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Promissory Notes

( Originally Published 1918 )

A Negotiable Note is a positive promise in writing to pay to a person therein named or his order, or to bearer, a certain sum of money, at a specified date, or within a time that is certainly ascertainable.

A Note Promising to Pay "At Sight" or "On Demand" is negotiable, for it is presumed that the party interested will see that sight is given or demand made.

If No Time of Payment Is Specified "on demand" will be presumed to be intended.

Blanks in Notes.—If a note is made with the date left out, any holder of the note may insert the true date. If any material particular is left out, any holder may fill the blank.

Parties to a Note.—The person who promises is called the maker, and the one to whom the promise is made is called the payee. One who transfers a note to another by indorsing his name on the back is called an indorser, and the person to whom the note is transferred is called the holder.

Negotiation.—A note is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof; if payable to bearer it is negotiated by delivery; if payable to order it is negotiated by the indorsement of the holder, completed by de-livery.

Negotiability.—A contract may be assigned by merely executing an assignment through which its obligations pass unchanged from one party to another, who thereby becomes liable to any action that might have been brought against the assignor. But this is not the case with a promissory note, because if it were, any reason for refusal that might have existed between the original parties could be brought in at the time for payment, and the value of the note be destroyed. Therefore the "law of negotiable instruments" has grown up to protect those who take notes in the due course of business. That is, before maturity, and without knowledge of anything that would affect the title. This law says that "a holder in due course holds the instrument free from defect of title of prior parties and free from any defenses available to prior parties among themselves, and may enforce payment of the instrument in full amount thereof against all par-ties liable thereto."

Transfer After Maturity.--A note may be transferred as well after maturity and in the same manner as before maturity, but the purchaser takes it at his own risk. It is subject in his hands to any defenses that may have existed against it in the hands of one holding it when it became due.

Holders in Good Faith.—A purchaser or holder of a note or other negotiable instrument who has acquired it in good faith, for a valuable consideration, in the ordinary course of business, when it is not overdue, without notice of dishonor, and without notice of facts which impeach its validity, has a title unaffected by those facts, and may recover on the instrument, even though it was without consideration between the parties originally, was subsequently released or paid, or was originally obtained by fraud, theft or robbery.

Absence of Consideration.—A note without consideration is not good as against either party; nor against a third party who knows there was no consideration. A note made without consideration and as a gift is not good as against the maker and may at any time be recalled or revoked. But if before its maturity such a note pass into the hands of a third party ("a holder in good faith"), it is valid and must be paid.

In Case of Fraud, Theft or Robbery, if an instrument had never been given force by the maker by delivery and he was not guilty of negligence, there could be no recovery; in such case the note would never have had Any legal existence. But the slightest negligence renders the maker liable; for instance, if the maker of a note after completing it, retains it in his possession, no matter how securely, he is, according to some authorities, others contra, liable to a holder in good faith, or, as he is commonly termed, a bona fide holder, although it was placed in circulation through fraud, theft or robbery.

Where a Holder in Good Faith Is Not Protected.—The defenses against which a bona fide holder is not protected are : 1. Incapacity of the maker of a note to contract; as where he is an infant, or a lunatic, or a person under guardian-ship. 2. The interdiction of a statute; as where a statute renders the contract void, for gambling or other illegality. 3. Where the party has never in fact signed the note as it stands; as where it was forged, or where it was subsequently altered without the maker's consent or fault. 4. Where the maker was misled into signing something he was not intending, through imposition, and without on his part, or where a person who is unable to read, or is blind, has a note falsely read to him, and he signs it believing it to have been correctly read, he will be protected. But where a person of ordinary faculties and knowledge is betrayed into signing a note, believing it an instrument of a different kind, he will be bound to bona fide holders, unless he has been free from negligence. If the maker with reasonable caution might have detected the fraud, the note will be good with a bona fide holder.

A Note Executed Under Duress—that is, under such fear or compulsion as to overcome the free agency of a reasonably firm man will not be good in the hands of a bona fide holder; for there was no consent and no fault of the maker. In some states the rule is otherwise.

Uncompleted Notes: If a note is executed and delivered with the amount left blank, the parties who sign or indorse it will be bound to a bona fide holder for any amount that may be filled in.

If a Party Entrusts His Signature on a Blank Paper to another to fill in some note, he will be bound to a bona fide holder though the other fills in an entirely different note than agreed. But if a person writes his name on a blank paper without any intention of having it filled out, and another obtains it and writes a note above the name, it will not be binding even in the hands of a holder in good faith.

Protest.—A protest of a note is a formal statement by a notary that the note was presented for payment and payment refused. When a note is not duly paid on presentation, it is said to be "dishonored" and is taken to a notary public, who again presents it; if not paid, he notes its non-payment, and afterward draws out a formal protest, that legal proceedings may be taken for recovering the amount due.

