INDORSEMENT OF NON-NEGOTIABLE PAPER BY ONE NOT A PARTY.

THE HE cases of Hahn v. Hull, 4 E. D. Smith, 664; Waterbury v. Sinclair, 16 How. 329; Moore v. Cross, 19 N. Y. 227; Lester v. Paine, 39 Barb. 616; Bacon v. Burnham, 37 N. Y. 616; Meyer v. Hibsher, 47 id. 265; Phelps v. Vischer, 50 id. 69; Hull v. Marvin, 2 T. & C. 420; Clothier v. Adriance, 51 N. Y. 322; Woodruff v. Leonard, 4 T. & C. 208; S. C., 1 Hun, 632, and Weld v. Bowns, 9 Daily Regr. 921, have finally and effectually settled the law in this State, that one, other than the maker, who indorses a negotiable promissory note before its delivery to the payee, is presumptively a second indorser, and is entitled to all the rights, privileges and exemptions incident to that situation; that prima facie he is not liable to the payee, whose name precedes his on the note, but only to subsequent indorsers; that an action upon such a note by payee against indorser may nevertheless be maintained, provided the former shows (which he may do by parol) that the apparent relative situation of the parties is not the real one, and that the payee took the note from, and gave credit or parted with value to the maker with the knowledge of the indorser and upon the faith of his indorsement. At first it was held that, as the payee is presumably liable to the indorser, he must, in order to recover of him and to avoid circuity of action, indorse the note without recourse, and could do so even at the trial, but since Moore v. Cross, supra, this requirement has been abandoned, and it is now held that having the right so to indorse it will be presumed to be done and treated as if done, and therefore in fact need not be done at all.

But as to non-negotiable paper a different rule has prevailed. The doctrine which has grown up in New York on this point seems to have been grounded upon the earlier cases, and notably that of Josselyn v. Ames, 3 Mass. 273, where it was held that an indorsee for value of a non-negotiable note may write over the name of the indorser a promise to pay the contents of the note to the indorsee, who may thereupon sue the indorser upon such promise. This was practically turning the indorser into a maker.

The cases of Dean v. Hall, 17 Wend. 219; Seabury v. Hungerford, 2 Hill, 84, and Hall v. Newcomb, 3 id. 233, though all suits on negotiable paper, contain suggestive dicta on this question. In Dean v. Hall, Judge Cowen says: "Where the defendant is privy to the consideration and indorses a note not negotiable * * the declaration may then charge the defendant directly as maker." In Seabury v. Hungerford, Bronson, J., says: "If the note had not been negotiable, or if * * the defendant

could not have been charged as indorser, and there had been an agreement that he would answer in

some other form, then the plaintiff might have written over the name such a contract as would carry into effect the intention of the parties." In Hall v. Newcomb, Cowen, J., says: "The question depends entirely on the fact of negotiability

ut res magis valeat quam pereat."

In Seymour v. Van Slyck, 8 Wend. 403, Albany, 1832, Sutherland, J., uses the following language in reference to a non-negotiable note indorsed by the payees: "The indorsement in such a case is equivalent to the making of a new note; it is a guaranty that the note will be paid - it is a direct and positive undertaking, on the part of the indorser, to pay the note to the indorsee, and not a conditional one to pay if the maker does not, upon demand, after due notice. Chitty on Bills, 142; Strange, 478; 3 East, 482; 6 Cranch, 222; 4 Mass. 258. The indorser in such a case, I apprehend, is not entitled to the usual privilege of an indorser of negotiable paper; he stands in the relation of principal and not surety to his indorsee. An absolute guar

anty may be written over his indorsement upon which a recovery may be had against him. 12 Johns. 159; 17 id. 326."

White v. Low, 7 Barb. 204, was a Special Term decision in 1849. The suit was brought by a receiver of a bank as owner of a non-negotiable note against the maker and payees (indorsers) charging the latter as indorsers and as guarantors. The indorsers demurred. Hand, J., seemed to think they could be treated as indorsers and that they should not be held in any other capacity. "But, although not negotiable," he says, "by indorsing it (the note) they conferred upon the Canal Bank such right of action as against themselves. Story on Bills, § 199; Chitty on Bills, 196, 241, 242; Seymour v. Van Slyck, 8 Wend. 404; Hill v. Lewis, 1 Salk. 132. And see Phinley v. Westley, 2 Bing. N. C. 249."

The doctrine in this case on the main point seems contrary to the general current of authority and has not since been followed.

