224. Introduction. The defenses offered as an objection to the payment of negotiable paper may be against the instrument or they may be of a personal character. To fully discuss the question it will be well to classify parties as mediate and immediate, and defenses as real and personal. Mediate parties are those who are separated by another party or parties, and immediate are those standing next to each other in their order of liability. A real defense is a defense or objection to the instrument itself, while a personal defense is one arising out of the transaction, and relates rather to the acts that caused the instrument to be issued than to the instrument itself. The following are real defenses: No delivery, incapacity, void by statute, alteration, and, perhaps, lunacy. The following are personal defenses: Fraud, duress, failure of consideration, and payment.

1. The Distinction. Personal defenses are good and available between immediate parties or a line of parties with notice.

They cease to be valid as soon as a bona fide party intervenes. Real defenses are good against all subsequent parties, whether mediate or immediate. Personal defenses are against the creative act, while real defenses are against the instrument; the former acknowledge the instrument but deny its standing; the latter deny existence of the contract.

the very

2. Delivery. This is one of the essential elements of all negotiable papers, and to prove that an instrument never was issued with the authority or consent of the maker is to defeat the legal effect of the instrument. Paper stolen and put into circulation by the thief does not in any way obligate the maker. No subsequent holder has a valid claim against the maker.

3. Incapacity. This defense, when urged against the enforcement of a negotiable instrument, needs no discussion. Parties lacking capacity are not bound by their contracts. The minor is an example of this class.

4. Void by Statute. If the statutes of a state declare an instrument invalid, it cannot be enforced even by a bona fide purchaser. While usury is illegal according to statute, it is not necessarily a defense against a purchaser in good faith. Notes given in consideration of wagers or gambling are frequently made void by statute.

5. Alteration. If a material alteration is made in an instrument the maker is released. The instrument is not the one signed and delivered. Forgery is a real defense, for it lacks intent and consent on the part of the one whose name is forged.

6. Lunacy. This is not necessarily a real defense. But if the maker is an adjudged lunatic, his negotiable instruments are void in the hands of all subsequent parties so far as he is concerned.

7. Fraud. If the transaction out of which issues a negotiable instrument is tainted with fraud, it is a personal defense and good only between immediate parties or those having knowledge of it; but if fraud is practiced in the making of an instrument, it is a real defense.

8. Duress. When a contract is procured by resorting to force, the delivery lacks both intent and consent. It is therefore voidable but not void. Properly, prompt effort should be made by the maker so that he may not be chargeable with negligence. Duress as a defense is always available against immediate parties, and, at times, will constitute a real defense.

9. Failure of Consideration. Consideration as a defense is always presumed between immediate parties, but this presumption may be overcome. As in ordinary contracts, inadequacy is no defense.

10. Payment. This is an extinguishment of the contract and may always be offered as between immediate parties. If a transfer is made after maturity by the payee, the defense of payment is good against the subsequent party, because his transferrer has no property in a contract which has already been extinguished. If, however, the payment is made before the maturity of the paper and is transferred before maturity to an innocent purchaser, the defense of payment will not be effective.

225. QUESTIONS

Explain the following: defenses, mediate and immediate parties; real and personal defenses.

What is the distinction between a personal and a real defense? What constitutes a good delivery? What kind of a defense is incapacity? Give an example. Explain the defense "void by statute."

What effect on the standing of an instrument has an alteration? Is lunacy a personal or a real defense? How does fraud affect a contract? What is duress and when a defense?

To what extent is failure of consideration a good defense? When is payment a good defense and when not?

1. In Town of E v. K, 84 Ill. 292, where certain negotiable bonds were declared by statute not to be valid and binding until certain conditions precedent were complied with, it was held, that unless it has been so expressly declared by the legislature, illegality of consideration will be no defense in an action at the suit of a bona fide holder without notice of the illegality, unless he obtained the bill or note after it became due.

It is by force of the peremptory words of the statute declaring such paper void, that it is held to be void in the hands of an innocent indorsee without notice.

2. In McS v. N, 91 Pa. St. 17, where the maker of a note had poor eyesight, was purposely made drunk and then induced to sign an instrument for a much larger sum than the amount he owed, which subsequently and before maturity came into the hands of a bona fide purchaser for values without notice of the circumstances of its execution, it was held that if a man voluntarily deprives himself of the use of his reason by strong drink he is responsible to an innocent party for the acts which he performs while in that condition. It was so decided upon the principle that where a loss must be borne by one of two innocent parties it shall be borne by him who occasioned it, and that nothing but clear evidence of knowledge of or notice of fraud or bad faith can impeach the prima facie title of the holder of negotiable paper taken before maturity.

3. In U v. B, 1 Harris 601, where the action was upon a note given for a gambling debt, it was held that the contract was in defiance of a prohibitory statute, and that such a case was excepted from the operation of the law relating to negotiable securities; i. e., the nature of the consideration was a good defense against a bona fide holder.

4. In S B v. McC, 19 P. F. 204, where fraud on the part of the payee of a note was set up by the maker in a suit by the indorsee, and it was alleged that when he signed the note the defendant was so intoxicated as to be unconscious of the fact, it was held that even "if the evidence had made out a case of gross carelessness on the part of the bank, that alone would not have been sufficient to defeat title to the note." There must have been proof that the bank took it in bad faith or with notice of the fraud.

227. Introduction. These terms are frequently used synonymously. That there are certain points in common cannot be denied, but it is also undeniable that this looseness of definition leads to misunderstanding. Both guaranty and surety are undertakings to answer "for the debt or default of another," and therefore the agreements must be in writing according to the