Davis, Carleton M.

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Kentucky Law JournalVolume 35 | Issue 1 Article 51946Accommodation Paper Transferred After Maturity--The Defense of Lack of ConsiderationCarleton M. DavisUniversity of KentuckyFollow this and additional works at: https://uknowledge.uky.edu/kljPart of the Contracts CommonsRight click to open a feedback form in a new tab to let us know how this document benefitsyou.This Note is brought to you for free and open access by the Law Journals at UKnowledge. It has been accepted for inclusion in Kentucky Law Journal byan authorized editor of UKnowledge. For more information, please contact UKnowledge@lsv.uky.edu.Recommended CitationDavis, Carleton M. (1946) "Accommodation Paper Transferred After Maturity--The Defense of Lack of Consideration," Kentucky LawJournal: Vol. 35 : Iss. 1 , Article 5.Available at: https://uknowledge.uky.edu/klj/vol35/iss1/5ACCOMMODATION PAPER TRANSFERRED AFTERMATURITY-THE DEFENSE OF LACKOF CONSIDERATIONThe question as to the general liability of an accommodationparty to a negotiable instrument which was not transferred forvalue until after maturity has frequently arisen. If the accommo-dation party has expressly restricted the accommodated party's use ofthe instrument, either as to the time during which the accom-modation party is to be bound or as to the use of the proceedstherefrom, he is ordinarily permitted to use a violation of eitherrestriction as a defense. This is done on the theory that his restric-tion constitutes an equity which can only be severed by the superiorrights of a holder in due course, which rights one taking after ma-turity cannot claim.The narrower problem to be dealt with in this note is that in-volving a situation in which no value is paid until after the ma-turity of the instrument, and under such circumstances as to makethis the only defense. In other words, the accommodation partyhas placed no express limitations upon the accommodated party'suse of the instrument and his only defense when sued by the holderwho takes the instrument for value after maturity is that he is anaccommodation party.Before the adoption of the Negotiable Instruments Law, anduntil the decision of Bower v. Hastings,' in 1860, the Americancourts, as well as the English courts, had held the accommodationparty liable on an instrument first transferred for value after ma-turity.' In that case D was the maker of an accommodation ninety-day note for M, in 1852, which M held until 1856, and transferredunder questionable circumstances to P. The judgment of the trialcourt was reversed because of the refusal to admit evidence of thenote's accommodation character. The trial court was directed tofollow the law as stated in Tinson v. Francis" which was cited as'Wilhoit v. Seavall, 121 Kan. 239, 246 Pac. 1013 (1926); Parr v.Jewell, 16 C. B. 684, 81 E. C. L. 684, 139 Eng. R. 928 (1855); Sturte-vant v. Ford, 4 M. & G. 101, 134 Eng. R. 42 (1842); Stein v. Yglesias,3 Dowl. P. C. 252, 149 Eng. R. 1205 (1834); Charles v. Marsden, 1Taunt. 224, 127 Eng. R. 818 (1808).2Mersick v. Alderman, 77 Conn. 634, 60 Atl. 109 (1905); Tharpv. Kitchell, 151 Fla. 226, 9 S. 2d 457 (1942); Bacon v. Harris, 15 R. I.599, 10 Atl. 647 (1887).'36 Pa. 285 (1860)."Renwick v. Williams, 2 Md. 356 (1852); Grant v. Ellicott, 7Wend. 227 (N. Y. 1831); Brown v. Mott, 7 John. 361 (N. Y. 1811);Jewell v. Parr, 13 C. B. 909, 138 Eng. R. 1460 (1853); Sturtevant v.Ford, 4 M. & G. 101, 134 Eng. R. 42 (1842); Stein v. Yglesias, 3 Dowl.P. C. 252, 149 Eng. R. 1205 (1834); Charles v. Marsden, 1 Taunt. 224,127 Eng. It. 818 (1808).11 Camp. 19, 170 Eng. R. 861 (1807). The facts of this caseshow that the matured note had been placed in the hands of an agentof the accommodated party to be returned to the accommodationKENTUCKY LAW JOURNALholding: "After a bill or note is due, it comes disgraced to thfendorsee, and it is his duty to make inquiries concerning it. If hetakes it, though he gives a full consideration for it, he takes it onthe credit of the endorser and subject to all the equities with whichit may be encumbered." Although the decision of this case markedthe beginning of an apparent diversity of opinion in this country, aclose examination of the cases arising before the passage of theNegotiable Instruments Law reveals that the majority of the courtswhich refused to hold the accommodation party liable did notnecessarily decide the point being dealt with in this paper. Theirdecisions show that in practically every instance there had beena violation of an agreement or restriction, or that the accom-modation party had some other valid defense.7 On the other hand,a