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EQUITIES, as we have seen, imply the existence of a contract, the contract, because of such defences, being defeasible between What equities the parties to the equities and all others standing imply. in their shoes,' but binding in favor of bona fide holders for value or holders in due course. This is, indeed, the great field of bona fide holders for value, the field in which the rights of such holders stand out conspicuously as the most favored in the law. It is here that the law merchant appears in its strongest colors and in its most striking contrast to the common law.

Purchase for value and without notice cuts off equities is the cardinal rule. A holder in due course, the Statute declares, holds the instrument free from any defect of title of prior parties, and free from defences available by such parties among themselves, and may enforce payment of the instrument for the full amount against all parties liable thereon."

1 Holder in due course' is the well-chosen term of the American, following the English, Statute, shortly expressing the idea stated more fully and also more concretely in the words 'bona fide holder for value.' The Statute defines the holder in due course as one who has taken the instrument (1) as complete and regular on its face, (2) before it became overdue and without notice of any dishonor of it, (3) in good faith and for value, (4) and without notice of any infirmity in it or defect of title in the hands of the person negotiating it. N. I. L. § 91. See Bills of Exchange Act, § 29. That then is what is meant also by the expression ‘bona fide holder for value.'

2 N. I. L. § 64; Memphis Bethel v. Bank, 101 Tenn. 130 (purchase for value from trustee without notice of breach of trust by him). But it seems that a holder subject to equities may be liable to prior parties in damages if he transfers the instrument to a holder in due course and a prior party is compelled to pay. Nashville Lumber Co. v. Fourth National Bank, 94 Tenn. 374; s. c. 27 L. R. A. 519, and note.

The first thing then to be grasped is the meaning of the term 'bona fide holder for value.' The term is one of deliberately chosen use, each part of it having a characteristic meaning, and each part being necessary to give the party the paramount rights above mentioned; though where it is not important to make any distinction, either part of the expression is often used for the whole. But to enable the holder to occupy the most favored position, he or some one before him must have been both a bona fide holder and a holder for value. What, then, constitutes one a bona fide holder, and what a holder for value?

A preliminary general remark should be made. Ordinarily there intervenes between the bona fide holder for value, with the special rights of such party, and the defendant at least one person. But that is not necessary; the payee of a bill of exchange, or of a cheque, or even of a promissory note,1 or the drawer of a bill or cheque, may be such a holder, as for instance where the instrument has been offered to the payee for discount and so purchased.

§ 2. BONA FIDE HOLDER: NOTICE: NEGLIGENCE. The term 'bona fide holder,' properly speaking, means 2 holder according to the law merchant, without knowledge or notice of equities of any sort (defences not abso- Meaning of lute) which could be set up against a prior holder of term. the instrument. Absence of knowledge or notice of the defence, when the instrument was taken, is the essential thing in the matter of bona fides. Notice calls for very special explanation. In other departments of law notice may be either absolute or constructive. The contrast to constructive notice is usually put as actual notice; but that is an ob- constructive jectionable designation; it naturally suggests, and indeed is commonly used and understood to mean, knowledge.3 1 Lookout v. Aull, 93 Tenn. 645; Passumpsic Bank v. Goss, 31 Vt. 315; Willet v. Parker, 2 Met. 608; Deardorff v. Forseman, 24 Ind. 481.

2 Merritt v. Duncan, 7 Heisk. 156.

Absolute and


As a matter of fact, actual notice' in the law of bills and notes means knowledge; but it would be better to say that the plaintiff had knowledge, than that he had actual notice.

But that leaves too much for constructive notice; it leaves much to that kind of notice which is not 'constructive' at all, as, for example, notice by the public registry. And if notice by the registry be called actual notice, then actual notice is used in inconsistent senses; in one sense it means knowledge; in another, something short of knowledge.

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The term 'absolute notice' creates no such confusion; it does not suggest or mean knowledge at all. It means the kind of notice which in and of itself is notice; the registry, for example, is notice in and of itself, - the Statute makes it so, and it is, therefore, absolute notice; taking a negotiable bill or note after maturity is in and of itself notice (of equities, if any exist), the law merchant makes it so, and hence it is absolute notice. Whether there is knowledge or not in these cases is immaterial.

'Constructive notice' is a very different thing both in manifestation and in effect. It arises from facts putting one upon inquiry; a person has been put upon a trail.



The notice: negli trail must be followed, but if followed with proper diligence, there is an end of the notice altogether, whatever the result. The notice attaches, in other words, only when the trail is not taken up and diligently followed, that is, when there is negligence.

