Title American Commercial Law Series

Author Alfred W. Bays

Publisher Callaghan And Company
Year 1920
Copyright 1920, Callaghan And Company

Volume I. Contracts
Volume II. Negotiable Paper
Volume III. Sales Of Personal Property
Volume IV. Agency. Partnership
Volume V. Corporations
Volume VI. Insurance. Suretyship
Volume VII. Debtor And Creditor Bankruptcy.
Volume VIII. Banks And Banking.
Volume IX. Property
This series of books is respectfully dedicated to professor Willard Eugene Hotchkiss, dean of northwestern university
school of commerce, whose zeal in the cause of commercial education has been a constant source of inspiration to the
author.

Preface To Revised Edition

The first edition of these books was prepared and published in 1911 and 1912, largely with the idea of meeting the
class room needs of the author's own students. They have, however, been widely sold throughout the country and
used in a large number of schools and colleges with much success.
A revision is now offered in order to enable the author to extend somewhat the scope of the work as well as to
incorporate some new ideas and bring the work down to date.
Time was when an author of books upon business law, adapted for use in lay instruction, felt called upon to justify his
endeavor. The law was a holy and mysterious thing not meant for common gaze. Possibly this view was based upon a
belief that "a little learning was a dangerous thing." The obvious answer that if a little is dangerous, safety lies in getting
more, was overlooked. For law is something with which the business man must deal. There is no escape. He cannot
leave it alone. Every business man is continually dealing with legal facts. He is held by legal presumption to a
knowledge of the law. How absurd to say that he must make contracts, but must not have explained to him that there is
such a thing as consideration, or a statute of frauds, or a parol evidence rule; that he must become bound upon
negotiable paper, but must not know the significance of its negotiable quality. If it is felt that he will strive to be "his own
lawyer," the fear is groundless. In a certain sense every man is his own lawyer, just as every one is his own physician.
But in so far as that expression means that the reader will strive to dispense with the services of an expert where an
expert is needed, experience shows that the more one knows of law, and the more generally intelligent he is, the less
likely he is to step into legal pitfalls. In that sense only, the lawyer loses business.
Law of business arises out of business practices and business needs; it is, or should be, to serve business. To serve
business efficiently a business man should know of it as much as he can; not in order to practice it, for he has neither
the skill nor the time for that, and the more he studies law, the more he realizes that fact.
The layman who studies these pages will realize the vastness of the field of law. He will appreciate that it is as broad
as human endeavor; that it has countless applications; that it is ever in development. He will, however, learn also, that
some principles of law have become fundamental, that some rules and practices of law have become permanently
established and can be relied upon not to change; that he can acquire practical knowledge that will help him in
immediate ways in his own business ; and that he must, not alone for safety's sake, but to have workmanlike
assistance, consult the expert when occasion demands.
A study of law strengthens the reasoning faculties, broadens the general view, and has an important part in one's
liberal education.
A few forms have been appended. The author is, however, not a great believer in the desirability of forms in a book of
this character. Forms of deeds, charters, etc., are primarily for the lawyer, and each jurisdiction has its variations.
Hence, there has been no attempt to do much in the way of forms.
Questions and problems follow each text. Authorities are quoted more extensively than in the first edition, and are to
enable further research where it is desired.
Alfred W. Bays. Chicago, September 1, 1920.

General Survey. Chapter 1. Law Defined

Sec. 1. What Is Law

To obtain an accurate estimate of the idea contained in the word law (i. e., political law) it must first be divided into that
law which governs sovereign nations in their relationships with each other and that law by which each sovereignty
governs individuals within its territory. Between the two is a basic distinction - so basic in fact that some writers have
hesitated to call the first division law at all, although it is generally accepted as properly so described. This distinction is
in the fact that sovereign bodies have as to each other by their very nature no legislative, judicial or executive superior
to declare, interpret or enforce rules to govern them, but each of them has as to its own constituent inhabitants
superiority of power by which it can prescribe and enforce its rules enacted to preserve its integrity and maintain its
peace.
If each of these divisions is properly called political law what is the common element or characteristic? It consists in this
- that both branches are composed of rules of political action emanating from sovereignty. Even in the case of
international law, such rules as have the moral sanction of common international opinion merit the mandatory word
"law."
Let us note more particularly each division and first, international law.

Sec. 2. International Law

International law may be defined as the body of rules and customs which have become recognized by the
sovereignties of the world to determine their mutual rights and to govern their intercourse with each other.
We have noticed that sovereignties, being bodies without political superior, cannot, therefore, be legislated upon. They
may be parties to compacts, but by the very nature of things there is no superior authentic tribunal out of which law
may come to govern them. Yet sovereignties must trade together, they must use the common highways of the world,
they war upon each other. In the process of time common customs become established, treaties are entered into,
recognition of principles determined. The sum total is international law. And because it has behind it the recognition of
the consenting nations, it has a moral force to sanction it, and has the true character of law.
"The agreement or consent which is essential to the validity of a rule of international law is said to be express or
positive when it is embodied in treaties or formal declarations of public policy, or in statutes which are enacted in
support or recognition of the accepted usages of nations ; it is said to be tacit when it takes the form or conformity to
the approved practices of the state in their international relaions."

Sec. 3. National Or Municipal Law

Municipal law is political law in its fullest sense. It is the law imposed by the sovereignty (or its dependencies or
subdivisions) upon its subjects. It is prescribed by a superior and must be obeyed.
I. Davis, The Elements of International Law, p. 2.

Sec. 4. Branches Of Municipal Law

The objects sought to be attained by municipal law by which we may divide it into branches for the purpose of
comprehending its character, are as follows:
A. Public Law: or that Law with Whose Objects the State at Large Is Primarily Concerned.
1. Constitutional law;
2. Administrative law;
3. Criminal law and procedure.
B. Private Law: or the Law Provided for the Benefit of the Individual with Whose Enforcement the State Is Not
Concerned Except for the Individual's Benefit and at His Instance.
1. The law of the obligation of individual to individual.
a. The law of contract; b. The law of quasi contract; c. The law of torts.
2. The law of property.
a. The law of tenure; b. The law of transfer inter vivos; c. The law of descent and wills.
3. The law of status.
4. The law of delegation of authority.
5. The law of business associations.
a. The law of partnerships; b. The law of corporations.
6. The law of judicial procedure in civil cases.
a. The law of pleading; b. The law of evidence; c The law of judicial procedure generally.
The above division is not scientifically accurate or complete. It cannot be. Grouping may be made from other
standpoints. There might readily be a difference of opinion as to some of the divisions and subdivisions. One division
cannot be made exclusive of the others, for all of the branches of the law interlace with and cross each other. Further
divisions might be added. But the above division is fairly in accord with accepted terminology and subdivision.
In the following chapter we will discuss the various branches of the law.

Chapter 2. The Branches Of Municipal Law

Sec. 5. Constitutional Law

The law by which a government is organized and by which basic principles of its existence are formulated and
enforced is known as constitutional law.
The constitutional law of any country may be in a highly advanced or a very crude condition. It may consist in a
document drawn up to embrace all of the constitutional law (as in our Federal constitution), or it may consist merely in
detached charters or in practices and principles recognized as fundamental in the life of the nation. In the former case
we say that the constitution is written; in the latter unwritten.
"In a much qualified and very imperfect sense every state may be said to possess a constitution, that is to say, some
leading principle has prevailed in the administration of its government until it has become an understood part of its
system, to which obedience is expected and habitually yielded; like the hereditary principle in most monarchies, and
the custom of choosing the chieftain by the body of the people which prevails among some savage tribes. But the term
constitutional government is applied only to those whose fundamental rules or maxims not only locate the sovereign
power in individuals or bodies designated or chosen in some prescribed manner, but also define the limits of its
exercise so as to protect individual rights and shield them against the assumption of arbitrary power. The number of
these is not great, and the protection they afford to individual rights is far from being uniform." 2
It will be noticed that there are properly two ideas embraced in the words "constitutional law" - the idea of organizing
the government upon a working basis by establishing its departments and offices, and the idea of limiting the power of
those who legislate and rule by establishing certain principles for the protection of the individual which may not be
departed from. Thus in our Federal Constitution we have these two ideas highly exemplified - the organization of our
government and the limitation of its power over individual rights. Where the rights of the individual are assured in this
manner, the government is a truly "constitutional government."
A law is said to be "unconstitutional" when it is opposed to the constitutional law. The effect of an attempt to enact such
a law varies according to whether the constitution itself declares all such laws void, or whether the legislating body is
permitted to keep unrestricted power to legislate as it will. In the former, as in the United States, the law is void, is in
fact, no law at all, and the word "unconstitutional law" is a self-contradiction, although custom has sanctioned its usage.
In the latter, as in England, the phrase "unconstitutional law" is used to indicate merely that the law so enacted is
contrary to the fundamental principles of the government as commonly understood, and therefore should by
subsequent legislation be repealed.
Let us now notice more particularly our Federal and the state constitutions.

Sec. 6. The Federal Constitution

The Federal constitution is a grant of power by the states to the
2. Cooley, Constitutional Limitations, 7th Ed., p. 4.
Federal Government by which sovereignty is bestowed and prescribed powers conferred.
The original colonies, after experimenting unsuccessfully without centralized power in the "league of friendship" known
as the Articles of Confederation,3 were driven by the logic of events to the adoption of the present Federal
Constitution. The United States Constitution was adopted in convention on September 17, 1787, to go into effect by the
ratification of nine states. It was ratified by the necessary number on June 21, 1788, and went into effect March 4,
1789.
The first ten amendments were ratified by the various dates from November 20, 1789, to December 15, 1791, and are
restrictions on Congress in the nature of a Federal bill of rights.
The 11th amendment was declared ratified January 8, 1798, and relates to the judicial power.
The 12th amendment was proclaimed as ratified September 25, 1804, and relates to the mode of election of the
President and the Vice President.
The 13th amendment resulted from the civil war and abolishes slavery and was declared ratified December 18, 1865.
The 14th amendment was declared ratified July 21, 1868. It relates to citizenship.
The 15th amendment was declared ratified March 30, 1870.
The 16th amendment was effective February 23, 1913, and gives Congress the power to tax incomes.
The 17th amendment was effective May 31, 1913, and provides for the election of senators by direct vote.
The 18th amendment was in force January 17, 1920, and establishes national prohibition of the making or sale of
intoxicating liquors.
3. Adopted July 9, 1778.
The 19th amendment was proclaimed adopted in August, 1920, and establishes woman suffrage.
The federal constitution is in its nature a grant of power. Each state, being in effect sovereign, granted to the federal
government the powers therein stipulated, all power not therein granted being retained. Accordingly we speak of the
federal government as a grant of power, and from this fact arises the governing principle of construction that the
federal congress has no power of legislation except such as has been granted in the federal constitution, either
expressly or by reasonable implication.
The federal constitution (1) sets forth the form of the federal government, (2) stipulates the powers of congress, (3)
contains a bill of rights.
The federal government has a threefold division created by the constitution - the executive, the legislative and the
judicial. These departments are co-ordinate in rank. The question early arose whether the judiciary had the power to
declare unconstitutional a law enacted by congress. But Chief Justice Marshall in a strong opinion,4 basing his
reasoning upon the provision of the constitution that it shall be the supreme law of the land, decided that it is within the
power and that it is the duty of the court to declare an enactment null and void if it shall be found against the
constitution or without the power of congress to enact. This right is now taken as a matter of course.
What are the powers delegated to the federal government?
First, sovereignty has been granted. As far as other sovereignties are concerned, the federal government is the
repository of all power and the states are unknown except as divisions of the United States.
4. Marbury v. Madison, 1 Cranch. (U. S.) 137.
Second, we may say that the states have retained the general power to deal with questions of local commerce, with
questions of individual rights and status, with questions of property.
Third, to the federal government has been given jurisdiction on matters deemed to be of more than local importance,
particularly interstate commerce, coinage of money, patents, post office, bankruptcies, and taxation for federal
revenues. The enumeration of the particular powers of the constitution is in Section Eight of the constitution.
Another question which agitated men's minds in our early history was whether the constitution should have a strict or a
liberal construction, and Chief Justice Marshall in McCulloch v. Maryland 5 resolved this doubt in favor of a liberal
construction which may be formulated in words to this effect, that congress has not only power to enact such laws as
are specifically provided for in the constitution, but all laws that are necessary or reasonable for carrying into effect the
express constitutional powers.
The manner of the amendment of the constitution is provided therein.

The Branches Of Municipal Law. Part 2

Sec. 7. The State Constitutions

The state con-stitutions are those by which the people of the state constitute their local form of government and limit
the powers of their own representatives.
We have seen that the states reserved all power not granted away by the federal constitution. They adopt their own
written constitutions for two purposes: (i) to prescribe the form of the state government, and (2) to limit and determine
the power of their representatives. A state constitution is a limitation of power. The federal constitution is a grant of
power. If the power of congress to pass a law is in question, we must inquire whether the federal constitution or its
amendments confer that power by express grant or reasonable implication ; if the power of the state assembly to pass
a law is in question (assuming it not to be a power taken from the state by the federal constitution) we inquire if the
state constitution has limited the power. If it hasn't then the state assembly has the power.
5. 4 Wheat. (U. S.) 316.
A state constitution may be amended at the pleasure of the state.

Sec. 8. Administrative Law

The administrative law is that branch of the law wherein is included all laws by which the government functions and
administers its affairs, as the laws by which territorial divisions are made, revenue law, etc.
We may gather into one large body laws of a public nature by which the government administers its affairs, and call the
group administrative law. Laws creating territorial divisions, revenue laws, the laws creating and governing highways,
public improvements, etc., are all placed in this large and important branch of law.

Sec. 9. The Law Of Crimes

A crime may be defined as any act or omission to act, declared by public law to be punishable by the state in a
proceeding in its own name.
The state must preserve its own integrity as well against inward demoralization as outward attack. It exists by virtue of
the obedience of its citizens or other subjects to the laws by which it is held together as a political body. It prevents this
inward demoralization (so far as overt act is concerned) by its criminal law, or those laws whose infraction by a subject
will be deemed an injury to the state itself.
Theoretically every disregard by one individual of the rights of others, every invasion by one subject of the sphere
allotted by general law to another, is an attack upon the communal system, the tendency of which, however slight, is
toward the demoralization of the scheme of mutual protection for which the state exists. But in practice it cannot always
be so regarded on account of its remote tendency to affect the state in its public capacity. And although reparation may
be sought by the individual injured by way of damages or other form of restoration in the courts furnished by the state,
the state itself takes no notice of the act other than by thus furnishing the means of redress, deeming that sufficient
remedy, unless the act is also of such a nature that it has as a practical tendency a demoralizing effect upon public
peace and order. To effectuate its declaration that the infraction will be considered injurious to the state in its public
capacity, it affixes a punishment, ordinarily by way of a monetary charge called a "fine" or by imprisonment or both.
A crime, then, may be defined as any act or omission to act, declared by public law to be punishable by the state in a
proceeding in its own name.
The act thus constituting a crime may or may not be an act injuring an individual. The test is whether according to the
public policy of the state it is an act injurious to the state itself. If it also injures an individual he has also his redress.
Thus, having in one's possession appliances for counterfeiting money may be a crime, but no individual is so far by
that act injured. So, killing another unjustifiably and inexcusably is a crime, and here we have both the public and
private wrong. But, as we shall see, there cannot be a private wrong unless private injury is present.
Crimes are usually divided into three classes according to the enormity of their turpitude; treasons, felonies and
misdemeanors. Treason is declared by our federal constitution, to "consist only in levying war against them (The
United States) or in adhering to their enemies giving them aid and comfort" (Article III, SEC. 3). A felony at common
law was a crime which worked a forfeiture of the offender's lands or goods. In this country there is no such thing as
forfeiture of property as a punishment for crime, and felonies are those crimes punishable by death or imprisonment in
a state prison. Misdemeanors are all crimes below the grade of felony. The distinction is sometimes important because
of the fact that certain civil disabilities (as the right to vote, or to hold public office) are attached in some states to
conviction of felony.
There are some acts which are adjudged a public evil by the sense of all civilized communities. These are the acts
(usually) which the common law declared criminal. They are said to be acts "mala in se." But an act may be evil only
because legislation declares it so. Such acts are called "mala prohibita." Thus it may be a crime in one jurisdiction to
drive an automobile in a public street at a speed greater than twelve miles an hour, while in another jurisdiction such
act may not be declared unlawful.

The Branches Of Municipal Law. Part 3

Sec. 10. The Law Of Torts

The law of torts is the law which determines the obligations of each person toward his neighbor as imposed by the
general law of the land and by the breach of which the neighbor sustains damage.
In the arrangement of the social order each individual must be assigned his own sphere, limited by the very hypothesis
by the spheres of the other members of the community. To pass out of this sphere into the sphere of another is a
trespass that may, as we have seen, be so serious in its disintegrating tendencies as to constitute an offense against
the collective whole, but whether that be so, it is in derogation of the rights vouchsafed by the general law to that other.
As such transgressor takes so must he be made to return as far as may be, an equivalent. The law defining the sphere
is known as the law of torts.
The word tort signifies "wrong." The correlative right has no one accepted word to describe it.
Whether an act is a tort depends obviously upon the question whether the actor is regarded by the general law as
under a legal obligation not to do that particular act, or, in other words, whether the doing of that act is regarded as a
legal harm. By way of illustration, the general law might or might not regard it as a legal harm for me to refuse without
cause, to recommend to another the services of my former employee. The law might or might not regard it as a legal
harm for me to cause mental fright (without physical injury) to another. We must determine first what sort of acts are
regarded by law as legal harms. And in establishing whether or not an act is a legal harm, the law in its development
looks to various circumstances; whether the alleged harm is of a nature that its existence can in any creditable way be
tested; whether the freedom of individual action is not thereby too much confined; whether a recognition of the act as a
harm would not lead to difficulty in the enforcement of the remedy. We find that the most common classes of wrongs
now settled as such in our law are as follows: physical interference by one with the possession by another of real
property or personal property (trespass quare clausum fregit and trespass de bonis asporta-tis); physical assault by
one upon the person of another (trespass ad personam or assault and battery) ; disturbing one's enjoyment of his
property by maintaining noxious smells, noises and the like, adjacent to the property (nuisance) ; defaming one's
reputation (slander and libel) ; failing to observe due care for the safety of another's person or property (negligence) ;
deceiving or defrauding one and thereby causing him loss (deceit and fraud); conspiring with others to injure one
(conspiracy) ; and others.
Having decided that the act complained of is a wrong act within the meaning of the law, we next determine the
responsibility for the act, that is, we discover the connection between the wrong and the wrong doer.
The actor may have a justification or excuse for his act. Admitting that the act is one which constitutes an invasion of
the civil sphere of another, and that he is the cause thereof, yet he may claim special circumstances that either justify
him or excuse him. Plaintiff may have been himself the aggressor, or may have consented, or may have contributed by
his own fault to the harm done, or may have been a law breaker. These are all excuses based on the plaintiff's
conduct. Other things may justify. The needs of public justice (as where a judge on the bench utters calumny in the
course of a trial) or of public safety (as where a fireman pulls down a building to stop the progress of a fire) and other
needs resting on the good of society as a whole, may fully justify the act and bring exemption from damages.

Sec. 11. The Law Of Judicial Procedure

The law of judicial procedure is the law that governs the presentation and trial of cases in the courts.
A very important branch of the law is that law by which the prosecution and defense of cases in the courts is governed.
This law, it will be noticed at once, differs from all of the other branches in a very basic way. It confers no rights, but
only determines how the rights conferred by the other branches shall be asserted. It is sometimes called "adjective
law," and the other branches of the law "substantive law."
The adjective law includes the law of pleading by which the written statement of the case and of the defense is
governed. This law by the early common law courts was very technical and exact, so that frequently great injustice was
done to litigants by the enforcement of the rules of pleading. The rules now are vastly more liberal, and pleadings are
subject to ready amendment. It must always remain true, however, that in any system of judicial procedure there must
be rules to govern the statement of the respective sides, and suitors must be required to conform to these rules. The
decision of the case upon its merits should however, be the governing consideration, and all rules of pleading made
subservient thereto.
The adjective law also includes all of the law of judicial procedure and practice governing the progress of the case in its
trial, the rendition of the judgment, the right and manner of appeal to higher courts, and all of the steps that have to do
with judicial determination of a cause.

Sec. 12. The Other Branches Of The Municipal Law

We have considered above the chief branches of the law which we will not consider elsewhere at length. The other
branches are taken up at length in this volume and companion volumes.

Chapter 3. Form Of Law

Sec. 13. Purpose Of This Chapter

In this chapter we propose to inquire into the form which the law takes in its expression. Where it is stated, so that we
may read it ? Who has authority to state it ?

Sec. 14. Written Law

Written law is the law prescribed by a body having law making power, and is so called because the permanent
memorial of it is in writing.
Law, as we have noticed, is essential to government. Necessarily, then, there must be a law maker or a law making
body. In England it is the Parliament, in the United States, the Congress, and in the various states, the State
assemblies. As law when made by a law making body is in the form of a permanent written record, it has come to be
called written law. Obviously, this term would include all state papers that have the force of law, treaties and
constitutions as well as statutes and city ordinances. Let us briefly notice each of these.
Constitutions we have already considered.
Treaties are compacts between nations. In the United States they are in the nature of legislative acts and are expressly
declared by the constitution to be with the constitution the "supreme law of the land." Accordingly, the state legislatures
as well as Congress must observe them.
"Statutes" is a word sometimes used in a larger sense to include state papers of any sort, but as commonly employed
and understood signifies the enactments of the law making body in the pursuance of its normal powers. In our
discussion of constitutional law we have noted the power of the federal congress and the power of the state
assemblies to enact statutes and that any attempted enactment that is contrary to or inhibited by the constitution is void
and of no effect and the court will so declare it.

Sec. 15. Codes

A code is a statutory enactment which assumes to put the law of any particular subject in a complete written form, or
which assumes to embody the entire law of the jurisdiction in orderly shape.
A form of statutory law is that of the code. A code is a textual embodiment of the law on a given subject or of all the
law. The Code Napoleon is the first great example in history. In the United States there has been but little codification
until the 3d quarter of the 1800's. Georgia, Iowa, Dakota and California were the first states to codify their entire law;
about a dozen states now have such codes. The statutory law of the United States and of the several states has been
enacted from time to time as need has required. But attempts have been made to codify on various subjects.
While there is much to be said in favor of codification, especially of the law of certain subjects, there are dangers that
surround it. Unskilful codification is likely to twist and warp the law from the symmetrical growth which it would have
with time by the enactment of statutes from time to time and the development of the common law.
For this reason codification more befits subjects of the law that are already fairly well developed.

Sec. 16. Uniform Laws

A number of laws, chiefly on essentially commercial subjects, have been drafted by a commission, known as the
Commissioners on Uniformity of Legislation, and adopted more or less widely by the various states for the purpose of
establishing a uniformity on the subjects covered throughout the several states.
As the federal constitution takes over into national domain only the powers specifically enumerated, and leaves to the
state the great bulk and reserve of power over commercial and other questions we have the possibility of the law
developing differently in different states. To overcome this tendency, the different states have within times fairly recent
appointed commissioners upon uniformity of legislation who have drafted bills upon various subjects and proposed
them for enactment to the several states of the union. Some of these acts have been quite widely adopted, while
others have been slow of acceptance. The principal acts are as follows:
(1) Negotiable Instruments Act.6
(2) Sales Act.7
(3) Bills of Lading Act.7
(4) Warehouse Receipt Act.7
(5) Partnership Act.8
(6) Limited Partnership Act.8
(7) Stock Transfer Act.9

Sec. 17. Unwritten Law

The unwritten or common law is the law declared by the judges in the decision of litigated cases which there is no
written law to cover and is derived from the common ideas of right and expediency.
6. See Volume on Negotiable Instruments in this series.
7. See Volume on Bailments, Carriers and Sales in this series.
8. See Volume on Partnerships in this series. 9. See Volume on Corporations in this series.
It is a little difficult to define the common law without giving the impression that the judges are law makers in all cases
in which the legislature has not spoken. Such an impression would be very far from the truth. The early English writers
defined the common law as that law which had been in existence for so long that the memory of man runneth not to the
contrary. They thought of it as law the origin of which had been lost in the mists of antiquity. One writer says that it
originated in statutes worn out by time. This is pure fiction and is an example of the fictions in which the earlier writers
delighted to deal in the explanation of legal facts.
Common law is really judge made law, but only in the sense that judges must declare and apply the fundamental ideas
of justice developed by the people at large. Myriads of cases must come before them for decision that involve
questions of common right and wrong and questions of customs and even of expediency upon which there is no
statutory law which they must decide. In so deciding them they make law, and other judges in future cases will strive to
follow the precedent unless they believe it manifestly wrong, in which case it will be modified or overridden.
The great foundation of our law is the common law. Statutes add to it or modify it or alter it, or re-state it.
Let us see if we cannot get a more adequate idea of the nature of the common law by an illustration. Suppose one man
slays another without cause. No statute has been enacted defining this to be a crime. The slayer is brought before the
bar of justice. The court declares him to be guilty of a crime by the common law. Note that in this instance, the judge
does not proclaim a general rule to govern future cases, as statutes do, but merely decides the case before him. Or,
again, we shall notice in the law of contracts, the contractual rights and liabilities of minors. That whole subject has
developed as a part of the common law as innumerable cases involving particular facts have arisen for decision.
The common law is found in the reports of cases to be considered in a following section.

