Behrens, Maurice F., Jr.

English

St. John's University School of Law

St. John's Law Review Volume 23 Number 2 Volume 23, April 1949, Number 2 Article 8 July 2013 The Status of an Accommodation Indorser Under Section 29 of the Uniform Negotiable Instruments Law Maurice F. Behrens Jr. Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview Recommended Citation Behrens, Maurice F. Jr. (1949) "The Status of an Accommodation Indorser Under Section 29 of the Uniform Negotiable Instruments Law," St. John's Law Review: Vol. 23 : No. 2 , Article 8. Available at: https://scholarship.law.stjohns.edu/lawreview/vol23/iss2/8 This Note is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion in St. John's Law Review by an authorized editor of St. John's Law Scholarship Repository. For more information, please contact selbyc@stjohns.edu. NOTES AND COMMENTreasonably worth $2,000, petitioner's conduct is such that the courtwas justified in doubting her motives. Out of 1,650,000 outstandingshares, she alone, with a mere 50 shares, objected to the corporateaction and asked for an appraisal. She could have received a veryhandsome sum by selling on the open market, which sum, while notten times the value of her stock, would nevertheless have given hermore than a reasonable return on her investment. And, while it. issettled that the number of shares held or the good faith of the share-holder is irrelevant, still ". . . the court is not required to blind itselfto reality and permit the proceeding to go beyond what is necessaryto award petitioner fair value for her stock and become a device forobtaining more than fair value." 33While the Marcus case was decided in a very practical andrealistic manner, it could just as well have gone the other way, therebeing no set channels to guide or limit the appraisers'and judges.Though market value has been emphasized continuously throughoutthe cases, a problem arises when there is no listing on an exchangeor any transactions on the open market. A question also ariseswhether the courts might not take a contrary view to that taken inthe Marcus case if the dissenting stockholder owned, instead of 50shares, 500,000 shares, or some other figure. While the controversiesarising on the subject are not many, still it appears that the legisla-ture should set forth certain general standards which would aid im-measurably in clarifying the situation, and it is submitted that StockCorporation Law, Section 21, be amended to accomplish this result.Louis E. MATTERA.THE STATUS OF AN AccomM,!ODATION INDORSER UNDER SECTION 29OF THE UNIFORz, NEGOTIABLE INSTRUMENTS LAWSince the adoption of the Uniform Negotiable Instruments Lawin 1896 by the Commissioners on Uniform State Laws in NationalConference and its subsequent enactment by all the states, one of itsprovisions, Section 29,1 has been the subject of much criticism; 2and the source of litigation, much of which is concentrated upon the33 Id. at 729, 79 N. Y. S. 2d at 80.I N. Y. NEGOTIABLE INSTRUMENTs LAW § 55. "An accommodation partyis one who has signed the instrument as maker, drawer, acceptor, or indorser,without receiving value therefor, and for the purpose of lending his name tosome other person. Such a person is liable on the instrument to a holder forvalue, notwithstanding such holder at the time of taking the instrument knewhim to be only an accommodation party."2 Ames, The Negotiable Instruments Law, 14 HARv. L. REv. 241, 242(1900); Brannon, Some Necessary Ainendnments of the Negotiable Instrw-meints Law, 26 HARv. L. REv. 493, 494 (1913) ; Brewster, Proposed Amend-1949 ]ST. JOHN'S LAW REVIEWaccommodation indorser. This litigation concerning the accommoda-tion indorser will be examined in this article from the following view-points: What constitutes an accommodation indorser; his liabilityto the accommodated party; his liability to a holder other than theaccommodated party; and his rights after payment of the instru-ment. No attempt will be made to limit this to the law of any par-ticular jurisdiction for this is a uniform law. Wherever possible,however, the New York cases in point will be cited.What Constitutes an Accommodation Indorser. The purposeof an accommodation indorsement is the loan of one person's name,the indorser, to another, the accommodated party, so that the.lattermay transfer the instrument on the strength of the reputation of theformer.3 Yet the signature