Story Case

Matthews arranged with three of his associates to secure an advance of money, by means of their indorsement of his note. He made the note payable to them and signed it, and then went to them for their indorsements. The first one to sign was Westenholz, and when he indorsed the note, it was payable to the three payees. The second one, Lystrom, failed to keep his promise as to the arrangement and refused to indorse. Matthews then scratched out his name on the face of the note. Thereafter, it was indorsed by the third, now the second, payee, Robinson. Matthews took the note to his bank and secured the amount of its face, upon the strength of the indorsements. It was sold by the bank to Flood, who presented it to all the parties at its maturity. Failing to receive payment, he brought suit against the indorsers, Westenholz and Robinson, who were financially responsible. Their defense consisted in the fact that the marking out of Lystrom's name after the execution of the note was a material alteration which rendered it void, so that they could not be held liable upon it. Is this defense effective?

Ruling Court Case. State Bank Vs. Fearing, Volume 16 Pickering Reports, Page 533. Volume 28 American Decisions, Page 265

Charles Brown made a note, in the sum of $2000, payable to the order of Thomas Jackson. The name of Thomas Jackson appeared upon the back of the note, indorsing it to Fearing. Fearing, thereupon, indorsed it to the State Bank, which discounted it for him. Brown refused to pay the note. After notice was given, the State Bank sued Fearing upon his indorsement. Fearing contended that he was not liable, because the indorsement of Thomas Jackson, which appeared upon the note, was forged.

Decision: A person who indorses a negotiable instrument guarantees the ability to pay, and the genuineness of the signature of all prior parties.

Mr. Chief Justice Shaw said: "The peculiar features of this action are that the plaintiff claims of the second indorser, from whom they immediately took the note. The question is, whether the forgery of the indorsement of the name of a prior party is a good defense to the note; and the court is of the opinion that it is not. In general it is not necessary for the holder to prove the signature of any party prior to the party whom he sues. The reason seems to be obvious that the party defendant, by his indorsement, has admitted the ability and the signature of all prior parties. The effect of the engagement of the indorser is, that if the prior parties do not pay the note according to its tenor upon due presentment, upon notice to him, he will." Judgment was given for State Bank.

Ruling Law. Story Case Answer

An indorser, by indorsing a bill or note, promises that the instrument is valid as it purports to be. By the indorsement, as between him and his indorsee, a new contract arises; and by the terms of this new contract, the indorser undertakes to assure every subsequent holder that he is passing a genuine note, that the names of none of the parties theretofore are forged, that the instrument has in no way been altered. Accordingly, as between the indorser and subsequent holders, the indorser cannot raise anything of the foregoing nature by way of defense, when sued by a subsequent party.

Since the note, in the Ruling Court Case, is exactly the same note upon which Fearing wrote his name as indorser, he will be held liable on his promise to pay-that note, regardless of defects which existed in it at that time. So also, in the Story Case, Robinson, who signed a note with two payees, will be held liable to pay that note. But Westenholz indorsed a note with three payees, and it was changed after his indorsement. Therefore he in no way accepted, waived, or warranted against the alteration, and as it was one which changed his obligation in a material way, he is released by it. The new contract of the indorser covers the bill as it is, not as it may be made subsequently thereto. Thus, in the Story Case, Flood should recover against Robinson, but not against Westenholz.