Sec. 18. Judicial Reports

The decisions of the courts, with the opinions sustaining them, are preserved in books called judicial reports.
The courts in deciding the cases coming before them, whether involving statutory law or common law or both,
generally in the higher courts accompany them with opinions setting forth the reasons for their decision. The opinions
are published in books termed judicial reports and they constitute one of the most important sources from which the
lawyer obtains his estimate of the law.
In the early days reporting of the cases was done as private enterprise and most of these earlier reports go by the
name of the reporter. Thus Marbury v. Madison, 1 Cranch, 137, means the United States Supreme Court case of
Marbury against Madison, reported in Cranch's reports, Volume 1, at page 137. Reports now go by the name of the
jurisdiction, as McDonald v. City, 258 111. 52, and the earlier reports have been numbered in the series so that the
report of 1 Cranch could now also be identified as 5 United States.
The judicial reports are as important in determining the statutory law as the common law. They are, generally speaking,
the only repository of the common law. Text books which are written upon the common law derive their information
from the reports. But while the statutes are preserved in the legislative archives and separately published, and we need
not go to the reports to find them out, yet the judges must construe and apply the statutes as they decide cases
covered by them; and it is as important to our knowledge of the statutory law to find how it has been construed and
applied to different sets of facts as it is to know the text of the statutes. For statutes are necessarily very general in
their terms, and frequently need construction, and certainly need a great amount of consideration in applying them to
the thousand different sorts of cases that arise. For instance, if a statute says that a workman injured in the course of
his employment shall have compensation, we have a multitude of questions as to what constitutes the course of
employment, upon which the statute cannot possibly be explicit not only because of the great amount of detail that
would be required but because also of the impossibility of foreseeing all of the divers facts that will arise. Is an accident
in the course of going to or from work in the course of the employment? If it occurs during the lunch hour upon the
premises? Suppose the workman is doing an errand for the employer upon his way home from work; suppose that
being sent upon an errand during working hours he deviates for a purpose of his own and is injured. We can readily
see that if we had a case involving facts of this sort we would not only have to consult the statute on that subject, but
also the reports to find the construction and application of the statute to a case as near our own as possible. So that we
may readily see how important the judicial reports are, first, as the sole repository of the common law, second, as the
exposition of the statutory law.

Sec. 19. Doctrine Of Stare Decisis

In. the English and American law it is the policy to stand by decided cases.
From what has been said in the former section it is apparent that we depend upon past decisions as guides to what the
court will do in future decisions upon similar facts. From what the court has said we determine what the law is, that is,
what the court will continue to say. The court will stand by precedents and the precedents form the law. This doctrine is
expressed in the words "stare decisis."
Precedents will be overruled by the courts where manifestly unjust or erroneous or out of harmony with the decisions.
And the law may be so gradually modified that a precedent of years ago may become overruled almost without any
appearance thereof. Legislation, may of course at any time, override prior decisions.
Decisions of other jurisdictions have only a persuasive force; they are not binding.

Sec. 20. Secondary Sources Of The Law

Text books, encyclopedias, digests, derive their information from the statutes and reports and constitute very great
helps in finding the law.
Finding the law is greatly facilitated today by the fact that there are cyclopedias, text books, digests and other law
finders by which the law in the reports is arranged and pointed out. Were it not for the fact that this work is done for the
lawyer, he would find himself helpless in the enormous mass of material he would have to digest for himself. To
thoroughly investigate the law on any point he of course goes to the statutes and reports themselves, but he is able to
find his cases expeditiously through these secondary authorities.

Chapter 4. The Judicial System

Sec. 21. Function Of The Courts

The courts are the constituted tribunals for the trial of cases according to the law as interpreted by them.
In our scheme of government we have the legislature to make the law, the judiciary to interpret and apply it to cases,
and the executive to execute it. We have already seen, that the judges in their declaration of the common law,
practically assume the function of law makers upon matters of fundamental principles where the legislature has not
spoken, although theoretically they have no law making power, and practically also they have none except in the sense
indicated - that is to apply the customs that have become established and the principles of right which are generally
accepted. The interpretation of statutes and their application to varying sets of fact constitutes an essential adjunct to
the statutory law and must always be considered in the understanding of the law.
We have also seen that it is the function of courts to determine whether statutes are constitutional or not.
The courts sit for the trial of cases and it is only in the consideration of actual events that call for the application of the
law that they will render any opinion upon it.

Sec. 22. Courts Of Law And Courts Of Equity

In English and American jurisprudence rights, titles and remedies are of two classes: those developed in the so-called
courts of law; and those which are of the kind developed in the courts of equity.
The courts of law in England, established by the King to constitute the judicial system of the realm, except as he might
himself dispense justice as a part of his prerogative, developed a jurisdiction based upon precedent, which was well
enough and the theory of our own judicial law today, except that they permitted themselves to be limited, fettered and
hindered by such precedents in the law of pleading - they came to think of a right and a remedy in terms of a "form of
action." The word action means suit, and a form of action is the form of pleading in which one must bring his suit.
These forms became established by precedents and then were limited by those precedents. A suitor had no right of
action unless he could find a form of action to suit his case; if he could find no such form, he had to twist, warp or limit
his right until it did conform; and if he could not even do this he was without remedy. Forms of action as they came to
be developed were chiefly of three sorts.
(1) Real actions, for the recovery of one's real estate;
(2) Personal actions ex contractu;
(a) Covenant, or suit for damages on a sealed promise;
(b) Debt, or suit for money debt;
(3) Personal actions ex delicto;
(a) Trespass;
(b) Detinue, or suit for damages for wrongful detention of personal property.
Each of these forms of action had definite rules to govern it, violation of which was fatal, as though pleading were a
game for the sharpest to win at.
Not only were the forms of action thus limited; but it will be noticed how narrow the court's power by way of remedy. If
one's real property were withheld from him by one who had no right thereto, he could obtain a judgment for its
recovery; if one's personal property were wrongfully detained he could recover it or its value in an action of detinue; if
the limited kinds of contracts recognized by the forms of action were broken, or if the limited number of torts so
recognized were committed he could have damages. Damages, recovery of one's property - these were the only
remedies recognized as within the court's power to give.
In the time of Edward I, to relieve this situation, Parliament enacted the Statute of Westminster which authorized and
directed the issuance of new writs, and by virtue of this statute common law pleading took a long step forward and
became far more elastic and permitted the development of the common law into the admirable structure that it came to
be. Forms of action known as Actions on the Case were devised and cases founded on negligence, which today forms
so large a body of law, could be brought; also actions for the breach of executory unsealed contracts in which
damages are unliquidated until assessed by a jury were recognized, and thus came into being our simple bilateral
contract as we have it today.
But still the courts in spite of this statute, enforced with great rigidity the rules of pleading, and forbade the
multiplication of forms of actions except where similar to those already existing, and limited their remedies as
theretofore.
But in the meantime English law was finding an outlet otherwise. The King still had his jurisdiction of litigation if he
chose to exercise it. He was the fountain of justice. Litigants who could not obtain redress in the established courts of
law petitioned it of the King, reciting as the basis of their right, that they had no adequate remedy "by the hard and fast
rules of the common law."
Such petitions came to be referred to the Chancellor "the keeper of the King's Conscience," to whom in course of time
the petitions were made directly and thus came to be formed the Court of Chancery.
Now the Court of Chancery being a court of conscience established its jurisdiction on the theory of equity, and so also
came to be known as the Court of Equity. It put in force many equitable maxims, as "He who wants equity must do
equity"; "he who comes into equity must come with clean hands"; "equity aids the vigilant and not those who slumber
on their rights"; "equity will not suffer a wrong without a remedy"; "equity abhors forfeitures"; and a number of others.
Wherein did the court of equity give a more adequate remedy than the court of law? In three broad general ways: It
recognized rights which the law courts knew not of, rights based on mistake, accident, fraud, and the like; it recognized
and established titles the law court did not know, title by assignment, trusts, etc.; it enforced remedies of a great range
- injunctions, specific performances, accountings, cancellations, partitions, removal of clouds on titles, discovery of
evidence, administration, receiverships, and so on. One can readily see how in the matter of remedy it brought about
an administration of justice far superior to that exercised by the courts of law.
This jurisdiction was based upon the inadequacy of the legal remedy. In other words if a suitor made a case which
showed he had an adequate remedy at law, the chancellor refused to touch it. When is a remedy adequate at law ?
The remedy of the law courts is considered adequate when one seeks the recovery of real estate wrongfully withheld
from him.
The remedy of the law courts is adequate when one seeks the recovery of, or value of, personal property belonging to
him and wrongfully taken and withheld from him.
The remedy of the law courts is adequate where one bases his action upon the breach of a contract (with some
exceptions) ; damages are an adequate remedy.
The remedy of the law courts is adequate where one bases his action upon injury sustained by him in the commission
of a past tort; damages will compensate him.
In all of these cases the court of equity will refuse to listen.
The court of equity as it developed was looked upon with disfavor by the common law courts, who feared its inroads;
but gradually it became recognized that the mission of the court of chancery, being based on the inadequacy of the
legal remedy was not to replace, but to supplement the common law jurisdiction. And so came harmony and co-
operation.
Today we have in some states an attempted abolition between courts of law and courts of equity. In other courts the
distinction is still preserved, although the same court exercises the law jurisdiction and the equitable jurisdiction, having
a law side and an equity side. A judge may hear law cases one day and chancery cases, the next. In the Federal
Courts the distinction is clearly maintained between law cases and equity cases.

The Judicial System. Continued

Sec. 23. Courts Of Original Jurisdiction And Of Review

Our courts may be divided into those courts which take original jurisdiction for the trial of cases and those courts to
which a defeated party in the original court may take the cause for purposes of review. The reviewing court does not
retry the cause, but merely reviews the record.
Courts in which cases are begun and in which they are tried are known as courts of original jurisdiction. After the trial
has been had and the judgment rendered, the party who has been defeated may feel that the law has been
misinterpreted or misapplied and in that case he may take the cause to a higher court by way of appeal or similar
procedure. The higher court has been constituted as a court of review, and serves as a check upon the lower court, for
it is not likely that both courts will make the same error. This higher court does not retry the cause; it hears no
evidence; it merely passes upon the record that is brought before it, to consider whether in the decision of the court
below there was error which wrought an injustice or that may have done so. If convinced of such error, it will reverse
the judgment below, and if justice requires will send the case back for a new trial. It is in these courts of review that the
opinions are rendered that are published in the judicial reports. It is true that we have some sets of reports of opinions
rendered in the lower courts, but this is not now usual or practicable. It is of course only a small percentage of litigated
cases that come before courts of review. A defeated party only increases his expenses and consumes his time by an
appeal unless there is hope of reversal. And the court above will not interfere with the function of the court below by
disturbing findings of pure fact unless clearly against the weight of the evidence. In other words, suppose, plaintiff
testifies one way and defendant to the contrary, and the judge or jury below (according to whether there is a jury trial or
not) believes the plaintiff, and judgment is accordingly so rendered. The court above would not disturb this finding of
fact even if had such higher court been sitting as the trial court, it would have believed the defendant, but will only
consider whether improper evidence was admitted, proper evidence excluded, erroneous instructions given to the jury,
or any other error committed by which the defendant has been denied a fair trial according to law.

Sec. 24. The Progress Of A Case Through The Courts

Below is given in a very general way a view of the progress of a civil case through the law courts.
(a) Service on defendant.
It is essential that the defendant be brought into court to answer to plaintiff's claim. He may voluntarily file his
appearance, which brings him before the court without further action; but unless it is a friendly suit ordinarily he must
be summoned in. A process therefore issues at plaintiff's request known as a summons, which is served by the sheriff
(in United States Courts he is called the Marshal and in some courts he is called the Bailiff), notifying the defendant to
appear. This must be served upon the defendant personally in ordinary law cases, by reading it to him and leaving a
copy with him. In some cases involving property within the jurisdiction of the court, service may be had by publication if
defendant cannot be served personally. Unless there is an appearance, or the service that the law requires, the court is
without jurisdiction to hear the cause, and any proceedings thereafter are void.
(b) The pleadings.
1. Plaintiff's statement. The plaintiff must set forth in writing the general facts upon which he bases his claim. At
common law this is called a declaration, and there were a great many technical rules that had to be observed in
drafting it. Under reformed procedure a simplification and greater liberality has been attempted, and the statement is
now frequently called a Statement of Claim. (In equity the statement of the case is called a Bill of Complaint.)
2. Defendant's statement. The defendant, being properly summoned in, must answer, within the time prescribed by the
rules, and his pleading is called in common law pleading a Plea (in some states, an answer). If he is convinced that
plaintiff's statement is insufficient as a statement of a case, he may demur, that is, allege that the statement, taken in
its most favorable aspect, does not make out a case. The court will pass upon this and either overrule it and order
defendant to answer, or sustain it, and allow plaintiff to amend, unless it appears his case is such that amendment
cannot cure it. In the same way plaintiff may demur to the defense.
The defense under reformed procedure has likewise been simplified.
3. Plaintiff's reply. Plaintiff may reply to the plea if it calls for reply. This is called the Replication in common law
pleading. If no reply is necessary, plaintiff merely joins issue; at common law, by filing a similiter.
(c) The trial.
The case being put at issue, now proceeds to trial. In courts of law either side is entitled to a jury trial (this is not true in
equity cases). Plaintiff puts in his evidence to support his declaration or statement of claim. Defendant puts in his
evidence sustaining his defense. Questions of the law, the court decides. Questions of fact are decided by the jury
under the instructions of the court as to the law governing the facts. If both sides waive a jury, the court acts also as
arbiter of the facts.
The jury's decision is known as a verdict.
The decision of the court where there is no jury is called a finding.
The formal pronouncement by the judge upon the verdict or finding is called a judgment.
(d) Appeal.
The defeated party may appeal, as we have discussed in another connection.

Chapter 5. Administrative Boards And Commissions

Sec. 25. In General

There have been created in the federal government and in the state governments, boards and commissions of
considerable importance in the administration of certain laws. These boards and commissions do not constitute a part
of the judicial system. They may have hearings, make investigations, subpoena witnesses, and enter decrees, and the
conduct of an investigation before them may have the appearance of the trial of a cause, but they are not judicial
courts, except in a very limited sense, and generally their final orders are appealable to the regular courts for final
decision.
The chief boards and commissions for the administration of the law under the federal acts are:
(1) The Interstate Commerce Commission;
(2) The Federal Reserve Board;
(3) The Federal Trade Commission;
(4) The Federal Land Office.
The chief boards under the state acts are:
(1) Public Utility Commissions;
(2) Employer's Liability Commissions;
(3) Commissions to regulate or revise matters of taxation.
(4) The Insurance Commission;
(5) The Securities Commission (Blue Sky Law) ;
(6) The Board of Pardons;
(7) The Licensing Boards (law, medicine, dentistry, accounting, etc.) ;
(8) The Corporation Commission.

Sec. 26. The Interstate Commerce Commission

The Interstate Commerce Commission is a body created to inquire into the management of the business of interstate
common carriers, and to regulate such business.
The Interstate Commerce Commission is an administrative body with quasi judicial powers consisting of seven
members, appointed by the President by and with the advice and consent of the Senate. It was created to inquire into
the business of common carriers doing an interstate business, and to that end might subpoena witnesses and require
the production of books and papers. It did not originally have power to fix maximum rates but that power was given in
1906 (The Hepburn Act). (See "The Rise of the Interstate Commerce Commission," by Bruce Wyman, in 24 Yale Law
Review, 529, for interesting history of the commission showing the amendments from time to time adding to the powers
and converting it from a body of inquiry into one with quasi judicial powers.)

Sec. 27. The Federal Reserve Board

The Federal Reserve Board is a board or commission created in connection with the Federal Reserve Banking System
to maintain a supervision over and to issue regulations governing the Federal Reserve Banks.
The Federal Reserve Board, consisting of seven members, was created by the Federal Reserve Act, enacted 1913, as
a part of Federal Reserve Banking System to maintain an advisory and administrative supervision over Federal
Reserve Banks. It has power to examine the books and accounts of the Federal Reserve banks, may permit the
rediscount of discounted paper of other Federal Reserve banks, at rates fixed by it, to suspend the reserve
requirements of the law for short periods, to supervise and regulate issue and retirement of notes, to suspend or
remove officers of Federal Reserve banks, and so on.
(Associated with this board is the Federal Advisory Council, consisting of as many members as there are Federal
Reserve districts. Their powers are purely advisory.)

Sec. 28. The Federal Trade Commission

The Federal Trade Commission is a commission empowered to inquire into unfair trade and monopolistic practices, to
hold hearings thereon, to enter orders, appealable to the federal courts, and to report upon and advise legislation.
The chief function of the Federal Trade Commission is to inquire into and prevent unfair trade practices. It was
authorized by an Act of 1914, to consist of five members appointed by the President, by and with the advice and
consent of the Senate. It has power to inquire into alleged unfair trade practices in specific instances, to hold hearings,
and subpoena witnesses. Its orders are reviewable by any party who is ordered to desist from any alleged unfair
practice by an appeal to the United States Circuit Court of Appeals. It may gather data from corporations respecting
trade practices and may advise the enactment of trade laws. It has jurisdiction, of course, only in respect to interstate
commerce.

Sec. 29. Public Utility Commissions

In the various states there are boards or commissions for supervision and regulation of public utility corporations.
By various names and with varying powers, commissions have been established in the different states for the purpose
of administering the law governing public utilities (railroads, telegraph and telephone companies, public warehouses,
street railways, pipe lines, lighting companies, and the like). Their powers depend entirely upon the statute, but
generally speaking, they may conduct hearings, establish maximum rates, regulate the conditions of service, etc.

Sec. 30. Employers Liability Commissions

In most states there are laws enacted to provide for the compensation of employees by employers for injuries
sustained while at work regardless of the employer's fault or the employee's lack of fault. Boards are created to award
the compensation. These orders are appealable to the courts.
Formerly the law was that an employee could not recover for an injury sustained in the course of his employment
unless his employer was negligent and the employee was not negligent. But the theory of the law now is that the
employer should compensate for injuries sustained by the employee regardless of the question of negligence (unless
under some laws the employer or employee elect before the injury occurs not to come under the act). These damages
are awarded by a board or commission. These boards are administrative, as the law fixes the amounts payable for
various injuries, but they are quasi-judicial in that they decide questions of fact, e. g., as to whether an accident
happened in the course of the employment; but their decisions may be reviewed by the courts.

Sec. 31. Commissions To Revise Or Regulate Taxes

Such boards are in existence in the different states.
Bodies to assess taxes, and to review and equalize taxes exist in all jurisdictions.

Sec. 32. Other Boards Or Commissions

The boards and commissions listed above in Section 25 have the powers and functions indicated by their titles. Space
will not permit fuller description here.
It would be interesting to note the powers and functions of various other boards and commissions by which the law is
administered but it is not possible in a book of this sort to make more than a general description.

General Law Of Contract. Part I. Formation Of Contract. Chapter I. Definition And

Classification

Sec. 1. Contract Defined

A contract is an agreement that contemplates as its object and results in an obligation for the breach of which a suit for
damages may be maintained in a court of law.
The word "contract" is a word in common usage, conveying the idea of agreement. But every agreement is not a
contract. It must be an agreement intending to create and that does create a legal obligation of certain characteristics.
Some agreements are merely passive, and result in no obligation whatever, and some are intended to create
obligations of a merely social sort, and some agreements create legal obligations of a different nature, as those
connected with the marriage relation, or those attaching to holding property in trust. Those agreements which are of a
contractual nature are those which, according to usually accepted standards, show forth an intention to create
obligations of legal force, for the breach of which the injured party may have his legal remedy. This is no more than
saying that the law has developed consequent upon a demand permitting individuals to assume obligations by making
agreements with each other, and to accomplish this establishes the conditions which the agreement must meet.
The following ideas enter into the legal concept:
(1) An agreement, contemplating and resulting in
(2) An obligation
(3) Enforceable in a court of law by an award of damages and in some cases other remedies.

Sec. 2. Essential Elements Of Contracts

In every contract we must have:
1. Competent parties;
2. Offer and acceptance;
3. A legal object;
4. Consideration, or, a certain form.
These are all considered in Part I of this book.

Sec. 3. Kinds Of Contracts

The broadest division of contracts is into formal and simple contracts. From other standpoints divisions may be made
in order to furnish a terminology indicating the condition, state, and evidence of the contract.
We will make a classification of contracts at this time in order to get before us a general view of the subject, and to
define in part the terminology hereafter to be used. To one who is just entering upon the study of the law of contracts,
these terms seem strange and have little significance; yet they should receive careful consideration at this point for the
purposes mentioned. Their discussion will follow in appropriate place throughout the text.
We may classify or divide contracts as follows:
(1) A classification of contracts in respect to their validity as derived from form or consideration.
a. Formal contracts, whose distinctive element of validity is form.
1. Contracts of record; a. Judgments.
b. Recognizances.
2. Contracts under seal, or specialties.
b. Simple contracts, whose distinctive element of validity is consideration.
1. Written, but not under seal;
2. Oral contracts;
3. Implied contracts.
(2) A classification in respect to the manner or form of their expression.
a. Express contracts.
1. Formal contracts.
2. Contracts in writing, but not under seal.
3. * Oral contracts.
b. Implied contracts.
(3) A classification indicating state of performance.
a. Executory contracts.
1. Contracts in which one party performs an act for the promise of the other party thereafter to perform an act
(executory on one side, called also unilateral).
2. Contracts consisting in their inception of promise for promise (executory on both sides, also called bilateral).
b. Executed contracts; or contracts which have been fully performed. It will be noted that a judgment is classed as a
contract. But this is really a fiction, and we need not further consider it here.1
Example 1. John Doe enters into a written agreement with Richard Roe whereby John Doe undertakes to sell and
Richard Roe to buy a farm for $20,000.00 upon terms stated. We have in this example a contract which is:
A. Bilateral;
B. Simple;
C. Express;
D. In writing.
If the contract above had the seals of the parties attached to their signatures, it would be a contract under seal instead
of a simple contract.
Example 2. John Doe orders groceries from Richard Roe's store saying nothing about paying for them and Roe
promises to send them over. We have in this example a contract which is:
A. Bilateral;
B. Simple;
C. Implied as to Doe's promise to pay;
D. Express as to Roe's promise to deliver.
Example 3. John Doe offers a public reward to anyone who will procure certain information for him. Richard Roe
furnishes the information. Here we have an example of a contract which is accepted by the act as well as thereby
performed. It is a unilateral simple contract. All contracts are two sided and in that sense bilateral, but the word
unilateral signifies a contract in which one side only is executory.
1. "It is an obligation of this character which is unfortunately styled a contract of record in English law. The phrase is
unfortunate because it suggests that an obligation springs from agreement, which is really imposed on the parties ab
extra." Anson, Contracts, Knowlton's Am. Ed., p. 7.

Chapter 2. Parties To Contracts. A. Who Are Parties

Sec. 4. Parties Defined

A party to a contract is a person who by himself or his agent, has a part in making the contract.
A contract carries an adversary idea, that is to say, an arrangement of those who form it on different sides having
interests that may in fact be mutual but which may at any time become antagonistic through the failure of one side to
perform and thus force the other into court for the protection of his interests. Accordingly every contract must have at
least two sides; but it may have more. There may be any number of persons on any side. A "party" is any person who
by himself or through his agent has been a maker thereof. No other person is a party, even though named in the
contract, and, generally speaking, can have no rights or liabilities thereon.

Sec. 5. Capacity Of Parties Generally

A natural person has a full capacity to contract when of legal age and in possession of the natural faculties, unless the
law has imposed upon him, as a member of a class, a disability. A corporation has such capacity as the sovereign has
bestowed upon it.
We note at the outset that unless a person is not of full age, or is not in the possession of the ordinary natural faculties,
or is not a member of a class which the law, for reasons of public policy, has placed under a total or partial disability,
he has the full capacity to contract; he is free to impose upon himself whatsoever contractual obligations he will. We
are, then, concerned only with those exceptional cases, in which some disability is imposed by the law. The chief of
these are, (a) minors, (b) married women, (c) insane persons, (d) drunkards, (e) aliens, and (f) artificial persons or
corporations.
The class composed of minors is of course far the most important as it is a class in which every natural person is for a
time a member.

B. Minors

Sec. 6. Who Are Minors?

A minor or infant is one who has not attained the age which the law deems necessary to give him his full maturity of
mind and below which he requires a special protection from the state.
In the legal conception all children are under guardianship, directly by their parents or other legal guardian, and
indirectly by the state. They are mentally incompetent through lack of experience and because of immaturity of mind,
and therefore not legally competent to protect their own interests to the full extent. To afford them a protection to which
the adult is not entitled, the law qualifies their liability upon contract.
Now the distinction between infancy and adult life is not arbitrary, and we all recognize the distinction and act upon it,
but we cannot point to any particular moment or year as a dividing line. Yet to have a workable rule the law must do
this rather arbitrary thing and apply it generally, although in specific instances it must accomplish the result of affording
a person of a certain age a protection he does not need, as much as another of a greater age does need it to whom
the protection is denied. Some young men of eighteen are more mature than others of twenty-two; but one can see at
once that there is no workable test to measure these things except by setting a line to apply for all, as suggested by
normal experience. This the law has done by saying that from the standpoint of contract, a person is an infant or a
minor until his twenty-first birthday. In some jurisdictions, females attain full age at eighteen.

Sec. 7. Power Of Minors To Contract

A minor has the power to contract, but for his own protection he is given the right to disaffirm, or withdraw from, any
contract made by him, except that the law makes him absolutely liable for the reasonable value of necessaries
furnished him at his request; and except also that in some jurisdictions he has no power whatever to appoint an agent
for important purposes.
The careless statement is frequently made, that a minor has no power to contract, except for necessaries, but this
conception is erroneous. The law does not deny him the power to contract, but furnishes him with relief by way of
disaffirmance if he chooses to rely upon his infancy. This seems to be the true view of the present law. The contract
made by the minor he may not care to disaffirm, and the other party cannot avoid on the ground of the minority of the
party with whom he has contracted.2
In some states the position is taken that a minor cannot appoint an agent,3 but the better view is that there is no
distinction between this and his other voidable contracts, and that the appointment of an agent is not void, but merely
voidable. Being merely voidable, it is capable of ratification by him when he becomes of age.4
2. Wright v. Buchanan, 287 111. 468.

Sec. 8. Minor's Liability For Necessaries

A minor is liable for the reasonable value of necessaries purchased by him upon his credit and actually supplied him.
The law gives a minor the right to elect whether he shall be bound for all contracts made by him except his executed
contracts for necessaries. If a minor could not render himself absolutely liable for the things which are supplied to him
as actual needs, he might be compelled to go in want.
He is not bound to pay what he may have promised, but only the reasonable worth of the thing supplied, that is to say,
the market or real value. Thus, if he purchases a suit of clothes reasonably worth the sum of fifteen dollars, and gives
his promissory note for thirty dollars, he may elect not to be bound upon the note, and fifteen dollars would be the
measure of the seller's damage.
His liability has been said to be not strictly contractual, as it is imposed upon him by law, irrespective of his actual
promise. "Its real foundation is an obligation which the law imposes on the infant to make a fair payment in respect to
needs satisfied." 5 But it is of the nature of contract in this sense that the minor gets the benefit through agreement,
and no harm is done to think of it as a true contract if we remember simply that the state in its regard for the welfare of
the minor protects him against his unreasonable promises, and also that an executory contract even for necessaries is
not enforce-able against a minor.
3. McDonald v. Spring Valley, 285 111. 52; Cole v. Pennoyer, 14 111. 158.
4. Coursolle v. Weyerhauser, 69 Minn. 328.
5. Nash v. Wyman (1908), 2 K. B. I.

