College of William & Mary Law School

William & Mary Law School Scholarship Repository

1948–1962: Dudley W. Woodbridge (Acting Dean
Virginia Bar Notes
1948-1950)

1968

Negotiable Instruments
Dudley Warner Woodbridge
William & Mary Law School

Repository Citation
Woodbridge, Dudley Warner, "Negotiable Instruments" (1968). Virginia Bar Notes. 38.
[Link]

Copyright c 1968 by the authors. This article is brought to you by the William & Mary Law School Scholarship Repository.
[Link]
 ,l
I
j)r:Jf.-,.._s L- 0 .f [//~#,- h. NEGOTIABLE INSTRUMENTS Revised June 1965 1.
1, Jones executes /a ne.g4tiable note payable to Smith for a gambling debt. Before
ma tul'~. ty,C becomes the holder of the note in due course, and when it. is due, he sues
buth Jones and Smith. What defenses can Jones and Smith make?
Vl/11-14 makes gambling contracts "utterly void". The U .c.C.3-305 expressly provide ~
that a holder in due course takes free from all defenses except "(2 )(b) such ~!-::-!~
illegality -lHH~ aa renders the obligation a nullity." Hence the defense that the note
was given for a gambling debt is a real defense which Jones can make even against a
holder in due course. (Note. Some q11estion may be raised as to the above conclusion
in Virginia because of 116 Va.834 in which it, was held that a bank that had lent
money to maker of a note who, unknown to the bank, had borrmved it for the purpose
of gambling, was entitled to a judgment against the maker). Smith, however, is
liable under u.c.c. 3-417(2)(d) because of a breach of an implied warranty to C
that no defense of~~ par~ ~ ·s ood against him.
f) r:J~ t:Jf Jv~.' 1, rl _ A~ s t-,..- s
r. I hold the c, And D. I desire to sue. In what order are
not~ ' or A, endo se~· by B,
· the endorsers liable, and how many may be sued?
As between themselves endorsers are liable in the direct order of signing unless
there was some agreement between them to a different effect. Such an agreement may
be shown in spite of the parol evidence rule since their endorsements do not purport
to set forth the contract as between themselves. As regards holders, it is immateria:
what the arrangement was as between the endorsers. At common law the holder could
only proceed against one endorser at a time QDless there was a joint endorsement.
But by V#6-422 all prior parties may be joined in one action and a joint judgment
given. ,
I(;} d~ ;~ [Link]. . c6<,v.,..S L- · · .
.3. Chas. Moses is i~., .debted to the Front Royal National Bank in the sum of $500.00
as evidenced by the joint negotiable note of himself and wife. At the time of pro-
curing the loan he likewise delivers to the bank, as collateral security a note of
wm. Brown, payable to Moses, for the sum of $300.00, and payable six months after
date. Three days later, Brown, not knowing that the note has been pledged to the
bank, pays to Moses the sum of $200 on this note. Later Moses and his wife both
become insolvent and the bank institutes suit on Brown's note for $300, which it
held as collateral security. Brmm claims the credit of ~~200 above referred to.
Will his claim be upheld?
No. The bank is a holder in due course. Most defenses and all equities of owner-
ship are out off by a negotiation to a holder in due course. Brown could have pro-
tected himself by insisting that all payments made by him be indorsed on the note.
A taking for a pre-existing debt or as collateral for such a debt is value. Note:
To be a holder in due course (u.c.c. 3-302) one must be a holder who takes for value,
in good faith, and without notice that it is overdue or has been dishonored or of
~ any de ense or~ J laim to it on the p:::~ any person.
£I .s. - ;re..c61:~1 J:~f.,-.u
• The maker of i negotiable note stipulates on its face that in the event of de-
fault in the payment thereof he will pay 10% attorney's f ees for collection. What
is the present doctrine in Virginia as to this stipulati on?
Such a sUpulation does not destroy negotiability. u.c.c. 3-106(l)(e). If the
ten per cent attorney's fee is reasonable under the cl~cumstance s , that sum will be
due if it is necessary to resort to an attorney to collect, but attorneys' fees are
subject to court control as an incident of attorneys being regarded as off icers of
the court. Note: Learn the following from u.c.C.J-104:(1) Any writing to be a nego-
tiable instrument wit,hin th::l.s Article must (a) be signed by the maker or drawer;and
(b) contain an unconditional promise or order to pay a sum certain in money and no
other promise, order, obligation or power given by t he maker or drawer except as
authorized by this Article; and (c) be payable on demand or at a definite time;and
(d) be payable to order or to bearer.
And by u.c.C.3-102(l)(b) an order must identify the person who is to pay with
reasonable certainty.
~~ fJ; d~ fv-le.. - - L ~s .-~ _NFt'bTIABTE
INS'ffiUHENTS Revised June 1965
rf, A solicits from 1ra loan~onf,ooo~ B agrees to lend him the money upon a not~
endorsed by C and D. In the presence of B, C endorsed the note with the express
pr oviso that both D and E shall also endorse it. A secures ·t;he endorsement of D,
but not that of E, and then delivers the note to B. The note is not paid. Can B
recover from C on his endorsement and reason?
No. B knew that as between the parties C was not to be liable until the condi tior1
precedent of E's signing had taken place. An o~al condition precedent can be shown
as between the parties(despite the parol evidence rule)not for the purpose of va:cyirg
-llc:s en~1gem~t b~t, to show that there is no such engagement.
U f1t.P rLHt1- J) (J J r• h-4!.--
6. A purchases in ordinary course a negotiable note from B, who has no knowledge of
any equities between the original parties. A, however, has such knowledlge at the
time of such purchase. Can he or not enforce the note clear of such equities?
He can under the ''umbrella doctrine''. One who traces his title through a holder in
due course has all the rights o! a hol der_jn du course. Hence A's knowledge of a
defense is immaterial. This does not make the maker any worse off, while any other
rule might seriously impair a holder in due course's privilege of further negotiating
the instrument. This doctrine is su'Qject to the exception that orie cannot improve
his position by reacquiring the instrument after it has gone through the hands of a
holder in due course.
7. When, if at all, does a check operate as an assignment of the funds to the credit
of the drawer?
Under U~C .C.3-409 a cheek or draft is not in t. There i s
some authority to the e
ec a a certification a check amounts to an assigrnn~nt
but the U.C.C.J-411 dealing with certification of a check is silent on this point.
There are decisions to the effect that a check is an assignment,(l) when it is for
the exact amount due the drawer when he closes his accoun·t. 9 (2) when the bank has
received a sum of money to cover a specificed check, and, (3) when the drawer borrows
money on the faith of a particular deposit made known to his creditor.
Note(l):The u.c.C.(3M417 and 3-418) adopts the rule of Price v. Neal both as to
payment and acceptance and certification; Hence if F forges D's name as drawer of a
check payable to the order ofF, and ifF cashes the check at the P Store, and the
drawee bank honors the check and fails to return the itemwithin the time allowed if
presented through a clearing house the loss is on the drawee bank. It cannot charge
D's account because D did not authorize or ratify the forgery. It cannot recover
back the payment made to the P Store [Link] the P Stor e acted in good faith and
only warranted that it had no knowledge that D's signature was forged.
Note(2). This is to be contrasted with the rld,Je ap nt t'g;r~ ements a;(,Q;:der
pape[• In such a case ti1e holder who collects warrants that he has good title which,
of course, he does not have if he must trace his title through a forgery, and while
the drawee bank cannot legally charge the draHer's account(because it paid to the
order of forger when directed other-v1ise)it is entitled to recover back any sum paid
on quasi-contractual principles--mon ~y - r-aid under a mutual mistake of fact. The
reason for the distinction between t he recovery of money paid because of a forged
drawer's signature and that of a forged indorsement is that the dralvee has or can
have the drawer's signature on file, but he cannot be expected to know the signatures
of indo: sers ~o may ~ a~~ the world.
~~en,fif ~~ will a holder of a check have a right of action against the
bank on which it is drawn?
~fuen the bank has accepted or certified it. The doctrine of third party benefici-
aries has not been extended to include anyone who might be a holder. Thus, as a
rule, only the drawer would have an action against the bank for wrongful refusal to
honor the drawer's checks. Also when there is something in addition to the check
sufficient to make it operate as an ass i grunent.
 c ,e,rf.' ti t../:1-t: .:>--. Negotiable Instruments Revised 6-1965 3.
9" "V-Jhat is the effect as to dratver and [Link] when the [Link] of the check pro-
cures it to be certified or accepted by the bank on which it is drawn?
lClo What. is thE'! affect as to the drawer of a check, when the drawer on his orm
account procures the check to be certified or accepted by the bank on which H is
d:;:awn, and then delivers it to the payee?
If a check is certified after delivery, on presentation by the holder, the bank
beecmes the aboolute--debtor of the holder, and the drawer is released, the cheGk
b0ing regard€:d as paid as between the d:rawer and the holder. It hc.s been held, he>w-
er;rer, that when a check is certifiecr'before delivery, the effect is to assure the
person afterward receiving it that it . is genuine, and will be paid, the bank and the
drawer both being bound therefor. In the first case endorsers would also be dis-
charged for suchacceptance or certification would be an election to look to the
bank alone ..
11. What is the cardinal difference in legal effect betwean negotiable and non-
vega+ ; ahl e j nstt"nments?
In the case of non-negotiable paper assignees have no better rights than their
assignors. In the case of negotiable paper holders in due course t ake free from all
/) dy fe~es except real defenses and also free from eq:1i ties of [Link].
{fW /.} e. k-..s. c..>
12. Give two instances when a negotiable note is void in Virgini a, and cannot be
enforced by a holder in' due coursa?e
Real defenses include forgery, fraud in the factum( where [Link] person Was not
~egligen·~)' ~~ y' some cases of insa . ~xtreme dure ~s and ip ~ ir&inia, that
J.t was [Link] for a gaming transaction. These defenses are good aga:mst anyone, even
a holder in due course. Fraud in the factum is to be distinguished from Fraud in
the procurement which is not a real defense: Examples-I : :·equest you to sign a paper
telling you that it is my tvill. You sign it and it turns out to be a note. That is
fraud in the factum. On the other hand if I falsaly tell you that X stock is sell-
[Link] at $150 per share on Wall St. and thus get your note for $900 for seven shares
tha~ i p frj-Jl? il) .the procurement and is not a real defense.
!J1.~'1 V orl t9{ /Yffe -r,d-. t>-....-
. lJ., lrJhat is the effect of material alteration of a negotiable instrument?
A holder who makes a fraudulent alteration can recover nothing.. Holders in due
ourse may recover according to the original tenor of the instrument. Non-fraudulent
alterations are ineffeetive. u.c.C.3 ~407.,