number of courts held the accommodation party liable when hisdefense was that he was an accommodation party.'The conclusion should be then that at the time of the adoptionof the Negotiable Instruments Law the majority of American courtsstill followed the English rule and refused to permit the accom-modation party to use the defense of lack of consideration unlessthat defense arose out of a violation of an agreement or restrictionmade by the accommodation party, or unless it was coupled withsome other valid defense.This apparent conflict of authority was not expressly dealt withby the committee which drafted the Negotiable Instruments Law.Section 29 of this law provides:"Liability of Accommodation Party.-An accommoda-tion party is one who has signed the instrument asmaker, drawer, acceptor, or indorser, without receiv-ing value therefor, and for the purpose of lending hisname to some other person. Such a person is liableon the instrument to a holder for value, notwithstand-ing such holder at the time of taking the instrumentknew him to be only an accommodation party."maker and that it was the agent who transferred it for value. Thiswould make the law as stated by Lord Ellenborough mere dictuminsofar as the defense here dealt with is concerned.a Kellog v. Barton, 12 Allen 527 (Mass. 1866); Mackay v. Hol-land, 4 Met. 69 (Mass. 1842); Wheeler v. Barrett, 20 Mo. 573 (1855);Osborn v. McClelland, 43 Ohio 284, 1 N. E. 644 (1885); Britton v.Bishop, 11 Vt. 70 (1839).Glasscock v. Smith, 25 Ala. 474 (1854); Coghlin v. May, 17 Cal.515 (1861); Strauss v. Friend, 73 Ga. 782 (1884); Turcas v. Rogers,3 Mart. N. S. 699 (La. 1825); Livermore v. Blood, 40 Mo. 48 (1867);Riverside Bank v. Jones, 75 App. Div. 531, 78 N. Y. Supp. 325 (1902);Hoffman v. Foster, 43 Pa. 137 (1862); Bacon v. Harris, 15 R. I. 599, 10Ati. 647 (1887); Cottrell v. Watkins, 89 Va. 801, 17 S. E. 328 (1893).8 Connerly & Co. v. Planters' and Merchants' Ins. Co., 66 Ala.432 (1880); Naef v. Potter, 226 Ill. 628, 80 N. E. 1084 (1907); Millerv. Lamed, 103 Ill. 562 (1882); Warder v. Gibbs, 92 Mich. 29, 52 N. W.73 (1892); semble, Dunn v. Weston, 71 Me. 270 (1880); Seyfort v.Edison, 45 N. J. Law 393 (1883).STUDENT NOTSThis section is taken virtually word for word from the English Billsof Exchange Act,' which was used as a model by the drafters of ouruniform act. This would seem necessarily to lead to the assumptionthat it was the intent of the committee to adopt the English ruleholding the accommodation party liable, and particularly so sincea majority of the American courts at that time also followed thatrule.Upon the strength of this reasoning the accommodation partyshould be held liable in jurisdictions where, before the passage ofthe uniform act, this problem had not arisen, as well as in thosewhich had followed the English rule. In jurisdictions such as NewYork, however, where, before passage of the uniform act, the ac-commodation party to a negotiable instrument not transferred forvalue until after maturity had been permitted to defend simply onthe ground that he was an accommodation party,' it may be arguedthat a different result might be reached. The courts of that statemay contend that section 29 was not adopted subject to the con-struction placed upon it by the drafters of the act; but, that sucha jurisdiction is free to construe that section in accordance with itsprevious decisions and permit no recovery. But even in thesejurisdictions the English rule should be followed for the reasonthat it was the intent of their legislatures to enact a uniform law,and since no change was made in section 29, they must have in-tended to adopt it, in the spirit of uniformity, with the constructionplaced upon it by the drafters of the act and the English courts.The courts which refuse to hold the accommodation partyliable, however, ignore the origin of the uniform act." They pro-ceed on the assumption that lack of consideration becomes a de-fense after maturity and that it is only by means of the term"holder for value" in section 29, that its use as such can be avoided.They then reason that to construe the term according to its definedmeaning would lead to the absurd result of refusing to accommoda-tion parties the use of such defenses as fraud and duress, in addi-tion to that of lack of consideration. These courts argue that theNegotiable Instruments Law, although made up of a number ofprovisions, is in fact only one law, and that all of its provisions mustbe construed together in order to determine the meaning ofany one section. It is said that before the term "holder for value"can be construed as prohibiting the use of the defense that one is anaccommodation party, sections 28 and 58 must be considered. Sec-tion 28 of the uniform act reads:"Effect of Want of Consideration.