Ogden, James M

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Indiana University Bloomington Maurer School of Law

Indiana Law JournalVolume 1 | Issue 4 Article 14-1926Rules in Indiana as to Payment by Notes or ChecksJames M. OgdenIndiana State Bar AssociationFollow this and additional works at: http://www.repository.law.indiana.edu/iljPart of the Commercial Law Commons, and the State and Local Government Law CommonsThis Article is brought to you for free and open access by the Law SchoolJournals at Digital Repository @ Maurer Law. It has been accepted forinclusion in Indiana Law Journal by an authorized administrator of DigitalRepository @ Maurer Law. For more information, please contactwattn@indiana.edu.Recommended CitationOgden, James M. (1926) "Rules in Indiana as to Payment by Notes or Checks," Indiana Law Journal: Vol. 1: Iss. 4, Article 1.Available at: http://www.repository.law.indiana.edu/ilj/vol1/iss4/1INDIANALAW JOURNALVol. I April, 1926 No. 4RULE IN INDIANA AS TO PAYMENT BY NOTES OR CHECKSJAMES M. OGDEN*The Uuniform Negotiable Instruments Law has not provided for allmatters which may arise ii connection with commercial paper. Theconditions relating to this paper are so numerous that it would be im-possible to provide for all of them. One of the matters concerningwhich no provision has been made is as to whether or not the givingand taking of a promissory note is prima facie absolute or prima facieconditional payment.PROMISSORY NOTES AS PAYMENTThere is much conflict in the different jurisdictions as to the abovematters. The courts of Indiana are opposed to the general rule, whichis that the taking of a promissory note is not prima facie an absoluteand unconditional payment of the debt and a discharge of the originalobligation.' It is well settled by the Indiana courts that the takingof a promissory note by a creditor is prima facie payment of the debt,the burden being on the creditor to show that the note was not soreceived. 2 It may be shown, however, that the parties did not intend*See biographical note p. 202.'"In the absence of the agreement between the parties that it is to bereceived as payment, the common law rule which prevails in England andhas been adopted without question in nearly all of the states in this country,that a draft or bill of exchange, acceptance, order, or promissory note ofthe debtor, is not a payment or an extinguishment of the original demand.And the same rule applies to the bill, note, order, or acceptance of a thirdperson given by the debtor to the creditor." 30 Cyc. 1194-1197. Davidsonv. Bridgeport Borough, 8 Conn. 472. ilMarrinette Iron Works v. Cody, 108Mich. 381, 66 N. W. 334. Feldman v. Beier, 78 N. Y. 293. Bradford v.Neill, etc., Co., 76 Ill. App. 488."Where a negotiable instrument to which the debtor is a party as drawer,acceptor, maker or endorser is received for debt, whether precedent or con-temporaneous, in the absence of agreement to the contrary a presumptionarises in most jurisdictions that the instrument is received in conditionaland not in absolute payment." Norton on bills and Notes, Third Edition,page 19.2"In Indiana, Maine, Massachusetts and Vermont the rule as to theeffect of giving a bill or note as constituting a payment is different fromthe common-law rule prevailing in England and in the other states of thiscountry. The minority rule is that the taking of a bill of exchange or apromissory note governed by the law merchant, by the creditor from hisINDIANA LAW JOURNALthat it should have that effect.3 The same presumption of paymentarises whether the debt is a contemporaneous debt or a pre-existingdebt.4It should be understood that these are only presumltions whicharise in Indiana and if the intention is expressed it always governs,so that the presumption may be rebutted by circumstances.5But the Indiana decisions agree with the general rule, that thetaking by a creditor of the negotiable promissory note of a third partyis presumed to be conditional payment.6There is an exception to the last stated rule, however, where thenote of a third person, or a stranger's note, is payable to bearer, orhas been endorsed in blank by a prior holder, so that it may be trans-ferred without endorsement. In this case it is generally consideredas absolute payment when given for a contemporaneous debt, but whenit is payable to order and can be transferred only by endorsement, itis considered as conditional payment.7In all jurisdictions a non-negotiable promissory note is presumedto be conditional payment."It is