Story Case

A note made by James Hackett was held by the Inland Bank at its maturity. Hackett had induced his friend, Gerrard "Walton, to make a note in his name, payable to Hackett, with which to discharge the first note held by the bank. Walton informed the bank by letter of his intention, and the organization agreed to accept the new note and fully release Hackett. Instead of carrying out this plan, the Inland Bank yielded to the persuasions of Hackett to advance cash to him upon Walton's note and to extend the note of Hackett for a new term. Because his note was not used for the purpose for which it had been issued, Walton refused to pay at its maturity. Suit was brought by the bank, but Walton pleaded that the bank, having full knowledge of his purpose in signing the note without consideration, could not participate in defeating that purpose, and still hold him responsible. Can the bank recover?

Ruling Court Case. Goddard Vs. Kimball, Volume 6 Cushing, Massachusetts Reports, Page 469

Brown was liable as indorser upon a note. He desired Kimball to take up this note. He refused, but agreed to indorse a note for his friend's accommodation, which was to be used by Brown in the payment of the first note. Brown then made the note, which Kimball indorsed for his accommodation. Brown indorsed this note to Goddard as collateral security for a debt owed by Brown to Goddard, instead of taking up the first note. The latter was ignorant of the fact that it was an accommodation note. When it matured, Goddard sought to collect from Brown on it, but Brown was insolvent and unable to pay it. Thereupon, Goddard sued Kimball as indorser. Kimball contended that he was not liable upon it, because the note was an accommodation note and had not been used for the purpose for which it was given.

Mr. Chief Justice Shaw, who delivered the opinion of the court, said in part: "An indorser of an accommodation note, passed by indorsement to a bona Me holder, in due course of business, is effectually bound to all liability to which, by law, the indorser of a business note is liable. He stipulates to take on himself the qualified obligation of one who indorses and puts in circulation a note taken by himself for value in the course of business. If an accommodation note is obtained from another by fraud, deception, or false practices, or having been obtained for one purpose is fraudulently misapplied to another, and it is negotiated to one even for value, with full notice of the fraud in obtaining or misusing it, he cannot recover; he is not a bona fide holder; an attempt to recover it would make him a partaker in the fraud; and the same would be true of a business note." Judgment was given for Goddard, in accordance with the principles just laid down.

Ruling Law. Story Case Answer

When a person signs an instrument for the accommodation of another, it is, as we have seen, merely a way by which he thereby lends his credit to the party whom he accommodates. Accordingly, the accommodation party has the right to stipulate the conditions upon which the credit is to be used, or the manner in which it is used; if this paper is then used for other purposes, or in another manner, and the person receiving it is aware of the fact, he may not hold the accommodation party. The credit having been un-authorizedly diverted, the accommodation party is discharged as to one who knows of the diversion of the credit. A person, however, who receives the instrument, ignorant of this diversion, may still hold the accommodation party.

The Inland Bank knew that Walton had given this accommodation to Hackett solely to reduce his indebtedness. "When it was used for extending his operations, with the indebtedness continuing undiminished, it was diverted from the maker's plan. This diversion would not be a defense against an innocent purchaser, but is conclusive against one who knew of it and assisted in its accomplishment. Walton is not liable to the Inland Bank, because it did not carry out the understanding with him.