Story Case

Henry Heckman required money for his business, and applied for it to his friends, James Waller and George Manton. Neither desired to make the advance alone, and Waller's funds were temporarily unavailable. Therefore, together, they made the following arrangement to assist Heckman: Waller drew a bill upon Manton, payable to Heckman, which Manton accepted. It thus had the credit of both the men, with Manton primarily liable, and, as their credit was good in their town, Heckman easily disposed of the paper for the cash he needed. Before the bill matured, both Manton and Waller became involved in matters that made it inadvisable for the holder to attempt to collect from them. At maturity, the bill was held by Cragg, an investor of the town, who knew all the facts. He did not present the bill to "Waller or Manton, nor make any effort to enforce the acceptance of Manton. He demanded payment from Heckman, and when it was refused, brought suit. Heckman said that he should not be held, because his liability as an indorser had never become complete, because of the failure by Cragg to present to the acceptor and give notice of dishonor.

Ruling Court Case. Hamer Vs. Brainard, Volume 7 Utah 245. Volume 12 Lawyers' Reports Annotated, Page 434

The Zion's Savings Bank drew a bill for $6.50 on Richards & Company of New York, payable to J. S. Field. Field indorsed it to Brainard and he assigned it to Hamer for $500 in cash and $100 due on a real estate transaction. Before it was assigned to Hamer it appears that the bill had been raised to $600. When it was presented to Zion's Savings Bank, the alteration was discovered, and the bank refused to pay it. Hamer then brought this action against Brainard to recover the excess amount, $593.50.

Brainard contended that he was not liable, because he had not been given notice of the bank's refusal to pay it.

Decision: An indorser of a forged bill is liable to the indorsee on its dishonor without proof of demand or notice.

Mr. Chief Justice Zane said: "The law applicable to the facts of this case is stated, as we hold, in section 669 a and b Daniel, Negotiable Instruments. The indorser engages (1) that the bill or note will be accepted or paid, as the case may be, according to its purport; but this engagement is conditional upon due presentment or demand and notice; he also engages (2) that it is in every respect genuine; (3) that it is the valid instrument it purports to be; (4) that the ostensible parties are competent; and (5) that he has lawful title to it and the right to indorse it. And if it turns out that any of these engagements but that first named are not fulfilled, the indorser may be sued for a recovery of the original consideration which has failed, or be held liable as a party without proof of demand and notice."

Ruling Law. Story Case Answer

When a person indorses a negotiable instrument, he assumes a liability in respect to it, but he does not promise to pay the instrument at all events. He engages to pay, only under certain conditions. The holder of the instrument must first use due diligence in procuring payment from the party of primary liability. If, after due notice, the party of primary liability refuses to accept or pay the instrument, the holder must then notify the indorser of this failure; if these conditions are performed, then the holder of the bill may charge the indorser.

In the Ruling Court Case, Brainard was not sued upon the bill as an instrument, but upon his obligation as the seller of a valuable article, that it was genuinely what it purported to be. Since it was not genuine, he was liable without regard to the conduct of the other parties to the bill. But in the Story Case, Heck-man was sued as the indorser of the instrument solely, and would not ordinarily be liable unless the principal parties had been in default. His obligation as indorser is that he will pay to the holder what the promising parties should have paid, and he is entitled to have it shown that they would not pay in the regular way, namely by proof that it was physically presented to them on the day of maturity with an actual request for payment. He is further entitled to prompt notice of their refusal, so that he may take necessary steps to investigate the cause, or to preserve his remedy over against them. Lack of either of these two things is a defense to a suit upon his indorsement. But the special situation here leads to a different result. Where due diligence has been used or where the presentment and notice would not really be worth anything to the indorser, it may, in certain established cases, be dispensed with. Thus, it is not necessary where the drawee is known to the indorser to be fictitious or nonexistent, so that he could not accept or pay, or where the paper was drawn or accepted for the accommodation of the indorser, so that he will be the party who is finally held for the sum in the end. This bill was for the accommodation of Heckman, so that if Manton paid it Heckman would have to repay him, or if Heckman now pays it he would have no recourse against him. This is the absolute reverse of the usual liabilities between the parties, and is sufficient to dispense with the ordinarily required procedure of presentment and notice. Cragg can recover without them.