well stated in the Bradway case that "in this state it is firmlyestablished that a debtor's giving to his creditor a promissory note,not governed by the law merchant, affords no evidence that it wasoffered and accepted as payment; and that the giving of a promissorynote governed by the law merchant is prima facie evidence of payment,which must be accepted as conclusive in the absence of any evidencethat such was not the intention of the parties ".9 The presumption asto payment may be rebutted in Indiana by proving an express agree-ment to the contrary, or may be rebutted by the circumstances of thetransaction itself.debtor for an existing debt, is a payment of the debt, unless it is otherwiseagreed by the parties, the presumption being that the debt is thereby paidand the burden of proving a contrary agreement being upon the creditor.On the other hand, if the note is not governed by the law merchant, that is,is not negotiable, it is not a payment of the debt unless it is so agreed bythe parties, and the burden of proving such agreement is upon the debtor.This rule applies equally well where the bill or note is of a third person."30 Cyc. 1197-1198. Bradway v. Groenendyke, 153 Ind. 508, 55 N. E. 434.A'mos v. Bennett, 125 Mass. 120. Hadley v. Bordo, 62 Vt. 285, 19 Atl. 476.3 Alford v. Baker, 53 Ind., 279; Keck v. State, ex rel, 12 Ind. App., 119;Hibben, etc., Co., v. Hicks, Assignee, 26 Ind. App. 646; Smith '0. Bettger,68 Ind., 254; Knight v. Kerfoot, 184 Ind., 31, 110 N. R., 206; State, ex rel,v. Traylor, 77 Ind. App., 419, 132 N. E., 608.4 Mason v. Douglass, 6 Ind. App., 558.5 Scott v. Edgar, 159 Ind., 38. Kelley v. York, 183 Ind., 628.6Nipperman v. Hardy, 17 Ind. App., 142; Tyner v. Stoops, 11 Ind., 22;Maxwell v. Day, 45 Ind., 509; Dick v. Flanagan, 122 Ind., 277; State, ex rel,v. Traylor, 77 Ind. App., 419.7 See Smith v. Bettger, 68 Ind., 254, 263.s Bradway v. Groenendyke, 153 Ind., 508.9 Bradway v. Groenendyke, 153 Ind. 508 at 510.RULE IN INDIANA AS TO PAYMENT BY NOTE OR CHECK 191It is important to know whether or not a negotiable promissorynote is to be considered as payment. If it is so considered, the cred-itor must rely on the note and cannot proceed or rely on the originalindebtedness, but must proceed upon the note; and cannot bring hisaction for goods sold and delivered, or whatever was the original con-sideration. It often becomes important in matters of insolvency orbankruptcy as will be pointed out in the Baughnan case set out below.CHECKS AS PAYMENTThe rule in Indiana as to whether or not a check is conditional orabsolute payment follows the general rule in most jurisdictions. Thisrule is that the giving and taking of a check is considered prima facieonly as a conditional payment; that is, that it will become absolutewhen paid. This is true of the giving and taking of the cheek of athird person, and the principle also applies to payment by an orderon a third person, by a certificate of deposit, by a draft, or by a billof exchange.10There is a long line of cases in Indiana holding that the taking of ,check is prima facie a conditional payment and not absolute." It isunderstood, of course, that by agreement the check may be absolutepayment. 12  The theory is that a check is only a means of payment,and the debt will not be extinguished unless and until the check ispaid, or unless loss is sustained by the drawer in consequence of lachesof the holder, in which case the debt will be discharged in proportionto the loss sustained.In Bairglmian v. Lowe, A said to B: "You have waited a little toolong to receive your payment. The curtain at the bank I see is down,and you cannot get any money tonight. We will just send you adraft for this, 'Monday morning, or I can give you my check." Bsaid: "That is all right. You can send me a draft. It will be allright. Or you can just give me a check. I had just as lief have thecheek as the money. I have a bank account at. Monticello, and it willnot cost me anything for exchange. I had just as soon have thecheck as the money." 