in and of itself is of no legal significance.It is its later sale for value that attaches legal consequences to theact .4Section 29 of the U. N. I. L. states: "An accommodation partyis one that has signed the instrument as maker, drawer, acceptor, orindorser, without receiving value therefor, and for the purpose oflending his name to some other person." The wording of this sec-tion has been vigorously attacked as inaccurate and misleading.,One naturally thinks of an accommodation party as one who hassigned for the accommodation of another, without receiving any con-sideration for so signing. But the courts have construed the words"without receiving value therefor" as applying to the word "instru-ment" rather than to the word "signed" or to the clause following,"and for the purpose of lending his name to some other person." Acomma shuts off the words "without receiving value therefor" fromthe clause which follows it, and as a matter of English grammar theword "therefor" must refer to the nearest appropriate word precedingit, which is "instrument." Thus it has been held that one may be anaccommodation party even if he received value for signing as long ashe has not received value from the instrument itself.6 Specifically,ments to the Uniform Negotiable Instruiments Law, 22 ILL. L. REv. 815, 824(1928); Greeley, The Uniform Negotiable Instruments Law, 2 In.. L. REv.146, 150 (1907) ; Hening, The Uniform Negotiable Instruments Law, 29 U. OFPA. L. REv. 470, 486 (1911); Mack, Some Suggestions on the Proposal toEnact the "Uniform Negotiable Instruments Law" in Illinois, 1 IL. L. REv.592, 597 (1907); Turner, A Factual Analysis of Certain Proposed Amend-ments to the Negotiable Instruments Law, 24 ILL. L. REv. 150, 159 (1929).3 Morrison v. Painter, 170 S. W. 2d 965 (Mo. App. 1943).4 Runciman v. Brown, 223 Mich. 298, 193 N. W. 880 (1923); Dean v.Lyde, 223 Ala. 394, 136 So. 857 (1931); Sabine v. Paine, 166 App. Div. 9,151 N. Y. Supp. 735 (2d Dep't 1915).5 Ames, supra note 2.6 Carr v. Wainwright, 43 F. 2d 507 (C. C. A. 3d 1940); McGhee Inv.Co. v. Kirsker, 71 Colo. 137, 204 Pac. 891 (1922) ; Morris County Brick Co.v. Austin, 79 N. J. L. 273, 75 Atl. 550 (1910). Contra: Stauffer v. Ti HangLung and Co., 29 Cal. App. 2d 121, 84 P. 2d 209 (1938).[ VOL. 23NOTES AND COMMENTit has been held that one who indorsed a note without consideration"to make it look better," 7 one who indorsed a note before deliveryto give credit,8 the president and directors of a bank who indorseda note so that the bank might secure cash,9 a principal who indorseda note of a customer taken by his agent who was responsible to theprincipal for the cash price,10 a wife that indorsed a note given toher husband by another as salary," and a payee of a note that in-dorsed it only so that the maker could raise funds 12 are all accom-modation indorsers. On the other hand, one that indorsed the noteof his debtor so as to get the proceeds, 13 a corporation that indorseda note in the adjustment of claims against it and was thereby releasedfrom existing liabilities,' 4 and a corporate indorser engaged in thesame business as the maker with stockholders and officers in com-mon 15 are not accommodation indorsers.A manufacturing corporation has no power to make or indorsenotes for the accommodation of others,10 nevertheless, a corporationis bound if it makes or indorses commercial paper for the accommo-dation of another in respect to a bona file holder who discounts itbefore maturity on the faith of its being business paper.'7In determining whether or not one is an accommodation in-dorser, the courts have uniformly held that parol evidence is admis-sible.' 8 It is likewise admissible in determining which party wasaccommodated.' 9In view of the foregoing, it can be seen that the critical pointand the only point to be established in deciding if one is an accom-modation party is whether or not consideration was received by theindorser from the instrument; the fact that consideration might havebeen received for the signature is not relevant.7 Pirtle v. Johnson, 145 Kan. 8, 64 P. 2d 2 (1937).8 Myrtilles, Inc. v. Johnson, 124 Conn. 177, 199 Ati. 115 (1938).9 Davis v. Holt, 154 S. W. 2d 595 (Mo. App. 1942).10Ford v. Moreland, 96 W. Va. 225, 122 S. E. 652 (1924).11 Middleborough Nat. Bank v. Cole, 191 Mass. 168, 77 N. E. 781 (1906).22 Mechanics and Farmers Savings Bank v. Katterjohn, 137 Ky. 427, 