Protest is unnecessary, the certificate of the notary being merely prima facie evidence of dishonor. Notice of dishonor, however, should be given all the endorsers. The rules as to notice vary in different states.

Notice of Protest.—The holder of a note may give notice of protest. either to all the previous indorsers or only to one of them; in the latter case he must select the last indorser, and the last must give notice to the last before him, and so on.

Where notice of protest is duly addressed and deposited in the postoffice the sender is deemed to have given due notice notwithstanding any miscarriage in the mails. Rules as to endorsers' notice vary in different states.

Demand and Payment.—Notes payable on demand must be presented for payment within a reasonable time, in order to hold indorsers.

Where Days of Grace Are Allowed by statute on notes, they are not considered due until the expiration of the days of grace. If a note is presented and payment demanded on the last day of grace, and payment refused, the maker is in default, and notice of dishonor may forthwith be given to the indorser. For days of grace allowed by the statutes of different States, see Interest Laws and Statutes of Limitation, page 41.

A Note Made Payable at a Bank and held there for payment until the usual hour for closing, need not be presented to the maker in person to bind the indorser. It may be protested, as in the case of drafts, immediately on the close of bank hours. Payment must be immediately demanded of the indorser if he resides in the same place; if he is a non-resident he must be notified at once by letter. Laws as to notice vary in different states.

Presentment Not Necessary to Render Maker Liable.—Presentment for payment is not required in order to charge the maker of a note.

Sundays and Holidays. When the day of maturity falls upon Sunday or a legal holiday the note is payable on the next succeeding business day if no days of grace are allowed. But in case days of grace are allowed and the last day of grace falls on Sunday or a holiday, the note is payable on the next preceding day.

Place of Demand.—Where place of payment is specified in a note demand should be duly made at that place.

By Whom Demand May Be Made.—The holder of a note or any one acting for him may make the demand for payment and send notice of dishonor to the indorsers. Usually the holder or his agent notifies all the parties on the note. This is the most business-like, as well as the most prudent way, as it renders all parties responsible to him, and each responsible to the others in their order.

Extending Time of Payment by the holder releases the indorsers of the note, unless consent to such extension has been given by the indorsers.

Lost Notes.—The loss of a note does not release obligation. If the maker should refuse to pay a note which has been lost, he may by law be compelled to pay it, but it would be necessary for the collector to give bond to protect the maker from all further claims on account of it. But in some states if the note was lost after maturity and without endorsement, no bond is required.

Proof Required.—It is sometimes necessary to prove that a note has been given by a certain party or parties. If the defendant claims that the note has been paid, the burden of proof is on him to prove that. The production of the note by the plaintiff gives rise to the presumption that it has not been paid.

The Finder of a Note, as of all other property, must make reasonable efforts to find the owner, before he is entitled to appropriate it for his own purposes. If the finder conceal it, he is liable to the charge of larceny or theft.

A Note Destroyed by Fire can be collected by proof of loss.

Interest.—A note which does not state on its face that it bears interest, will bear interest only from maturity.

Legal Rate of Interest.—Where interest is mentioned but no rate of interest is specified, the legal rate under the law of the state in which the note is made will run. Specification of interest at a rate higher than the maximum legal rate would be usurious and could not be collected.

Discount.—A note made in good faith for value received may be sold at a discount larger than the maximum legal rate of interest, and such sale would not be usury. But an accommodation note made to borrow money on and discounted to net the holder more than the legal rate, would be usury.

If the Date on Which Interest Will Begin to Run is not stated in an interest-bearing note, the interest will run from the day the note is issued.

If the Words "With Interest" Are Included in a Note, it draws legal interest from the date of making it.

If the Note Is to Draw a Rate of Interest Higher Than the Legal, but not higher than the statute of the state allows, the rate of interest must be specified.

When Right of Action Expires.--.Every state has a law setting a limit of time in which civil action may be instituted. This law is called the Statute of Limitations. It applies in all the states to notes, contracts and the like. In some states, the right of action ceases absolutely when the time limit is reached. In others, the cause of action remains, but the law does not permit the courts to enforce it after a certain period, and if action is brought within that period the opposite party may plead that the law bars the right of suit. If he makes no such plea, the action may go on, the suitor taking his chances in pressing it on its merits. In effect, however, the Statute of Limitations is accepted as final.

Death of a Holder.—After the death of a holder of a negotiable note, his executor or administrator may transfer it by his endorsement.

Nonessentials.—The validity of a, negotiable note is not impaired if it is not dated; if it does not specify the value given or that any value has been given; if it does not specify the place where it is drawn or the place where it is payable; if it bears a seal; or if it designates a particular kind of current money in which payment is to be made. Exception to these cases is made only where one or any of them is in conflict with any statute requiring that in certain cases the nature of the consideration be stated in the instrument.

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