 Wis., 220, Dixon, C. J.: "We forbear to express any opinion further than that the mere transfer of the collateral raises no presumption of a stipulation for further time to pay a pre-existing debt, which will operate to defeat the equities of the maker or indorser, as the same existed before the transfer was made; which is all it is necessary to decide in this case." In Tennessee it is held that the transfer of negotiable paper before maturity as collateral for a mature debt, is not in the due course of trade, and that if it were paid before such transfer, the holder can not recover. See Sawyer v. Moran, 3 Tenn. Ch. R., 36; Richardson v. Rice, S. C. of Tenn., April, 1878; Central Law Journal, vol. 7, No. 12, Sept. 20, 1878, p. 225, citing Gosling v. Griffin, which overrules Vatterlien v. Howell, 5 Sneed, 441.

'See Michigan State Bank v. Leavenworth, 28 Vt., 209.

* See Redfield & Bigelow's Leading Cases, 203.

the collateral is less in amount, there can not be any inferred consideration of forbearance or delay to constitute the holder, on that ground, a holder for value.

§831a. Becoming a party to the instrument transferred as collateral for pre-existing debt alone protects transferee as a bona fide holder.-When there is no express or implied agreement for forbearance and delay as to the preexisting debt, the transferee of the collateral can not be regarded as a bona fide holder for value within the law merchant, unless simply becoming a party to the bill or note transferred as collateral security for the debt, and the existence of the debt, are sufficient to create that relation. Many cases deny that it is.1 But this alone is, in our judgment, sufficient. The maker has sent out a negotiable contract to pay the bearer or indorsee a certain sum. has been acquired before maturity for a valuable consideration, and the burden of fixing the liability of the indorser (if any) assumed. The holder is naturally lulled into security and inactivity, by crediting the face of the note; and he should not be made to suffer by the maker for confidence which his own promise created. In Maryland this subject has been fully considered and the views of the text approved; and so likewise in Indiana.3

It

1 Wagner v. Simmons, 61 Ala., 143; Penn. Bank v. Frankish, 91 Penn. St., 339. See N. Y. cases § 8316; Goodman v. Simonds, 19 Mo., 106; Grant v. Kidwell, 30 Mo., 455; Brainard v. Davis, 2 Mo. Ap., 490. See cases in preceding notes.

* Maitland v. Citizens' National Bank, 40 Md., 540 (1874). Alvey, J., after quoting Swift v. Tyson, and the New York cases, said: "Subsequently the doctrine has been mooted in the Supreme Court of the United States, upon the theory that the case of Swift v. Tyson did not call for the decision of the broad and comprehensive question, whether the holder of a negotiable note, received simply as collateral security for a pre-existing debt, should be regarded as a holder for value, and, if received bona fide, protected against antecedent equities. In the case of Goodman v. Simonds, 20 How., 343, the question was much discussed, and though the facts of that case did not require the expres sion of a direct opinion upon the subject, yet it is not difficult to perceive the inclination of the court in favor of the principle of their former decision; as they take care to fortify it by showing that it is in accordance with the decisions in England, and in many of the States of this country. In the later case of McCarty v. Roots, 21 How., 432, 439, which arose on the indorsement of an ac

Straughan v. Fairchild, S. C. of Ind., April 27, 1882, Central L. J., May 26, 1882, p. 413, vol. 14, No. 21.

§8316. In the United States Supreme Court the ques tion under consideration was recently fairly presented, and it was called on to determine whether the transfer of a negotiable note, merely, as collateral security for a preexisting debt, was such a negotiation as excluded defences. which were available between anterior parties. In the case referred to, it appeared that the Brooklyn City and Newtown R.R. Company executed and delivered to H. & J. a