( 14. What constitutes a material alteration?

. Any act which changes the legal effe~t of the instrument, either in its tenns or
in the relation of the parties to i t, is a material alteration . Thus a change of
date on a note is a material alteration but the change of t he figures $100 to $400
without changing the written words 11 one hundred dollar s" would not be a material
alteration for in case of conflict the words govern so the no ·~e is still for $100.
fl~15.
/dtL..-WhatI~ constitutes
cL-.__ l4-u.. r .S ~
a hold er
in due course of negotiable paper?
u.c.C.#S-302 defines a holder in due course is a holder who ta..kes the instrument
ror value and in good faith, and w} thout notice : that i t is overdue or has been
S'J~nor~~ny ~efense a gainst or claim to it o~ the part of any person,

17. ~ draw' a check for $500 in favor of B on the [Link] Exchange Bank of Roanoke.
B endorses and transfers the check, for ~alue and without notice of any infirmity
in the check, to c. Subsequently A notifies the ban1c to stop payment because the
check was obtained by fraud by B. Is the bank r ight i n refusing payment to C?
Yes. The bank must follow the drawer ' s direc tions . A check may be stopped by the
drawer at any t i me before paid. C has no privity with the banke C1 s rights are
against A and not against the bank, or against B as an endorser.
 f.·e:L"-~~<W., . P~~ NEGOTIABLE INSTRUHENTS ReYised 6-le65 ~. ~
J8 ~ John Stnithf an attorney-at-law, sold land belong:!.ng to hts client, and the pur~·
r_. haser executed his two negotiable [Link] for the purchase price payable to ~' Joi1n
[Link] th, Attorney / 1 which notes were endorsed by him in like style before ma·~ur:Lt.y ·co
Samuel Smiles in payment of a debt due by Smi-th to him. VJhen the notes fell due t hc;y
weJ:e paid to Smiles. Upon discovering this, Smith 1 s client sued Smiles to re~over
the amount paid him by the purchaser of the property. Is he entitled to recover
in tho suit?
Yes. Smiles vras not a holder in due course as he could not have taken in good
faith when the instrument itself contained the words "John Smith, Attorney". The
word "attorney•.• put him on guard ~to find the agent's authority to pay his private
. debts wi th1 fiduciary paper.
JJ~nh.J Jt~/c-
19" When is a negotiable note payable on demand due, and within what time must pay-
ment be demanded in order to fix the liability of the endorser? A executed his two
negotiable notes to B, one based upon an usurious and the other upon a gambling con-
sideration both before maturity pass int.o the hands of an innocent holder for value.
Can A make defense to the notes or either of them?
(a) A demand note is due on its date, or, if no date is stated, on the date of
issue. Note that a demand in the case of an ordinary demand note is not a conditiorl
precedent to its becoming due, and the statute of limitations starts running at. ome.
(b) By u.c.C.3-503(l)(e) presentment for payment to hold indorsers of demand paper
must be made within a reaso::1able time after such party became liable theraon. In
the case of an ordinary check 7 daya is presumed to be a reasonable time in the case
of indorsers. To be a holder in due course of demand paper one must acquire it
within a reasonable time a:'ter its issue .. u.c~C.3-304(3)(c)The gambling note is made
utterly void by statute. A has no defense to the usury note an against a holder in
due course since there is no statute in Virgirua making usurious contracts utterly
void. Illegal~ tr is ordinarily enly a personal defense.