B. Minors. Part 2

Sec. 9. What Are Necessaries?

Necessaries are advantages supplied to a person under age which are requisite to his physical well-being, and
common school education, and with which he is not already supplied by parent or guardian, and which are suitable to
his station in life.
(a) Kind of advantages that may constitute necessaries.
A comprehensive definition of necessaries in general terms is difficult. The term does not signify that a thing be
absolutely indispensable to the physical well-being of the minor. It is not necessary that he be saved from actual
hunger or exposure.6 Yet it can never be a mere luxury. A necessary will fall under some such head as food, lodging,
apparel, medicine and surgery (or other health requirement), academic instruction and working tools when the minor
makes his own living. These headings are not absolutely exhaustive, yet they are nearly so. Let us further consider
each of them.
Food, Lodging and Apparel. Here is no difficulty as to the nature of the supply. Other questions, however, may arise,
as indicated further in this Section.
Medicine and Surgery (or Other Health Requirement). Under this heading things which would not ordinarily be
necessaries may be so considered.
6. Strong v. Foote, 42 Conn. 203.
Example 4. A physician orders horse riding as a means of health for a minor in comfortable circumstances. The minor
is liable for the purchase of the horse bought for this purpose.7
Example 5. A dentist renders dental services to a minor and sends a reasonable bill. The minor must pay.8
Academic Instruction. A common school education is classed as necessary and so is an education for a trade.
Example 6. "A" learns the trade of pattern making and promises to pay his instructor a sum of money for teaching him.
He is liable on his contract.9
A college education has been held, however, not to be a necessary.10 This is a rule of doubtful wisdom.
Working Tools. To a minor in trade, working tools are properly classed as necessaries, but even if making his own
living, his purchase of a business is voidable, as he therefore risks his fortune.
Example 7. A minor who has learned the trade of a barber, buys a barber-shop business including the usual fixtures
and supplies. He may avoid the contract if he wishes; but he would be liable if he purchased the usual number of
implements necessary to enable him to pursue his trade.11
7. McKanna v. Merry, 61 111. 177.
8. Strong v. Foote, 42 Conn. 203.
9. Pardey v. Amer. Ship Windlass Co., 20 R. I. 147.
10. Middlebury Coll. v. Chandler, 16 Vt. 683.
11. Ryan v. Smith, 165 Miss. 303.
(b) Station in life as factor.
The station in life of the minor involved is an item in determining whether the article in question is necessary. What is
necessary to the son of a millionaire may not be necessary to a boy whose family are in poor circumstances. And yet,
in any case, the thing supplied must not be a mere luxury. "Suppose the son of the richest man in the kingdom to be
supplied with diamonds and race horses." 12 These could not be considered necessaries. So it has been held that
expensive suppers given by a wealthy young man to his friends, could not be considered necessaries. So an
automobile or bicycle could not constitute a necessary except under very peculiar circumstances. For, no matter what
one's station in life, or how highly pampered its occupant has been, a thing is not a necessary unless referable to some
such heading as indicated. The position of the youth is to be taken into account more to determine upon the grade of a
thing ordered, than the kind of a thing ordered. The son of the poor man and the son of the rich man both need
overcoats, if not supplied. But the former cannot bind himself to pay for such an expensive one as the latter; but neither
the son of a rich man nor the son of a poor man needs automobiles, race horses, club memberships, theater tickets,
etc.
(c) Minor already supplied.
Suppose that the needs of the minor are already abundantly supplied, is that which he purchases necessary? If so,
how is the merchant to know and to protect himself? The rule is that in determining whether a thing supplied is a
necessary, the actual needs of the minor with respect to that class of necessaries, must be considered, and if he
already has a sufficient supply, the thing in question is not a necessary. The person dealing with the minor must take
the risk.
12. Wharton v. McKenzie, 5 Q. B. 606.
Example 8. Nash, a tailor, supplied Inman, a freshman at college and a minor, during his school year with a quantity of
clothes, including eleven fancy waistcoats. Inman was already adequately supplied with clothing according to his
station in life. Held, Nash could not maintain a suit for the price.13
(d) Necessaries must be actually supplied.
The minor is not liable upon his executory contract for necessaries.
Example p. A minor, being in college, rents a room for the entire school year. He gives up the room after a short time
and the owner cannot rent it for the balance of the year. Held, that the minor is not liable, conceding that if he had
occupied the room, he would have been liable.14
Sec. 10. Disaffirmance Of Minor's Voidable Contracts
A minor has the right to disaffirm any contract except for necessaries made by him during minority, at any time during
minority and at any time after majority unless he has ratified after majority. An exception is of his deeds to real estate
which he can disaffirm only after attaining his majority. Upon disaffirmance he must restore what he has received if he
still has it; but his right to disaffirm is not barred by his inability to place the other party in statu quo. If, after becoming
of age, he ratifies a contract made during his minority, it becomes binding, upon him.
13. Nash v. Inman (1908), 2 K. B. 1.
14. Gregory v. Lee, 64 Conn. 407.
(a) Right to disaffirm.
We have seen that contracts made during minority are voidable, unless they are for necessaries actually supplied. In
this Section we will discuss the rules governing disaffirmance.
(b) Time of disaffirmance.
A contract, whether executed or executory, may be disaffirmed by a minor at any time during minority; and may be
disaffirmed at any time after majority unless, and until the minor ratifies after majority. His deeds to real estate,
however, he cannot disaffirm until he arrives at age. See below for further discussion.
(c) Conditions of disaffirmance.
The rule is that a minor can disaffirm any voidable contract, whether executed or executory upon giving back the
benefits received thereunder if he still has them, but the fact that such benefits are injured, lessened or gone, through
willful dissipation, negligence or accident, does not destroy the minor's right to disaffirm.15
Example 10. Hauser brought a suit against the Marmon Company to recover back $450.00 paid by him while a minor,
on a $600.00 automobile. The automobile has been used by Hauser and has deteriorated in value. Held, that upon
restoration of the machine, the plaintiff can recover the $450.00.16
15. Wuller v. Chuse Groc. Co., 241 111. 308.
(d) Disaffirmance of minor's deeds to real estate.
The minor cannot disaffirm his deeds to real estate until after he becomes of age, and then he must disaffirm them
within a reasonable time by some overt act of equal dignity with his deed, as by bringing suit, or deeding to another, or
by making entry. In some states the time is made specific by Statute, as, say, three years.
(e) Ratification.
A minor cannot ratify during minority. After attaining his majority, he may ratify expressly or by his acts. His mere failure
to disaffirm is not in itself ratification unless he is dealing with the benefits of the contract. If he still has benefits under
the contract, he cannot retain them, yet he has a reasonable time to disaffirm. Upon ratification, the contract becomes
absolutely binding upon him, that is, his right to disaffirm has gone forever.
Example 11. A minor enters into a contract to purchase land, paying $1,000.00 cash, balance in installments. He made
several payments before coming of age. He became of age in October, and made a payment in November and another
in December. He then hired a lawyer and tendered back the contract and a quit claim deed and demanded his money
back. Held, that the contract, While voidable by him, before or after age, had been ratified by his payments made under
it and thereby became binding.17
16. Hauser v. Marmon Co., 208 111. App. 171.
B. Minors. Part 3

Sec. 11. Tortious Liability Of Minors In Cases Involving Contracts

A minor is responsible for his torts. If in connection with some voidable contract made by him he commits a wilful and
independent tort, he may be held liable for the damages caused by the tort, but if the wrong alleged consists in a mere
breach of his contract, he cannot be rendered liable by calling his default a tort.
A minor is liable for his torts; his minority is no protection. If, for instance, he deliberately breaks a window, a judgment
may be had against him for the damages caused. Cases arise in which a minor commits a wrong tortious in its nature,
about the time of or in connection with a contract made by him, and when sued in tort responds that his act was at
most a mere breach of contract and not a tort. Thus, if he should hire a horse to drive to an adjoining town and in his
inexperience should drive it so immoderately as to injure it, the injury not being wilful, he can reply if sued in tort for
negligence or conversion, that the other party is attempting to deprive him of a defense to a charge of breach of
contract, by simply calling his breach a tort, and this cannot be permitted. But if a minor takes advantage of a contract
to commit a wilful tort he is liable notwithstanding he would not have been able to commit it if he had not entered into
the contract, as where he maliciously beats a horse hired by him, or drives it further than his contract permitted.18 Also
if in order to hire the horse he misrepresented himself to be of age, he has committed the tort of deceit and is liable.19
17. Rubin v. Strandberg. 288 111. 64.
18. Towne v. Wiley, 23 Vt. 355.
19. Fitts v. Hall, 9 N. H. 441.
C. Other Parties Under Disability.

Sec. 12. Married Women

By the common law a married woman had no capacity to contract even for her necessaries, although she had an
implied authority to bind her husband for her necessaries, which he could not by any act on his part deprive her of. By
modern statutes, her disability to contract has been largely removed.
An unmarried woman, or feme sole, had capacity to contract, but a married woman had no power to contract. Courts of
equity, it is true, allowed property to be settled upon her for her sole use and developed the doctrine that such separate
estate could be charged with debts contracted by her, but she could not be sued personally. By modern statutes,
married women may contract freely.

Sec. 13. Insane Persons

Contracts by an insane person, except for his necessaries, are voidable if he restore the consideration; or in many
jurisdictions by statute if he has been legally declared insane and a conservator appointed, his contracts are voidable
at all events, or void.
The law as to contracts with insane persons varies somewhat in the different states. Statutes quite generally govern
the matter. Many of these declare that the contracts of an insane person, whose insanity has been adjudged by the
law, and is a matter of record, and over whom a conservator or guardian has been appointed, are voidable at the
option of the insane person or such conservator, but are fully binding on the other. Before such adjudication, a contract
with an insane person is voidable by the insane person, unless it is for necessaries. If the other person knew of the
insanity he is only entitled to such of the consideration as the insane person has not parted with. But if the insanity was
not known, the insane person on avoidance must place the other party in statu quo.
Sec. 14. Drunken Persons
A drunken person is liable upon his contract unless the drunkenness is so great as to drown reason, judgment, and
memory, or unless he was made drunk that he might be imposed upon.
The defense of drunkenness is not regarded with favor, unless it has induced a temporary insanity which obscures
reason, judgment, and memory, or unless it was produced as a part of a scheme to defraud on the part of the other
party.20

Sec. 15. Aliens

An alien has power to contract when his country is at peace with this country. But during hostilities he may not enter
into any contract with citizens of this country. Rights acquired prior to the declaration of war are suspended, but not
annulled, and may be enforced in our courts when peace is resumed. An alien enemy may be sued in our courts and
when sued may make his defense.
Alien enemy acts are passed in time of war specifically governing the rights and disabilities of alien enemies.

Sec. 16. Corporations

A corporation's capacity to contract is determined by its charter. Generally speaking it may make contracts that are
fairly intended to further its legitimate corporate purposes.
A full discussion of the capacity of a corporation to contract would be out of place here. That must be sought in some
treatise upon the law of corporations. See the Law of Corporations in this series. We may say generally that a
corporation has the power to make such contracts as reasonably tend to the furtherance of its legitimate business, but
no others.
20. Martin v. Harsh, 231 111. 384.

Chapter 3. Offer And Acceptance. 1. What Constitutes. A. Necessity Of Offer And

Acceptance

Sec. 17. No Contract Without Offer And Acceptance

In every contract, there must be an offer and an acceptance thereof.
Offer and acceptance are essential to contract. That is, there must be, as the courts say, a meeting of the minds. It is
true that in some instances we may hold parties to a contract although their minds have not absolutely met on every
point, as where one party has not read his contract. And some educators have criticized the statement that there must
be a "meeting of minds." But the criticism does not seem sound from a practical standpoint. It is true, as a general
proposition, that in every contract there must be an offer, complete enough to result in obligation, either by its express
terms or by its implications, and an acceptance of that offer consisting in an agreement with it on every term. If, in any
particular case, we hold a person to a term to which he claims he has not in reality assented, as for instance, that he
was ignorant of a custom which we must charge him with as entering into the contract, or because he has not read the
contract, we do so upon the theory that he must be charged with the knowledge of those terms, Whether in fact he
knew them or not. This may be a fiction, but it is a fiction necessary to any reasonable and workable rule. In the same
way we are not concerned with a person's secret thoughts, where he claims they were different from what the party
with whom he was contracting was entitled to believe them from the words used or acts done by him.
With these explanations we may say that the rule is that in every contract, one party must make a definite offer,
intended as such when judged by usual standards of interpretation, complete and definite enough to be enforceable
against him if accepted, and the party to whom the offer is made must accept the offer as made, that is, without
qualifications, (if he does qualify it, he thereby makes a counter offer which the original offeror may accept).
The party who makes an offer is called an "Offeror," the party to whom it is made is called the "Offeree." An offeree
may be, (and usually is), a definite person or persons, or may be any person or persons in a class, as an offer to
anyone who will secure a certain number of subscriptions to a newspaper.
B. What Constitutes Offer.

Sec. 18. No Offer And Acceptance Because No Communication To Offeree

There is no contract where the offer is not communicated to the offeree.
Cases occur in which an offer is made, and then the person who would have accepted the offer does the very thing
that the offer calls for yet without knowledge of the offer; there is no contract.
Example 12. A offers a public reward to any one who will furnish information as to the whereabouts of an accused
person. B, ignorant of the reward, furnishes him such information. He is not entitled to the reward, as he did not act in
response thereto, what he did he would have done had there been no reward.21

Sec. 19. No Offer Because Offer Not Uttered

Though an offer is framed, offeree cannot accept it if it lacks utterance or delivery to him.
Clearly an offer is not legally made, even if put in final form, unless it is uttered to or delivered to offeree. We all know
of cases in which letters are written, and even signed, but not sent. The final act of delivery is essential to the offer,
otherwise it is not an offer.
Example 13. A writes a letter to the janitor of the building, explaining that he has lost a ring about the premises and
offering a certain reward to the janitor if he will find the ring. He signs this letter and leaves it on his desk intending to
think it over before he delivers it in the morning. The janitor sees it on the desk and reads it. Whether this is an offer
would depend on whether the letter were left in such a way that the janitor would be entitled to suppose it was meant to
be read by him.
Example 14. A tells B he will give C $200.00 for his horse Dick. B tells this to C. Here is no offer unless A intended B to
tell C, or unless B were C's agent for that purpose.
Example 15. The Board of Directors of the X Corporation vote to offer a reward for certain information.
21. Broadnax v. Ledbetter, 100 Tex. 375.
The X Corporation does not, however, offer the reward. A learns of the vote and furnishes the information. There is no
contract, for the offer lacked delivery.22

Sec. 20. Preliminary Announcements Intended To Secure Offers Distinguished From Offers
Announcements made in a preliminary way, in the nature of advertisements meant to attract trade are not offers and
cannot be accepted. Responses to them are the offers which the original announcer can accept or reject as he
chooses.
Cases frequently arise in which a person claims that a contract is complete because he has ordered goods or taken
some action in response to a proposition which the proposer claims was not intended as an offer, but as a mere
advertisement or preliminary proposition intended to invite offers. Whether such a proposition is an offer or not,
depends of course on the construction that the alleged acceptor would be entitled to place on it, according to
reasonable rules of interpretation.
Example 16. The Johnson Company, a manufacturer of firearms, selling only to jobbers, sent out a circular letter to its
prospective customers, setting forth the terms upon which revolvers would be sold to the jobbing trade. Ward, having
received the letter, sent in an order for revolvers. This is not a contract without acceptance by The Johnson Company,
as the circular letter was not an offer.23
It is very clear that circular letters are not intended as offers, even if they contain the phrase, "We offer," and even if
there is no reservation of right to reject. It is wise business policy to include in any such letter a statement that the right
to reject orders is reserved, for that may save a lawsuit, but such letters are clearly not offers.
22. See Sears v. Kings Co. El. Co., a L. R. A. (Mass.), 117.
23. Montgomery Ward & Co. v. Johnson, 209 Mass. 89.
If the letter is by one person to another, it may still have the nature of a circular letter, even though of a definite nature,
if, by its terminology it suggests that it is such a letter as may have been sent generally to other customers, whether in
fact it has been or not. Thus, a statement by a merchant that he has on hand a quantity of material which he is offering
at certain prices and on certain terms is not an offer.
Example 17. Harsh wrote Nebraska Seed Company, "I have about 1800 bushels of millet seed, of which I am mailing
you a sample. This millet is recleaned and was grown on sod and is good seed. I want $2.25 per cwt. for this seed, f. o.
b. Lowell." Held, not an offer and an attempted acceptance would not complete a contract. The court said, "The
language used is general and such as may be used in an advertisement or circular addressed generally to those
engaged in the seed business, and is not an offer by which he may be bound, if accepted, by any and all persons
addressed." 24
It is very clear, however, that there may be cases of this sort where it is very hard to draw the line. It took a Supreme
Court decision to convince the loser in the above example, and the winner would have saved his trouble if he had put a
reservation in the letter. But, of course, if one really intends an offer, he would not care to put in such reservation.
24. Harsh v. Nebraska Seed Co., L. R. A. 1915 F. 824 (Nebr.).
On the other hand, if one party makes a definite proposition to another in terms the reasonable construction of which
indicates an offer, an acceptance thereof completes the contract and the offeror is bound.
Advertisements in public newspapers or by public announcement of any sort may or may not be offers according to
how the same are worded. Thus advertisements of rewards are clearly offers to those who will do what is called for, but
advertisements of goods for sale or of sales to be held are not offers.
Catalogues are generally not offers, as catalogues sent out by mail order houses and the like. They are in the nature of
circular letters. But catalogues may contain offers. So in fact may circular letters, if that is the reasonable construction
of them, as where they offer a reward.25

Sec. 21. Offer Indefinite

If the proposition is too indefinite to be enforceable, if accepted it is clearly not an offer, even though intended as such.
A proposition, although intended as such, may be either too indefinite or too incomplete to constitute an offer. An offer
must be definite enough so that a contract may be made out of it by the mere reply, "I accept." In other words it must
be definite enough and complete enough to be enforceable.
Example 18. A offers B 100 acres of land, if B will work for him until B's marriage. B accepts and performs. A's promise
is unenforceable because "100 acres of land" is too indefinite. It may mean fertile or barren land, improved or
unimproved land, valuable or poor land.26
25. Bank v. Griffin, 66 111. Ap. 577.
26. Sherman v. Kitsmiller, 17 S. & R. (Pa.) 45.
Example 19. A promise by an oil dealer to sell oil on favorable terms so that the buyer could compete successfully with
other parties selling in the same territory is too indefinite to constitute an offer.27

Sec. 22. Proposition Incomplete

If the propo sition, although definite enough to be an offer, so far as stated, is incomplete in its terms, it is not an offer;
but where by fair interpretation the terms alleged to be lacking were meant to be implied, the offer may thereby be
rendered complete.
The alleged offer must be of sufficient completeness to constitute a valid offer. This is of course very closely connected
with the subject matter of the last section, but here we refer to those cases in which the offer as far as it goes is definite
enough, but it omits details that are essential to make it complete, as an offer to sell a certain farm, no price being
stated. Clearly there is no offer here that an acceptance can turn into a contract.
But another consideration presents itself in these cases. It is a .very common occurrence to have terms' included in an
offer by implication, provided, the implication is a reasonable one to make under the circumstances. In the case
supposed above of the sale of the farm no terms as to price could be implied, but if one orders goods stating no price
and they have a market value, it is to be assumed that he intends to pay the prevailing prices. By reasonable
construction, the price is a part of his offer.
Contracts which may be reduced to certainty by reference to events stipulated in the contract are good, as sales for
future market prices.
27. Marble v. Standard Oil Co., 169 Mass. 553.

C. Duration Of Offer

Sec. 23. Duration Of Offer

An offer remains open for acceptance: (1) The time stated; or (2) if no time is stated, a reasonable time; provided in
either case it is not sooner withdrawn.
An offer being made, how long will it last? Within what time must the offeree act upon it ? The offeror may in making
the offer expressly stipulate how long it shall remain open, but more than likely he will say nothing about it. If he sets
the time, that will of course govern ; if he does not set the time, then we are forced to the general statement that an
offer will remain open a reasonable length of time.
In either case the offeror may withdraw his offer unless he has contracted to keep the offer open. See Section 27
below for further discussion. If no definite time is stated, what is a reasonable time? Is it one day, one week, or one
month? Clearly this depends entirely on the circumstances, as the nature of the subject matter, the locality, the
previous dealings of the parties, prevailing customs.
Example 20. Kempner offers to sell land to Cohn by letter reaching Cohn February 2. On February 7th Cohn accepted
the offer by letter reaching Kempner February 9th. Seller lived in Hot Springs and buyer in Little Rock, Arkansas. Land
was a lot in Little Rock. Jury found time not unreasonable.28
Example 21. An offer reaching offerer by telegram Monday morning between 8 o'clock and 9 o'clock offering to sell oil
which at the time was rapidly fluctuating in market price was attempted to be accepted by telegram sent out Tuesday
morning at 8:53 A. M. The court held the time to be unreasonable.29
28. Kempner v. Cohn, 47 Ark. 519.
It is apparent from these considerations that it is an impossible task to lay down a rule of yardstick character which one
may go by. The jury is the final arbiter, subject of course to the instructions of the court. The time cannot be measured
off by the clock and one who accepts after some delay may not be able to absolutely know whether he has a good
case or not, and his lawyer may not be able to tell him.
No matter when the offer would expire by mere lapse of time, it may be accepted thereafter if the offeror still treats it as
being in force.

Sec. 24. Termination Of Offer By Rejection

A rejection of an offer by the offeree terminates it. A counter offer is equivalent to a rejection.
If the offeree positively rejects the offer, it is of course within the offeror's power to tell him that the offer is no longer
open, but he may not think to do that and may have no opportunity to do so. An offeree may reject an offer, and then
within the time that it would have remained open may attempt to accept it. Must the offeror honor the acceptance? The
law is that the rejection terminates the offer. For clearly, if A offers B goods at certain prices, and B replies with a
definite rejection, A ought then to be able to forget all about B and seek another buyer.
A counter offer is regarded as a rejection and therefore also terminates the offer.30
20. Minn. Linseed Oil Co. v. Collier White Lead Co., 4 Dill. 431 (Fed. Cas. No. 9635) ; 17 Federal Cases 447.
30. Shaw v. Ingram Day Lumber Co., 152 Ky. 329, L. R. A. 1915 D. 145.

Sec. 25. Termination Of Offer By Destruction Of Subject Matter

If the offer relates to definite subject matter, and such subject matter is destroyed prior to acceptance, there is no
contract.
If A offers to sell a certain horse to B and the horse dies before B accepts, there is no contract. If, however, the subject
matter is destroyed out of which A intends to perform, but he may perform out of any other subject matter, the
destruction of such subject matter does not terminate the offer.

Sec. 26. Termination By Death Or Insanity Of Offeror Or Offeree

The death or insanity of offeror or offeree before acceptance will terminate an offer.
Except in cases of a consideration to keep an offer open, death of the offeror before acceptance, or his insanity, will
cause the offer to lapse,31 and so will the death or insanity of the offeree.32

Sec. 27. Revocation Of Offer

An offer may be withdrawn at any time, unless a consideration has been given to keep it open; but the attempted
revocation must actually reach the offeree before acceptance.
An offer may be withdrawn at any time, even if the offeror in withdrawing it breaks his promise to keep it open; except
where the promisor for a valid consideration has agreed to keep it open (and except where under seal in those
jurisdictions which still adhere to the law of the seal). The withdrawal must actually reach the offeree to be effectual.
31. Beach v. M. E. Church, 06 111. 177.
32. Sutherland v. Parkins, 75 111. 338.
Example 22. A mails an offer to B on Monday which reaches B on Tuesday. B, after receipt of the letter on Tuesday,
mails his acceptance. (This completes the contract, see Section 31, post.) Prior to B's acceptance on Tuesday, A wires
B a revocation which reaches B after B has deposited his letter. The revocation is ineffective.33

Sec. 28. Contracts To Keep Offers Open

A contract to keep an offer open, operates to prevent its withdrawal within the time stated.
As we have seen, an offer may be withdrawn at any time before acceptance, no matter how long it would have
otherwise remained open and although the promise to keep it open is thereby violated. But parties may contract that an
offer shall remain open, as they may contract almost anything else, and in that case, retraction amounts to a breach of
such contract.
Example 23. A offers to sell B his house for $10,000.00. B is undetermined. A, therefore, at B's request, promises to
keep the offer open for ten days, in consideration that B will pay him $50.00 for the option. B agrees. A has no right to
revoke." If he attempts to do so, some courts look upon the revocation as a breach of his contract not to revoke, and
some look upon it as ineffectual, leaving the offer still in effect. The result is substantially the same under either theory.

D. The Acceptance

Sec. 29. What Constitutes Acceptance

Acceptance is a definite manifestation of a purpose to be bound according to the terms of the offer. Therefore there is
no acceptance where there is doubt or difference expressed or except in unusual cases where there is mere silence.
Acceptance may be by promise or act whichever is contemplated by the offer.
33. Kempner v. Cohn, 47 Ark. 519.
We have seen in the discussion of the offer that the acceptance completes the contract and is therefore irrevocable;
that it must be in the terms of the offer; and a few questions only remain for our discussion.