The question came up squarely in Griswold v. Slocum, 10 Barb. 402, Albany General Term, 1851. The action was against the indorser of a note made by S. & Co. payable to the plaintiff. The complaint was in the usual form of indorsee against indorser. The defendant claimed to be liable only as second indorser. Per Parker, J.: "The defendant cannot be charged as indorser because the promissory note is not negotiable. * * The defendant

put his name on the note as security at the time the note was made and before its delivery to the plaintiffs. I think the law well settled that under such circumstances the defendant may be held liable as maker or guarantor; unless he is thus liable he escapes all liability on his contract. His name is placed on the back of the note, but he is not strictly an indorser, because a legal indorsement can only be made on a negotiable note. The dis

tinction in this respect between paper negotiable and not negotiable has been plainly recognized, and is now well established. All the conflict of authority has been in regard to negotiable paper. There has been none in regard to paper not negotiable," quoting Josselyn v. Ames, Dean v. Hall, Seabury v. Hungerford, and Hall v. Newcomb, supra. Watson, J., dissented.

The decision was in conformity with the rule laid down in Story's Prom. Notes, § 473, 6th ed., and cases cited, that "if the blank indorsement was made at the same time as the note itself, the indorser ought to be held liable as an original promisor or maker of the note, and that the payee is at liberty to write over the blank signature, "For value received I undertake to pay the money within mentioned to B. (the payee)."

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The next case in this State was Richards v. Warring, 39 Barb. 42, 1863, Schenectady General Term. The note here was similar in form to the one in Griswold v. Slocum, and no steps had been taken to charge the defendant as indorser. Per Potter, J.: "What then is the legal effect to one who writes his name, without any thing more, upon the back of a promissory note not negotiable, which is thereupon transferred to the payee named in the note, and who at the time of the delivery thereof to him parts with the full consideration mentioned in it, upon the credit of the note?" After defining an indorsement as the writing of one's name on the back of or across a note, etc., by which the property in the same is transferred, the court say: "This effect, that is, a transfer is not wrought upon a note not negotiable, by a signature across the back of it. The title, or property, does not pass by merely writing the name thus upon it. * * *The note is thereby not transferred. * * * Not being such an indorser as to pass the title * * the defendant is not liable as such. But did not the defendant therefore make any contract with the payee by so affixing his name to the note? * It is insisted, and with great force, that he intended only to bind himself as indorser, and not otherwise, and that the court cannot make another contract for him. It is clear that he put his name on the note, knowing that the money was to be obtained on the note from Richards (payee). It is equally clear that he knew his name was wanted to give credit to the note to Richards." After reasoning that the legal presumption as to the intent of the defendant is opposed to the contract of an indorser, and that his signature warrants the legality of the contract, and that the only other parties to such a note are maker and guarantor, and that he could not be held liable as the latter, the conclusion is reached that the defendant is a maker or joint promisor; that the law prescribes no place for the signatures of maker and indorser, and that although it is customary for the one to sign on the face and the other on the

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back, yet the precise locality of their respective signatures is immaterial. The opinion is full, citing numerous authorities, especially Moies v. Bird, 11 Mass. 436; Griswold v. Slocum, supra; Lake v. Mc Vean (an unreported case), and Chitty on Bills, 177.

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This case went to the Court of Appeals, and was there affirmed. 1 Keyes, 576. The opinions were written by Hogeboom and Davies, JJ. Hogeboom, J., says, that it was fair to infer from the evidence that the defendant was not contemplating the contingent liability of an indorser, "for the law, which he is presumed to know, did not admit of such a relation, but rather that he would indorse the paper by writing his name upon the back of it and contract thereby such relations to the other parties to the paper as such a signature would confer or entail upon him. He designed, then, to be a surety of the makers to the payee, and may be held in that character. * * *He is in effect a maker of the note, an original party to the instrument, whose name, equally with that of the other makers, was intended to give currency and credit to it in the hands of the payee, and on the faith of whose signature, either as principal or as surety for the other makers, the paper was discounted. The signature on the back of the instrument is not inconsistent with his liability as maker, if he in fact intended to assume that character." The opinion concludes with an approval of the rule laid down in 1 Abb. Dig. 491 (new ed.), viz.: "If the note be not negotiable, the payee is authorized to overwrite a contract of guaranty, on an original promise to pay the note over the name indorsed, and may maintain an action thereon. Because, unless the indorsement is held to imply such an authority, it is wholly inoperative and senseless, as there can be no liability as indorser in strictness, of a non-negotiable note."

Davies, J., says: "When a party writes his name on the back of a note not negotiable, as there is no contract of indorsement, the courts endeavor to prevent the utter failure of the contract by giving it effect in some other way, as by allowing the holder to overwrite the indorser's name, with the real contract implied by law, or recover against him as a maker or guarantor of the note." Citing Edwards on Bills, 167, 230, and cases cited above.