16: ~1atw~ s the

@;"-<> Awe.!!.
effect of the transaction where one who is primarily bound for the
payment of a note takes it up? What if the note be taken up by a stranger who is
neither a party to the paper nor in any way bound for its payment? What title does
the purchaser of past due negotiable paper from an agent for collection acquire?
(a) Secondary parties are discharged unless the instrument was for their accomo-
dation. (b)U.C.C*3-603 provides that payment may be made with the consent of the
holder by any person including a st:r.:m ger to the instrument and that surrender of
the instrument to the payor gives him the status of a transferee. (c) Only the title
the agent for the collection had. If he holds the note as an agent, so does the
purchaser, and this for two reasons, first after maturity, and second knmdedge of
the agency • 1
•
1\ :sc.l~ ..... --- d{ ~;~ ; I."'-
~l. A note for $500 in p~yment of a. subscrip·[Link] to stock in a land company is made
payable to tlA 1 Secretary and Treasurer 11 • The company discounts the note to B, and
A, in order to effect the transfer endorsee in the terms above used. The note is
protested for non-payment; the r:ompany is insolvent, and B endeavors to hold A in-
dividually as endorser. What as to A's lial;)ility?
A is liable unless he indorsed in such a way as to disclaim liability as "'A,
Secretary and Trea:::urer without recourse". Comm ent 1 to u.c.c~ 3- 414 reads in part,
"An indorser may disclaim his liability on the contract of indorsement, but only if
the indorsement so specifies o Se~tion 44(of the N.I~L.) permitting a representative
to indorse in such terms as to exclude personal liability is omitted as unnecessary
and included in the broader right to [Link] an;y liability •11
,, /J ,"'- t,_.()..,,,.cL: I :Ck~ i'h-~.-('~.. {)-- (),.. J,._.,. fiJ I~ )I
1. IS the following inltrument neopt j ~ble? 11 X, pay $900 out of the money due me for
building your barn.-2 11 •
The fact that a bill of exchange(draft) is not dated nor the place of execution
mentioned, does not affect its status as a negotiable instrument. The above instru-
ment is not negotiable(l) because not payable to order or beater(2) because the
order is conditional on the existence of a particular fund. Note hol-mver if the
promise or order is absolute, a direction to charge to a particular account or fund
 NEGOTIABLE INSTRUMENTS Revised June 1965. 5 "'
19//tf..,
~~s nop/ in itself make a promise fJndit~o ~'.l~~
f;V6 · ~ 6-- ~L or- A r1 J,~--f;~t; fe.-
de....-.
,
-/-:rxe'
2 ,, I !J X's otherwise negotiable note nego'c>:[Link] if payable(l)1rJhen he is 25 year3 o!
c::.ge.(2) At his death.()) When the wheat on certain land is harvested (4} 1~1hen de-
manded (5) Ten years from date, but i f any of this series of notes be not paid 1•Jhen
daP;, then all to become due and payable?
tl) No, as X may never reach 25 years of age.(2) No. U.C.C.3-109(2) reverses the
fo~me::c law and provides that an instrument which by its terms is otherwise [Link]
only on a.n act or event uncertain as to time of occurrence is not payable at a
definite time even though the act or everi!" has occurred. (3) No.; as it may never bo
harvested.(4) Yes. This is an ordinary demand note. (5) Yes. By U~C.C.3-109(e) an
instrument is payable at a definite time even though it is subject to any kind of

~
celeration.

(_fi-ve-,- f1 ~ I• It
(1) When 1s an 1nstrument payable to bearer?(2) A check read, 11 Pay X, or bearer
$500-Y 11 • Y sent this check through the mails to X. Z stole it .from the mails and
forged X's name thereto and negotiated it to A, a holder in due course. The drawee
bank charged Y's account. \nJas it wH,hin its rights in so doing?
(1~ By U.C.C./13-111 an instrument is payable to bearer when it is payable to beare!
or to the order of bearer, or to a specified pernon or bearer, or cash or to the
order of cash, or any other indication which does not purport to designate a specific
payee. And "[Link] U.C .C .//3··204 (2) a.n instru:r.1ent payable to order and indorsed in blank
becomes payable to bearer ar1d may be negotiated by delhrery alone until specially
indorsed. Note: Bearer paper of Jill kinds can be effeotively specially indorsed.
(2) Yes. This is bearer ;)aper. A does not have to trace a title through the
forgery and hence may stril{e it out. If this ha.d been order paper the bank would
have~ ad o make good as they would not have paid to the order of X.
-r::
c· Ut.-
k~~~
4~ P g e his servant, A, a check filled in every way ~~cept as to amount, and
directed him to get certain articles at the X store and fill in the amount of the
check for those articles.. A got articles for himself instead and filled in a much
greater amount in the presence of the storekeeper, and absconded. (1) Must P make
good to the storekeeper? (2) If tile storekeeper had passed the check to a holder in
due course would P be liable on the check?
The answer is nyesn in each case pl:'ovided the storekeeper acted in good faith.
The [Link] .. treats this case as an alteration and under U.C.C./;lJ-407(3) when an in-
omplete instrument has been completed a holder in due course may enforce it as
ompleted. And by U.C.C.#J-302(2) a payee can be a holder in due course •
( ; • X made out his note to Y for $500 but had not yet given it to him. The parties
. disagreed. While X left the room to see what his ~ife wanted Y walked off with the
note, and negotiated same to H, a holder in due course o (1) Is X liable thereon?
(2) Suppose the note had been incomplete and Y had filled it in before he negotiate1
it to H.
X is liable in each case to H.
Lack of delivery of a completed instrument is only a personal defense. The U.C.C,
(3-115 and J-407 combined) makes X liable even in the case of a stolen incomplete
instrument which [Link] X's genuine signature. 11 And when an incomplete instrument is
completed(a holder in due cou:cse) may enforce it as completed." (
J) ~ft-..s. of )~f ~f {(y;,_s:cle;;). "- - ~e{eiL . . €. l. , ...)( • 'i~t./4L-
6. Plaintiff, the payee, in his motion for judgmen't on a note agau!'st the maker d:.d
not allege that the note was given for value. Defendant demurred. Result?
Demurrer over-ruled. Considerat i on is presumed. Lack of consideration must be
set up as a defense. Note that lack of consideration is not a defense as against
a holder in due course . However, J.f Maker is m.::.ed by an alleged holder in due course
and i f Maker can [Link] a personal defense, then the alleged holder in due course
has the l:urden of proving t hat he is in all respects a holder in due course or traces
his title through a holder in due course.
 NEGOTIABLE INSTRUMENTS Revised June 1965 6ft
'( ., X lent Y $500, for which Y gave X his negotiable note. X endorsed this noee to
Z after maturity and without any consideration. Y refused to pay and Z sued X and
Y both of whom set up the fact of no consideration. Result?
X is not liable to Z as he has received no consideration for his indorsement as Z
knew . Y is liable to Z as he has no defense. True Z is not a holder in due course
but that is immaterial unless there is some sort of defense. Z has at least all the
rights of a gratuitous assigneeo X meant to make a gift to Z and not to Y and it
~ make~ no difference to Y wpether he ~ays X or a party whom X has ordered him to pay.
(.)~> . {:c._ ,J :- .,_ of ~~~~ew-...-ff..s ·
Bo Classify the follow~ng indorsements(l) Pay toY, X. (2) X. (3) Pay Y if he passes
the bar exam, X (4) Pay Y only, X (5) X, without recourse on me. (6) Pay Y, for
collection only, X. (7) Pay Y as trustee for B, Xo
(1) Is a special indorsement, (2) blank, (3), (4), (6), and (7) are restrictive,

