If Stonecipher had presented the notes for payment to the maker, they would have paid him as the apparent owner for he was the party in possession of bearer paper. It is true, Stonecipher's title was defective, being that of mere custodian, but his apparent title was that of legal holder.)

§ 467. (Nego. Instru., Sec. 75.) To be a holder in due course the negotiable instrument must be properly indorsed to the holder unless bearer paper.

Case 492. Goshen Bank v. Bingham, 118 N. Y. 349. Facts: The bank gave a check to Brown, who acquired it by fraud. He transferred it in due course to Bingham & Co. except the indorsement of the check (it not being payable to bearer) was overlooked. Before the indorsement was procured, Bingham & Co. had notice of the fraud.

Point Involved: Whether one who acquires an instrument which cannot be negotiated by delivery, without the indorsement thereof is a holder in due course and subject to all defenses of which he has notice prior to such indorsement.

PARKER, J.: "As against Brown, to whose order the check was payable, the bank had a good defense. But it could not defeat a recovery by a bona fide holder to whom the check had been indorsed for value. By an oversight on the part of both Brown and Bingham & Co. the check was accepted and cashed without the indorsement of the payee. Before the authority to indorse the name of the payee upon the check was procured and its subsequent indorsement thereon, Bingham & Co. had notice of the fraud which constituted a defense for the bank as against Brown. Can the recovery had be sustained?

"It is too well settled by authority, both in England and in this country, to permit of questioning, that a purchaser of a draft, or check, who obtains title without an indorsement by the payee, holds it subject to all equities and defenses existing between the original parties, even though he has paid full consideration, without notice of

the existence of such equities and defenses. Harrop v. Fisher, 30 L. J. 283; Whistler v. Forster, 14 C. B. (N. S.) 246; Savage v. King, 17 Me. 301; Clark v. Callison, 7 Ill. 263; Haskell v. Mitchell, 53 Me. 468; Clark v. Whittaker, 50 N. H. 474; Calder v. Billington, 15 Me. 398; Lancaster Nat. Bk. v. Taylor, 100 Mass. 18; Gilbert v. Sharp, 2 Lans. 412; Hedges v. Sealy, 9 Barb. 214-218; Franklin Bank v. Raymond, 3 Wend. 69; Raynor v. Hoagland, 7 J. & S. 11; Muller v. Pondir, 55 N. Y. 325; Freund v. Importers & Trades Bk., 76 Id. 352; Trust Co. v. Nat. Bank, 101 U. S. 68; Osgood v. Artt, 17 Fed. Rep. 575.

"The reasoning on which this doctrine is founded may be briefly stated as follows: The general rule is that no one can transfer a better title than he possesses. An exception arises out of the rule of the law-merchant, as to negotiable instruments. It is founded on the commercial policy of sustaining the credit of commercial paper, being treated as currency in commercial transactions, such instruments are subject to the same rule as money. If transferred by indorsement, for value, in good faith and before maturity, they become available in the hands of the holder, notwithstanding the existence of equities, and defenses, which would have rendered them unavailable in the hands of a prior holder.

"This rule is only applicable to negotiable instruments which are negotiated according to the law-merchant.

"When, as in this case, such an instrument is transferred but without an indorsement, it is treated as a chose in action assigned to the purchaser. The assignee acquires all the title of the assignor and may maintain an action thereon in his own name. And like other choses in action it is subject to all the equities and defenses existing in favor of the maker or acceptor against the previous holder.

"Prior to the indorsement of this check, therefore, Bingham & Co. were subject to the defense existing in favor of the bank as against Brown, the payee.

"Evidence of an intention on the part of the payee to indorse does not aid the plaintiff. It is the act of indorse

ment, not the intention, which negotiates the instrument, and it cannot be said that the intent constitutes the act.

"The effect of the indorsement made after notice to Bingham & Co. of the bank's defense must now be considered. Did it relate back to the time of the transfer, so as to constitute the plaintiffs holders by indorsement as of that time?

"While the referee finds that it was intended both by Brown and the plaintiffs that the check should be indorsed, and it was supposed that he had so indorsed it, he also finds that Brown made no statement to the effect that the check was endorsed; neither did the defendants request Brown to indorse it. There was, therefore, no agreement to indorse. Nothing whatever was said upon the subject. Before Brown did agree to indorse the plaintiffs had notice of the bank's defense. Indeed, it had commenced an action to recover possession of the check.