commodation bill, and where the defendant pleaded that the bill has been delivered to the plaintiff by the indorser as collateral security for a pre-existing liability of the indorser, and for no other consideration, upon demurrer to the plea, and the demurrer being sustained by the court below, the Supreme Court held the demurrer properly sustained, and expressly declared that the delivery of the bill to the plaintiff as collateral security for a pre-existing debt, under the decision of Swift v. Tyson was legal, and consequently the plaintiff was entitled to recover. The principle, therefore, may be taken to be established in the Supreme Court, and, indeed, in the entire Federal jurisdiction of the country; as upon commercial questions the State adjudications are not accepted by the Federal courts as binding rules of decision. In this State there has been no decision of the appellate court, going to the extent of maintaining fully the doctrine of the cases in the Supreme Court, to which we have referred. In the case of the Cecil Bank v. Heald et al., 25 Md., 563, this court held that a bona fide holder of negotiable paper, for value, without notice, will be protected against the antecedent equities existing between the original parties, and that such holder is entitled to protection where he has received the paper in payment of an antecedent debt, regarding such debt as a valuable consideration; and the case of Swift v. Tyson was so far approved, as it declared that the receiving of negotiable paper in payment of a pre-existing debt is according to the known usual course of trade and business. The court, however, declined expressing any opinion upon the right of a holder of a negotiable instrument received by him as security for a pre-existing debt. The case of Miller v. The Farmers' and Mechanics' Bank of Carroll Co., 30 Md., 392, has been relied on by the counsel of defendants, as maintaining a doctrine somewhat in variance with that maintained in Swift v. Tyson. But we are not of that opinion. The case of Miller v. The Bank was the ordinary case of a bank asserting its lien upon security in its hands for the payment of balances due from its customers. According to the law of the land, the bank, a kind of factor in pecuniary transactions, was entitled to a lien upon all the securities for money of its customers in its hands for its advances to such customers, in the ordinary course of business, without reference to the true ownership of such securities, if the bank was without knowledge upon the subject (Davis v. Bowsher, 5 T. R., 488; Collins v. Martin, 1 B. & P., 648; Barnett v. Brandao, 6 M. & Gr., 630) ; and the question was, whether the bank had received the note from its customer in its usual course of dealing without notice of the true ownership, and whether any credit had been given on the faith of it. There being, then, no adjudication in the State to restrict the application of the principle as maintained in the decisions of the Supreme Court to which we have referred, we have no hesitation in giving to it our full approval; believing it to be supported by reason and the usual and ordinary course of dealing in the commercial community, as well as by a decided preponderance of judicial authority. Indeed, so well established is the principle, as applicable to accommodation paper, that we find Mr. Parsons, in his works on Notes and Bills, Vol. 1, p. 226, stating that it is universally con

certain note for the purpose only of raising money for the company; and that H. & J. indorsed it in blank, and transferred it as security for a call loan to the National Bank of the Republic. The court sustained the right of the bank to recover against the railroad company, notwithstanding the fact that the transaction was in New York, in which State the decisions of the courts are, in principle, opposed to such right. And the opinions of Judges Harlan, Clifford, and Bradley are most learned and able expositions of the subject in all of its ramifications.1

§ 831c. New York decisions. In the leading case in New York on the question under consideration, it was held

ceded, that the holder of an accommodation note, without restriction as to the mode of using it, may transfer it, either in payment or as collateral security for an antecedent debt, and the maker will have no defence. See also Lord v. Ocean Bank, 20 Penn. St., 384. Applying the principle just stated to the case before us, and there can be no doubt of the sufficiency of the consideration for the transfer of the note to the plaintiff, whether it was as collateral security for a pre-existing or a contemporaneous debt, or to secure future discounts or advances, or all combined. In either case, the consideration would be valuable in the sense of the rule which protects the holder of negotiable paper, and the plaintiff be entitled to the full benefit of the security, unless mala fides, or notice of such facts as will impeach its title to the note, be shown."

1 Railroad Co. v. National Bank, 102 U. S. (12 Otto), 25 (1880), Harlan, J., pursuing the views set forth in §§ 828, 831, and saying: "We are of opinion that the undertaking of the bank to fix the liability of prior parties, by due presentation for payment, and due notice in case of non-payment-an undertaking necessarily implied by becoming a party to the instrument-was a sufficient consideration to protect it against equities existing between the other parties, of which it had no notice. It assumed the duties and responsibilities of a holder for value, and should have the rights and privileges pertaining to that position. Our conclusion, therefore, is, that the transfer before maturity of negotiable paper, as security for an antecedent debt, merely, without other circumstances, if the paper be so indorsed that the holder becomes a party to the instrument, although the transfer is without express agreement by the creditor for indulgence, is not an improper use of such. paper, and is as much in the usual course of commercial business as its transfer in the payment of such debt." Clifford, J., said: "Bills and notes of the kind indorsed in blank, or payable to bearer, when transferred to an innocent holder, create the same liability as if indorsed at the time of the transfer." Bradley, J., said: "Security for the payment of a debt actually owing, is a good consideration, and sufficient to support a transfer of property. When such transfer is made for such purpose it has due effect as a complete transfer, according to the nature and incidents of the property transferred. When it is a promissory note or bill of exchange it has the effect of giving absolute title and of cutting off prior equities, provided the ordinary conditions exist to give it that effect. If not transferred before maturity, or in due course of business, then, of course, it can not have such effect. But I think it is well shown in the principal opinion that a transfer for the purpose of securing a debt is a transfer in due course."