~escl-v:e:-rdt
d (5) is quai{ i ied. ..J- _
In
r. t[( e~ ·
question (3) would the drawee bank be safe in paying if it knew he had failed
to pass the bar exam indicated?
No. Under U.C.C.#J-205 the former conditional indorsement has been changed to one
. form of restrictive indorsement. And under u.c.C.#3-603(l)(b) a payment made in a

(10. ~£i
man~ ~con;~ tent with a restrictive indorsement does not discharge the payoro
is the effect of a restrictive endorsement?
Section 3-206. Effect of Restricti-ve Indorsement.
(1) No restrictive indorsement prevents further transfer or negotiation of the
instrument.
(2) An intermediary bank, or a payor bank which is not the depositary bank, is
neither given notice nor otherwise [Link] by a restrictive indo:csement of any
person except the bank's immediate transferor or the person presenting for payment.
(3) Except for an intermediary bank, any transferee under an indorsement which is
conditional or includes the words 11 for collection", llfor deposit", "pay any bank",
or like terms(sub-paragraphs (a) and (c) of Section 3~205) must pay or apply any
value given by him for or on the security of the instrument consistently with the
indorsement and to the ex:tent that he does so he becomes a holder for value. In
addition such transferee is a holder in due course if he otherwise complies with
the requirements of Section 3~302 on what constitutes a holder in due course.
(4) The first taker under an indorsement for the benefit of the indorser or an-
other person(subparagraph (d) of Section 3-205) must pay or apply any value given
by him for or on the security of the instrument consistently with the indorsement
and to the extent that he does so he becomes a holder for value. In addition such
taker is a holder in due course if he otherwise complies with the requirements of
Section 3-302 on what constitutes a holder in due course. A later hoider for value
is neither given notice nor otherwise affected by such restrictive indorsement un-
less he has knowledge that a fiduciary or o ther person has negotiated the instrwnent
in any transaction for his own benefit or otherwise in breach of duty(subsection (2)
o~ ~ectio~1 3-304) • . ·-'
£11#[Link]-.7] () i ...uJ clUJ !ft,~L.--
11. ·{1) X jorge yfs name as drawer of a check and negotiated it to z, a holder in
due course, who indorsed to A as follol-JS- 11 Pay A, without recourse on me, Z •11 Is z
liable to A? {2) X, an infant, wrote the folJowing check "Pay to the order of cash
$50.00, X. 11 He then delivered the check to Y who passed it to Z without endorse-
ment. Z indorsed to A. X stopped payment. A neglected to give Z notice of dis-
honor. (a) If A sues Z what result? (b) If A sues Y what result?
(1) Yes. Under u.c.C.#3-417 (2)(b) any party who transfers an instrument for a
consideration warrants that all signatures are genuine or authorized. (2)(a) Z is
liable on his warranty that no defense of any party is good as against him unless
he indorsed without recourse in which case the warranty is (as to this point) that
he has no knowledge of any defense. No proceedings on dishonor are necessary to
hold a party on warranties. (b) Y is not liable. A transferror without indorsement
is liable only to his immediate transferee. Had Y indorsed he would have been
liable on his warranties to any subsequent holder who took in good faith.
{(1 'f 0 Ju JffY .s e../?( ~J- NEGOTIABLE- INS'rRL"MENTS / .Revised June 196.5 7 ,,
l ?.. Suppose X forgets to indorse when he passes the instrument on toy for valu e,
[Link] [Link] Yis rights?
Section 3·..201. T:::-ansfer: Right to Indorsement.
(1) Transfer of an instrument, vests in the transferee such rights as the t:-cansf l':r' ··
or has therein, except that a transferee who has himself been a party to any fraud
or illegality affecting the instrument or who as a prior holder had notice of a
defense or claim against it cannot improve his position by taking from a ]_ate:,~
holder in due course. (2) * ~~- ~~- (;3) Unless otherwise agreed any transfer for value
of an instrument not then :payable· to bearer gives the transferee the specifieall~r
enforceable right to have the unqualified indorsement of the transferor. NegotiaGion
takes effect only when the indorsement is made and until that time there is no pre-
~umpp i~n that the transferee is the owner.
"-·tf/J i/, 1'-J of hdcnrsws
13. What/should be remembered about the liability of indorsers as indorsers?
Section 3-414. Contract of -Indorser; Order of Liability.
(1) Unless the indorsement otherwise specifies (as by Gu~h words as "without re-
ooursen) every indors~ engages that upon dishonor and any ne~essc:try notice of dis-
honor and protest. he will pay the instrument accordiqg to its tenor at the time
of his indorsement to the holder or to any subsequent indorser who takes it up,
even though the indorser who takes it up was not obligated to do so. (2) Unless they
otherwise agree indorsers are li ~ble to one another in the order in which they in-
dorse, which is preswned to be the order in which their signatures appear on the
t~~~t:: 6"
~ ~~;sked Y hr
u -·
he, Y, would cash his $200 check. Y telephoned the drawee bank,
and upon their promise to honor X's check, Y told X that he would take it. After
Y called the bank several other checks were presented to the bank drawn by X which
exhausted his account. The bank refused to honor X's check. Y sued the bank.
[Link]?
Judgment for the bank. It cannot be held as an acceptor unless acceptance was