125S. W. 1071 (1910).13 Commercial Nat. Bank v. Ashley Corp., 133 S. C. 304, 130 S. E. 890(1925).14 Il re Prospect Leasing Co., 250 Fed. 707 (C. C. A. 2d 1918).Is Port Washington v. Polonia Phonograph Co., 180 Wis. 71, 192 N. W.472 (1923).16 Nat. Park Bank v. Ger. Am. M. W. S. Co., 116 N. Y. 281, 22 N. E.567 (1889).17 Mechanic's Banking Assoc. v. N. Y. & S. White Lead Co., 35 N. Y.525 (1866).1s Palmer v. Oscar Dowling Food Products Co., 174 La. 923, 142 So. 127(1932); Lee v. Hildebrand, 119 Neb. 717, 230 N. W. 673 (1930); Luikart v.Meierjurgen, 124 Neb. 816, 248 N. W. 379 (1933); Goldberg v. Albert, 161Misc. 281, 291 N. Y. Supp. 855 (Mun. Ct. 1936).19 Goodman v. Gaul, 244 Mass. 528, 138 N. E. 910 (1923).1 99ST. JOHN'S LAW REVIEWLiability to Accommodated Party. The accommodated party ishe to whom the credit is lent, and the fact that another benefitsthereby does not make it accommodation paper as to him.20  In-variably an accommodation indorser is not liable to the party ac-commodated. 2 ' Nor does he owe the accommodated party any dutyto pay the debt for both the accommodating and the accommodatedparties are severally as well as jointly bound to pay the instrument.22Nevertheless, at times public policy will estop the accommodationindorser from asserting his status in a suit by the accommodatedparty.23 The usual case where this estoppel is permitted is one inwhich a bank is the accommodated party. The note is an apparentasset of the bank, and permitting the defense of no liability to theaccommodated party would work a fraud on the depositors of thebank.Liability to Holder Other Than Accommodated Party. Muchof the litigation under this section is a direct result of the use of thephrase in Section 29, "'Such a person is liable on the instrument to aholder for value, notwithstanding such holder at the time of takingthe instrument knew him to be only an accommodation party." TheIndiana court in a well reasoned decision interpreted it as follows:There is a conflict in the decisions on this point but we believe that ... section29 of the act, properly construed, merely means that absence of considerationbetween the accommodated and accommodating parties does not in itself con-stitute a defense against a holder even though he knew of it when he becamea holder. Want of consideration is an infirmity within the meaning of section52, cl. 4 of the Negotiable Instruments Act . . . . and one who becomes aholder with knowledge of this infirmity cannot be a holder in due course. Theeffect of section 29 is to make an exception to the foregoing when the wantof consideration of which the holder has knowledge is between the accom-modated and accommodating party. Stated another way, one who is in otherrespects a holder in due course does not lose his rights as a holder in duecourse against a party to the instrument even though he knew that such partywas an accommodation party. But we do not think that section 29 can, inthe light of other sections of the Uniform Negotiable Instruments Act, beconstrued to allow a holder for value, not otherwise a holder in due course,to recover against an accommodation party.24The consideration that supports the liability of the accommoda-tion indorser is the consideration that moves to the accommodatedparty 25 unless the indorsement is placed there after completion and20 Brundage v. Proctor, 304 Ill. App. 253, 26 N. E. 2d 156 (1940).215 U. L. A. §29, n. 81.22 First and Citizens Nat. Bank v. Hinton, 216 N. C. 159, 4 S. E. 2d 332(1939).23Tarrytown Nat. Bank and Trust Co. v. McMahon, 250 App. Div. 739,293 N. Y. Supp. 513 (2d Dep't 1937); Brand v. Kortle, 128 Tex. 488, 99S. W. 2d 285 (1937).24 National City Bank v. Parr, 205 Ind. 108, -, 185 N. E. 904, 906 (1933).25 Chase v. Du Pont National Bank, 277 Fed. 235 (C. C. A. 3d 1922).[ VOL. 23NOTES AND COMMENTdelivery between the original parties, in which event it must havethe support of a new and independent consideration or be furthernegotiated.2 6The holder can sue the accommodation indorser without firstsuing the accommodated party.2 7 Nor is it necessary that he firstexhaust any collateral security before proceeding against the accom-modation indorser.2s But where the security for the instrument isreleased by a holder to the disadvantage of the accommodation in-dorser, he is not thereby totally exempted from liability but is merelydischarged pro tanto.29An indorser of a note who signs for the accommodation of thepayee is not liable to the payee's transferee after maturity.30 He isliable, however, to a holder after maturity who takes from a holderfor value. 