The last reported case in this State was Cromwell v. Hewitt, 40. N. Y. 491, 1869. This case differed from Griswold v. Slocum and Richards v. Warring, in that there the actions were by payees against indorsers, who were charged as makers or joint promisors, whereas here was a suit against the payee (who had indorsed to the plaintiffs), seeking to hold him as guarantor. No steps had been taken to charge him as indorser. The court below held the suit could not be maintained. On appeal the judgment was

reversed upon the authority of Richards v. Warring. This was carrying out the doctrine of the previous cases to the fullest extent.

There are two considerations, however, in reference to this question which must be borne in mind, viz.:

I. The prima facie and presumptive liability incurred by the technical indorsement of commercial paper generally (by the payee or otherwise), according to our New York rule, depends entirely upon the form of the paper at its inception as contradistinguished from the doctrine of other States, which in this respect place non-negotiable paper and paper negotiable but not negotiated on the same footing. This latter rule was sought to be established in this State in the earlier cases, but has been overslaughed, as we have seen. The New York distinction has not escaped criticism. The learned reporter of 40 New York, in an able and exhaustive note to Cromwell v. Hewitt, 494, says: "Indeed, if it be true," as stated by the Chancellor in 7 Hill, 416, that when a man writes his name upon the back of a promissory note, he only agrees that he will pay the note to the holder on receiving due notice that the maker, upon demand made at the proper time, has neglected to pay it, can he be properly held to any greater or other liability in the case of one non-negotiable in form? And is it really much more difficult to presume this to be his contract, when he indorses a note made payable to the payee alone, than when he has indorsed his name, before delivery to the payee, upon paper negotiable in form, but, of course, as yet as utterly incapable of being indorsed by him as first indorser, and liable as such to the payee, as if it contained no negotiable words?"

In Rothschild v. Grix, 31 Mich. 150, 1875, the Supreme Court of Michigan, per Graves, Ch. J., after reviewing the decisions of the various States on the general question of indorsements by third parties, uses the following language in reference to the distinction adopted in New York: "The reasoning on which the distinction proceeds does not seem quite clear and convincing, * and it neither regards any extrinsic arrangement nor understanding bearing on the quality of the undertaking, nor the circumstances that when the backer's contract is complete and defined by delivery to the payee, the words of negotiability still remain dormant, and the note without an indispensable quality to make it presently negotiable. Now the backer's contract takes effect simultaneously with that of the party who signs upon the face, and the right of the payee against each inures at the same time, * the contract relation of the backer to the payee is constituted at the outset. If the backer's attitude to the payee is not then that of indorser, it cannot grow into it by mere lapse of time. The possibility

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II. In all the cases in this State upon non-negotiable paper, the exact relation of the parties and the circumstances and purpose of the indorsement were fully ventilated, and were the subject of evidence aliunde, upon the trial. But none of the decisions have as yet gone so far as to declare the effect of the bare indorsement of paper non-negotiable in form by one not a party, and the presumptive liability of such an indorser to the payee prima facie, and unsupported by any proof whatever, nor have we been able to discover any decision on this point. Reporter's note, 40 N. Y. 496; Rothschild v. Grix, supra, 156.

Vide

The question arose in a late case, Lynch v. Levy, N. Y. Sup. Ct., Gen. Term, May, 1877, not yet re ported. The complaint was upon a note made by one C., payable to the plaintiff, and alleged "that the defendant then and there and before the deliv ery of said note to the plaintiff, indorsed the same to the plaintiff for value; that said note was afterward, and before the commencement of this action, delivered to the plaintiff herein for value, and the plaintiff became and now is the owner thereof for value;" and alleged demand, notice and non-payment. The defendant demurred for insufficiency. Plaintiff obtained judgment on motion, on the ground of the frivolousness of the demurrer, from which judgment defendant appealed. On the argument the question was discussed from the standpoint of both negotiable and non-negotiable paper. It was urged on behalf of the appellant and indorser, that a note must be sued on according to its legal import (Bishop v. Hayward, 4 Term R. 471; Collins v. Everett, 4 Ga. 274); that if the effect of the indorsement of a non-negotiable note by one not a party, be to authorize the payee to overwrite the name of the indorser with the obligation or contract agreed to be assumed, or with an original promise to pay the note, yet the plaintiff could not recover until he should first overwrite such indorsement, and declare upon the overwritten contract (Castle v. Candee, 16 Conn. 232; ron v. Woram, 1 Hill, 93; Seabury v. Hungerford, 2 id. 84; Josselyn v. Ames, supra); that allegations charging one as indorser are not sustained by proof of a contract or liability as maker (Dean v. Hall, supra; Cottrell v. Conklin, 4 Duer, 45; Heffer v. Alden, 3 Minn. 335; Parkinson v. McKim, 1 Pinney [Wis.], 214; Perry v. Barret, 18 Mo. 140); that where the obligation charged is one which the law does not recognize in the form as charged, the contract is presumed to be a nullity, and allegations and evidence aliunde are necessary to give it vitality

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and effect (Second Nat. Bank v. Miller, 63 N. Y. 639); and that if the instrument sued upon is one which cannot be the subject of a valid legal indorsement, then a declaration charging the indorser of such an instrument upon his assumed contract of indorsement fails to charge him legally at all.