~
writing and on the draft(check).
)"~I{ ~ ~- ~ ~~ ,rf- 'b r-IQ<.i (/,/'
L)J

~nD~awer -tr~ral checks and died before the checks cleared. Would the
Drawee Bank be within its rights in honoring these checks if its officers knew about
Drawer 1 s death?
U.c.C •.f/4~405 reads in part:Death or Incompetence of Customer.* ~*" ~~Neither death
nor incompetence of a customer revokes such authority to accept, pay, C•)[Link] or
account until the bank knows of the fact of death or of an adjudication of incompe-
tence and has [Link] opportunl ty to al!t on it. (2) Even with knowled ge a bank
may for ten days after the date of death pay or certify checks drawn on or prior to
that date unless ordered. to sto:;::> payment by a person claiming an intei·est in the
account.
16. A [Link] inStr11ment -v1as not a able to crder or bearer. Is it
governed by Arti cle
Yes. [Link] #3-805 provides t hat such an instrument is negotiable for all purposes
except that there can be no holder i n due course. All other provisions of Article
3 are applicable. I·Ience indorsers are entitled to notice of dishonor, consideration
ia presumed, and procedural provisions apply.
NEGOTIABLE INSTRUMENTS ~-. -~.-/- ~Wd
{ - m,qo/J June 1965 166 Va .. 439.
One S turned over $150Q _to her son-:01.:~ ~61:-end on real estate. M lent the
0

money to C who gave a note for $1500 payable to bearer, and C executed a deed of
trust to Mo The note sho't~ed that it was secured by deed of trust. M later pledged
this note for a debt of his own to the ~ Bank. S claims that she is entitled to t he
note. The bank claims that it is a holder in due course of bearer paper. Discuss.
1. Statements on notes payable to bearer that they were secured by deed of trust
made unto named party as trustee should have arous~suspicion of bank acquiring notes
from such party of possible equities of other parties, although statements were not
sufficient in themselves to charge bank with bad faith in acquiring note. 2. Section
56 of the N.I.L. (Code 1919 1!'5618) makes a distinction between constructive notice as
applied in other branches of the law, particularly equity, and as applied under the
law merchant. In the former, ••The care which a person of ordinary honesty and
prudence would have exercised is the test.n Under the law merchant the question is
•1 not ought the holder to have suspected, but did he suspect the existence of the
equity. 11 3. At the time the bank acquired this note it knew that M was unable to
meet his financial obligations. He was $1500 in arrears for office rent due the
bank. The bank knew M was the son-in-law of S, that he habitually lent money for
her and others on Norfolk real estate and that he made himself trustee in the deeds
of trust securing these loans. Yet the bank make no inquiry of any sort from M or
anyone else. A jury could find from these facts not mere negligence, but bad faith,
and if they did, as they did in this case, it -vms error for the trial court to set
aside the verdict of the jury.
Note: There would be the same result under the u.c.c. The test of good faith in
Virginia is "the empty head and white heart rule". But if a purchaser has knowledge
of such facts that his action in taking the instrument amounts to bad faith he has
not taken in good faith. The Virginia version of u.c.c. #3-30u adds a nsuhseotion (7)
W Eich keeps the law on this-point in this State as it w nder the N.~-~·
NEGOTIABLE INSTRUMENTsfk~ .JP;J_ ~ .tJr-tlV--;5 .;-th.. • '.!L 1 1/J-( 166 Va.325
A $250 note was payab~e~ instal~ents of $10 1 eaCh' staftinn; April 1, 1932, the in-
stalments being due every 2 months. The note provided that 11 In the event that two of
said payments shall be due and unpaid at the same time, and then, if not paid within
30 days of the due date of the last of the s aid two overdue payments, the balance
in full of this note shall immediately become due and payable without notice."
(1). Does the statute of limitations run from the due date of the last instalment,
or, from accelerated due date, in case of default? (2) Is the note negotiable?
(1) While there are cases which hold that these contracts of acceleration are for
the benefit of the creditors and merely confer upon them the right at their option
to treat the debt as due, still when the acceleration provision is absolute in form,
as here, the whole note becomes due according to the acceleration provision automa-
tically and the statute of limitations starts [Link] from accelerated date.
u.c.C.#3-109(l)(d) in accord.
(2) u.c.c. #3~109(l)(d) permits any kind of acceleration, and provides that acceler-
ation provisions do not destroy the requirement that the instrument must be payable
on demand or at a definite time.
NEGOTIABlE INSTRUMENTS--S~ 168 Va.28)~.
J bought a car on the instalment plan evidenced by one note of $428 payable in 12
monthly instalments, and in case of default all to become due at once(Note:Not at
the option of the holder but automatically). .
He failed to make the two first payments. Suit was brought therefor and judgment
recovered and paid. He refused to make any further payments and Finance Co. took
the car.
Helds Guilty of conversion. ~uit for two instalments when all instalments were due
b e remainder. "No one should be vexed wice for one and the
same thing.n Different result if acceleration had been at the option of holder
instead of automatically.
 Al j· , J.. J 22o1. Revised June 1965
!·:-:~L:OTIABIE INSTRUMENTS 111~ ~{..~ (J.f v ; ~~ 172 [Link].
~~ -1. Is oral notice of dishonor suffi,:ient?
2. Is notice of [Link] sufficient if given to an executor before his qualifica-
t.::..on?
3 • If the holder of a note is also executor of a party seconda.ri1y liable m'.lSt he
give notice of dishonor?
4. If the holder-executor as above gives a binding extension of time to the MalcE::r
for 4 years is the deceased's estate released?
A.l. Oral notice is notice . The U .c.c. does not require a written notice.
2. Yes, as it would be presumed that he still had this notice in mind after he
qualified.
3. no. One need not give notice to himself.
4. An executor has no authority at common law to consent to an extension. Under Va.
Code renewals in such cases cannot exceed 2 years. Hence the deceased's estate is
not liable having been discharged by a binding extension of time for 2 years without
· a reservation of rights against parties secondarily liable.

NEGOTIABI.E INSTRUMENTS be...~sc..s. ·173 Va.436.

Dr. E applied by B, an insurance agent, for life insurance in the amount of $10,00~
Dro E gave B his note for $600 for the first year's premium if Dr. E's applicati on
was accepted. Otherwise the note was to be returned. The application was rejected.
B, instead of returning the note, wrota on it. ~ npayable at. the C Bank". B then took
the note to the C Bank which discounted it for B the note being payable to B's order~
The C Bank acted in good faith and knew nothi ng of the ac!dition. The C Bank sued
Dr. E who defended on the eround of material alteration and conditional delivery.
Discuss.
Material alteration exists for if one adds a place of payment where no place is
specified the contract has been changed. But a holder in due course may collect
according to the original tenor of the instrument. Likewis e a conditional delivery
is not a good defense as against a holder in due course as it is a personal defense
rather than a real one.
NEGOTIABLE INSTRUMENTS 173 Va.l68.
Parol evidence as to a negotiable instrument will not be r eceived, unless there is
some·i:.hing on face of instrument, or in manner of signature, to create an ambiguity
as to liability of party signing.
~f a bank is holder in gue course, a receiver of the bank ;,rho traces his title
through the bank has the same righta as a holder in due course.