"It would seem, therefore, that having taken title by assignment, for such was the legal effect of the transaction, by reason of which the defense of the bank against Brown became effectual as a defense against a recovery on the check in the hands of the plaintiffs as well, that Brown, and Bingham & Co., could not, by any subsequent agreement or act, so change the legal character of the transfer as to affect the equities and rights which had accrued to the bank. That the subsequent act of indorsement could not relate back so as to destroy the intervening rights and remedies of a third party.

"This position is supported by authority. Harrop v. Fisher; Whistler v. Forster; Savage v. King; Haskell v. Mitchell; Clark v. Whitaker; Clark v. Callison; Lancaster Nat. Bank v. Taylor; Gilbert v. Sharp, cited, supra." Question 492: Why was the indorsement omitted in this. case? Was it afterwards procured? When was it procured with reference to the knowledge of the fraud by the holder? When the indorsement was procured did it relate back? Was the holder subject to the defense in this case?

Case 493. Osgood's Adm'rs v. Artt, 17 Fed. 575. Facts: May 14, 1856, Artt, executed and delivered to R. & M. Rwy. Co. his note, payable to the Company or its order, for $2,500, in five years from May 10, 1856, with interest, etc. As security therefore, he executed a mortgage on real estate in Carroll County, Wisconsin. Afterwards the R. Co. made its bond dated June 10, 1856, acknowledging indebtedness to and promising to pay Charles Osgood or bearer $2,500, May 10, 1861, with interest, etc., which contained a provision that to better secure said bond the company "have assigned and transferred, and by these presents do assign and transfer" to the holder of the bond, the said note signed by Artt, together with the mortgage on said real estate. The Artt note, the bond and the mortgage were attached together with eyelets. When these papers were delivered to Osgood, there was no indorsement of the note, which though afterwards secured in these words, "Racine & Mississippi Railroad Company, by H. S. Durand, President," was not placed on said note until after Osgood had learned that the note had been secured from Artt by fraud, and that also there had been a failure of consideration. Artt, contending that Osgood is not a holder in due course, seeks to set up these defenses against him. Osgood did not know of the defenses when he purchased and received the notes, but learned of them before he secured the indorsement.

Point Involved: As in the above case, with the additional question as to what constitutes an indorsement.

HARLAN, J.: "1. It is a settled doctrine of the lawmerchant that the bona fide purchaser for value of negotiable paper, payable to order, if it be indorsed by the payee, takes the legal title unaffected by any equities which the payor may have as against the payee.

"2. But it is equally well settled that the purchaser, if the paper be delivered to him without indorsement, takes, by the law-merchant only the rights which the payee has, and therefore takes subject to any defense the payor

might rightfully assert as against the payee. The purchaser in such case becomes only the equitable owner of the claim or debt evidenced by the negotiable security, and in the absence of defense by the payor, may demand and receive the amount due and, if not paid, sue for its recovery, in the name of the payee, or in his own name, when so authorized by the local law.

"3. As a general rule the legal title to negotiable paper, payable to order, passes, according to the lawmerchant, only by the payee's indorsement on the security itself. The only established exception to this rule is where the indorsement is made on a piece of paper, so attached to the original instrument as, in effect, to become part thereof, or be incorporated into it. This addition is called, in the adjudged cases and elementary treatises, an allonge. That device had its origin in cases where the back of the instrument had been covered with indorsements, or writing, leaving no room for further indorsements thereon. But, perhaps, an indorsement upon a piece of paper, attached in the manner indicated, would now be deemed sufficient to pass the legal title, although, there may have been, in fact, room for it on the original instrument.

"4. But neither the general doctrines of commercial law, nor any established exception thereto, make words of mere assignment and transfer of such paper-contained in a separate instrument, executed for a wholly different and distinct purpose-equivalent to an indorsement within the rule, which admits the payor to urge, as against the holder of an unindorsed negotiable security, payable to order, any valid defense which he has against the original payee.

"5. The transfer of the note in suit, by words of assignment in the body of the railroad company's bond, did not, in the judgment of the Court, amount to an indorsement of the note, although the bond, note and mortgage were originally fastened together by eyelets. The facts set out in the third plea, and sustained by the special finding, constitute, therefore, a complete defense