13 Thereupon a check was accepted by B whichstated that it was in full for the Lowe-West settlement, and $10.00on another account. As the bank was insolvent and did not openagain, it was held that by the agreement of the parties the check wasabsolute payment, and B lost on account of the insolvency of the bank.CHECK OR PROMISSORY NOTE TAKEN FOR LESS AMOUNTAnother matter which is not settled by the Uniform NegotiableInstruments Law is as to whether or not the giving and taking of apromissory note or check for a less amount than the indebtedness dis-10 See cases cited in 30 Cyc. 1195-1197, Notes 31, 32 and 33.11 Cox v. Hayes, 18 Ind. App., 220; Sutton v. Baldwin, 146 Ind., 361; Boydv. Olvey, 82 Ind. 294.12 Batighnwn, et al., v. Lowe, 41 Ind. App., 1.13 Baughnm, et al., v. Lowe, 49 Ind. App. 1 at page 3.INDIANA LAW JOURNALcharges the indebtedness. The law, however, as to this matter is wellsettled by judicial decision. The Indiana courts are in accord with thesettled rule. There are two classes of cases in which promissory notesor checks may be taken for a less amount. One is the case of a liqui-dated amount, and the other is the case of an unliquidated amount.LIQUIDATEDWhere a debtor sent to his creditor a check for a part of a liquidatedsum due the creditor, reciting in the check that it is in full paymentof all demands, the acceptance of the check by the creditor does notdischarge the entire debt.' 4 The theory is that the release of thedebtor from the liability for the whole debt on payment of a part is anaked promise and void for want of consideration; and the receipt ofa less sum in money is no legal defense to a suit for an unpaid balance.However, if accepted as payment under circumstances which amountto an accord and satisfaction it discharges the whole claim.15It has been held that a new note given in renewal of a former noteand for a less amount, will be considered as a satisfaction of the priornote, as all differences are presumed to have been adjusted when thenew note was given. It has also been held that the acceptance by theholder of a promissory note of part of the amount due upon it in sat-isfaction and discharge of the whole note, and the surrender of thenote by the holder to the maker to be canceled, is a full dischargeof the note, and no action can be maintained for the unpaid portion.'If part payment is made before maturity, or made by a stranger,or by a bill or note, with a surety or collateral security, or in any waymore advantageous to the creditor, it will support an agreement toaccept it in satisfaction. Any agreement by way of compromise orcomposition into which any new element entered will be sustained.The same ancient authority which declares that the payment andacceptance of a less sum on the day the debt becomes due in satisfac-tion of a greater is no defense beyond the amount paid, also declaresthat the payment and acceptance of a less sum before the day of pay-ment has arrived, in satisfaction of the whole, would be a good accordand satisfaction, for it is said peradventure parcel of the same beforethe day it fell due would be more beneficial to him than the whole atthe day, and the value of the satisfaction is not material.UNLIQUIDATEDIf the amount due is unliquidated, a check or note in full paymentand settlement, accepted and cashed by the creditor without objection,discharges the account in full, even though smaller than the amountclaimed by him to be due.'7'4 Hodges v. Truax, 19 Ind. App., 651; Meyer v. Green, 21 Ind. App., 138;Jennings v. Durflinger, 23 Ind. App., 678.15 American Seeding Machine Co. v. Baker, 55 Ind. App., 625.'6 Draper v. Hitt, 43 Vt. 439.'7 5 Amer. Rep. 292.RULE IN INDIANA AS TO PAYMENT BY NOTE OR CHECK 193SUMMARYSummarizing we find that in Indiana:1. The giving and taking of a negotiable promissory note is pre-sumed to be absolute payment.a. This is a presumption only.b. If intention is expressed it always governs.c. The presumption may be rebutted by circumstances.d. The same rule holds whether it is given and taken for con-temporaneous or pre-existing debt.e. If the note is that of a third party it is presumed conditionalpayment.f. If the note is non-negotiable it is presumed to be conditionalpayment.2. The giving and taking of a check is presumed to be conditionalpayment.a. It may be absolute by agreement.Summarizing as to payment of a less amount than the entire indebt-ness we find the general rule to be:1. The giving and taking of a promissory note or check for a lessamount than the indebtedness does not discharge the indebted-ness if the amount is liquidated.a. It may discharge it by an agreement on consideration.b. It may discharge it by an accord and satisfaction.2. It does discharge the indebtedness if the amount is unliquidated.

Rules in Indiana as to Payment by Notes or Checks

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Rules in Indiana as to Payment by Notes or Checks

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Indiana University Bloomington Maurer School of Law