NEGOTIABLE INSTRUMENTS 1.80 Va.76.

A note made by X,Y, and Z was indorsed by D as an accommodation indorser. When it
matured, the holder, H, assigned the instrument without recourse to X,Y,and Z who
then re-indorsed and redelivered the note t o H as collateral security for a renewal
note. D died in the meantime . H a.s personal representative, did not r e-indorse the
origi nal note nor did she indorse the renewal note. Is she liable on the original
note assuming that she consented to the execution of the renawal note?
Held: Not liable. To assign without recourse to the makers is to divest one of the
note. Hence the makers became the 01·mers of the note in their own rigM;. U.c.c. l/3-
601(3)(a) reads, "The liabilHy oi' al t .schar ed when an a has
himself no ri ht of ac tion or recourse on the instrument reacqui reo the instrument
~~i-ght." -- - - .

NEGOTIABLE INSTRUMENTS ~s <"o-,. •...

t) 180 Va •77.
X made a note which contained the sentence that both maker and endorser cons ented
to an extension of payment beyond the dalbe of ma·~uri ~y. D was an accommodation in-
dors er. He died, and the note was renewad several times after his death . Is D's
personal representative liable?
Held: No. Such extensions cannot be continued indefi nitely after the death of the
endorser, for; if it could, the executrix might never be able to settle the estate
of her decedent. (p.81)
 2202. Revised June 196S.
I1Q te: An endorser of a note has the [Link] of a surety, and any change in the con-
t r act, made withou·t; his consent, even though it be to his advantage discharges the
sureJGy(p.82). Of course, there must; be consideration for the change in the contra<":t,
or there is no change. A renewal note constitutes a change as maker was under no
duty to give a new note and the payee was under no duty to take a new note. Note:
UoC.C.#3-118(f) reads in part, "Unless otherwise specified consent to extension
[Link] a single exten~o [Link].-tru ori inal eriod."
NEGOTIABLE INSTRUMENTS 18& [Link].
A note for $2,000 was secured by deed of trust. The note did not, contain any
acceleration clause but the deed of trust [Link]. or ace [Link]:atiQ.o_at the ogt:[Link] of
[Link] note holder if taxes were not paid or interest was not kept paid up. The maker
of the note failed to keep up interest payments and taxes. Does this accelerate the
note if the holder so desires?
Held: Yes, by express statutory provision{V#SS-59). Thur: the rU:_le in Virginia is
that the note as \vell as th.e deed g f +.rust is acc..eler:.a:ted under t he above cftcum-
stances.
NEGOTIABLE INSTRUMENTS 180 Va.421Q
A bearer negotiable bond was indorsed in blank by x. The next indorsement was as
follatws, "Pay to Y the interest on this bond for Y1 s life if Y supports her mother,
and at Y' a death to be the prope1·ty of my b:rothers and sisters. Z ." Y contends that
she can strike out the above indor8ement and hold the paper in her own right since
the bond is payable to bearer. Is this contention sound?
Held: Section 40 of the NIL(Where an instrument payable to bearer is indorsed
specially it may nevertheless be further negotiated by delivery •• )and section 49
(The holder may at any time strike out any indorsement which is not necessary to
his title) have no application to the instant case as the indorsement here is con-
ditional and is necessary to Y's limited titleo Note: Under U.c.C.f'3-2'04(1) the rule
laid down in Section 0 of the " is chan ea, cand .begrer a e~ my be indorsed
s ec ially ~ . n... fl:r--h,/. · r -._.. Cll./J.l... ..112- .

NEGOTIABLE INSTRUMENTS--Co~s ~~~tion,Statute of Limitations 181 Va.377.

In 1919 H gave X a negot~a ? emand note for $4,ooo. This note was indorsed by W
who was H's wife. H died in 1940. X did no-t present the note to H's estate as the
[Link] of limitations had long since run. X persuaded W to give him a note, and the
sued Won the new note. W is now 85 years of age and deaf. Is she liable on the new
note?
Held: Yes. While she had been discharged long ago by failure to present the note
at its maturity, and by the running of the statute of limitations these defenses do
not discharge the obligations but merely bar tho remedy. W waived the bar when she
gave the new note, and if there was consideration for her original liability on the
original note that same consideration suffices for the new note.
NEGOTIABLE INSTRUMENTS ~~d~.,z..,r I"- t.- ~r.> "
clu. 182 Va.,45S.
X was the holder of a J6[~ for $3000 payable to bearer and secured by deed of
trust. X was a lawyer and held this note in trust for an estate, and was bonded.
X secured a divorce for Mrs. G and learned from her that she had $2000 in the bank.
X told her that she ought to take out the $2,000 and invest it in the note he had,
and she could have a 2/3rds interest therein. He said he couldn't let her have the
note as the estate still had a one-t;hird interest: So Mrs. G gave him the money and
he gave her a receipt for same indicating it was a loan on the not.e. A month later
X sold the note to D who was a holder in due course. X died a few weeks later totall
insolvent. What are the rights of the parties?
Held: (1) Mrs. G was not a holder in due course as ehe knew this note was not X• a
own private property and that he had no authority to borro-w on it. Same result under
u.c.c.#J-304(2).
(2) D was a holder in due course and is entitled to collect same from the maker.
(3) The Surety Bonding Co~ is not liable to Mrs. G as this wae outside the scope
of the trust, and a matter purely per sonal between X and his client.
 2203. Revised June 1965.
NSGOTIABLE INSTRUMENTS 183 Va.83,94.
"In Vaa a ~i~Ilat1on 1n a note for compensation to attorneys for collection fees
L1curred, i f payment of the note is not made at maturity, is a valid, binding.v [Link]
enforceable contract. If the attorney's fees are incurred under the conditions se~
Otlt in the notes, they are a part of the same obligation as the principal and inter-
ee t.11
Hence a deed of trust securing the payment of the note equally secures the paymant
of the attorney's fees.

NEGOTIABLE INSTRUMENTS fl/4rJ.· ~ 10. S.E.(2d)873, 176 Va.255.