Sec. 30. Acceptance By Promise Or Act

The acceptance must be in manner and form as contemplated by the offer which may be by promise or by act.
One may accept an offer by a promise to do what the offer calls for if that is the manner of acceptance contemplated
by the offer, but if the offer calls for the doing of an act by way of acceptance the offer could not be accepted by
promising to do the act in the future. It would be no objection in that case that the offeree signified that he did accept;
and in all cases acceptance calls for notification to the offeror that the offeree has accepted. A few examples will
elucidate this subject:
Example 24. A in June makes an offer to B consisting in a promise by A to sell goods for the fall trade to be made up
on B's order. This is an offer clearly to be accepted by B's promise to buy such goods. The contract when accepted,
consists in mutual promises.34
Example 25. A offers a public reward to any person who will furnish him certain information. B furnishes that
information. In this case B accepts the offer by doing an act.35
34. Trademen's Nat. Bk. v. Curtis, 167 N. Y. 194, 52 L. R. A. 430.
Example 26. A, being about to go to Chicago to buy goods at wholesale, takes with him a letter of credit from B,
promising to guarantee A's credit with anyone of whom A purchases the goods up to a certain amount and over a
prescribed period. M sells A goods on the strength of this letter and M accepts this offer by selling the goods, as such
is the reasonable interpretation of the letter, but M must notify B within a reasonable time that he has accepted the
letter.36
Example 27. A sends an order by mail to the M. Company, ordering goods as per catalogue prices. The Company
accepts this offer by shipping the goods, but must notify A, so that he may know of the acceptance.37

Sec. 31. Communication Of Acceptance

When complete the acceptance must be communicated to the offeror or his agent in that behalf, except in cases in
which the offer evidently contemplates communication by an act without previous communication. If a contract is made
by mail or telegraph the offer is not complete until it reaches the sendee or his agent in that behalf, but the acceptance
is complete when delivered to the post office or telegraph company, unless the offer stipulates otherwise; provided the
mail or telegraph in the specific case is the proper method of communication, as expressly or impliedly authorized by
the offer.
(a) Communication of offer.
We have discussed this principle in the previous section.
35. Elkins v. Bd. of County Com'rs, 86 Kan. 305, 120 Pac. 542.
36. Wm. Deering & Co. v. Mortell, 21 S. D. 159, no N. W. 86.
37. Main v. Tracy, 76 Ark. 371.
(b) Communication to agent.
The communication of the acceptance to an agent of the offeror is at that moment a communication to the offeror,
whether in fact the offeror ever receives it or not, but such agent would have to have actual or apparent authority to
receive the offer. The fact that he was an agent of the offeror for some purposes would not necessarily carry. with it
authority to receive the acceptance of any offer. See generally, the subject of Agency.
(c) Communication by mail or telegraph.
It is clearly established by the cases that if the acceptance is properly made either by mail or telegraph, the contract is
complete when the acceptance is delivered to the postoffice or telegraph company, properly addressed and paid for,
and that subsequent delay or miscarriage will not defeat the contract. This has been supported on various theories, a
favorite one being that the post-office or telegraph company is the agent of the offeror to receive the acceptance, which
according to the principles stated in the paragraph next above, would make the contract complete at that time.
According to this rule, an attempted revocation of the acceptance after so made, is ineffectual even if it actually
reaches the offeror before the acceptance reaches him.38
(d) When acceptance by mail or telegraph authorised.
The difficult question is to determine when the acceptance is authorized to be sent by mail or telegraph. The offer may
of course be explicit, as "wire reply," or "reply by return mail," but if nothing is said, what is the rule? The authorities
differ. It has been said that if there is nothing in the case to the contrary, an offer sent by mail is an authorization to the
sendee to use only the mail in reply; and if the offer is sent by wire that is an authorization to the sendee to use only
the telegraph in reply.39 But, other authorities hold that an offer by mail may be accepted by telegram and vice versa,
and that the acceptance is complete when put in course of transmission.40
38. Brauer v. Shaw, 168 Mass. 198.
(e) Acceptance may be by any method if it actually reaches the offeror in time.
No matter what mode of communication is employed by the offeree, it is clearly good, if it reaches the offeror provided
also it reaches him before the offer has lapsed. Thus if A mails an offer to B and asks for a reply by mail, and B wires
his reply, the contract is not complete at the time of sending the message, but if the reply goes to A in due season, the
contract is complete when it reaches A, but he takes the risk that it will reach A and reach him in time.41

Sec. 32. Silence As Acceptance

Mere silence cannot be construed generally as acceptance, nor can one claim he has accepted, where he has merely
remained silent, but one's conduct in not replying where under the circumstances, he would be expected to reply may
debar him from saying he did not assent.
39. Lucas v. W. U. T. Co., 6 L. R. A. new series, 1016.
40. Farmers Produce Co. v. Schreiner (Okla.), L. R. A. 1916 A. 1297.
41. Lucas v. W. U. T. Co., supra.
Suppose an offer is made to one, and he remains silent? Does his lack of reply signify acceptance?
It might be contended that it did or did not either from the offeror or offeree's standpoint.
The offeror cannot claim acceptance by the offeree merely because the offeree does not reply. One cannot impose a
duty on another to speak.42 But, there are cases in which from previous dealings, an offeree's refusal to reject may be
a circumstance from which the offeror may infer an assent.
The offeree cannot claim he has assented where he did not speak, or at least show by his conduct, known to the
offeror, that he accepts.43
42. Hobbs v. Massasoit Whip Co., 158 Mass. 194.
43. Thurber v. Smith, 25 R. I. 60,54 Atl. 790.

Chapter 4. Offer And Acceptance. 2. Validity Of Assent Therein

Sec. 33. Introduction

We have discussed what will constitute offer and what acceptance. In so doing we have assumed a true contractual
intent on both sides without mistake as to subject matter, or any undue advantage taken by one side over the other by
way of fraud, coercion or undue influence. In other words we have looked only to the words used or acts done
indicating offer and acceptance without inquiring whether there may be extrinsic circumstances which prevent those
words or acts from expressing the true contractual intent of the parties. We will find that we may group these
circumstances under the following headings:
(A) Circumstances defeating contractual intent (mistake and deception as to act done).
(B) Circumstances of unfairness giving party imposed on a right to disaffirm the contract (fraud as to consideration or in
the inducement, duress and undue influence).
A. Extrinsic Circumstances Defeating Contractual Intent.

Sec. 34. Fraud In The Inception Or Execution

A fraud practiced by one person upon another, whereby the other's seeming assent is procured to a contract which he
in reality never agreed to, prevents a contract from being formed. This is variously called fraud in the inception, in the
execution, and in the procurement.
Suppose A is sued upon a note, to which his signature is attached, but which he does not know he has signed, having
been misled by the payee into believing he was signing an agreement for an agency. Is he bound on the note ? A
contract signifies an agreement, and clearly there has not been such an agreement in this case. We have heretofore
considered that one may sign an instrument and still be bound thereon, though .he has not read it, but this is upon the
theory that he has been willing to take a chance on what it contains, and no other rule would be a workable one. But in
those cases there has been no misrepresentation as to what the instrument contains. We are now considering a case
of fraud by which the content of the alleged contract is misrepresented. The rule is that such a contract is void.
Example 28. Plaintiff was injured in a railroad accident. While in a dazed condition and about an hour and a half after
the accident, he was conducted into the superintendent's office, and told that the railroad company was willing to pay
the sum of $17.00 for the injury to his hat and trousers, and asked him to sign a receipt for same. Plaintiff was seriously
injured and brought suit. It turned out the paper he signed was a release in full for his injuries. Held, that it was a
question for the jury whether he was defrauded or not, and a jury's verdict that he had been so defrauded, would not be
disturbed.44
In these cases the contention is sometimes made that it is the defendant's own negligence that he did not read what he
signed, and therefore ought not to be permitted to avoid it. In answer we may say, first, that in many cases there is no
ground for claiming negligence, as in the case above, where the party was dazed, or in cases where the other party by
some excuse or device prevents him from reading. And, second, that in a contest between one who has been guilty of
fraud, and one who has been merely negligent, the justice ought to be with the latter, or in other words that it ought not
to be for the court to assist one guilty of fraud to recover the gains thereof, on the ground that his victim was
careless.45 This is therefore regarded as the better rule, although the contrary rule has been laid down in some cases,
and a negligent person held to be bound to a contract which he never really assented to, by reason of the fraud of the
other.
44. Bliss v. N. Y. C. & H. R. Co., 160 Mass. 447.

Offer And Acceptance. Validity Of Assent Therein. Part 2

Sec. 35. Mistake

A mutual mistake of fact, (a) as to the existence of the subject matter, (b) as to the identity of the subject matter, (c) as
to terms employed, prevents the existence of a contract, but mistake as to value or quality, does not affect the validity
of the contract.
The subject of mistake in contract has occasioned a great deal of difficulty and a diversity of views, and what is said
here will be an attempt to formulate that part of the subject upon which there is a general agreement.
(a) Mutual mistake as to existence of subject matter. This prevents contract.
Example 29. Riegel had a policy of insurance upon the life of his debtor. The debtor disappeared and Riegel kept up
the premiums, but finding the matter burdensome, took out a paid up policy for a less sum, in exchange for the old
policy. At the time of this change, the debtor was dead, unknown to both parties, and Riegel had the right to recover on
the former policy. Held that the mistake prevented the new policy from taking the place of the old and that it would be
set aside and a recovery allowed on the faith of the old policy.46
45. Maxfield v. Schwartz, 45 Minn. 150, 47 N. W. 448.
(b) Mutual mistake as to the identity of the subject matter.
If one person has in mind one thing and the other has in mind another thing, and each attempts to contract as to thing
he had in mind, there is no "meeting of the minds" and no contract results.
Example 3o. A has a quantity of hemp and also tow for sale all done up in bales, and identified by numbers. The
auctioneer made out a catalogue describing the bales by numbers and not disclosing the difference in the
commodities. B examined some of the bales of hemp, but not of tow. At the auction the auctioneer offered a quantity of
tow, describing it by the number of the bale, and B bid, intending to buy hemp. Held that there was no contract
because of the mistake.47
(c) Mutual mistake as to terms employed.
Mistake as to terms employed is not a mistake that ordinarily can be set up by a party to a contract, if we eliminate the
cases of mistake induced by fraud. Those cases we have already considered, and are not to be thought of as cases
under the heading of mistake, but rather as cases under the subject of fraud.
46. Riegel v. Amer. L. Ins. Co., 153 Pa. 134.
47. Scriven Bros. v. Hindley & Co., L. R., K. B. 1913, p. 564.
If, there being no fraud present, a person will not read a contract, he will be bound by what it contains.47a Any other
rule, as has been explained, could not be a workable rule, for the reason that there is really no test whereby we could
determine the actual fact, and because also, such a rule would encourage laxity.
Example 31. A landlord presents a lease for B, his prospective tenant, to sign. B signs it without reading it. B is bound
by the provisions of the lease although he neglected to read the lease, there being no fraud on the part of the landlord.
If a document as finally written contains a scrivener's error, as where the parties agree to a one year lease, and the
typist in preparing makes it ten years, a court of equity would, upon that fact being proved, reform the instrument to
meet the true intention of the parties.
Mistake as to Terms of Oral Contract. If there is a mutual mistake as to the terms of an oral contract, and it is evident to
the court that there was such a mistake, and if the party claiming the mistake has not acted in any way to prejudice the
other, there is no contract.48
(d) Known Mistake as to Terms Taken Advantage of by the Other Party.
If one party makes a mistake as to the terms of the contract which the other party knows he has made and takes
advantage thereof, there is no real meeting of minds, and a contract does not result.
47a. Bateman v. Small, 100 S. E. 573 (Geo.). 48. Rupley v. Daggett, 74 111. 351.
Example 32. Butler wrote Moses he would sell him cloth at "five cents a yard that Gale would charge you." This cloth
was worth from $2.00 to $6.00 a yard, and Butler meant he would sell cloth for five cents a yard less than Gale would
charge. Moses knew this, as he knew that Gale would not sell for the absurd price of five cents a yard. Held no
contract.49
B. Circumstances of Undue Advantage Rendering Contract
Voidable.
(a) Fraud in the inducement or consideration.

Sec. 36. Fraud In The Inducement Defined

Fraud in the inducement consists in a representation of fact by one party to the other, known to be false, or with
disregard as to whether true or false, made to be acted upon and which is relied upon to the other's damage.
If a party to a contract has secured its execution by the other party by making a statement as to a material fact which
he knew to be false and which he made in order to secure its execution and thereby did secure it, the party thus misled
may, by proceeding aptly, avoid the contract and may have the aid of the courts, where necessary, to secure
rescission.
In cases involving this sort of fraud, the party defrauded is not misled as to the nature of his act, but is simply
misinformed as to its advantages or value to him. He has, for instance, been defrauded in buying the Maple Leaf Farm,
but he knew that he was buying that farm. Facts were asserted which misled him in order to induce him to make that
contract, but he did the very act and entered into the very contract he intended. He may abide by this contract, or avoid
it if he chooses.
49. Butler v. Moses, 43 Ohio St. 166, 1 N. E. 316.

Sec. 37. Express Statements Of Fact As Fraud

Statements of fact which misrepresent, whether by reason of their falsity, or by being so framed as to actually mislead,
constitute fraud.
Any statement of fact by which another person is actually misled, is fraudulent.
In Twin Lakes Land & Water Company v. Dohner,50 the Court said: "And it is not at all improbable that defendant's
agents, without any literal misstatement of fact, would have created in Dohner's mind the impression that they were
claiming the existence of this quantity of reserve water, and should have they known that what they said would create
that impression and so must be deemed to have misrepresented in this respect just as much as if they had used the
very language charged against them."

Offer And Acceptance. 2. Validity Of Assent Therein. Part 3

Sec. 38. Opinions And Predictions Not Fraud

Opinions and predictions are not fraud even if stated by one who himself does not believe them to be true.
It is well established that the statement of an opinion or the making of a prediction cannot be fraud. The reason is clear.
First, because if a statement is uttered as an opinion we know that an opinion is a mere matter of personal judgment;
and second, we must look for extravagances of language from any person who is seeking to drive a bargain. Parties
will "puff their wares" and indulge in "dealer's talk,"51 and the principle extends not only to sales but to all contracts.
50. 242 Fed. 399.
51. Deming v. Darling, 148 Mass. 504.
Example 33- Townsend bought a cash register upon the statement that its use would save the expense of a
bookkeeper and half of a clerk's time. Held a mere opinion and defendant not guilty of fraud.52
"The reason of this rule is that while the person to whom the representations were made has a right to rely upon them,
he is assumed to be equally able from his own opinion to come to as correct a decision as the other party, and
therefore cannot claim to be misled by such opinion." 53
According to this rule a statement as to value is generally regarded as not actionable for value is a mere matter of
opinion. "Purchasers are presumed to know that the vendor will, if asked as to value, place it as high as he thinks the
property will bear, and, on the other hand, the vendor knows that the purchaser will endeavor to convince him that the
property is worth considerably less. ' "It is naught, it is naught," saith the buyer, but when he has gone his way, he
boasteth.' " 53a But, statements as to value may be made as statements of fact, as where they purport to be so made
and the party making them has superior means of knowledge.54

Sec. 39. Active Concealment As Fraud

If a person conceals facts for the purpose of preventing them from being discovered by the other party to the
prospective contract, this is fraud which renders the contract voidable.
We will see that mere silence as a general rule (with notable exceptions) is not fraud. But if one covers up
52. Nat. Cash Reg. Co. v. Townsend, 137 N. C. 652.
53. Brady v. Cole, 164 111. 116.
53a. Morgan v. Hodge, 145 Wis. 143, 129 N. W. 1083.
facts of a material nature to prevent the other party from discovering them, this is fraud.
54. Biewer v. Mueller, 254 111. 315.
Example 34. A sues T for damages for fraud and deceit in inducing him to purchase interests in a mining lease. T,
upon becoming the owner of the lease, looked about for a purchaser and in order to make the proposition attractive,
concealed former mining operations showing that the place had been long since abandoned for mining purposes. To
this end, he built a new shaft which led into the old mines, but this was concealed by boards across its bottom, covered
by dirt. He represented to A that the shaft was in virgin territory, of great richness and therefore would require years to
exhaust. The ground over the abandoned areas was sunken because of withdrawal of supports. This he represented to
be a blow-out. A was without practical knowledge of mining. Upon T's representations and after inspecting the mine, he
purchased the lease from T. Held, that he could recover.55
Throwing one off his guard by artifice so that he will not discover the facts is fraud, as where his attention is distracted,
evasive answers to his questions are given, or he is otherwise kept in ignorance by the other's conduct.

Sec. 40. Silence As Fraud

Mere non-disclosure or silence is not fraud; with exceptions as later noted.
Suppose that one, being about to contract with another, merely keeps silent as to a point upon which he knows that the
other is, without any action on his part, uninformed or misinformed - is it his duty to speak and cor55- Tooker v. Alston,
159 Fed. 599, 16 L. R. A. N. S. 818.
rect the misimpression ? We have previously noted that if he is aware of a mistake as to a material term of the
contract, his taking advantage of that mistake prevents the minds of the parties agreeing upon the terms, as where one
intends to offer to sell at one figure, but really proposes another which the other party purports to accept, knowing of
the error. In that case there is no contract at all. But now we have that class of cases in which the terms are agreed
upon, the identity of the subject matter is not in question, but there is some material element of fact that one of the
parties to the other's knowledge, is uninformed or misinformed about. Must he inform him? The general rule is that, the
parties dealing at arm's length, information is not essential.
Example 35. A gave B an option to purchase real estate for a certain price. B knew of the fact that a manufacturing
plant was going to be established nearby which would make the land much more valuable. A did not know this. B's
failure to disclose does not affect the contract.56
Parties must be on their own lookout; if we attempted to apply a test to cases of this sort, it would in the nature of
things be indecisive.

Sec. 41. Silence As Fraud - Facts Not Discoverable

If one party has information as to material facts, which are, as he knows, practically non-accessible to the other by the
exercise of all diligence one may reasonably expect of such other, the non-disclosure is fraud.
A duty may be upon one to speak by reason of the peculiarity of the facts making the ascertainment of the facts not
discoverable by the other upon the exercise of reasonable diligence. This is well illustrated by the "texas fever" case,
as follows:
56. Guaranty Co. v. Liebold, 207 Pa. 399.
Example 36. A has cattle which he knows to be afflicted with "texas fever," a disease not apparent upon any
examination one could be expected to make upon buying cattle on the market. He sells them to B for a sound price, B
examining them and not discovering the disease. This is fraud and B may on account thereof rescind the contract or
have damages.57

Offer And Acceptance. 2. Validity Of Assent Therein. Part 4

Sec. 42. Silence As Fraud - Contract One Uberrimae Fidel

If a contract is of such a nature that it presupposes full disclosure non-disclosure is fraud. This has been applied to
cases of suretyship and insurance. But there is difference of opinion among courts as to the operation of this rule.
It is said that certain classes of contracts are based upon the presumption of the highest good faith in making them,
and this has been often said as to contracts of insurance and suretyship. But perhaps the true reason for the rule
requiring full disclosure in such cases is the fact a risk is taken and the risk is determined by the actual facts and in
order to cover this risk the actual facts must be known. In other words, if I ask an insurance company to insure my life,
what they assume to undertake is not a sham risk which I can make them believe exists but a real risk based upon
facts as we both know them. The importance of this principle is largely diminished in life insurance cases by the fact
that such insurance is written only after a list of questions is an57- Grigsby v. Stapleton, 94 Mo. 423.
swered and the applicant may generally assume that the omitted questions are those whose answer the insurer does
not care for. Nevertheless, even in such a case, a failure to disclose a material fact which the applicant must know is
material amounts to fraud according to many cases.
Example 37. A desires insurance upon his house. He is acquainted with the fact that incendiary fires have been
attempted upon his property very recently. He must inform the insurance company of his knowledge to get valid
insurance.58
Example 38. A desires to obtain a bondsman for his employee, and seeks a fidelity company for that purpose. The
employee has been a defaulter and is so known to A. A must so inform the company.

Sec. 43. Silence As Fraud - Relationships Of Trust And Confidence

If one stands to another in a relationship of trust and confidence, any contract made by him with the other party must
be upon full disclosure of all material facts known by him, for the reason that the other party because of such
relationship is not upon his guard.
The rule that one contracting party need not acquaint the other with material facts which might affect his decision to
contract were they known to him is based at least partially upon the fact that the parties are at arm's length and one
owes no duty to protect the other. In those relationships in which there is a duty of protection and for that reason the
party is off his guard and not at
58. Pelzer Mfg. Co. v. St. Paul Co., 41 Fed. 271. (There is a difference of opinion as to this rule and its application in
the American courts.) arm's length in the bargain, the law requires full disclosure. This is true of the following
relationships: principal and agent, attorney and client, guardian and ward, trustee and beneficiary, and director and
corporation.
Example 39. P employs A to sell his real estate for him. A states that he will buy it himself. If he knows of any material
fact that P does not know which affects the bargain he must so inform P.59

Sec. 44. Summary Of What Constitutes Fraud

Below is a table summarizing what constitutes fraud. (For disaffirmance and ratification in cases of fraud see sections
47 and 48.)
Fraud consists in
1. Positive statements of fact or any affirmative representation by which the truth is distorted.
2. Not mere opinions and predictions.
3. Active concealment of material facts.
4. Not mere silence or nondisclosure, unless a. Facts are not discoverable by the other by reasonable diligence.
b. Contract is one assumed upon the theory of full disclosure, as insurance and suretyship.
c. Relationship of trust and confidence.
- attorney and client. - principal and agent. - guardian and ward. - trustee and beneficiary. - director and corporation.
59. Brooke v. Berry, 2 Gill (Md.) 83.
(b) Duress

Sec. 45. Duress Defined - Its Effect

Duress consists in securing a contract from another by imprisonment or by fear induced by threats regarding his
personal safety or liberty or his property whereby the free exercise of his will is overcome.
A contract must not be secured from another by threat or force. The theory of contract is that it is an obligation freely
assumed by agreement. If it is forced from another, he may avoid it.
Mere persuasion, no matter how constant or unpleasant, is not duress. There must be force or fear.
Duress by Imprisonment. Actual imprisonment may be duress whether the imprisonment is lawful if procured for the
purpose of extorting a contract and a contract is thereby extorted. "Though a person is arrested under a legal warrant
by a proper officer, yet if one of the objects of the arrest is thereby to enforce the settlement of a civil claim, such arrest
is a false imprisonment and a release and conveyance of property by means of such arrest is void." 60 But it has been
held that a contract will not be set aside though procured under duress if it expresses or settles a real indebtedness.61
Duress by Threats (per Minas). It was once said that a threat would not amount to duress unless it was of such a
nature that it would overcome the will of a constant and courageous man; later, that it was duress if it would overcome
the will of a person of ordinary firmness; but the latest development is that it is duress if it is used for the purpose of
overcoming, and actually does overcome the will of the person involved.62
60. Jordan v. Beecher, L. R. A. 1915 D. 1122 (Ga.)
61. Kronmeyer v. Buck, 258 111. 586.
62. Galusha v. Sherman, 81 N. W. (Wis.) 495.
Example 40. Anna Voboril gave notes to pay her husband's indebtedness upon threat that if she would not do so her
husband would be imprisoned. Being sued on the notes she claims they were obtained from her by duress. Plaintiff
contends that the alleged threat, even if true, could not constitute duress as the husband had done nothing for which
he could be arrested. But it appeared that Anna Voboril was an illiterate foreigner, ignorant of our laws, a mother of
seven children, unversed in business affairs, and the court held that such a threat was calculated to induce in her a
fear which would destroy the freedom of her will in making the contract in question.63
It was formerly held that duress by threatening injury to one's property was not duress, but this absurd view is
abandoned.64
To threaten a person with arrest for a crime that he is believed to have committed is duress according to the weight of
authority; except that it has been held that a promise to pay or the payment of a real indebtedness (as in case of
embezzlement) will not be disturbed when so secured.65
(c) Undue influence.

Sec. 46. Undue Influence Defined Its Effect

Undue influence consists in an abuse of influence or power which one by reason of a fiduciary relationship or of the
sickness, infirmity or necessitous distress of the other, has over that other, thereby to induce him to enter into a
contract he would not have freely made. It renders the contract voidable by the other party.
63. Voboril v. International Harv. Co., 187 Fed. 973.
64. Spaids v. Barrett, 57 111. 289.
65. Kronmeyer v. Buck, 258 111. 586.
The courts will not interfere to relieve a person from his contracts merely because they are unjust or oppressive and
constitute hardship upon him. Even if he were in distress or great necessity, or sick, or infirm from age, or mentally
weak, his contract is not for that reason voidable, though unfair and hard, provided he exercised his own will and
judgment. For, by such circumstances he is not deprived of his freedom to contract. But it must be shown in addition
thereto that an advantage was taken of him, depriving him of his own mental freedom. Argument, solicitation and
pleading, however strong, do not in themselves constitute undue influence.
The chief cases of undue influence arise when the parties sustain a relationship to each other which puts one of them
in a position calculated to give him great advantage over the other in directing his conduct and acts. Under such
circumstances, the parties may still contract with each other; yet if after a contract is made, the party at a
disadvantage, in apt time, avers that he was imposed upon, the court will presume in his behalf that such was the
case, casting the burden upon the other of showing that such was not the case.
The chief relationships in which the law will presume undue influence are: (i) family relationships in which one party
stands in an influentially superior position; (2) the relationship of guardian and ward; (3) that of attorney and client; and
(4) that of physician and patient.
It is, however, not necessary that there be any technical relationship. "Courts have refused to set any bounds to the
circumstances out of which a fiduciary relation may spring. * * * it extends to every possible case in which a fiduciary
relation exists in fact, and in which there is confidence reposed on one side and resulting domination and influence on
the other." 66
(d) Disaffirmance and ratification of contracts voidable for foregoing reasons.

Sec. 47. Conditions Of Disaffirmance

A party wishing to disaffirm on the ground of fraud, duress or undue influence must do so with reasonable promptness
under the circumstances after he has discovered the fraud, or after the undue influence or duress has been removed;
and he must put the other party in statu quo. In cases of fraud he may either disaffirm or sue for damages.
Contracts obtained by means of fraud, duress or undue influence are voidable, not void. Until avoided they have the
status of contracts. The injured party may not care to disaffirm. It is for him to do so after discovering the fraud, or after
the duress and undue influence have ceased to operate.
This he must do, if at all, within a reasonable time, and what is a reasonable time depends on all of the
circumstances.67
He must also give back what he has received under the contract. Unless he has done so, or made a tender of doing
so, he cannot rescind.68

Sec. 48. Ratification

A contract avoidable for the causes considered in this chapter may be ratified by undue delay and by express
affirmation, or by any acts that are inconsistent with disaffirmance.
66. Mors v. Peterson, 261 111. 532.
67. Mortimer v. McMullen, 202 111. 413, 67 N. E. 20.
68. Burwash v. Ballou, 230 111. 34.
The contract being voidable only, and not void, may be ratified. This may be by mere delay;70 or by language
affirmative of the contract; or by conduct which is inconsistent with the idea of disaffirmance, as selling the property,71
or in any way dealing with it in a manner which shows affirmance. One cannot affirm and then disaffirm, he must do
one or the other.
Of course nothing said or done before the fraud is discovered or before the duress or undue influence has ceased to
operate can be considered ratification.
70. Burwash v. Ballou, 230 111. 34.
71. Tarkington v. Purvis, 128 Ind. 182.
Chapter 5. Consideration
A. Theory and Nature.