31 This is for the reason that transfer after maturity op-erates as an assignment, the assignee obtaining the rights that theassignor had and conversely being subjected to the same defenses.The payee, being the accommodated party, could not collect from theaccommodation indorser, consequently his assignee cannot. Theholder for value could collect from the accommodation indorser,therefore his assignee can.3 2Generally speaking then, a holder has the same rights againstan accommodation indorser as he would have against a regular in-dorser. He is also subject to the same defenses.Rights of Accommodation Indorser After Payment. The ac-commodation party, having made payment, may sue the accommo-dated party for reimbursement since the relation between them is ineffect that of surety and principal.3 This is true even if the accom-modated party signed "without recourse" 34 provided that the accom-modated party gave his assent to the accommodation."6Generally successive accommodation indorsers have no right tocontribution since they are not treated as co-sureties.3 6 Prima faciethey are liable to one another in the order of their signatures; butif they indorse under an agreement to be equally liable, contributionwill lie.37 This agreement may be shown by parol evidence and it28 McAfee v. Jeter & Townsend, 147 S. W. 2d 884 (Tex. Civ. App. 1941).27 Dexter Bank v. Simmons, 204 S. W. 837 (Mo. App. 1918) (however,he must make demand, give notice and, at times, protest in conformity with§§ 70, 89, and 152 of the Negotiable Instruments Law).2 Miller v. Leavitt, 226 Mass. 330, 115 N. E. 431 (1917).29 Marine Trust Co. v. Willis, 240 App. Div. 176, 269 N. Y. Supp. 204(4th Dep't 1934).30 Robinson v. Linn, 155 Ore. 591, 65 P. 2d 669 (1937).31 Miles v. Dodson, 102 Ark. 422, 144 S. W. 908 (1912).32 BRi'roN, BILLS AND NoTms § 236 (1943).33 5 U. L. A. § 29, n. 171.34 Davis v. Holt, 154 S. W. 2d 595 (Mo. App. 1942).35 Nolan v. H. E. Wilcox Motor Co., 137 Tenn. 667, 195 S. W. 581 (1917).36 Egbert v. Hanson, 34 Misc. 596, 70 N. Y. Supp. 383 (1901).37 Plumley v. Hinton, 76 W. Va. 635, 87 S. E. 94 (1915).1949 ]ST. JOHN'S LAW REVIEWmay be implied from the circumstances. 38  Under the rule of Painv. Packard 39 the accommodation indorser can put the risk of anysubsequent insolvency on the holder by giving him notice to sue theprincipal debtor who is then solvent.Conclusion. In view of the foregoing it can be seen that theproblems that stem from an accommodation indorsement are pri-marily problems that are a direct result of vague or misleading termsand phrases in the section. For this reason many suggestions havebeen offered that would attempt to make the meaning clearer; 40of these, probably the best is that proposed in the Code of Commer-cial Law which was jointly drafted by the American Law Instituteand the National Conference of Commissioners on Uniform StateLaws. The suggestion is that the present Section 29 be replaced bythe following:(1) An accommodation party is one who signs the instrument as maker,drawer, acceptor or indorser but as surety for another party thereto. Hisobligation is supported by any consideration or value for which it is taken.(2) An accommodation party is not liable to the party accommodated, and ifhe pays the instrument has a right of recourse thereon against such party. Heis otherwise liable even though the holder knows of the accommodation.41Its main attributes are that it concisely includes the pertinentmaterial in Section 29 along with much of the decisional law ap-plicable to it and at the same time resolves most of the ambiguitiesof the existing section.MAURICE F. BEHRENS, JR.38 Gambell v. McKean, 28 Ariz. 427, 237 Pac. 196 (1925).39 13 Johns. 174, 7 Am. Dec. 369 (N. Y. 1816).40 See note 2 supra.41 CODE OF COMMER cIAL LAw Art. III, § 517 (proposed final draft 1948).(Article III is a complete revision of the Negotiable Instruments Law.)[ VOL. 23

The Status of an Accommodation Indorser Under Section 29 of the Uniform Negotiable Instruments Law

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The Status of an Accommodation Indorser Under Section 29 of the Uniform Negotiable Instruments Law

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