In still other words, and dropping the figure, constructive notice imports knowledge of a preliminary fact or set of facts which would suggest to the average man the existence of some ulterior fact of importance; the preliminary fact puts him upon inquiry concerning the probable, ulterior fact. If he does not pursue the inquiry suggested, or if he pursues it faithlessly rather than faithfully, he is fixed with notice of it; he stands. as if he knew it. Thus, a man about to buy a horse hears of a fact which would suggest to a man of average intelligence that perhaps another may have an unrecorded lien upon the animal. Now if that man buys the horse without making any inquiry in regard to the possible lien, he will buy it with notice if any lien in fact exists; on the other hand, if he makes diligent inquiry, and his suspicion is entirely removed, he takes title free from the defect though in point of fact there was a lien

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Absolute notice, as we have seen, is part of the law of bills, notes, and cheques; and it was at one time supposed that constructive notice by putting upon inquiry and negligencewas also, in the full sense of the term, part of the same law, and in some States it is to this day. For example: The plaintiff, a banker, is indorsee of a bill of exchange, accepted by the defendant, and now sued upon. The bill, indorsed in blank, was offered to the plaintiff for discount by an entire stranger to him. The plaintiff makes no inquiry of the stranger concerning his title or right to the bill, and discounts it. The stranger had found the bill, and had no right to it except as finder. The plaintiff (by some authorities on the unwritten law) cannot recover, having constructive notice that the stranger had no right to the bill; it was the plaintiff's duty, the bill being offered by a stranger, to make inquiry, and he was guilty of negligence in failing to make it.1

This rule of constructive notice was laid down in England in the year 1824, and was maintained there until the year 1836, when it was overturned. The rule of 1824 was never quite satisfactory, and it was finally declared, in 1836, in effect, that this doctrine of constructive notice, by way of negligence, being a bar to the demand of a holder who had paid value and was not otherwise affected with notice, was unsuited to the law merchant as applied to bills and notes, that is, it was inconsistent with custom; and the contrary was now firmly and finally laid down.

Negligence only, even though gross, accordingly was and still is in England held insufficient to defeat the claim of one whose right to recover is otherwise perfect; nothing short of bad faith will suffice to subject him to the equities which the defendant seeks to set up. And that has long been the prevailing rule in this country, the most of our courts which had at first accepted the earlier doctrine having, since 1836, abandoned


Gill v. Cubitt, 3 Barn. & C. 466; Sturgis v. Metropolitan Bank, 49 Ill. 220, 227; Merritt v. Duncan, 7 Heisk. 156; Limerick Bank v. Adams, 70 Vt. 132.

Goodman v. Harvey, 4 Ad. & E. 870.

that doctrine for the one just stated. For example: The plaintiff is an indorsee for value of a bill of exchange now sued upon, which was purchased by him in good faith, in point of fact, and the defendant is acceptor thereof. At the trial the following instruction was given to the jury: If such facts and circumstances were known to the plaintiff as caused him to suspect, or would have caused one of ordinary prudence to suspect, that the drawer had no interest in the bill, and no authority to use the same for his own benefit, and by ordinary diligence he could have ascertained these facts,' the plaintiff cannot recover. The instruction was erroneous; nothing short of bad faith would overcome the plaintiff's demand, and the plaintiff need not show the absence of bad faith.1

narrower sense


Proof of bad faith will subject the plaintiff to equities, if such exist; and bad faith may be shown, for instance, by eviBad faith: dence that he himself actually had reasonable of constructive suspicion, from facts within his knowledge, that the prior holder's title was somehow tainted or defective, and still went forward and purchased the instrument, closing his eyes to the facts and not making inquiry. To that extent the doctrine of constructive notice, a term which may cover cases of bad faith as well as of negligence, obtains in the law of bills, notes, and cheques, and to that extent only, except in the few States in which the courts still adhere to the English doctrine of 1824.

There is then a limited sense in which it is still true that putting one upon inquiry is (constructive) notice, if the inquiry be not pursued; but it is not the sense in which putting upon inquiry amounts to notice by the common law or in equity, which proceeds upon the footing that it is enough that it

1 Goodman v. Simonds, 20 How. 343. See also Lancaster Bank v. Garber, 178 Penn. St. 91; Second National Bank v. Morgan, 165 Penn. St. 199; Cheever v. Pittsburgh R. Co., 150 N. Y. 59; N. I. L. § 63: To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect or knowledge of such facts that his action in taking the instrument amounted to bad faith.'

2 Jones v. Gordon, 2 App. Cas. 216, 228.

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