Sec. 49. Consideration Defined; A Necessary Element In Every Simple Contract

A promise or undertaking not under seal is not legally binding upon the promisor unless the promisee thereof has on its
faith and pursuant to it parted with or promised to part with something to which he has a legal right, or, in other words,
unless such promisee has sustained a legal detriment. This legal detriment constitutes the consideration.
By the English common law two classes of promises were enforceable: First, where the promise was made in solemn
form, that is, under seal; and second, where something was given, done, or promised by the promisee on account of
the promise. In the formation of simple contracts, whether written, oral or implied, consideration must enter, and it must
enter also in sealed contracts where the statute has abolished the ancient meaning of the seal in that regard.
We have noticed that contracts result from offer and acceptance. In every simple contract the offer must consist in a
promise to do something or to part with something, if in return therefor, the offeror will also do something or part with
something or promise to do so. There is here an exchange of values, that is to say, each party gives up or undertakes
to give up something to which he is legally entitled in return for the other party's similar act or engagement. And the test
of the validity of the contract alleged to be found in an offer and acceptance consists in this: Did the party now seeking
to enforce a promise made by the other (either by way of offer or acceptance) sustain a legal detriment - give up
something to which lie was entitled? There may have been an offer and an acceptance, but the offeror or the acceptor
may have promised to do something he was already bound to do; he may have promised to surrender something to
which he had no right. If so, no contract resulted.
We define a consideration by saying it is a detriment to the promisee, or a benefit to the promisor; but it is only in rare
cases we need consider whether it is a benefit to the promisor. For it is not usually to be considered a benefit to the
promisor unless it is also a detriment to the promisee. It is a benefit to the promisor when he can demand something or
has obtained something to which he was not otherwise legally entitled. We may then for our purposes simplify the
discussion by referring to consideration in its aspect as a detriment to the promisee.
Thus, A offers to sell B a certain acre of ground for $5,000 on certain terms, one year from date. B accepts the offer.
Each are promisors; each promisees. Each has promised to part with something to which he was legally entitled. He
has therefore in the eyes of the law sustained a legal detriment. A contract has resulted.
Again, A orders a sack of flour from his grocer. A promise to pay the reasonable value of the flour is implied. B delivers
the flour, thereby accepting the promise with an act. B in this case never was the promisor. But he becomes a
promisee by accepting the promise by parting with that which the promise calls upon him to part with. He has sustained
a legal detriment. The consideration for A's promise is B's act, that is, it is a detriment to the promisee.
A detriment is sustained whenever one gives up something to which he has a legal right, though he may have no moral
right to it. Thus, we have a line of cases in which a young man is induced by promise of reward to give up a self-
indulgent way of life. It is held in such cases that if he lives up to his agreement he may recover though it was to his
benefit to live so, and no personal benefit to the promisor. Yielding up his right to live as he chooses within the law is a
legal detriment.72
When a person comes into court to sue upon a promise, he comes in his capacity as promisee. He alleges that a
promise was made to him and the law asks him what he paid for it, what detriment would it be to him if the promise
was not enforced?
If he has given or promised nothing in return for the promise to him, that promise is said to be without consideration -
"nudum pactum."
Sec. 50. Inadequacy Of Consideration
The adequacy of consideration, as between the parties, is immaterial, so long as there is no fraud. Gross inadequacy
may in a proper case be considered as evidence tending to prove an allegation of fraud.
If one in full possession of his faculties parts with a right for an inadequate return, there being no fraud, he cannot ask
the courts to aid him. The law leaves the parties to bargain for themselves and one may give away his property or sell
it for whatsoever he chooses.73
Where the rights of creditors are involved, and affected by the contract or gift, other considerations appear; altogether it
may be said generally that creditors who have no lien cannot complain where the debtor sells for even an inadequate
consideration, so long as he and his vendee are not acting fraudulently to defeat or delay the creditor. If a
consideration is grossly inadequate that may, with other circumstances, make out a case of fraud, but in itself such
inadequacy is not material.
72. Hamer v. Sidway, 124 N. Y. 538.
73. Nelson v. Brassington, 116 Pac. (Wash.) 629.
B. Examples of Consideration.

Consideration. Part 2

Sec. 51. Consideration May Consist In Promise Or Act

The detriment sustained by one as a consideration may be either his promise or his act, whichever is responsive to the
expression of the other side; but a promise to be a consideration must be a promise to do or refrain from doing a
definite thing within an ascertainable time.
A promise on one side is a good consideration for a promise upon the other. In other words, it is not necessarily doing
an act, but may be the making of a promise to do an act, which may constitute the consideration. This depends upon
the requirements of the offer and acceptance. In all bilateral contracts the consideration for the promise of each is the
promise of the other.
A promise cannot be a good consideration unless it binds one within a definite time to do or refrain from doing a
definite thing, - a promise cannot be a considera-tion unless it is definite enough to be broken.
Example 41. A agreed to sell and K to buy at stipulated prices 10,000 barrels of oil as the buyer might desire them.
Held to be no contract. "But suppose Kirk & Company do not desire, and do not order, or order in such quantities as
would require a hundred years to complete
- is there any way open to the defendant to put plaintiffs in default?" 74
Example 42. N agreed to sell and K to buy all of a certain quality of pig iron which K would need, use or consume in its
business during the coming season from July 9, 1879, to July 1, 1880. Held, a good contract. "It cannot be said that K
was not bound by the contract. It has no right to purchase iron elsewhere for use in its business." 75
Where the promise is to sell, and the corresponding promise to buy, the needs of a future period, the period should be
definite and the amount should be all that the buyer needs or all that he needs up to a certain amount, or, of course, a
prescribed amount. It has been argued that it is not certain that the buyer will need any amount, and this has been
answered by the statement that in all probability he will. But that answer is not the correct one. If the seller promises to
sell and the buyer to buy, his needs during a certain future period, the consideration is in fact that the seller must stand
ready to deliver at the prices and terms agreed on all that the buyer may order, and the buyer must, if he needs any of
such commodity buy it from this seller at the prices and terms agreed upon. He gives up his right to buy elsewhere on
possibly better terms.
74. American Cotton Oil Co. v. Kirk, 68 Fed. 791.
75. Nat. Furn. Co. v. Keystone Mfg. Co., 110 111. 427.

Sec. 52. Past Act

An act done prior to the promise sought to be enforced and therefore without reference to it does not constitute a legal
detriment and therefore is not a consideration to support such subsequent promise and make it enforceable.
If one performs an act with no right to claim anything for doing it, and after that time a promise to pay him for doing it is
made, such promise is without consideration and cannot be enforced. No detriment has been sustained by the
promisee on the faith of the promise. One must not confuse such cases with the cases in which, where one does an
act, he does it under such circumstances that he may reasonably demand compensation therefor. In such case we
know there was really a promise, though not expressed, in reliance upon which the act was done. But if the act is
without reference to receiving the reward afterwards promised, the subsequent promise is an unenforceable promise.
Example 43. A father made a promise of compensation to a stranger who had cared for his son as an act of kindness.
He then refused to perform the promise. Held, no contract.76
Where a discharge in bankruptcy has been obtained, or the statute of limitations has run, a subsequent promise to pay
is enforceable, though in some states it must be in writing.

Sec. 53. Performance Of Or Promise To Perform Obligations Imposed By Law

The performance of or promise to perform an act required of one as a legal duty cannot be a legal detriment, and is
therefore not a consideration.
Where one does an act which the law requires of him, he cannot claim a promise of reward made to him for doing it.
Take, for instance, the case of a reward offered for the capture of an accused person to an officer whose public duty is
to capture such person if he can. Such reward is not recoverable, not only because there is no consideration, but
because public policy opposes rewards in such cases. This is true even though the officer actually exercised a greater
degree of diligence than he would otherwise have done. An officer cannot bargain in respect to his zeal and graduate it
according to the remuneration offered.77
76. Mills v. Wyman, 3 Pick (Mass.) 207.
If an officer does that which his legal duty does not require of him pursuant to an offer he may recover. This would be
the case where a fireman at the risk of his own life, made a rescue pursuant to promise of reward made him.

Sec. 54. Promise To Perform Unexecuted Contract

A promise to perform or the performance of that which one is under an existing contract to perform is not a good
consideration.
Suppose that A has contracted with B, that he will dig a cellar for B, within a certain time at a certain price. In the
progress of the work, A comes upon a substratum of shale on whose existence he had not figured. To dig the cellar will
require a greater expense than that of his original calculations, and he will lose money on the project. He therefore
informs B that he will not proceed further unless B will pay him $100.00 in addition to the original contract price. To this
B, being in a hurry for the cellar, assents. He refuses, however, to pay more than the original contract price. Can A
force him to pay the $100 ? B's argument is that A was already under a contract to do this work, and if he offered him
$100 for doing it, his promise had no legal effect, because A suffered no detriment. He did nothing he was not already
bound to do. This is the view of many of the courts.78 Some, however, allow a recovery where unforeseen
circumstances arise (as in the above case) which make the demand justifiable.70
77. Hogan v. Stophlet, 179 111. 150.
It is always permissible for parties to rescind an old agreement and substitute a new one, as where A having agreed to
put in single doors in B's dwelling, afterwards for a larger price, agrees to put in double doors. In such a case, there is
no trouble in finding mutual considerations. But a mere promise to increase the contract price for no other reason than
that the other party regrets his contract and threatens to break it, is unenforceable.

Consideration. Part 3

Sec. 55. Part Payment Of Debt As Consideration For Release Of Balance

A payment of a part of a debt whose amount is liquidated and not in question is not a good consideration for a release
of the entire debt; but any disadvantage in addition by the debtor constitutes a consideration; and the rule does not
apply if the payment is other than by money or if the debt is unliquidated or its validity in dispute, or a compromise by a
debtor with his creditors.
(a) Part payment of liquidated debt - General rule.
It was laid down in early cases 80 and has been generally adhered to since, that a part payment of a debt cannot
possibly be a good consideration for an agreement to release the entire debt. The reason given was that in paying a
part of his debt, the debtor was only doing what he was already under legal obligation to do, and the creditor was
receiving no benefit except that to which he was already entitled; that therefore the promise of the creditor to release
the balance had no consideration to support it and it was therefore unenforceable.81
78. Johnson's Adm'r v. Seller's Adm'r, 33 Ala. 265.
79. King v. Duluth, M. & N. Ry. Co., 61 Minn. 482.
80. Pinnell's Case, 5 Co. 117.
Example 44. A owes B $100, due and payable. A tells B he will pay him $75.00 if B will receive it in full of the debt. B
agrees and gives A a receipt in full. B may nevertheless sue A for the balance despite his promise, on the theory that
his promise was without consideration. B gave up no right or thing to which he was entitled and A got no advantage he
was not otherwise entitled to.
This is an undesirable doctrine in our law inasmuch as it encourages bad faith on the part of creditors and is against
sound morality. It has been repudiated in several states,82 has been deplored though enforced in nearly all
jurisdictions83 and prediction has been made that the courts will in time abrogate the rule.84 This disfavor has led the
courts to limit the rule strictly to the payment of a mature debt of a liquidated amount. The various situations that will
prevent the operation of the rule are given below.
81. Gilman v. Cary, 198 Mass. 318, 84 N. E. 312.
82. Clayton v. Clark, 74 Miss. 499; Herman v. Schlessinger, 114 Wis. 382 (stating that the rule has been abolished by
statute in Alabama, Georgia, Maine, North Carolina, Tennessee and Virginia and perhaps some other states).
83. Harper v. Graham, 20 Ohio 105.
84. Schlesinger v. Schlesinger, 39 Colo. 44.
(b) Any disadvantage in addition to part payment of debt.
If the debtor pays the part of the debt before it is due, or at another place than that at which he is bound to pay it, or
suffer any other disadvantage, the agreement is supported by ample consideration and the creditor cannot sue for the
balance.85
(c) Payment other than by money.
If the payment is other than by money the release is good.
Example 45. A owes B $500. He offers B a note of X, which he holds for $350, if B will receive the same in full
payment. B agrees and gives A a receipt in full. This will discharge A's debt to B.86
If one gives his own promissory note in full payment for a liquidated debt of a larger amount, authorities differ whether
there is any consideration for the agreement to discharge the balance. Clearly, if there is any change in the obligation,
as to pay interest where none was payable before, or to pay a larger rate of interest, or by giving security, there is
consideration.
(d) Debt unliquidated.
If the debt is unliquidated, any agreement to settle it is based upon a good consideration.
Example 46. G was tenant of S and made repairs. He claimed the landlord agreed to re-imburse him, but the landlord
denied that he had agreed to do so, and claimed that he was under no obligation to make or pay for such repairs. The
dispute was in good faith. The tenant sent a check for the month's rent with a deduction to re-imburse him for the
repairs marking such check in full payment. The landlord retained the check protesting that he received it in full
payment and brought suit for the balance. The court held that one must receive a check upon the condition upon which
it is sent, and that the landlord's retention of the check was tantamount to an agreement by him to receive the check in
full payment, that the amount being unliquidated such an agreement was supported by a good consideration.87
85. Harper v. Graham, supra.
86. Varney v. Conery, 77 Me. 527.
(e) Composition by debtor with creditors.
A composition by a debtor with his creditors or some of them is an arrangement whereby such creditors agree to take a
percentage of their claim in full discharge thereof in order to enable the debtor to successfully weather a financial
period of distress. The element is here introduced of the creditors agreeing with each other and with the debtor, and
the releases of each of them is good consideration for the others. Such an arrangement is everywhere upheld as being
upon good consideration.88

Sec. 56. Compromise Of Disputed Claim

If the validity of a claim is disputed, any compromise thereof constitutes a good contract.
A promise to pay an amount of money to settle a disputed claim, is upon acceptance by the other side enforceable by
either side. The waiver of the right to have the validity or invalidity tried out in Court constitutes the consideration. In
such a case, the actual merits of the original controversy will not be inquired into, for it has been settled by the contract
of the parties. If the party against whom the claim is made repudiates it, he may be sued upon the promise, or as he
has not kept his promise, the claimant may also ignore it and sue on his original cause of action.
87. Snow v. Greisheimer, 220 111. 105.
88. Baxter v. Bell, 86 N. Y. 195.
It is essential to the validity of a compromise of a claim that the claimant make it in good faith, that is, believing he has
a claim. Some courts also hold that there must also be a basis in fact justifying the belief, although it is never
necessary that the claimant should have prevailed.
Example 47. A is struck by B's automobile. A threatens suit against B. B denies liability claiming that A was at fault in
stepping in front of the car. B agrees however in order to avoid a law suit to pay A $200.00 and A accepts. A can
enforce B's promise and the Court will not hear evidence as to the validity of A's original claim. B can also plead this
promise in defense of any suit brought by A for the injury, unless B repudiated the promise or refused to perform it. In
that case A may sue either on the promise or for the original injury.

Sec. 57. Forbearance Of Suit As Good Consideration

A forbearance to sue for a definite time is a good consideration for a promise.
If a person deems he has a good cause of action and defers suit upon the same for a definite period, this will constitute
a good consideration for a promise whereby the forbearance was secured.
Example 48. A threatens to sue B. B denies liability, and in hopes of a settlement or for other reasons prevails on A not
to bring his suit for three months, B promising to pay him $50 for this delay. This is a good contract and B can enforce
the promise to pay the $50 independent of his right to recover on the original cause of action, and without regard to the
validity of the original cause of action.

Sec. 58. Consideration In Subscriptions

A subscription made for purposes of donation, etc., is unenforceable until acted upon by incurring liability, or unless it is
given in actual reliance on other subscriptions.
Where one subscribes to pay funds to a church, a charitable organization, or any institution, he is in reality only
promising to make a gift. Such promise is therefore unenforceable.89 If, however, the promise is acted upon, as by
incurring liability or expending money on the faith of it in the way it calls for, or by raising elsewhere a certain amount of
money, if that is the condition of the gift, it becomes enforceable. So if there are mutual subscriptions and each is in
fact a reliance on the others and not independent thereof, a consideration exists and the promise is enforceable.
89. Pratt v. Trustees, 93 111. 475

Chapter 6. Legality Of Contracts

A. Legality of Contract an Essential Element.

Sec. 59. Illegal Agreements Void

Any agreement to violate the law and any agreement forbidden by law is void.
An illegal agreement cannot be a contract. "Illegal contract" is a contradiction in terms, although a frequent phrase and
from usage permissible.
Contracts are illegal for two reasons: first, because their object is illegal; second, because though the object is perfectly
legal, the manner of making them is against the law.
A distinction is taken between contracts illegal in character and contracts merely unenforceable as being against public
policy - for instance, gambling agreements and agreements in restraint of trade. The one is absolutely illegal, the other
is illegal only in the sense it is unenforceable on account of being against public policy.
B. Particular Classes of Illegal Agreements.
(i) Contracts whose objects are in violation of law.

Sec. 60. Contracts In Restraint Of Trade

Contracts in restraint of trade are good if not unreasonable under the circumstances of the case and if not unlimited as
to territory.
(a) Contracts in restraint of trade, when reasonable, are valid.
A contract in restraint of trade is a contract whereby a person undertakes that he will not engage in trade or in some
particular line of trade; usually entered into by one who sells his business to another. It is valid if not unreasonable, and
what constitutes unreasonableness we must determine, but first let us notice why such a contract, if reasonable is
valid.
The common law and also our statutory law has developed upon the assumption, first, that the country ought not to be
deprived of the services of a person who is possibly skilled in one trade and that trade only, by any contract he may
make with another agreeing not to exercise his calling; second, that such a person ought not be permitted from the
standpoint of public policy to create a situation that will compel him to leave the country in order to make a living, and
third, and more important that competition between persons in trade is a good thing and beneficial to the community.
From these considerations, it would appear that the common law would condemn all agreements in restraint of trade,
but here another phase of public policy runs counter and results in compromise. If a person has built up a business,
public policy requires that it be a transferrable business, otherwise its building up would be discouraged, and many
things might interpose to destroy it or impair its usefulness to the community. But, it cannot be sold unless that most
valuable and intangible part of it can be delivered to the purchaser, namely, the good will, the expectation of continued
custom hard to define and composed of many elements. This good will is not deliverable unless the vendor shall be
allowed to say that he will not next day set up a competing establishment in the neighborhood, perhaps upon adjoining
premises and by his reputation draw to himself all of that good will which is the most valuable asset of the business
sold. The law therefore says that it will allow a person or corporation to enter into a contract in restraint of trade 89a
provided it is in reasonable restraint, that is to say is such restraint
(1) as is necessary for the protection of the purchaser against the competition of the vendor, and
(2) provided also it is not unlimited as to the territory of the country even if the business in question is so large as to
really require unlimited restriction for the protection of the vendee; but on this last clause there is a difference of opinion
as we shall see.
(b) Contracts in unreasonable restraint of trade are invalid.
Let us consider what constitutes unreasonableness of restraint. Whether or not a covenant in restraint of trade for the
protection of good will is reasonable or not depends upon the facts of the case; that is to say, on whether the area
covered by the covenant not to compete is substantially greater than the area covered by the business affected.
Example 49. B, a dentist, having an established business drawing customers from various points in the county, sold to
T, a dentist, and agreed not to compete in the county. Afterwards B opened an office within the county. At A's suit, an
injunction was granted.90
89a. Harris v. Theus, 10 L. R. A. N. S. 204. 90. Tillinghast v. Boothby, 20 R. I. 59.
Example 50. An incorporation of fish dealers in a sea port town, with provision in the bill of sale of each business to the
corporation, that the seller will not engage or become in any way interested in the same business in that and an
adjoining county, and within a hundred miles from the town in a period of ten years; and it appearing that the business
engaged in by the corporation so formed was at least co-extensive with the territory prohibited, held to be valid.91
Example 51. A had a cracker and biscuit business which extended over an area of approximately 100 miles' radius. B
bought it. As a part of the contract of purchase, A agreed not to engage in the same business within a radius of 1000
miles. He afterwards started a business within a radius of 100 miles. Held, that the covenant was unreasonable and
therefore void.92
(c) Contracts in general restraint of trade, when reasonable, are upheld by some, and denied by other courts.
If a contract is in unreasonable restraint of trade, whether limited or unlimited as to area, it is void for that reason, as
we have seen; it is conceivable, however, that the business may be of such magnitude that it requires a general
restraint of trade to protect the purchaser. In such a case it was stated in the earlier English cases, which have been
followed by many of our courts, that the agreement was void. Any restraint was considered unlimited as to space which
covered the entire country. The ground of this view was that under the operation of an agreement, the vendor would
likely be forced into another country where he could pursue the sort of business or calling which he had formerly
followed in the home country. Some of the American cases have followed this doctrine and in applying it treat either the
whole country or the entire state as an unlimited area, for the reason stated.93
91. Moorehead Sea Food Co. v. Way, 169 N. C. 679.
92. Althen v. Vreeland, 36 Atl. (N. J.) 479.
But in other courts, this doctrine has been departed from, and a covenant by a vendor of a business which is of such a
scope that unlimited restriction is necessary to protect the buyer from the seller's competition, is upheld.94
(d) Covenants in restraint of trade unlimited in time.
It is not necessary that there be any limitation as to time to make a restraint legal.
(e) Contract in restraint of trade not good unless ancillary to a contract protecting good will.
As was explained in the beginning, contracts in restraint of trade are permitted merely for the purpose of protecting the
good will where ancillary to another contract which is almost always one of a sale of the business. A contract in
restraint of trade entered into by itself is void.
(f) Invalidity does not impair rest of contract.
A provision in a contract which is invalid because of unreasonably restraining trade does not impair the rest of the
contract. Such a contract will stand, though the restraint falls.
93. Henschke v. Moore, 257 Pa. St. 196, L. R. A. 1917 F. 450 (entire country) ; Lanzit v. Mfg. Co., 184 111. 326 (state).
94. Hall Mfg. Co. v. Western Steel & Iron Works, 227 Fed. 588, L. R. A. 1916 C. 620 (annotated).

Legality Of Contracts. Part 2

Sec. 61. Contracts Of Monopolistic Tendency

Contracts of monopolistic tendency are illegal by the principles of the common law and by statute.
A contract whose purpose or effect is to create monopoly is condemned by the common and by statutory law as
opposed to public policy.
A monopoly signifies an attempt to control the market by destroying or preventing competition and controlling the
sources of supply.95 It consists in a wide diversity of practices from agreements between competitors to maintain
prices and restrict output, to practices of powerful concerns to use unfair means to force other concerns out of
business.
A corporation is not monopolistic merely because it is large.90
There is no monopoly where a concern controls the market through enterprises in manufacturing a better product,
selling policies and the like.
Corporation Trusts. The word "trust" in its general legal sense indicates a legal ownership of property by one person for
the benefit of another, and is an approved legal concept. The word "trust" as applied popularly to indicate an
arrangement among corporations to regulate prices and stifle competition, describes an illegal cooperation
monopolistic in character. The original scheme was to have a trusteeship of the stock of competing corporations, trust
certificates being issued therefor, the board of trustees holding the stock in trust, and voting it, and thus controlling the
directorate of all the corporations. Such a scheme has always been denounced by the courts.97
95. "An attempt to monopolize means an attempt to get control of the industry * * * by means which prevent other men
from engaging in fair competition with him." U. S. v. Whiting, 212 Fed. 460.
96. U. S. v. Naval Stores Co., 172 Fed. 455.
The word "trust" also has come to describe popularly a monopolistic corporation, though no technical trust is involved.
A corporation is not illegal merely because large, but the question is whether it is in fact monopolistic in character.

Sec. 62. Contracts Limiting Liability

Common carriers and public service corporations can by contract with the patron limit their liability for loss occurring
from any cause except their own negligence, unless a statute forbids such limitation; employers cannot limit their
liability for injury by negligence; but persons otherwise acting in a private capacity can contract against their own
negligence.
(a) Common carriers and other public service corporations.
A common carrier of goods at common law is liable for loss arising from any cause, negligence or not, except act of
God or Public Enemy, but the Courts have held that this liability may be limited by special contract, except that the
carrier cannot limit liability arising from the negligence of its employees. The Federal Government has by legislation
restored the full common law rule as to interstate shipments, by declaring such agreements void. Carriers of
passengers may limit liability, except for act of negligence, but cannot limit as to acts of negligence.
The rule applies to public service corporations generally that they can limit liability except in case of loss by negligence.
97. Distilling & Cattle Feeding Co. v. People, 156 111. 448.
(b) Employers and employees.
Employers cannot limit liability for injuries arising from their own negligence.
Example 52. Plaintiff, a cook on the outfit cars of a railroad company, in his contract of employment, released the
company from liability in case of future injury. Held, in a suit for damages for personal injury, such provision was invalid
and no bar to the suit.98
(c) Other cases.
It is competent as a general rule for one contracting with another to limit his liability for negligence.
Example 53. A railroad company having a warehouse leased it to C with a provision in the lease that the railroad
should not be liable for loss by fire originated from its engines. A fire occurred and C sued the company, claiming that
the provision was invalid to cover a case of negligence. Held, valid and a good defense even against the company's
negligence, as the company was not acting in its capacity of common carrier in leasing the warehouse."