D borrowed money from ,P"" and gave his note therefor payable one year from dateo Year
after year a renewal note for 1 year was given. On the occasion of the last renev..r?-.1.
D wrote "10 year ·"· P did not notice that there was a naught after the 1 at t h13 t in:8
D died. P then innocently erased the naught and attempted to collect the note fr o;n
D's personal representative. He refused to pay it because of the alteration cla~n~i ng
that the note was discharged by section 124 and 125 of the NIL(V.f/6-477 and 6-47tl)
Held: The note was discharged, but sinee P acted in good faith to correct a sup9os~
ed error P may collect on the original obligation for .whioh the discharged altered
note was given. Otherwise an innocent act would result in an unjust forfeiture. Of
course if P had acted fraudulently there could be no recovery either on the r.c ·~, e or
on the obligation for which the note WIOl.S givene
Note: Under u.c.C.//}u}.+07(2)(a) and (b) ~Fa-tion which iB ROt beth f'!'ettdttlent
a~material discharges no one, and the obli ation rna • according to its
ori 1na enor. n e pr nc pal case a ove under UaC,C. Jaw, nless the note could
'be re orm in equity, there would be no dutY t o pay it until it became d ter
the ~ .c. 3- 0 any act1on on the underlying obliga-
t a suspended until ~he note given for it is due.

NEGOTIABIE INSTRUMENTS f\.t~r~t- · ' eY.'6- 185 Va.977.

D as maker gave his brother B his notes for $21,000. Later B died. Before his death
B told D and four other persons that D need never pay the notes as he wanted D to
have the money. After B's death B•s personal representative found the notes in B1 s
valuable papers and demanded payment. Is D under a duty to pay them?
Held: Yes. Under the NIL(V#6-475) "a renunciation must be in writing unless the
instrument is delivered up to the person primarily liable thereon." Since the re-
nunication was not in writing and since the notes were not delivered up the obliga-
tions have not been discharged and it is the duty of B's personal representative to
collect them. ~ The same result would be [Link] under u.c.C.#3-605(l)(b) which
reads, "The g.~ of an instrument may even without consideration discharge any
part b renounc.ing_his _ri ghts by~ri~ned and el vered or by surrender of
tha~ar_ty_to.._he di schS!f_ged."

NEGOTIABLE INSTRUMEN'fS ~lJev- (H. dM.- ~~c_ - ;{(,. ../'d t.-- ()~ &6SJI1~-·51B,526.
Land was conveyed to T as trustee to secure a not~~ble to t~~~er-c>f L. Upon
default T foreclosed and sold t!1e land to G for G' a $4500 note payable to bearer,
which note was secured by a deed of trust on the land sold to G at the foreclosure
[Link] of giving thia note to L, the trustee T, long afterwards sold it to C
who gave value. After maturity C -sold the note to B. Contest between L and B as to
which one has priority in the proceeds of a sale of the land,whi ch sale "las acquies-
ced in by both Land B. The $4500 note matured in 1932. When C w~s asked when she
bought the note she said she could not remember exactly but that it was some time be-
tween 1930 and 1937. B claims that he traces his title to the $4500 note through a-
holder in due course, C> and hence that he has priority o·ver L. Is this contention
sound?
Held: No. When L showed that T negotiated the note in breach of trust he showed a
defeot in c•s tttle. The law then casts the burden on B to show that C was a holder
in due course. One of the elements of being a holder in due course is a purchase be-
fore maturity. c•s testimony that she acquired the note somewhere between 1930 and
1937 when the note was due in 1932 does not sustain thi s burden.
 220h.
Note: The result would be the same unde::c [Link]!3-307(3) 1-1hich reads, "After i t i s
Sfim.m ""that a def€nse exists a person claiming the rights of a holder in due course
has the burden of establishing that he or some person under whom he claims is in
all respects a holder in due course."
NEGOTIABLE INSTRill'lENTS Renunicationr iills 195 Va.92
F sold a farm to his Ne~w, N, aff fs mother for $12,000 taking their not e ther~
f or. The note bore 6% interest and vras payable in 15 annual installments of ~p 800
ea~h beginning on June 10,1948. F decided to make a gift to N and his mother of any--
thing that might be due on the note when F died so they all went to lav1yer L' s
office. L advised him to write on the note, nAt death this note is to be cancelled
and not to be collected" and to sign and date it. So they went to F 1 s home and N
wrote the statement above on the note and F signed it and gave the note to N's
mother. F died a few months later. Section 122 of the N.I.L.(V/16-475) reads in part,
11 The holder may expressly renounce his rights [Link] any party to the ins ·~rument