-Absence or failure' Bills of Exchange Act, 1882, Chap. 61, sec. 28 (2) 45 & 46 Vict.t Chester v. Dorr, 41 N. Y. 279 (1869)."Pacific-Southwest Trust & Savings Bank v. Valley FinanceCorp., 99 Cal. 728, 280 Pac. 134 (1929); Hederman v. Cox, 188 Miss.21, 193 So. 19 (1940); Rylee v. Wilkerson, 134 Miss. 663, 99 So. 901(1924); Bartels v. Suter, 130 Okla. 7, 266 Pac. 753 (1928).84 KENTUCKY LAW JoURNALof consideration is matter of defense as against anyperson not a holder in due course; and partial failureof consideration is a defense pro tanto, whether thefailure is an ascertained and liquidated amount orotherwise."Section 58 provides:'When Subject to Original Defenses.-In the hands ofany holder other than a holder in due course, anegotiable instrument is subject to the same defensesas if it were non-negotiable. But a holder who deriveshis title through a holder in due course, and who is nothimself a party to any fraud or illegality affecting theinstrument, has all the rights of such former holder inrespect of all parties prior to the latter."These courts, which refuse to hold the accommodation partyliable, then contend that since section 28 makes lack of considera-tion a defense against everyone except a holder in due course, andsection 58 makes an instrument taken after maturity, subject to thesame defense as though it were non-negotiable, it is impossibleto interpret the term "holder for value" as used in section 29 inany other way than as a holder for value before maturity."The very fact that section 28, which states the general rule asto the defense of lack of consideration, is immediately followed bysection 29, indicates an intention to make it clear that accommoda-tion paper constitutes an exception to that general rule-that theaccommodation party is not to be permitted to use as a defense themere fact that he received no material benefit under his contract.Furthermore, the term "holder for value" as used in this sectionseems to pertain alone to the defense that the defendant is "onlyan accommodation party." It is, therefore, unnecessary and illogicalto contend that this term applies to other defenses.Also, section 58 does not apply until such a lack of considerationas constitutes a defense is shown to be present. Since it is admittedthat the accommodation party receives consideration when credit isextended in reliance upon his signature, the only basis for contend-ing that he has not received consideration in this case is by imply-plying that he has not requested the extension of credit after theinstrument is mature. The decision of Chester v. Dorr,' is the onefirst applying such a fiction. In that case the court said, "It is notaccording to the intent or meaning of an indorsement for another'saccommodation, to say that the indorser intends to give the use ofhis credit for any other period than that limited in the note. Orthat such an indorsement imports authority to use it, when thatperiod has elapsed."'" And yet, at the time that decision was" The same view is also expressed by Professor Brannan, SomeNecessary Amendments of the Negotiable Instruments Law (1913)26 HARv. L. REV. 493.341 N.Y. 279 (1869).1 Id. at 286.STUDENT NOTES 85written the decisions in England and a majority of those in theUnited States were contra. At a time when both the courts of theUnited States and England were holding the accommodation partyliable when his instrument had not been transferred for value untilafter maturity, it could not logically have been presumed that theparties to such an instrument intended that the accommodationparty's liability should not extend beyond the maturity date of theinstrument.In conclusion, it is the writer's opinion that section 29 of theNegotiable Instruments Law should be construed as prohibiting theaccommodation party from relying on the defense of lack of con-sideration except in a suit between himself and the accommodatedparty, unless that lack of consideration is based on some fact otherthan that the defendant is a mere accommodation party. If theaccommodation party wishes to limit his liability to transfereestaking before maturity of the instrument he should make thatstipulation on its face, in which case he will be amply protected bysection 58 of the uniform act.CARLETON M. DAVIs

Accommodation Paper Transferred After Maturity--The Defense of Lack of Consideration

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Accommodation Paper Transferred After Maturity--The Defense of Lack of Consideration

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