Sec. 63. Usurious Contracts

The law of most jurisdictions prescribes the rate of interest which a creditor can charge the debtor for the use of
money, and attaches a penalty or risk for charging a greater rate.
98. Kansas R. Co. v. Peavey, 29 Kan. 122.
99. Checkley v. I. C. R. Co., 257 111. 491.
Interest is compensation for the use of money owing to another. It is allowed in some cases where not agreed upon.
For instance, judgments bear interest. But generally interest bearing debts are those which are agreed upon. The law
now regards it as entirely proper that one who loans another money should have compensation from the other.100
Inasmuch, however, as those who are borrowers are frequently the easy victims of oppressive provisions the
enforcement of which might throw them or certain of them upon the community it has become a commonly accepted
policy of the law to limit the rate of interest which it is proper to charge. Above that is "usury." Charging usurious rates
of interest is not criminal in the sense that it is punishable in any criminal proceeding. The penalty prescribed is a civil
penalty, as for instance, loss of all interest. It is generally held that the defense of usury is one that a party must make
for himself when sued upon the loan, and that if he pays the interest he cannot recover it back again upon the ground
that it was usurious.101 The penalties prescribed in case of usury differ in different states. In some it is loss of the
excess interest, in some loss of all interest, in some loss of a portion of the principal.
Corporations by some laws are excepted from the operation of the usury statute. Any amount agreed to be paid by
them is enforceable.
Certain classes of lenders are allowed a greater rate of interest because of the nature of their business, as for
instance, pawn brokers and lenders who loan in small amounts as a business. To lend at such rates such lenders must
comply with the law permitting that class of business, as, for instance, the pawn broker statute.
100. By the early English law, "Christians" were not allowed to charge interest, and all interest, whether lawful (by
those not Christian) or unlawful was called "usury."
101. In re Fishel, 192 Fed. 412.
Any device is usurious if it amounts to a greater charge than is permissible under the statute, no matter by what name
called. Thus a "commission" on one's own money, a charge for services, if merely evasive, make the contract usurious
if all the charges aggregate more than the rate allowed by law.102

Legality Of Contracts. Part 3

Sec. 64. Wager Contracts

A wager contract is a contract that on the outcome of a risk created or assumed by the contract, one party shall be
winner, the other loser. It is illegal.
There are many forms of wager agreements. The most obvious is the ordinary gambling agreement, as upon the
outcome of a game of cards, or a horse race, or a presidential election or the like. These are unenforceable, although
by the early common law they were enforced by the courts.103
Wager insurance is an illustration. Insurance is not valid except one have an insurable interest in the thing insured, that
is, a loss to guard against by reason of his interest in a thing independent of the insurance contract. One cannot have
insurance upon a life or upon property in which he has no interest to protect. One may, however, take out insurance on
his own life and make his beneficiary whomsoever he will.
Wagering on the rise and fall of the market is another form of wager agreement. To contract for the purchase or sale in
the future of a commodity at a price now stated is not gambling if an actual delivery is intended. But if there is an
intention to settle by the payment of differences, this is illegal.104 An option contract, that is to say, a contract that an
offer either to buy, or to sell, shall remain open for a certain length of time for acceptance, is wagering, where its
purpose is merely to gamble against the future rise or fall of prices.105 Thus, if I offer wheat at $1.00 a bushel, and
agree for a consideration paid me, that the offer shall remain open ten days, this is a gambling contract if our mutual
intention is merely to gamble on future prices, and in some states by statute any option contract in commodities is a
gambling contract.
102. In re Fishel, 192 Fed. 412.
103. Bernard v. Taylor, 23 Ore. 416.
By statute in some states, the right to recover money lost by gambling is given. Otherwise it does not exist.

Sec. 65. Contracts Tending To Corrupt The Public Service

Any agreement which tends to corrupt any branch of the public service is illegal and void, without regard to its actual
outcome.
A contract tending to corrupt the public service is void. Contracts tending to cause the judiciary, the legislature or any
officer of the Government to show favoritism, or to disregard duty in any manner, are unenforci-ble. Thus, agreements
by which one undertakes to "lobby" before the legislature have been repeatedly condemned,106 as has any contract
which contemplates personal influence to solicit 107 official action. Contracts with officers whereby they are to obtain
greater reward than the law allows, are void.108 Various sorts of cases are almost numberless.
104. Pope v. Hanke, 155 111. 617.
105. Bates v. Wood, 225 111. 126.
106. Mills v. Mills, 40 N. Y. 543.
107. Critchfield v. Paving Co., 174 111. 466.
The actual result in such cases is immaterial. A lobbying agreement may be ineffectual to accomplish its purpose or
may accomplish the enactment of a good law. An officer who is promised greater reward may do only what he would or
should have done anyway. This is not important. The tendency of the contract to corrupt the public service is what
makes it vicious.

Sec. 66. Agreements In Restraint Of Marriage

By the common law agreements in restraint of marriage were void.
Agreements in restraint of marriage are void. "Marriage lies at the foundation, not only of individual happiness, but also
of the prosperity, if not the very existence of the social state; and the law therefore frowns upon and removes out of the
way, every rash and unreasonable restraint upon it, whether by way of penalty or inducement." 109
(2) Contract illegal because of manner of formation.
Sec. 67. Sunday Agreement
Agreements made on Sunday are illegal under some statutes, unless made to serve some necessity or unless in
furtherance of charity.
By common law, contracts made on Sunday were not illegal. An early statute made them so,110 unless such contracts
were in aid of works of necessity or charity. Many states have similar statutes. But in all states Sunday contracts are
not forbidden. So in some states, contracts, whenever made, that contemplate performance on Sunday, are void.
108. Hogan v. Stophlet, 179 111. 150.
109. Sterling v. Sinnickson, 5 N. J. L. 885. 110. See Richmond v. Moore, 107 111. 429.
The policy of the state, making Sunday contracts void, seems at least questionable and has resulted in many unjust
decisions.

Sec. 68. Contracts Made Without Required License

If the law requires one to have a license before he can carry on a certain occupation, and such license is intended as a
regulation measure a contract made without the license is invalid, but failing to pay license fees required for purely
revenue purposes does not invalidate a contract.
If a license must be obtained by one before he may practice a certain occupation or profession, and such license is for
the purpose of regulating the calling and protecting the public, any contract made by one who has no such license is
invalid, as, for instance, a contract for legal services with one not admitted to practice 111 (fees not recoverable) ; or
with a real estate broker who has not paid his license (fees not recoverable).112
C. Intent to Put to Illegal Use Avails of Legal Contract.

Legality Of Contracts. Part 4

Sec. 69. Knowledge By One Of Other's Intent To Commit Crime

Where the contract is innocent upon its face, and the intention of one party is not illegal, the guilty intention of the other
will not invalidate the agreement as to the first party; and though that guilty intention is known to such first party, yet if
he have no share therein and do nothing in aid thereof, the contract is enforceiii. Brown v. Phelps, 211 Mass. 376, 97
N. E. 762. 112. Buckley v. Humason, 50 Minn. 195.
able by him, unless the intention is of a highly immoral or heinous character.
Suppose that a contract is fair upon its face and capable of performance for a legal purpose, will the guilty intention of
one party to take an illegal advantage of it make the agreement illegal? If that intention is secret, manifestly the party
harboring it cannot avail himself of it to prevent enforcement by the other. But suppose the other party knows of such
intention. It seems well established that if his share in the intention is by way of mere knowledge, that will not vitiate the
agreement as to him, it being kept in mind that the agreement is one which on its face is capable of a legal object. An
exception to this rule is that where the illegality contemplated is of a highly immoral or heinous character, the mere
knowledge will vitiate the agreement on the theory that one contracting party having knowledge of such contemplated
illegality becomes by his consent to the contract, particeps criminis.
Within these rules it has been held that mere knowledge that the buyer expects to resell the goods bought under the
contract without a required license can not be set up in defense to a suit for the purchase price, the seller doing nothing
to aid or encourage the violation of law, and the goods not being sold for the express purpose of enabling him to such
violation.113 But if he should sell poison knowing the intention was to accomplish a murder, he would be barred.114 If
one knowing that another intends to sell liquor contrary to law, aids him in the execution of that intention by false
113. Graves v. Johnson, 179 Mass. 53.
114. Hanauer v. Doane, 12 Wall. (U. S.) 342 (treason).
wrapping, fictitious inventories, etc., he becomes a party to the illegality and cannot enforce the agreement.115
D. Judicial Remedies in Illegal Agreements.

Sec. 70. No Remedy By Way Of Enforcement

A court will not enforce an illegal agreement.
From the considerations noted throughout this chapter, it is apparent that if an agreement is positively illegal, or against
public policy, courts will not enforce it. If it is illegal in its nature, the maxim applies "Ex turpi contractu non oritur actio."
116
As will be seen in the sections following, some relief may be afforded in certain cases by parties to illegal contracts, but
the relief is by way of withdrawal, not enforcement.

Sec. 71. No Remedy By Way Of Rescission

An illegal or unenforceable contract which has been executed, will not be rescinded by the courts.
If a person has lost money or parted with any consideration in the performance of an illegal agreement, he will not be
aided by the courts in the recovery of what he has parted with. As is frequently said, "The Court will leave him where it
finds him." As the maxim has it, "allegans suam turpitudinem non est audiendus."
Example 54. H paid C $300.00 for counterfeit money. C did not produce the money. H sues to get his money back.
Held, the Court will not help him.117
115. Kohn v. Melcher, 43 Fed. 641.
116. Goodrich v. Tenney, 144 111. 422.
117. Chapman v. Haley, 80 S. W. (Ky.) 190.
To this rule there are some exceptions, as shown below.

Sec. 72. Parties Not In Equal Guilt

If the plaintiff is not in equal guilt with the defendant, he may recover what he has parted with.
An exception is made to the rule that no relief will be granted where the parties are not "in pari delicto/' such relief
being always by way of avoidance and not enforcement. These cases, although called cases of "unequal guilt," usually
involve the element of undue influence, fraud, oppression or superior advantage of some sort, and there is not merely
a comparison of degrees of guilt, that being quite impossible.118
Example 55. Wolf was indicted for murder and was out on bail. Baehr loaned him money with which to flee from justice,
and took a mortgage on Wolf's land. Wolf was innocent of the crime with which he was charged, but under Baehr's
insinuations and arguments, his fears preyed on him and he fled from justice. Baehr's intentions were that Wolf should
disappear and he would ultimately have clear title to Wolf's land. Wolf returned and seeks foreclosure from the
mortgage. Baehr defends that Wolf mortgaged the land to obtain money to flee from justice. But the Court held that
there was a species of duress here which made the parties to be unequally in guilt and Wolf could have relief.119
Sec. 73. Defendant's Contract Wholly Executory
Doctrine of locus poenitentiae. Where the defendant's part of the contract is totally unperformed by him, and plaintiff
has paid money or parted with property to the defendant under an illegal contract, some courts allow a recovery.
118. Duval v. Wellman, 124 N. Y. 156.
119. Baehr v. Wolf, 59 111. 470.
Another exception as to a right to rescind in case of an illegal contract is one not so clearly defined, not recognized by
all courts and which seems as an exception to conflict with the rule rather than to be an exception to it, and may be
stated generally that where the plaintiff has paid money or parted with property to the defendant, and the defendant
has as yet done nothing, or at most very little in the performance of the contract, the plaintiff being in a place of
repentance (locus poeni-tentice), may recover what he has parted with. Thus, one who has paid a wager to a
stakeholder, has been allowed to recover it where, by acting, he prevents a horse race from being run.120 But this
doctrine is not accepted everywhere, and its distinction as an exception in not clearly distinguished from the general
rule that one who has become a party to an illegal contract is entitled to no aid from the courts, even by way of relief.

Sec. 74. Where Statute Allows Recovery

Even if the contract is executed the statute in some cases allows money paid or property parted with to be recovered.
In some cases the legislature deems it wise to make exceptions to the law and allow a party to be put back in his
original position. Thus, in some states one can recover money lost at gaming. The common law, applying the general
rule, would leave both parties in the position in which they have placed themselves, that is, would give its aid to neither
to relieve them of their illegal act. But the legislature in some states has deemed it best to alter this.121 So in case of
money paid to a lottery in some states; and in some states usury paid may be recovered.
120. Johnston v. Russell, 37 Cal. 670.
(d) Contracts partly legal and partly illegal.

Sec. 75. Where Contract Partly Legal, Partly Illegal

If one inseparable promise is based on several considerations, some illegal, the promise is nevertheless unenforceable
in toto; but if there are several promises, each referable to a separate consideration, only those promises will fall which
are supported by illegal considerations.
If an entire promise is based on one legal, one illegal consideration, it is impossible to say what part of the promise is
supported by the legal consideration and therefore the illegality will go to the whole contract.122 Thus, if A makes a
promise to pay $100 for a slot machine and a counter, it is impossible to say which part of the $100 is for the machine
and which for the counter. The court cannot divide the promise for the parties and make a contract for them. But
suppose at one bargaining A orders a slot machine for $50 and a counter for $50; this is one contract, yet its promises
and considerations are separable. The good will be upheld. The illegal will fall.
121. Rice v. Winslow, 182 Mass. 273.
122. Bixby v. Moor, 51 New Hampshire Reports, 402 (suit for wages for services rendered in caring for a billiard hall
operated legally and a saloon operated illegally, under one indivisible contract. Held, there could be no recovery for
any of the services).

Chapter 7. Form And Evidence Of Contract

Sec. 76. General Statement
We have considered the ingredients that must enter in the formation of contracts, without which a contract cannot exist;
confining ourselves to a consideration of those elements essential to all contracts, and disregarding elements which
may be additionally required in the formation of particular types of contracts, and until this time also ignoring the fact
that in the contract under seal, or only true type of formal contract, consideration, though usually present, is not an
essential element, the seal replacing it as completing the quota of essential elements. Such contract under seal will be
considered at this point as one of the subheadings of this chapter.
Let us now consider the form which the contract may take in its formation; and also what sort of evidence the law may
require for its proof.
A. The Formal Contract or Contract Under Seal.

Sec. 77. Definition Of Sealed Instrument

A contract is under seal when the impression or mark is affixed which constitutes in law the seal. This by the common
law was an impression on wax affixed to the instrument. It may now consist in a scrawl. A contract under seal is called
a formal contract or specialty.
In order for us to have a general understanding of contract law it becomes necessary for us to consider the contract
under seal, to inquire what contracts must be under seal, and to notice the effect of putting any contract under seal.
Perhaps the reader in signing some document has noticed the word "Seal" at the end of the line on which he has
signed, and has wondered just what was the exact purpose and effect of that word. Let us note first, that the great
majority of contracts into which men enter day by day are not under seal, except when they concern real estate or
consist in penal bonds, although any other contract may be under seal. We may say further that it seems to be the
tendency of legislatures and courts to minimize the importance of the seal, although it is still in the majority of the
states of much importance. But even where it still maintains its ancient meaning or any part thereof its importance to
the layman may be greatly lessened by these three facts:
First, in executing instruments which must be under seal (as deeds, mortgages, etc.), either printed forms are used
upon which the seal is printed, or the instrument is executed under the advice of an attorney at law who sees to it that
the seal is attached.
Second, the vast majority of contracts entered into for commercial purposes are not under seal, and it is, therefore, the
law of unsealed contracts which is of chief concern to the layman.
Third, though we shall find that a promise is binding when under seal though it lacks consideration and not binding
when not under seal if so lacking, yet it is a rare instance when a contract under seal does not have some
consideration, and its importance for that purpose becomes greatly minimized.
Yet, when all is said, it is of importance for the layman to know something of this form which has been of vast
importance in the history of contract law, and which still in many states today determines the fate of important litigation.
A seal by the old common law was an impressed wax or wafer affixed to the instrument to indicate an assent thereto
and a deliberate intention to be bound. The instrument with which the impression was made was also called a seal. To
say that a contract was under seal meant that an impressionable substance had been attached to it and impressed
with the obligor's seal or mark. This was taken to indicate that the party sealing the instrument thereby asserted in a
solemn and deliberate way that he intended to be bound according to the covenants therein contained. Usually a
recital was made in the contract that it was under seal, thus, "Given under my hand and seal," or "Witness my hand
and seal," but this was not essential.
By modern legislation it is no longer necessary to use an impressed wax or wafer to put an instrument under seal.
Ordinarily one simply writes after his signature the word "(Seal)" or "L. S." (Locus Sigilli, place of the seal).

Sec. 78. Effect Of Seal In Early Law

By the common law a seal makes a promise binding though without consideration.
By the common law, as we have seen, consideration was necessary, as it is now, to make effectual any promise which
was not under seal, but if it was under seal it was not necessary. It was considered that when a party deliberately
entered into a promise by affixing his seal thereto, there was no reason why he should not be bound thereupon, even
though such promise did not contemplate that anything should be given or promised in return.123
123. Walker v. Walker, 13 Ired. (N. C.) 335.
Accordingly we may say that the common law divided contracts into two great classes, those which, whether oral,
implied or written, were not under seal, and those which were under seal. The first were known as simple contracts: the
second, as formal contracts, contracts under seal or specialties. It was the presumption of the law, which once may
have accorded with the fact, that promises which were under seal were made with great solemnity and deliberation,
whereas promises not under seal (and therefore, in the old days, probably not even signed or written) were apt to be
made lightly with insufficient deliberation, and therefore it was said that in such a case the promise should not be
considered as contractual unless it contemplated that something should be promised or given in reliance on it and such
thing was in fact promised or given as contemplated.
It is no doubt true that at one time putting a seal to a contract indicated greater deliberation, but it does not do so now.
When the seal was first used, the ability by the average man to write was an uncommon, and indeed, a despised thing.
To make his signature, as illiterate men do in these days by a cross, each man had his seal with its highly distinctive
impression. He needed only to use it in those non-commercial days, upon rare and important occasions, and
consequently might well be presumed to do so only upon full deliberation, and with a solemnity of circumstance which
made his promise binding.
This is an old habit fallen into disuse. That the seal still has importance is explained only by a reference to its history.

Form And Evidence Of Contract. Part 2

Sec. 79. Instruments Requiring Seal At Common Law

By the common law a seal is essential to make binding all promises intended to operate without consideration and is
required upon deeds, mortgages, bonds and powers of attorney regardless of the consideration.
A deed conveying the absolute title of real estate to another, or a defeasible title by way of trust or mortgage, must be
under seal in many states. The very definition of a bond signifies that it is an instrument under seal; a power of
attorney, that is, a formal conferring of agency upon another is always under seal, and where an agent is appointed to
execute an instrument under seal, his authority must also be under seal. A seal placed on any contract makes it a
formal contract or specialty although the seal is not necessary.

Sec. 80. Modern Legislation In Respect To Sealed Instruments

Modern legislation tends to minimize the distinction between sealed and unsealed instruments, yet in many States the
seal still retains much of its ancient dignity.
We have seen that a promise under seal was given a weight not accorded other promises and this was because the
use of the seal indicated, or was presumed to indicate, deliberation on the part of the promisor. We have said that it no
longer does so. One who signs his name to a contract is doing in another way the very thing that was in olden times
done when the seal was affixed. Legislation has permitted the use of a printed or written scrawl in the place of the
impression on wax, and this in itself has taken from men's minds the solemnity of the act of sealing. It cannot with truth
be said that there is any greater deliberation in one's mind from the fact that he forms a scrawl after his name, or writes
his name before a printed scrawl. Beginning with this legislation which permits the use of the scrawl, some of the
legislatures have adopted laws tending to minimize, or in some cases altogether abolish, the use and effect of the
sealed instrument. Such legislation we may classify as follows:
(a) Legislation in respect to the form of bringing suit;
(b) Legislation in respect to the form of seal. This has been brought about in most states. The seal may be by scrawl
with use of the words "Seal" or "L. S." contained therein. Such scrawl may be written or printed;124
(c) Legislation allowing want or failure of consideration to be shown in a court of law. Under the common law a
common law court could not open up a sealed instrument for that purpose.
(d) Legislation abolishing all distinction between sealed and unsealed instruments or providing that a seal shall be
unnecessary on any contract. Such legislation places all contracts on the plane of the simple contracts. It is in force in
most of the states.125
B. Contracts Required by Law to Be in Writing.

Sec. 81. Certain Kinds Of Contracts Must Be In Writing, In Order To Be Effectual

Such are conveyances of real estate, negotiable instruments, promises to pay debts barred by statute of limitations,
assignment of patents, etc.
124. Laws to this effect are in force in most of the states.
125. The seal is either abolished in the following states or else amounts only to a presumptive evidence of
consideration which may be rebutted to defeat the contract: Alabama, Arizona, California, Idaho, Iowa, Kansas,
Michigan, Minnesota, Missouri, Mississippi, Montana, Nebraska, New Mexico, Tennessee, Texas, Wyoming. In many
states there is still preserved a marked distinction between sealed and unsealed instruments. The seal is necessary on
certain documents and whenever used has more or less of its ancient meaning.
Some contracts cannot exist as such unless in writing because of some specific provision of the law so requiring it.
A negotiable instrument must be in writing.
Acceptances of bills of exchange must be in writing.
A deed must be in writing.
A bond is necessarily a written instrument.
An assignment of a patent must be written.
Under some statutes, promises relied upon to prevent the running of the statute of limitations, must be in writing.
C. Contracts Not Enforceable Unless in Writing.
(a) Nature and object of Statute of Frauds.
Sec. 82. The Statute Of Frauds
By the English Statute of Frauds, and similar statutes patterned thereafter in this country, certain contracts are not
legally enforceable unless the evidence to prove them is a writing signed by the party sought to be charged, or in case
of contracts of sale or personal property, unless there is either a writing or a certain part performance.
The British Parliament in 1676 passed a statute known as the "Statute of Frauds and Perjuries," or more usually
referred to simply as "The Statute of Frauds." This is perhaps the most famous and far-reaching statute not of a
political nature in all English jurisprudence. It has been called the "adopted child of the common law."
The statute was fairly lengthy, concerning itself with other subjects than those of contract, but the fourth section of the
statute related to various classes of contracts therein enumerated, and the seventeenth section to contracts of sale of
personal property.
The requirement of the statute is that certain contracts cannot be enforced unless in writing and that sales of personal
property cannot be enforced unless there is a writing, or a certain part performance. It was called the Statute of Frauds
and Perjuries because the legislative motive in enacting it was to make more difficult perjured claims and perjured
defenses by requiring a certain kind of proof. But if, so far as contracts are concerned, it had been called some name
suggesting a certain kind of evidence, it would be less likely to confuse the student's mind.
The "statute of frauds" is, because of its title, likely to be thought of as a statute dealing with frauds generally, and this
title certainly conveys to the uninitiated no suggestion of writing. The title explains the reason for the enactment of the
statute arising out of the belief that suitors, by perjured testimony, either affirming the existence of contracts that did not
exist, or denying the existence of those that did exist, were accomplishing fraud, and that such miscarriage of justice
could be largely prevented by requiring that certain classes of contracts could not be proved unless the party seeking
to enforce such a contract could produce a writing or written memorandum signed by the other party. It was not
considered wise to carry this provision to all contracts, but only to certain classes thereof which, because of their
peculiar nature or importance, were likely to encourage false swearing; although, it is true that some judges have
pointed out that the statute also serves the purpose of preventing the proof of cases by the mistaken memory of honest
men.
This statute has undoubtedly performed the office of preventing much fraud and perjury. But it has also resulted in
great injustice. It prevents one who has a good case from proving it if he has neglected to obtain the evidence required
by the statute, even though he may have all sorts of other evidence, and even though the other party will not deny the
contract, but simply insists on this technical proof of it. And many judges have said that it has caused more fraud and
more liti-gation than it ever prevented. And yet it has a firm place in our law, and very likely its advantages greatly
outweigh the hardships. It has been adopted, in whole or in part, in all of our American States.
There are two sections of this statute relating to contracts, - the fourth and the seventeenth. The effect of the fourth
section is to render certain contracts unenforceable unless their existence can be proved by a written memorandum
signed by the party sought to be charged. The effect of the seventeenth section is to make unexecuted contracts for
the sale of personal property -for a certain price or upwards unenforceable unless their existence can be proved by a
written memorandum, signed by the party to be charged, or unless there has been a part performance of the contract.
This section has not been in force in some of the American States, but now it has been substantially embodied in the
Uniform Sales Act which is being generally adopted.
Of course these sections, when re-enacted in this country, do not necessarily retain those numbers.

Form And Evidence Of Contract. Part 3

Sec. 83. Text Of The Statute Of Frauds
The original English Statute of Frauds provided as follows:
"That no action shall be brought (1) whereby to charge any executor or administrator upon any special promise to
answer damages out of his own estate; (2) or whereby to charge the defendant upon any special promise to answer for
the debt, default, or miscarriage of another person; (3) or to charge any person upon any agreement made upon
consideration of marriage; (4) or upon any contract for the sale of lands, tenements or hereditaments, or any interest in
or concerning them; (5) or upon any agreement that is not to be performed in the space of one year from the making
thereof; unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall
be in writing and signed by the party to be charged therewith, or some other person thereunto by him lawfully
authorized." (4th Section.)
"That no contract for the sale of any goods, wares, and merchandise, for the price of ten pounds sterling or upwards,
shall be allowed to be good, except the buyer shall accept part of the goods so sold, and actually receive the same, or
give something in earnest to bind the bargain, or in part payment, or that some note or memorandum in writing of the
said bargain be made and signed by the parties to be charged by such contract, or their agents thereunto lawfully
authorized." (17th Section.)

Sec. 84. The Statute Relates To The Enforcement, Not The Validity Of Contracts
The Statute of Frauds does not have the effect of preventing the formation of contracts included within it without
complying with its provisions but merely furnishes a requisite in the manner of proof, if the adversary relies upon and
pleads the Statute of Frauds.
It is well established that the English statute of frauds and its patterns in this country do not require writing as an
element in the formation of the contract.
It merely requires that when a suit is instituted upon an alleged contract within the statute of frauds, the adversary party
may plead the statute as a defense and thus require the plaintiff to produce some written evidence which sets forth the
contract, and signed by the party to be charged thereon.
Example 56. A agrees to sell goods to B under an oral agreement. B decides not to take the goods and writes a letter
to A telling him so and sufficiently describing the contract to satisfy the statute of frauds. He signs the letter. A sues B.
B pleads statute of frauds. A can comply with the statute, and prove the contract, by producing B's letter.126
The justice of this is apparent. If a man makes a contract he ought to perform it. The statute was not to help him, but to
prevent fraud and perjury. Therefore, if the writing signed by him is produced, it would be the merest of technicalities,
and a perversion of the statute to say he could not be held because the contract was not made in writing.
Because of this view of the statute, it is generally held:
(1) The statute is not a defense unless affirmatively pleaded.
(2) It does not apply to executed contracts.
(3) The writing may have been made at any time, even after suit begun.
(b) The cases within the statute.

