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Brodhead Motor Co. v. Mid-states Finance Co.

JUNE 15, 1961.




Appeal from the Circuit Court of St. Clair County; the Hon. JOSEPH J. BARR, Judge, presiding. Judgment affirmed.


This was a suit on a check drawn by defendant, payable to a third party who indorsed and delivered it to plaintiff. The trial court directed a verdict in favor of plaintiff for the amount of the check plus interest. On this appeal defendant contends plaintiff was not a holder in due course, therefore is subject to defenses available against the payee-indorser.

The essential facts are not in dispute. Plaintiff had sold a truck to one Douglas, for which he owed them a balance of $2530. Plaintiff's representatives tried to collect this account but were unsuccessful for a time. Finally, Douglas told them he had arranged to borrow the money from a finance company. At his request, an agent of plaintiff rode with him to defendant's office, which Douglas entered, leaving plaintiff's agent in the vehicle.

When Douglas came out of the office, he indorsed and delivered to plaintiff's agent, a check for $2525. He made no statement as to what where his arrangements with the defendant. Plaintiff's bookkeeper entered a credit on the Douglas account for $2525 and the remaining five dollars was paid in cash by Douglas on or near the same date, so that the account was balanced.

Evidence for defendant discloses that the arrangements which Douglas had made with it did not materialize, therefore defendant notified its bank to stop payment on the check. When the check reached the drawee bank through the clearing channels, it was dishonored. Upon receiving notice of this, plaintiff's bookkeeper again debited the Douglas account for $2525 and plaintiff renewed efforts to collect from Douglas. He filed bankruptcy and plaintiff filed its claim for $2525 as an unpaid account. It is evident that defendant has no liability to Douglas, and the sole question is whether the plaintiff is a holder in due course.

The defendant does not contend that the plaintiff had notice of its defenses, nor that a past due obligation is not sufficient consideration for the giving of a negotiable instrument. It does contend that there was no actual consideration, in that the plaintiff, by its redebiting the Douglas account and its subsequent efforts to collect from him, showed that it did not take the check as total or partial satisfaction of the account but that the credit to his account was only provisional. The defense cites as law to this effect several cases from California, New York and Iowa. It is argued that plaintiff gave up nothing for the check, and is no worse off when payment was stopped than it was before.

The rule followed in California, New York and Iowa is a minority view. The majority of jurisdictions hold that the endorsee of a negotiable paper, taken to apply on a previous debt, is a holder in due course. See note in 80 ALR 670. It is there said of minority view: "it is hard to see wherein the distinction lies between a note taken in payment (in part or in whole) of an antecedent debt, and one taken as a credit on such debt. . . ."

In Illinois, the law is and has always been, in this situation, that the endorsee is a holder in due course. An early case was Manning v. McClure, 36 Ill. 490, wherein the court cited and discussed some of the cases holding the opposite view. In answer to the argument that the creditor is in no worse position than before, it was said:

"It is admitted in all the cases, that if the endorsee, at the time of taking the note as collateral security for a pre-existing debt, gives a new consideration as, for example, if he makes a valid agreement to give further time, he then takes it free from latent equities. But it is argued that in the absence of any such new consideration, or any such agreement, the endorsee is in no worse condition than he would have been if he had not received the note . . . We have no hesitation in saying, that the assumption that time is not in fact given, because it is not expressly agreed to be given, and that therefore the endorsee is not placed in a worse position by letting in the latent equities than he would have occupied if he had not received the note, is at variance with the general experience of all men whose business makes them cognizant of affairs of this character. What inducement has the debtor to part with his negotiable paper except the expectation of further forbearance?"

In another case, Mazer Co., Inc. v. Blauer-Goldstone Co., 259 Ill. App. 305, where a note was taken but no actual credit entered on the antecedent debt, the court said of the same argument that is made in the case at bar:

"The answer to this contention is obvious. The evidence of the plaintiff is to the effect that the note was accepted in liquidation of the account in part, when the money is received in payment of the note.

"Under the Negotiable Instruments Act, an antecedent or pre-existing claim constitutes value, and in this case, the note was taken by plaintiff to secure the payment of its account. . . . If the plaintiff was to credit the account of Kansteiner, Inc. when the note was, in fact, paid, reasonable inference necessarily would follow that the plaintiff was to forbear and not press the payment of its debt, and the acceptance of the note was collateral security of this account."

Again, in Elgin Nat. Bank v. Goeck, 259 Ill. 403, 129 N.E. 149, is is said:

"It is the well established law in this jurisdiction that an endorsee of a negotiable note who has taken it before maturity, as collateral security for a pre-existing debt and without any express agreement is deemed a holder for a valuable consideration, and ...

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