before, at, or after maturity. An absolute and unconditional renunciation of his

rights against the principal debtor made at or after maturity of the instrument
discharges the instrument. 11 F 1 s personal represent,ative wishes to hold N for the
balance of the note. Can he do so? ·
Held: No. It is immaterial that F's act may have been testamentary in nature.
Section 122 applies, and under the first senten~e of #122 there has been a valid
renun~iation. The power to renounce the whole immediately includes the power to
renounce a part at a later time, as at the death of the renouncer. Nor does a re~
nunication need cons er ·ion nor 'does -'t_h_a.Y.e_to_satm the re uire~ents of a
gif n er vivos cr. rtis he statute of wills.
o eJ We wou d in this case reach the same result under UoC.C./f3-.. 605(l)(b)(set
!O?tn- supra at the end of the second case before this) for the renunication vms in
writing and the note with the renunciation was delivered u.p to one of the makers .for
both of them thereby doubly satisfying the u.c.c. requi~ements for renunmiation.
1
NEGOTIABLE INSTRUMENTS ljfA. __ J1_ 1._ f. ,/) < / 197 Vao_589.
A dispute arose betw-aerf~ aJ to "U{e amount due P by D. D sent P a check for
$6,000 marked "Payment in full of accounts both no·!:.es and open." P notified D
that he would not accept the check as payment in full. P later had the check certi-
fied. The N.I.L.(V#6-541) states that certification is the equivalent of acceptan~e.
D contended that when P had the check certified he accepted it as per conditions
annexed thereon~
Held: D is wrong. The term 11 acc eptancett as used in the N.I.t. is a te~ hnical term
applying only to the liability of UJ e drawee bank. Whether or not P has accepted
the check in full payment depends Gn the intention of both P and D. Unless each
intended such a result the original debt is ·not discharged by an accord and satis-
faction. Note: Same result for same reason. See u.c.c. #'3-411.
NEGOTIABLE IN~TRUMENTS ~---"' •
,-/-- .1$ A--'dt)'k::, 198 Va.692.
M was the maker of a ~;,t~fo'r $8•.')0 and P tlie holder. Aft~r maturity P sued M who
relied on the defense of payment. Ac cording to H's testimony he wrote a check for
the amount due and gave it to his good friend, B, who was P's bookkeeper(now decea2-
ed), B did not have the note but is alleged to have promised to get it later and s c ~
it to M, but he never did. M was unable to pr oduce the cancelled check as he allegeri
it was destroyed when his house caught on fire. There was no evtdence that M had
tried to get the note from P. B did not give M a receipt, and had no authority ex .
press or implied to receive payment of notes due P.
Held: For P. The burden of provi ng payment, whi ch is an affirmative defense, i s
on the one claiming that he has paid. Even if M paid B he has not shown that B hC~.d
any authority to take the payment or that B accounted to P. B was M's agent to pay
P, and not P' a agent to receive the payment and the risk that B might not account t o
p was on M. The fact that B was never entrust ed with the note is strong evidence
that he had no authority to collect it.
 220) .
NEGOTIABLE INSTRUMENTS-·-Unauthorizcd Indorsament 202 Va .,286 ~
A, acting as an agent for P, negob .at ea a $6,000 loan from the S Bank~ P siencd 1
bond in that amount secured by a deed of trust on Black:,.cre and A secured a check
from the S Bank for the $6,000 payable to the order of P. Then A, thinking orroneoll :"
ly, but in good faith, that he had authority to indorse the check wrote on the back
thereof, "Deposit to the credit of pn, and turned the chec.k over to L, a building
and loan association. This indorsement is the equivalent of "Deposit to my credit.
(Signed)P". L then indorsed it, "For deposit only, L11 and deposited the ch11ck in ttG
C Bank. The C Bank indorsed it, "Pay any Baruc or Trust Company. All prior indorse-
ments guaranteed." The C Bank collected the check from the S Bank. P sued both
banks for $6,000.
Held: For P" While the indorsement of A was made in good faith, and hence he wcs
not guilty of a felony, nevertheless it was made without authority and is hence an
unauthorized signature. (Since this check belonged to P and was payable to her orde~
the Banks have converted pt s check)" Under Vl/6-375 the unauthorized indorsement
"Deposit to the credit of P11 was wholly inoperative 11 and no right to retain the in-
strument or to give a discharge therefor or to enforce payment thereof against any
party thereto can be acquired through or under such s:i..gnature unless the party
againot whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority"~ Since P had not ratified A! s act and was not [Link]:
she is entitled to judgment.(If the S Bank is forced to pay any portion of this
judgment it can recover from the C Bank under its guaranty of all prior indorsements)
Note: We would have substantially the · same result under the U.c .c. 'rhe [Link]
provisions of the [Link]. are 3-40l(i), "An unauthorized signa,tllre is .JoiliQlly "oopcr-a.~·
tive aS that Of the ers on "ThOSe name is ' S:[Link] unleSS he ratifies it Or is preCl\:.J ...
ecfl'Fo aen ;11 3- 19 1 c , "An instrument 1.8 converted V/hen i tl.s paid on a
forged [Link],", and thus the , Bank would e a c on7erter;1Jnder 3-419 (2) the C
Bank would not be liable ao a convcrtP.r tr. p if it act.:Jd reasonably and ii1 good
faith except as to proceeds c:f the check ,;[Link] in it:.> hands; and t:[Link] 3-417 the C
Bank warranted to the S Bank that t.r:"3 C Bmlk had good title to the instrument, so,
if P collects from the S Bank for c:Gnversion the S [Link] can :recover from the C Bank
for breach of its warra!Yt.y th.::J:!:. it had good title to tne cheok .

NEGOTIABLE INSTRUMENTS--Agencz 203 Va.827.

In order to finance the construction of a building J gave N, a note broker, his
negotiable note payable to the ordGr of N for ~2 0,000 secured by a deed of trust on
J's land. N the~ borrowed $20~000 f~om Bank on N's not0 to Bnruc which wa~ secured
by an indorseme.::t of J' s note to N :.,) Bank along with the det-:rl of trust S8curing
same. N then paid out the net prot:" •.· ads of his note to Bank t , contractors who were
working for J. In due course J maEed hi3 che-::k to N in fu l l payment of his note. J
thought N still had his note and that he would return the note to him and release
the deed of trust. Instead of doing this N used the money for other purposes than
repaying Bank. It was common practice for makers of notes to pay the original payee
to enable them to take up ple:l~ed r :)t,es in [Link] t..ype of trartsaction. N is now insol-
vent and Bank seeks to foreclose tl:> c deed of t n::.st to colle~~t the note pl ~,dgeci to
it as security for N's note to Banb J claims that because of the custom Hhich was
acquiesced in by Bank that Bank is estopped to claim that N vias not its agent to
receive payment, of J' s note to N which N had pledged to Bank.
Held: Bank can foreclose. J sent money to N because he thought N was holder of no·r.:.--
not because Bank held N out .as an agent. J trusted N to take care of the note for :;' .
Hence N was J • s agent to pay off tl:e note and N1 s [Link] t is J ~ s default " It waH :·...l
concern of Baruc whether J paid the note in person, by mail, or through, an agent.
Since J d:!.d not know of the transac'Gion between N and Bank he was not misled by
anything Bank did and hence there is no estoppel.
 2206. Revised June 1965.
·.!:EGOTIABLE INSTRUMENTS Suretyshi-e Creditors Ri~hts 204 Va.e543.
S sold a new car to M, and M gave S nlEs negot~a i e note for the balance due. Thi8
!.c ce wa.f: secured by a conditional sales contract which fact was properly noted en
t he certificate of title given to M. Later S negotiated the note to P indorsing i t
in blank. After M had made a few payments on the note, he stopped making any more
payments at all. P then had M give him a new certificate of title. It was stated
t hat this sale was for cash though nQ cash passed, and it showed a clear t i tle in Po
When P was unable to collect anything more from M or S he procured a confession of
judgment against M and S for the balance still due on the note. S then unsuccess-
fully moved to have this judgment set aside as per V#B-357.
Held: Reversed as to S who, as an unqualified indorser, was a surety forM. When
S negotiated the note to P the security for it followed the note as a matter of law ~
When P released the conditional sales contract security by taking title to the car
in his own name, he released S 1 the surety. A creditor who holds security for a deb·~
on which there is a surety cannot destroy the security and still hold the surety.
Here the security interest was destroyed by merger in the legal title as shown by
the certificate of title. (If there had been no release of the conditional sales
contract, S, on paying the note would have been subrogated to prs rights to the
security of the car. P has interfered with this right to S•s damage. Hence S is
discharged). Besides, Pis not entitled to a double recovery:(l) the car, and (2)
payment of the note. The explanation in parenthesis is mine.
Nptfa; The result would be the same [Link] U.c,C.#3-606(l)(b) which reads, "The holde
d~~c arges any party to the 1pstrumen~ to lthe extent that without such party's
cqnsent the holder unjusti fiably impairs any collateral for the instrument given by
or on behalf of the party or any perso~ against whom he has a right of recourse.