Sec. 85. Promises Of Executors And Administrators

A promise of an executor or administrator to charge himself personally with the payment of the debts of the decedent's
estate cannot be enforced unless there is written evidence of such promise signed by the party sought to be charged.
126. Bird v. Munroe, 66 Me. 337.
There is, of course, no duty upon an executor or administrator to pay the debts of the decedent's estate out of his own
personal estate. If, however, he takes it upon himself to be personally bound for such debts, the law requires the proof
of any such engagement to be in writing and signed. Not very much litigation has been occasioned in reference to this
provision.

Form And Evidence Of Contract. Part 4

Sec. 86. Promises To Answer For The Debt, Default, Or Miscarriage Of Another Person
A promise of any person to answer for the debt, default, or miscarriage of another person cannot be enforced unless
there is written evidence of such promise, signed by the person sought to be charged.
This provision of the statute contemplates a debt or liability from A to B, and C's promise to the creditor, B, to pay if A
does not. C is a guarantor, and his promise may arise either at the inception of the debt, or thereafter. It must, of
course, be supported by a consideration to be enforcible whether in writing or not, but it is not necessary that the
guarantor get any benefit or advantage for making the offer, for the consideration may consist in the detriment to the
creditor in extending the credit upon the strength of the guaranty, or if the credit has already been extended may
consist in granting further definite time upon it or any other right or thing parted with by the creditor in return for such
guaranty. This provision of the statute contemplates a main or original debt by A which he ought to pay and another's
promise to pay it if the debtor does not. It is held not to apply
(a) To any case in which the alleged guarantor is in fact the main debtor.
(b) To any case in which the promise to pay is not made to the creditor but to the debtor.
Example 57. A desiring to get credit from B is requested to furnish a sponsor. C thereupon promises B that he will pay
if A does not. If this promise is not in writing and signed by C, C when sued has a complete defense in the statute of
frauds.127
Example 58. If in the above case C had said to B, "Let A have goods and charge to my account" or "look to me for
payment," C would have made the debt his own and C could be compelled to pay whether his promise was in writing or
oral.128
127. Jones v. Cooper, 1 Cowp. 227.
128. Marr v. B. C. R. & N. R. Co., 121 la. 117.

Sec. 87. Promises In Consideration Of Marriage

A promise in consideration of marriage cannot be enforced unless there is written evidence thereof, signed by the party
sought to be charged.
This provision refers to ante-nuptial agreements to convey property in consideration of the marriage. It does not refer to
mutual promises to marry, which are binding, though oral. An oral promise to convey real estate would be
unenforceable both by this provision and the one relating to real estate.

Sec. 88. Contracts For The Sale Of Lands Or Any Interest In Or Concerning Them (Except
Short Terms Leases)
These contracts cannot be enforced unless there is written evidence of such contracts signed by the party sought to be
charged.
This provision applies to contracts which create an interest or estate in anything which is to be classed as real estate or
distinguished from personal property, except short term leases, as for one year, which are now generally excluded by
the American statutes. The most obvious application is to contracts to buy or sell a piece of real estate, as a farm, a
city lot, etc., but it also extends to any contract to convey or create an interest in anything which may be classed as real
estate. Thus it would apply to any contract to mine ore,129 to create an easement, to sell an old house to be
removed,130 etc. Note, however, that it is immaterial if the contract refers to something which is now real estate, if
before the sale or creation of the interest is to arise, it must be converted by the seller into personal property. Thus, a
right to mine ore in the land of another would be unenforceable unless in writing. But if A contracts to sell B 1,000 tons
of coal, this is a contract to sell personal property, though it may happen that when the contract is made the coal is
unmined and is therefore real estate. Such a contract to sell coal might, however, be unenforceable by reason of the
section in reference to sales of personal property. Yet that section might not apply, for sales of personal property are
good without writing, if a payment has been made or a part of the goods delivered and accepted. So in some states the
provision in reference to sales of personal property is not in force.
Crops which are planted and mature annually are regarded as personal property in this regard, and an oral sale of
them is enforceable so far as this provision of the statute is concerned.131 Thus, if A orally agrees to sell B all his
standing corn, this is enforceable whether A or B is to cut the corn and take it away.
129. Entwhistle v. Henke, 211 Illinois Reports, 273.
130. Meyers v. Schemp, 67 Id. 469.

Sec. 89. Contracts That Cannot Be Performed Within A Year From The Making Thereof
These contracts cannot be enforced unless there is written evidence of them signed by the party sought to be charged.
This provision relates only to those contracts which by their express terms or by their inherent nature cannot be
performed within a year from the time of their making. It is decided that if the contract may be performed within the
year, though the probability be remote, this provision does not apply and the contract is enforceable though oral. In
such a case it is immaterial that the performance as a matter of fact does take longer than a year.132 An illustration will
make this plain. Thus suppose that A, for a certain sum of money to be paid to him by B, by oral contract agrees to
support B the remainder of B's life. B is sixty years of age and in fair health. This contract may be enforced, though not
in writing, for B may die within the first year. The fact that B does actually live twenty years longer does not make any
difference. On the other hand, A employs B to work for him fifteen months. There must be written evidence of this
contract, and if either A or B breaks the contract he cannot be charged with its breach.

Form And Evidence Of Contract. Part 5

Sec. 90. Contracts For The Sale Of Goods, Wares And Merchandise For A Certain Price Or
Upwards
131. Bull v. Griswold, 19 Ibid. 631.
132. MacElree v. Wolfersberger, 59 Kan. 105.
These contracts in many jurisdictions cannot be proved unless there is written evidence of them signed by the party
sought to be charged, or unless there is at least part delivery and acceptance, or part payment.
It will be noticed at once that this provision of the statute differs from those which have been mentioned above, in two
main particulars: first, that it does not apply unless the price reaches a certain amount; and second, it is enforceable
though not in writing if there has been a delivery and acceptance of the goods, or part thereof, or payment in whole or
part. This provision is not in force in a number of the American States, but in the majority of them it is.133
The original English statute of frauds related to the sale of goods, wares, and merchandise for the price of ten pounds
sterling or upwards. In this country, the limitation as to price varies, although the commonest provision is fifty dollars.
For an elaboration of the law as to this subject, see The Law of Sales of Personal Property, in this series.
(c) What amounts to compliance with statute.

Sec. 91. The Memorandum And The Signature

The memorandum and signature may be made at any time. The memorandum need not be formal but must sufficiently
identify the parties, describe the subject matter and set forth the terms, but the consideration may usually be proved by
parol evidence. The signature may be any name intended as a signature either in the body of the writing or written
thereunder and made by the party or his agent.
133. See Sales in this series.
We have already seen how the writing and signature need not be made at the time of the formation of the contract, but
at any time thereafter.
The entire contract must appear from the writing, except the consideration which in many states may be orally proved.
Thus the writing must identify the subject matter, the parties and state the terms; but this may all appear from the
roughest sort of a memorandum, as a receipt, and the writing may be in the form of print, typewriting, or lead pencil
memorandum.134
The signature is the use by a party or his agent of a name or mark to express his acceptance of the contract. It may be
his true name, or any assumed name, or any mark intended as a signature. It need not be at the bottom of the writing,
but anywhere therein.
Example 59. John Smith engages in business as "The Novelty Store, Unincorporated." He employs Walter Jones as an
agent. Walter Jones, as agent, makes a contract with Harry Wilson which comes within the statute of frauds, reading
as follows: "The Novelty Store, Unincorporated, hereby promises," etc., and is not otherwise signed. This is a sufficient
signature to bind John Smith, assuming the agent had authority, real or apparent, to make this particular contract for
his principal.135
The signature of the party sought to be charged is sufficient. That the other party has not signed is unimportant, if in
fact he made the contract. Thus in the above example suppose Harry Wilson sues and is able to produce the above
memorandum. He can thereby supply signed, written evidence that Smith made the contract. The purpose of the
statute is accomplished.
134. Clason v. Bailey, 14 Johns (N. Y.) 484.
135. United Hardware Furn. Co. v. Blue, 59 Fla. 419.
Memorandum and Signature May Be by Agent. The statute expressly recognizes this, but undoubtedly that would be
the implication at any rate.
The agent of one party may be chosen by the other party as his agent for the purpose of making the memorandum and
the signature. This is recognized as the rule in two classes of cases:
First: Where the agent of the seller is an auctioneer, such auctioneer, although for all substantial purposes the agent of
the seller, is also the agent of the buyer for the purpose of complying with the statute.136
Second: Where the agent of either buyer or seller is a broker, that is, one who makes it his business to bring buyers
and sellers together, he is the agent of the one who employs him, but for the limited purpose of complying with the
statute of frauds, he is also the agent of the other party.137

Sec. 92. Compliance By Delivery And Acceptance In Sales Of Personal Property

Evidence of a contract of sale of personal property which is not in writing and signed may consist in a delivery and
acceptance of such property or a part thereof.
The 17th section of the statute of frauds and the sales act does not require signed written memorandum if there is part
delivery and acceptance of the property alleged to have been sold. In such a case the statute is no defense although
there is no writing.
136. Love v. Harris, 156 N. C. 88, 36 L. R. A. N. S. 927.
137. Clason v. Bailey, supra.
The Delivery. The delivery does not necessarily require a removal, but any surrender of authority over the property in
favor of the other, as the delivery of a key or a taking charge and assuming dominion by the buyer pursuant to the
alleged contract.138
The Acceptance. Acceptance signifies more than mere receipt. It signifies a receipt accompanied by an intention to
retain. Acceptance may be by carrier for some purposes, as to accomplish transition of title, but receipt by a carrier is
not acceptance from this standpoint.139

Sec. 93. Compliance By Payment Or Part Payment In Case Of Sales Of Personal Prop-Erty
Under the 17th section of the Statute of Frauds a contract of sale is enforcible though there is no writing or delivery
where the buyer has given something in earnest to bind the bargain or in part payment.
Another way of satisfying the statute of frauds relating to sales of personal property (the seventeenth section), is in
payment in whole or part of the purchase price by the buyer and its receipt by the seller.140 If this is proved this is
corroborative evidence of the fact that a contract has been had between the parties although the rest of it must be
proved by witnesses.
The entire amount need not be paid; it is sufficient if there be something in earnest to bind the bargain.

Form And Evidence Of Contract. Part 6

Sec. 94. Contracts For "Work And Labor" Not Within The Statute
If when the contract was made it was contemplated that the seller should make up for the buyer the goods which were
the subject matter of the sale, some courts held that this was not a contract of sale within the Statute of Frauds; but
other courts held that it was a sale notwithstanding this circumstance and some held that the statute did not apply
provided the goods were to be made up to the special order of the buyer and were not otherwise kept in stock.
138. Shindler v. Houston, 1 N. Y. 261.
139. United Hardware Co. v. Blue, 59 Fla. 419.
140. Wier v. Hudnutz, 115 Ind. 525.
If A orders a wagon from B which B is to make up from his own material, is this a sale? It undoubtedly is, and as much
so as though the wagon is already made up and taken away by A at the time of the bargain, and the law of sales must
be called upon to govern such a transaction. Now the 17th section of the statute of frauds said nothing as to the
exclusion of such a transaction from its operation, yet some courts regarding the hardship of the operation of the
statute in such cases, especially if the goods were to be made up specially for the buyer, excluded it by construction
through the simple device of calling such a contract one of work and labor rather than one of sale. Three rules
developed: 141 (1) the rule of those courts which followed the statute literally that such a contract was one of sale and
not enforcible if no writing, part payment or part delivery and receipt; (2) the rule that if the goods were to be made up
by the seller the statute did not apply; (3) the rule that it did not apply if the goods were to be made up by the seller
provided they were made up on the buyer's special order and were not fit for the general market. This question has
now been set at rest in this country to a very general extent by the adoption of the Uniform Sales Act. See next section.

Sec. 95. The Statute Of Frauds And The Uniform Sales Act
The 17th section of the Statute of
141. Goddard v. Binney, 115 Mass. 450.
Frauds has been incorporated in the Uniform Sales Act, which provides specifically that the statute shall apply to all
cases whether the goods are to be made up or not unless being ordered to be made up they are not fit for sale to
others in the ordinary course of the vendor's trade.
The statute of frauds relating to sales of personal property had been adopted in most of our American States and has
been reaffirmed by its inclusion in the Uniform Sales Act; the question presented by the last section has been settled
by a definite provision in that act that the statute must be complied with by signed written memorandum, or by part
delivery and acceptance or by part payment even if the goods are yet to be made unless they are made up for the
special benefit of the buyer, that is, are not stock goods, and cannot be disposed of on the general market.
Example 60. A hotel company orders a lot of dishes to be made up for it by the M. Co., with the monogram of the buyer
thereon. There is no written memorandum, no part payment, and no receipt of the goods by the buyer. The statute is
not a legal defense.
D. The Parol Evidence Rule.

Sec. 96. The Parol Evidence Rule Defined

The parol evidence rule is, that if a contract is reduced to writing, such writing is the evidence of the contract and
therefore not subject to contradiction, addition or variance by oral or extrinsic testimony.
Parties reduce a contract to writing either because such is the requirement of the law, or because they desire it to be in
that form.
It not infrequently happens that a party to a contract will claim that prior to the execution of his contract or at the time
thereof, there were other matters agreed upon which were not set forth in the writing which he now seeks to enforce.
For instance, suppose Smith sells a jewelry store to Brown and it is agreed that Brown shall not use Smith's name and
shall remove the signs upon the store, and it is so stated in the bill of sale, but, at the time, Brown makes the point that
he does not wish to go to the extra expense of new signs right away, and Smith states that while he is unwilling to give
Brown the right to use his signs, he will do the right thing and let Brown use the signs for a month. The next day Smith
demands that Brown pull down the signs and stop using the name. The parol evidence rule would forbid the proof by
Brown that any such an oral agreement was made, for it contradicts the writing that was made between the parties as
the expression of their contract. Notice that the parol evidence rule is a rule of exclusion of evidence. If a court
considers that evidence which is proffered would violate the parol evidence rule, it will, upon objection by the other
side, refuse to admit such evidence in the case. Now, such a rule undoubtedly works injustice in specific instances, but
it serves, nevertheless in other instances to prevent the injustice of the proof of collateral agreements that were never
made, and preserves the integrity of written evidence, which, but for such rule, would not serve the purpose that the
parties and the law intend it shall serve.
Example 61. A by contract in writing agrees to furnish B a certain quantity of cotton upon terms stated. B refuses to
receive cotton sent by A upon the ground that A agreed to deliver cotton grown by A upon his own land. A brings suit
and B offers this evidence. A objects. The Court refuses to admit it upon the ground that it would add to and vary the
terms of the written contract.142

Form And Evidence Of Contract. Part 7

Sec. 97. Parol Evidence Rule Permits Contract Partly In Writing And Partly Oral
The parol evidence rule does not prevent a contract from being partly oral and partly in writing if such appears to have
been the intention of the parties and if the law does not require the entire contract in question to be in writing.
We have said that the parol evidence rule forbids the alteration of a written contract by any additions thereto by oral
proof. But consistently with that we may still have a contract a part of which only was intended to be put in writing, the
rest being oral. In such a case the parol evidence rule applies to the part that was put in writing and such part cannot
be added to by the introduction of oral testimony, although the other part that the parties intended to be but oral may be
proved in connection with the written part. We assume here, of course, that the law does not require the entire contract
to be in writing. How do we know whether it was intended to put an entire contract in writing or not? If the defendant
says that he wants to prove some additional utterances that were agreed upon at the time qualifying what was said in
the writing, why does this not make a case of a contract partly in writing, partly oral? We must look to the contract and
the circumstances to answer that. If it appears therefrom as a reasonable conclusion that the writing was meant to be
the permanent memorial and evidence of their agreement, or of some particular part thereof, then the con142. Forsyth
Mfg. Co. v. Castlen, 112 Ga. 199.
tract, or that part thereof, cannot be added to or contradicted by proof of other things agreed upon at the same time
that would change the situation between the parties. In a contract orally made a note may be given. The note, as a
note, cannot be changed by parol evidence, but the rest of the agreement can be proved.143 The maker cannot show
that it was agreed that the rate of interest should be different from that stated in the note, or that he should have further
time than that therein provided. And it is usually not difficult to tell whether the writing is complete so as to permit no
further proof.

Sec. 98. Parol Evidence Rule Permits Proof Of Customs

Customs that must have been intended by the parties to govern their contract are a part of it and can be proved to
explain the terms of a written contract.
A custom or usage of such general nature that the parties must have contracted in reference to it can be proved to
explain the written terms used by them. The parol evidence rule does not forbid such proof because the parties are not
by such proof seeking to add to or vary the contract but merely to show in what sense the terms were used.144

Sec. 99. Evidence Not Forbidden By Parol Evidence Rule

A party, notwithstanding the parol evidence rule, may show (1) a subsequent alteration of a written contract by oral
agreement; (2) fraud, duress, undue
143- Id.
144. Walls v. Bailey, 49 N. Y. 464.
influence; (3) mistake preventing contract; (4) clerical error in reducing to writing; (5) illegality.
The sole object of the parol evidence rule is to preserve the evidence of the contract which the law required or the
parties must be taken to have intended to be the evidence thereof. The rule is a sensible one and is applied in a
common sense way. In the following situations oral evidence may be introduced in reference to a written contract for
the purposes indicated:
(a) Subsequent alteration of written contract by oral agreement.
Parties to a written agreement may afterwards change it by oral agreement. (By the common law a contract under seal
could not be altered except by agreement under seal, but this was not because of the parol evidence rule.)
(b) Oral proof of circumstances rendering contract voidable.
Fraud, duress, undue influence may be shown to avoid a written contract.
Example 62. A by fraudulent representations persuades B to enter into a written contract to buy a farm. B may show
the fraud for the purpose of withdrawing from the contract because of the fraud.
(c) Mistake preventing contract.
Referring to the former pages in which this subject was discussed, we may now note, further that such seeming
contracts, non-existent because of mistake, may be so shown to be by oral evidence notwithstanding they may have
been in writing.
(d) Clerical error in reducing to "writing.
Example 63. A applies to the X Insurance Company for insurance upon his house against the contingency of fire. The
agent for the X Company looks over the house and makes a rate upon it, and thereupon A takes out a policy. The
house is No. 10 Main Street, but the policy reads 100 Main Street. Upon a proper showing A can recover upon this
policy in case of fire.145
(e) Illegality.
A contract legal superficially may be shown to be really intended by the parties thereto to have an illegal purpose and
thus defeated.146
(f) That a contract was delivered on condition.
A party to a contract may show by parol evidence that though it was signed and delivered it was subject to an
agreement that it should not take effect except upon a condition that did not occur and therefore, that the contract, for
example, a note, did not become effective.

E. Oral And Implied Contracts

Sec. 100. Oral Contracts

Any contract may be oral which the law does not require to be in writing.
The general rule is that any contract may be oral (or implied) if some statute does not require it to be in
145. German F. Ins. Co. v. Gueck, 130 111. 345, 23 N. E. 112.
146. Muskogee Land Co. v. Mullins, 165 Fed. 179.
writing.147 An oral contract is of equal dignity with any simple written contract, but the evidence of course, is not so
satisfactory or enduring.

Sec. 101. Contracts Implied In Fact

A contract implied in fact is a contract the evidence of which consists in the circumstances which show forth a
contractual intention.
Actions may bespeak a contract. Such a contract we speak of as implied. Usually, however, an entire contract is not
implied, but merely some part thereof.
When will circumstances indicate the existence of a contract? Whenever we may say that the relationship which the
parties bear toward each other is more reasonably explained on the theory of contract than any other, a contract will be
implied. In other words, an implied contract is a true contract evidenced by the circumstances as existing between the
parties.
Example 64. A orders coal from his dealer saying nothing about prices. B delivers the coal. The inference here is that A
intended to pay and B to receive pay for the coal. If B sues for the price he could recover upon A's implied promise to
pay the price that B was then getting for his coal from his customers - the market price. Here, though B's promise is
implied, it is just as real as though he uttered the words. To overcome this inference of a promise, he could show, if
such were the fact, that B promised to make him a present of the coal.
As we have heretofore noticed, the law will not supply or infer terms of a contract merely because they are
147. McKennon v. Winn, 1 Okla. 327.
lacking. An agreement to sell a horse, no price being mentioned, would simply be an incomplete contract, as such
price could not be reasonably inferred, there being no market price which we could assume the buyer intended to pay.
If the circumstances are more readily explainable upon some other theory than that of contract, no contract will be
implied.
Example 65. A stays at home and helps his father upon the farm, while his two other sons go out to earn their living
away from home. The father dies. There being no will A regards it as unfair that there should be an equal division and
puts in his claim against the estate for his labor. The courts have taken the position that A's filial devotion explains his
conduct rather than the theory of contract, and therefore deny his claim. A could show, however, if such were the fact
that there was in fact, a contract between himself and his father, but he would have to show more than the facts stated,
as for instance, that the father kept an account of the amounts becoming due the son, or that the son kept one, with the
father's knowledge and consent.148

F. Contracts Implied In Law Or Quasi-Contracts

Sec. 102. Definition Of Quasi Contract

A quasi contract may be defined as a legal obligation arising out of the receipt of a benefit for which there has been no
actual promise to pay the retention of which without compensation would be unjust. The law therefore raises the
obligation to pay for it.
A quasi contract is not a contract at all, and may in fact exist in cases in which there is not only no resemblance to a
contract, but under circumstances that completely rebut such an idea, for instance, theft cases. Why is it then that we
use the word quasi contract (like contract) ?
148. Hertzog v. Hertzog, 29 Pa. St. 465.
We have seen that there is civil liability where one breaks an obligation arising out of agreement (the law of contracts) ;
and civil liability where one breaks an obligation imposed upon him by the general law (the law of torts), and this,
offhand, might seem to cover the entire field of civil liability; and it is quite thinkable that in the development of the law
of torts, that which we now call quasi contract might have been included; and, indeed, we will see that under some
circumstances one may sue in tort or quasi contract at his election.
In the history of the English common law there developed the theory of the "form of action" in bringing suit, whereby
any suitor had to find a form of action established by precedent to fit his case, and it was a rigid adherence to this
theory which was partially responsible for the development of courts of equity. Two kinds of forms of action to enforce
personal liability developed, the actions ex delicto (tort actions) and the actions ex contractu (contract actions) and
there were a number of each. Now, if one had received a benefit that he ought to pay for, a refusal to pay for which
would result in his unjust enrichment at another's expense, the court readily saw that the injured person should have
his remedy - yet there was no formal action to fit his case. So, the courts permitted his suit upon the theory that out of
the receipt of the benefit, the law would imply a contract to pay for it, and thus permitted an action ex contractu to be
brought - and so came to be the so-called class of contracts known as quasi contracts, or contracts implied in law as
distinguished from contracts implied in fact, which we have considered in the last section and which are true contracts.
The theory was extended to embrace cases in which there was a tortious taking of property - cases in which a tort
action (trover) could be brought, or the plaintiff could "waive the tort and sue in contract."
The following examples will illustrate the theory of quasi contract - note that the contractual intent is wanting, yet the
plaintiff sues on a quasi contract or contract implied in law. These cases may be divided into the following classes:
(1) Cases in which money is paid or other property parted with under a mistake of fact.
Example 66. A pays money to B, under the belief that B is C. A can recover this money from B, although there may be
no fraud on B's part. In the same way if A through error of calculation overpays his debt, he may recover the over
payment. In these cases, the recipient may be acting in perfect honesty so that he cannot be charged with a tort, and
there is no actual promise to repay. The recovery is on quasi contractual basis.149
(2) Benefit conferred under contract broken by plaintiff.
If a contract has been broken by plaintiff, he cannot sue thereon. But suppose he has conferred benefits thereunder; in
some jurisdictions he is allowed to sue on quasi contractual basis. See subject discussed in chapters on Discharge of
Contracts, post.
(3) Property parted with under compulsion and protest.
Example 67. A telephone company charges a rate which B believes to be excessive and unwarranted under the
company's franchise. But B cannot get telephone service without paying the rate demanded. He pays under protest.
He may recover upon showing that the charge was illegal.150
149. Devine v. Edwards, 101 111. 138.
(4) Benefit conferred through "dutiful intervention."
A being in a strange locality is killed. It becomes necessary for someone to go to expense. B, an undertaker, does so.
He may recover from the estate.151
150. Chicago R. Co. v. Chicago Coal Co., 79 111. 121.
151. Patterson v. Patterson, 59 N. Y. 574.

Part II. The Interpretation Of Contracts. Chapter 8. General Rules Of Interpretation

Sec. 103. The Governing Principle In Construction Of Contracts

The purpose of construe tion of contracts is to discover the intention of the parties.
It is not a court's business, nor has it power, to impose contracts on parties before it. It will endeavor to ascertain what
obligations the parties imposed upon themselves. To accomplish this it seeks to arrive at the parties' intentions as
expressed in their acts and words. To that end it calls to its aid certain rules of construction which are suggested by
experience and by reason to be reliable manifestations of the real intentions of the contracting parties. In instances,
those tests may fail, and an obligation may be imposed which was never intended by the party, as where he has
ignorantly or carelessly used expressions from which his true intent does not appear. Yet every one must know that
others have only his outward expressions whereby to read his inward meaning, and it will not be afterwards permitted
one to say that his true intention was contrary to his seeming one as the other party was entitled to read it.
It is not every intention, of course, which the law will enforce. This has been noticed in respect to all illegal agreements,
and in certain instances, where the contract is not illegal yet some provisions in it are against public policy. These
provisions will be ignored and not enforced.