The judgment was affirmed, but the question of non-negotiability was not passed upon or considered. After reciting the allegations of the complaint, the opinion proceeds as follows: "It be may supposed from these averments that the credit was given either to the maker or the defendant, on the strength of the latter's indorsement, but it matters not which, so far as the defendant's liability is concerned. The allegations are therefore sufficient, although signalized by the words for value,' to express the fact that a consideration moved to the defendant from the plaintiff, for the indorsement, and that the plaintiff was not in any sense bound to the defendant by reason of his relation to the paper." The opinion also suggests that the proper remedy for the defendant was a motion to make the complaint more definite and certain. The cases cited are Moore v. Cross and Woodruff v. Leonard, supra; Prindle v. Caruthers, 15 N. Y. 426, and Benson v. Couchman, 1 Code, 119. These cases can scarcely be said to affect non-negotiable paper; and the reasoning of the decision would seem to be equally if not more applicable to negotiable paper. The allegations of indorsement were doubtless equivalent to saying that the defendant wrote his name across the back of the note and received value for so doing, thereby contracting a liability which the law declares to be that of a maker or joint promisor, and that the averments of demand, notice, etc., could be regarded as mere surplusage, as in Griswold v. Slocum, supra, as to the effect of allegations of indorsement for value. Vide Smith v. Smith, 5 Jones & Sp. (Super. Ct.) 203.

Notwithstanding the apparent harmony in the various decisions in this State, it is noticeable that the conclusions are not always based upon the same reasoning, nor do they lead to the same identical result. In Griswold v. Slocum, the third party indorser of non-negotiable paper is styled a guarantor; in Richards v. Warring (in Supreme Court), a joint promisor; and the same case in the Court of Appeals, a surety.

The elements of non-negotiability in commercial paper are usually found in three principal classes or kinds of notes, viz.: 1. Where the note is drawn and reads in all other respects like ordinary negotiable business paper, but the maker has affixed his seal. 2. Where the payment is to be made in other than the ordinary currency or money of the country. 3. Where the note is not drawn to order or bearer, but to the payee alone, by name. The decisions in this State are all based on the last-named class of notes.

So far as presumptions of intent are to be indulged in, they must be judged from the surrounding circumstances; the place of the signature is one circumstance, the form of the note another. 2 Caines, 343. He who indorses a note upon the back can scarcely be presumed per se and prima facie to intend to bind himself primarily and as an original promisor, equally with one who signs on the face.

Take a note drawn by A to B or order, and indorsed by B, the payee, to C, and payable in merchandise or Canadian bank notes. This is a nonnegotiable note. Now, does it sound reasonable to say, that when B, the payee, indorses that note, he is presumed to intend to make himself primarily liable as an original promisor and a joint maker? Vide 2 Kans. 527; 1 Nev. 386. The theory of indorsement is opposed to the idea of primary liability. It is backing or guaranteeing the contract of another. The indorser does not promise that he will pay, but that the maker will pay; the presumption from the place of the respective signatures is, that the debt is the debt of the maker. In South Carolina, the indorsement of non-negotiable paper is equivalent to a guarantee of the solvency of the maker. 3 McCord, 236; 1 Hill's L. R. 58; 1 Nott & McCord's L. R. 128. So in Connecticut, 4 Conn. 124; 26 id. 437; 32 id. 378. In Tennessee such an indorser is only liable upon special contract, or where he transfers paper fraudulently. 3 Humph. 171; 6 id. 303; 3 Sneed, 49; 3 Caldw. 429. For a further exposition of the law of other States see Redf. & H. Leading Cases on Promissory Notes, and reporter's note, 40 N. Y. 494.

The result of the various decisions, however, seems to be as follows, viz.: that except in the technical sense of the words there is no such thing in this State as indorser or indorsement of non-negotiable paper; that the blank subscription of one's name upon or across such paper constitutes the subscriber presumptively a co-maker or joint promisor and surety of the maker, and he can be declared and recovered against as such; that a consideration is not presumed and must always be alleged and established; that proof of an intent to subscribe strictly as indorser, and to be liable only as such, is repugnant to the form of the contract, and will not be received; that subject to this rule the parties may severally show and claim the benefit of the exact agreement and understanding upon which the indorsement was made; that the holder of the note may overwrite the name of the blank indorser with such agreement or understanding, or with a contract of original promise, or guaranty, or suretyship, and may recover upon such overwritten contract; and finally, that the maxim ut res magis valeat quam pereat, applies.

J. C. L.