Sec. 104. General Rules Of Construction

The chief rules whereby the courts interpret the intentions of the parties are enumerated below.
(1) While to discover the true intention of the parties is the chief aim of the court, that intention is to be gathered from
the words and conduct of the parties in making the contract and a secret intention not so expressed is of no avail.
The only way whereby the intention of the parties may be read is from the language employed, or in cases of implied
terms, the conduct of the parties. This language or conduct is, then, the only source to which one can go to discover
the intention. Where these words are unambiguous and plain, the courts sometimes say that there is then nothing to
construe, meaning thereby that as the parties have plainly spoken, the only thing remaining to be done is to enforce
the contract, as expressed; and it may be said, generally, that the rules following have no application where from the
unambiguity of the terms no question can arise concerning their meaning.
The secret intention of a party, where it differs from his seeming intention as expressed by him, is immaterial and he
cannot afterwards assert what his secret meaning was. Of course, this is the most reasonable of rules and in fact the
only feasible one to apply.
(2) Words will be construed in their ordinary meaning, unless it can be shown they are mutually understood by the
parties to have an especial sense.
If the words are shown to have been used in a narrow technical sense or in some especial sense under the
circumstances, that is the meaning they will be given; but otherwise they will be construed in their common meaning.
(3) Each party will be presumed to have used the words in the sense in which under the circumstances he should have
known that the other party was entitled to understand them.
This is perhaps only saying in another way that one cannot afterwards assert a secret intention. If he knows or should
know that under the circumstances the other party is affixing a certain meaning to the words employed, he cannot
afterwards assert that he used them in any other meaning.
(4) All parts of the contract will be construed together and the general intent thereby asserted will govern the
interpretation of particular words and phrases.
The contract often will disclose from its entire wording an evident intent which it is necessary to read in order to
construe parts of the contract which are ambiguously worded.
(5) That construction will be adopted when possible which will uphold a contract rather than defeat it.
Where two constructions are possible, one of which will defeat a contract, the other uphold it, the latter construction will
be adopted.
(6) Every part of a contract will be given effect where possible.
(7) The words employed will be construed most strongly against the party using them.
If words are equally applicable to both parties, of course, this rule cannot apply. Often, however, one party draws the
contract and chooses the words, and if such words have a double meaning fairness requires a construction in favor of
the other party.
(8) Written words will prevail over printed where in conflict.
The sense of this rule is apparent. Parties show their real intention by writing in words, even though by mistake or
oversight they do not erase the print.
(9) Punctuation will be disregarded where it interferes with the obvious sense.
(10) When the meaning is ambiguous the construction placed upon the contract by the parties is admissible to show its
meaning.
(11) Where a custom or usage is shown to be generally adopted and known, the words will be considered as having
been used in the sense such custom or usage attaches to them.
If a custom or usage is shown to be of such general and well-known nature that the parties must be considered in the
absence of contrary proof to have acted in reference to it, such custom or usage will govern the meaning of the terms
used.

Chapter 9. Construction In Respect To Time Of Performance

Sec. 105. In A Court Of Law, Time Is Of The Essence

In a court of law time is deemed to be of the essence of a contract, and, unless time is waived, performance must be
within the time stated, or, if no time is stated, then within a reasonable time.
In a contract, the time within which performance is to be made, may be either expressly stated or not. If no time is
stated, the time is deemed to be a reasonable time. In a Court of law it is held that this stated time or reasonable time
(whichever the case) is of the essence of the contract. This means merely that a person to a contract to exonerate
himself of his obligation of performance thereunder, either in order to enable him to sue for his compensation, or
defend against a charge of non-performance, must show that he performed or tendered performance within the allotted
time; unless he can show that the other party waived performance within that time. It is not infrequent that a party to a
contract does waive performance and accepts or shows himself as willing to accept a belated performance.
Example 68. A buys goods to be delivered to his place on Monday. The goods arrive on Tuesday. A need not accept.

Sec. 106. Time Of Performance In A Court Of Equity

In a court of equity time is not the essence unless expressly made so, or unless it necessarily results from the nature
and circumstances of the contract.
In a court of equity a different rule prevails. This would seem to indicate that a person might be either a performer or a
breaker of a contract according to the door, whether that of law or equity, by which he entered the courthouse - but, the
distinction is in reality a fundamental one. The ordinary mercantile contract is one for which damages are regarded as
an adequate remedy and for that remedy one must go into a court of law. To come into equity, the case must involve
the doctrines or demand the remedies of equity, such as a foreclosure of a contract to buy real property because of
non-payment of installments, foreclosure of mortgages, specific performance of contracts to sell real estate and the
like, and in equitable cases, the rule is that time is not the essence, unless specifically made so, or unless there is
some element in the contract that justice requires that it shall be held so. And, even where it is so provided, there are
maxims of equity which may tend to offset it, to the effect that he who seeks equity must do equity, equity abhors
forfeitures, and so on.

Chapter 10. Interpretation Of Provisions As To Penalties Or Liquidated Damages

Sec. 107. In Explanation

Usually in contracts, no provision is made as to rights or remedies in event of breach, but not infrequently the
possibility of breach is contemplated, and provisions made regarding it. The law supplies remedies in the event of
breach - will the court permit the parties to make any stipulation changing the remedies that would otherwise exist? In
the first place we must keep certain principles in mind. Breach of a contract is a civil, not criminal, wrong, and the law
does not punish one for breaking a contract, but merely provides remedies for the compensation or protection of the
parties injured by such breach. In awarding damages, it seeks only to award compensation whereby the breach may
be amended, and the law will not permit these fundamental principles to be subverted by the parties by their
stipulations in the contract.
Let us assume that we have a case in which it is provided that in the event of breach by one of the parties he shall pay
the other the sum of $500.00, or that he shall forfeit $500 or that he puts up $500 as security for the performance of the
contract. Now we have the courts saying that if the parties intend a provision of this sort to be one for the payment of
damages, they will so enforce it, and call it a provision whereby the parties have in the contract itself liquidated the
damages in the event of its breach; but if the parties do not so intend it the courts will not so enforce it and will call it a
penalty. This language seems to put it within the power of the contracting parties to make the same sort of a provision
either enforcible or unenforcible according as they express their intention in connection therewith. But this is not the
true explanation, and the failure even by the courts themselves to appreciate the true meaning has led to confusion
and erroneous results. The true rule is this: that where there is a provision for the payment of money in the event of a
breach of a contract, and the parties have by language used by them made possible the construction that such
provision is intended to liquidate the damages and it furthermore appears that they have made the provision as a real
attempt to estimate the damages in some reasonable proportion to what they actually will be, then such a provision will
be enforced, but if, no matter whether they call the provision liquidated damages or not, or even declare it to be their
intention that such sum shall be considered as liquidated damages, they name a sum with apparent arbitrariness or
which violates all rules of damages and despite their language is really a penalty in its nature, then their true intention
is to provide for a penalty, and as penalties do not follow breach of contract, the courts will not enforce such provision.
The provision of a contract for liquidated damages is in many cases eminently wise and proper, as there are many
cases in which without such a provision an injured party sustaining real and perhaps great damages finds them either
immeasurable or at least very hard to measure by the very nature of his case.
If the provision is by way of liquidated damages, it determines the damages and therefore prohibits inquiry into the true
damages whether greater or less. Its purpose has been to save that inquiry and the courts will so enforce it.

Sec. 108. Damages Difficult To Ascertain And Amount Reasonable

If the damages will be difficult to ascertain and the amount is reasonable, a provision in a contract stated to be by way
of liquidated damages, will be so construed.
If the damages are difficult to ascertain and the sum is stated to be payable as damages, and is not unreasonable in
amount, it will be so enforced.
Example 69. W agreed to complete a grand stand for a race course by a certain day, to cost $133,000.00, and to pay
$100.00 for every day's delay as liquidated damages. Held, that the plaintiff could recover that amount for every day's
delay, and proof of actual damages not requisite, the sum being apparently reasonable from the nature and extent of
the work.152
Example 70. C agreed to remove a house a distance of three feet at a cost of about $100.00, and in the event of
failure, to pay $500.00 "as liquidated and ascertained damages." In a suit against him for not removing the house,
Held, that this sum was unreasonable and would be considered a penalty and therefore without force, and actual
damages would have to be proved.153
152. Wallis Iron Works v. Monmouth Park Ass'n, 55 N. J. L. 132.
153. Condon v. Kemper, 13 L. R. A. (Kan.) 671.

Sec. 109. Larger Sum Than Debt Payable In Event Of Default

If the parties prescribe that upon the failure to pay a debt a larger sum shall there upon accrue, this is unenforceable as
being a penalty.
If $100.00 is to be due July 1st, and if not paid on that day, then $125.00, this is a penalty no matter how the parties
describe it. This is to be carefully distinguished from a case of discount, as where $125.00 is due on July 1st, but if paid
before that day, a ten per cent discount will be allowed. This is a common custom of merchants under the discount
system. The distinction is that in the latter case $125.00 is the debt, while in the other, $100.00 is the debt, and a
penalty is added for its non-payment.154

Sec. 110. Certain Sum Payable For Breach Of Any Of Several Covenants Of Varying
Importance
If a sura is stated to be payable for breach of any promise in a contract, whether relatively more or less important, the
provision is a penalty.
Example 71. A leased a mine from B and agreed to indemnify B against all damages for injury to neighboring lands, to
use the water in certain ways, to pay a certain royalty, to fill up excavations, to use a certain road and to keep gates
shut and in repair, and for breach of any of these to pay B a certain amount. Held, a penalty.155

Sec. 111. Forfeiture Of Amounts Paid

If sums are paid by way of deposit, or in part payment, and a provision is made that these are to be retained, in case of
154. Goodyear v. Selz, 157 111. 186.
155. Keck v. Bieber, 148 Pa. St. 645.
default, they constitute liquidated damages unless unreasonable.
Frequently where deposits are made, as on contracts to buy real estate, or on installment contracts, it is provided that
the sum or sums paid may be retained as liquidated damages. These, if not unreasonable, are upheld ; if unreasonable
they will be treated as penalties.136
156. Advance Amusement Co. v. Franke, 268 111. 579.

Part III. Operation Of Contracts. Chapter 11. Operation As To Parties

Sec. 112. General Rule

A contract operates to confer upon the parties, and only upon the parties, rights and obligations according to its tenor.
We have discussed the formation of the contract, and its interpretation. Now we shall consider its operation.
We may state the general rule as to its operation in a few words. A contract operates to confer upon the parties to it,
and only upon them, rights and obligations as provided in the contract. No other person can be bound by the contract
or assert rights upon it. To this general rule there are notable exceptions. They are noticed in the following chapters.
How the contract operates as far as its terms are concerned, we necessarily consider in the subjects of formation of
contract, construction of contract, and discharge of contract. Hence, no separate consideration is necessary here.

Chapter 12. Beneficiaries To Contracts

Sec. 113. General Statement

One who is not a party to a contract, but who benefits thereby, cannot sue upon it at all in some jurisdictions, but in the
majority may sue provided he comes within rules that are variously stated in different cases.
The rights of one who is a beneficiary of a contract, but no party thereto, has occasioned considerable difficulty and
different decisions. The theory of contract is that it is purely an individual matter governed by agreement between the
parties. But when it benefits others, frequently an injustice would result if such beneficiaries could not enforce it.

Sec. 114. Incidental Beneficiary Cannot Sue

One who is merely an incidental beneficiary cannot sue no matter how great the incidental benefit may be.
If the .benefit is merely incidental, no matter how great, the beneficiary has no right to enforce the performance of the
contract. It is not uncommon for strangers to take a decided benefit from the performance of some contract made by
others. But, if the parties chose to rescind the contract, or if one refuses to go ahead, and the other will not force him,
one who would have benefited thereby can do nothing.157
157. Pennsylvania Steel Co. v. New York City R. Co., 198 Fed. 721.

Sec. 115. Beneficiary May Sue When

If the contract is intended primarily for the beneficiary's benefit, he may sue.
The doctrine of the courts that a beneficiary may sue has been variously stated and variously applied. No general rule
may be laid down which would be accurate and comprehensive of all the cases. But the doctrine, more or less
stringently applied, is in force in most jurisdictions. It is applied where the contract is made primarily for another's
benefit, and especially where a contract is made by which assets pass upon which a third person has an equitable
right, as a sale of a business and a promise by the buyer to pay the existing debts. A creditor may sue (in most
jurisdictions), on such a contract.
Example 72. Holly loaned defendant $300.00, which was the sum that Holly owed plaintiff. Defendant, as a part of the
contract, agreed with Holly to repay the $300.00 to plaintiff. Plaintiff sued defendant and it was objected that plaintiff
had no contract with defendant. But plaintiff was allowed a recovery as beneficiary.158
Example 73. A sells his business to B, who as a part of the consideration assumes the payment of outstanding debts.
Creditors may sue on this agreement.159
T58. Lawrence v. Fox, 20 N. Y. 268. 159. Snell v. Ives, 85 111. 279.

Chapter 13. Assignment Of Contracts

Sec. 116. General Statement

The transfer of something of an incorporeal nature is accomplished by assignment. Assignment may signify (1) a sale;
(2) a pledge to secure a loan; (3) a gift; (4) a transfer for some special purpose.
In the law of contracts we must ask to what extent one may assign his rights and obligations to another. Obviously this
introduces the question whether the adversary party to the contract consents or doesn't consent. If there is a contract
between A and B and B with A's consent assigns to C, the assignment is effectual to transfer to C whatever the
assignment purports to cover. But if A's consent is lacking, to what extent may B assign? This is the problem of the
cases. In the following topics upon the subject of what may be assigned let us therefore assume that the consent of the
adversary party (A) has not been procured.
We know that B's agreement with A has resulted in mutual obligations, or in other words, that A owes to B, and B owes
to A, certain obligations and that what B attempts to assign to C must necessarily be what A owes to B or B owes to A,
that is, his right against A or his obligation to A.
Can B, without A's consent assign his rights and obligations or either of them?
Now we must remember that a contract is an agreement between parties who have chosen each other for reasons of
their own. That one may choose with whom he will contract is a basic principle in contract law. Hence it would seem, to
begin with, that there could be no assignment by either party to the contract without the consent of the other. But it is
another policy of the law that he who has an asset of any kind should be able to traffic in it if he thereby does not
unduly disturb the right of any other person. And it is apparent that one may have a contractual right against another
the delivery of which he may direct without unduly disturbing the contractual relationship between the contracting
parties; and out of these conflicting policies has resulted the law that one may assign his rights under a contract
without the consent of the other party to the contract when such transfer does not involve the personality of the
assignor and assignee, as we shall hereafter notice.

Sec. 117. Power To Assign Mere Contractual Rights

A contracting party may assign his rights under the contract when such assignment does not involve the credit, skill or
other personality of the assignor. His rights to another's personal service he can never assign.
If one has a right under a contract to receive money or goods upon conditions that do not involve his credit, skill or
other item of personality, he may assign such a right.
Example 74- A assigns to L his right to receive his salary from E. E must honor this assignment when he receives
notice thereof from L.
In the illustration the real contract, one of service between the parties is not affected.
A right to another's services, a person can never assign. Thus in the above case E could not assign to another his
rights to A's services.

Sec. 118. Power To Assign Contractual Ob-Ligations

Generally speaking, there is no power to assign contractual obligations.
One's obligations under a contract he can not assign because he could thus make the other contracting party look to
one for the rendition of obligations with whom he did not contract and perhaps, indeed did not care to contract.
Example 75. A owes B a sum of money. A cannot assign this obligation to C without B's consent. It is true that C by
contract with A may assume the payment of the debt to B, and, as we have seen, B may sue on this contract; but B
need not accept C's obligation in place of A's if he does not want to.

Sec. 119. Power To Assign Contractual Rights When Coupled With Personal Confidence And
Liability
Contractual rights cannot be assigned if they are coupled with liabilities or involve the credit, skill or personal
confidence of the assignor.
One cannot assign his rights under a contract if such rights are connected with liability or other personal element. "You
have the right you anticipate from the character, credit and substance of the party with whom you contract." Humble v.
Hunter, 12 Q. B. 310.
Example 76. Dunton Lumber Co. sold to K. Co. the entire output of white pine lumber for 1901, except such as it
should need for its retail trade in Rumford Falls. The K. Co. were to pay within 10 days from receiving invoice. The K.
Co. attempted to assign to Demarest, but the Dunton Co. would not recognize him, and he brought suit. The court held
the contract not to be assignable.160

Sec. 120. Contractual Rights To Be Acquired In Future Not Assignable

One may assign any right under an existing contract, but cannot assign rights under a contract not yet made.
One cannot assign to another what he has not got himself, because assignment supposes present transfer of title. But
it is sufficient within this rule that the contract is actually existing, although it might be terminated by either party at any
moment.
A is employed by B. He borrows money from L, and as security assigns to L his salary from B, also any salary he may
make from any other employer. A's employment with B is from day to day and B could let him go at any time without
liability to A. The assignment of wages to be earned under the contract with B is good, but the assignment as to other
employers is ineffectual.161

Sec. 121. Effect Of Assignment As To Assignor

The assignor of an obligation still remains responsible to the other party for the due performance of the contract.
Assignment of rights divests the assignor of such title as he had.
If one assigns obligations he still is responsible for the performance of the contract, even though the consent of the
other party has been secured; but this must be understood as not referring to a case of novation or where the other
party has, instead of permitting an assignment, been a party to a novation. Thus, if one leases a building and
afterwards, with or without the assent of the landlord, assigns his lease to another, and that other fails to pay the rent,
the original lessee can be held.162
160. Demarest v. Dunton Lumber Co., 161 Fed. 264.
161. Mulhall v. Quinn, 67 Mass. 105; Mallin v. Wenham, 209 111. 252.
162. Grommes v. St. Paul Trust Co., 147 111. 634.
After assignment of a right the assignor loses his right to receive the benefits under the contract. The assignee for that
purpose has a right to step into his place.

Assignment Of Contracts. Continued

Sec. 122. The Assignee As The Successor To The Title Of The Assignor
The assignee takes the title and right of the assignor, and is subject to all the equities and defenses between the
original parties.
The theory of contract being that it is a personal relationship between two or more persons who have chosen each
other, assignment of rights thereunder, without the other party's consent, is permitted, as we have seen, upon the
theory that the contractual arrangement is not thereby disturbed. It follows from this, that such assignment cannot be
permitted to increase the obligations of the other party thereunder. Therefore, the assignee will take the right as it
actually exists, not as it may seem to be; and will take it subject to all adjustments and defenses to which the assignor
would have been subject had there been no assignment.
Example 77. A has a contract of service with B, by which B pays him a monthly salary. A assigns his salary to C in
security for a loan. If this salary has already been paid, though not due, or if A does not earn his salary, or if A owes B
money as a set off, these defenses may be had by B against C as readily as against A, provided B had done nothing
by which C in taking the assignment has been misled as to the true facts.163
Thus, failure of consideration, lack of consideration, fraud, duress, undue influence or any other defense between the
parties, may be made against an assignee.
If the assignment is by way of negotiation of a negotiable instrument, this reasoning does not apply, as negotiable
paper was invented in part to escape this situation.

Sec. 123. Effect Of Assignment As To Other Party (Debtor)

Where a contract is assignable, the debtor must pay heed to the assignment and recognize the assignee when he has
received notice of the assignment, but no rights are acquired against him until notice is given.
Assignment may be with the consent and knowledge of the other party to the contract, or it may be done quite
independently of him. The usual practice in assignment of wages as security for a loan is an example of this. If a
contract is assignable and is assigned, the debtor must recognize the assignment when it is brought to his notice. He
need not, however, ever assume that the party has assigned his contract and may treat with him on the theory that
there has been no assignment. Thus an assignable instrument differs again from a negotiable one. The maker of a
negotiable promissory note has no right to assume that a note has not been negotiated and must therefore demand, in
order to protect himself, the production of the instrument. But a promisor of a non-negotiable, though assignable, right,
need not assume its assignment and can treat with his promisee in perfect safety until the assignee notifies him.164
163. Westfall v. Jones, 23 Barb. (N. Y.) 9.

Sec. 124. What Constitutes Assignment, Drafts, Checks, Orders, Etc

The fund or right assigned must be designated or identified. An order by one party upon another to pay a third a certain
designated fund or debt owing will operate as an assignment of the fund. But a draft or a check is not an assignment
for it is drawn on the credit of the drawer and not upon the credit of any fund.
If B has a fund belonging to A, and A draws an order on B directing B to pay this fund to C, this will operate as an
assignment of the fund. There can be no assignment of a right to a fund, account, etc., unless it is identified. Manifestly
this must be so. The assignee must have a right to demand some certain thing and the other party to the contract must
know what to deliver or pay over.
A bill of exchange is an order by A on B to pay C, or order, a certain amount. Suppose B has in his possession funds
belonging to A. Is the bill of exchange an assignment? It is well settled it is not, because the bill is drawn on A's general
credit, and B assumes no liability until he accepts the bill. The bill also creates a liability both on A and on B when B
accepts that the face of the instrument will be paid, though the fund might fail. Even if the bill of exchange refers to a
fund out of which B may reimburse himself when he pays C, the bill is not an assignment.165 An assignment must
direct the payment of the fund. If an order is drawn on the general credit of the drawer it is not an assign164. Sears v.
Trustees, 28 111. 183.
165. See Negotiable Paper in this series.
ment. If it is an assignment it is not a bill of exchange, because it does not fulfil the definition of a bill of exchange. The
same reasoning applies to checks which are a species of a bill of exchange.

Sec. 125. Assignment By Operation Of Law

On the death or bankruptcy of a person, certain of his rights and liabilities pass to his representative. In general, all
rights and obligations pass which are not purely personal. In a sale of real estate, many rights and obligations pass
which were created by former deed.
The assignment of contracts by operation of law takes place in case of death or bankruptcy of a contracting party.
Such rights or liabilities as are not purely personal will go to the representative, who is called in case of death, the
executor (if appointed by will), or the administrator (if appointed by the court), and who is called in case of bankruptcy,
the trustee. Rights or liabilities purely personal would not pass. Thus, if A agrees to work for B for a year, but dies
during the year, the liability to B is discharged, but the right to salary earned during the period of actual employment
would pass to the executor or administrator. For the title which is acquired by a trustee in bankruptcy, see subject of
Bankruptcy.

Chapter 14. Interference With Contractual Relationships By Third Parties

Sec. 126. Duty Not To Interfere With Contract Rights

A third person has a duty not to interfere to induce another to break his contract, unless done in good faith, in the
exercise of fair competition. If he does so wrongfully interfere, he may be sued in tort by the party to the contract whom
he has thus wronged.
While the law upon this subject is not uniform in all its phases in all jurisdictions, the subject may be stated generally as
follows: That a contract between parties imposes a duty upon strangers thereto, toward each party not to induce the
other party to break off his contractual relationships, unless he does it in good faith and by way of fair competition.
Example 78. Horn was employed by A. S. & Co., as foreman; he was injured and made a claim against A. S. & Co., for
damages. A. S. & Co. carried liability insurance in the L. G. Co., covering this injury. The agent for the L. G. Co.
threatened to procure H's discharge unless he would settle for a sum offered. He refused it and the Insurance
Company did procure his discharge. He brought suit against the L. G. Co. for interfering with his contract with A. S. &
Co. Held, he had a case in tort on this ground, as there was no legal excuse in this case. The Court put emphasis on
the fact that this was not a case of competition.166
166. London Guarantee Co. v. Horn, 206 111. 493If the breach is obtained in the exercise of fair competition, it is
lawful, as where a dealer offers better service or better prices, and thus succeeds in getting trade from a competitor.
But the competition must be real, not simulated competition established to injure one,167 and there must neither be
promises of indemnity168 nor false reports about the rival.169

Sec. 127. Contract For Indefinite Period

By the better view it is immaterial whether the contract is for a fixed period or not if its discontinuance is caused by the
unlawful interference.
In the Horn case stated above, the employe was employed under no definite contract of employment. He could have
been discharged at any time. But he would not have been discharged except for the interference of the Insurance
Company. And, therefore, his case was not defeated by that character of his contract. To so hold would be to introduce
a technicality which would defeat justice.

Sec. 128. Prevention Of Future Contracts

If a person is reasonably certain to make a contract with another, and a third person without valid excuse interferes to
prevent it, he may be held in damages.
If one may interfere with an existing contract, he may certainly, under the same circumstances, prevent
167. Tuttle v. Buck, 107 Minn. 145.
168. Amer. Law Book Co. v. Edw. Thompson Co., 84 N. Y. Supp. 225.
169. Evanson v. Spaulding, 150 Fed. 517; Sperry v. Weber, 161 Fed. 219.
one, as where a person successfully gets a contract which his competitor would have procured. But if the interference
is without legal justification, a suit may be maintained.170
170. Lewis v. Bloede, 202 Fed. 7.

Part IV. Discharge Of Contracts. Chapter 15. Discharge By Performance, Tender And Breach

Sec. 129. Meaning Of Phrase "Discharge Of Contracts."

A contract is discharged when the obligations thereunder are in some way extinguished, so that no liability on the
contract furthermore exists.
Having considered the formation of contracts, and its operation, we may now consider how it shall be discharged, that
is to say, how its obligation shall be extinguished. Assuming, then, that a contract has been entered into, and binds the
parties, let us consider how it may come about that a party thereto may claim that his obligations thereunder are gone.
This discharge may arise in a number of ways. Naturally we think first of discharge by performance, for the
performance was the purpose of the contract. But there are a number of other means. We may state them here and
then consider them separately. Discharge of contract may arise (a) by performance; (b) by tender of performance; (c)
by breach; (d) by impossibility of performance; (e) by alteration of a written instrument; (f) by agreement; (g) by
operation of law, as by bankruptcy.

Sec. 130. Of The Performance Which Will Discharge Contract

Generally speaking, only literal compliance with the terms of a contract will operate to discharge it. Yet in some
contracts, where details are numerous and complex, and there is substantial compliance in good faith, this will be a
discharge.
As a general rule it may be stated that a contract must be strictly performed according to its terms, and such
performance certainly will always operate as a discharge, thus constituting a good cause of action for the party
performing if he brings suit, or a good defense if he is sued. For where one engages with another that he will supply
certain goods or perform certain services, he cannot claim that he has performed until those very goods have been
supplied, at the time and place and in the manner stipulated, or that those services have been rendered as agreed
upon. Yet the modern decisions allow one in many cases to aver a substantial performance made by him in good faith,
that is to say, in an attempt to perform literally, in order to bring suit upon the contract, or defend against a charge of
breaking his contract, allowing an amount from the contract price to compensate the other party for the slight defect.
Thus, in a building contract, the building contractor may sue to recover the contract price if he has in all things
substantially though not literally complied.171 But a sum will be deducted from such contract price to the extent
necessary to make the building entirely conform to the plans. This rule is considered more just, as it allows one to sue
for the price which is due according to his contract and permits the other to have a reduction on account of the
departure. Under this rule there cannot be any material departure and the departure must not have been purposeful.
171. Fitzgerald v. La Porte, 64 Ark. 34

Sec. 131. Of The Performance Of Contracts Which By Their Terms Are To Be To The
Satisfaction Of The Other Party
Occasionally one in his zeal to make a bargain, or because he has so great faith in his skill, undertakes to perform his
contract to the other's "satisfaction." Suppose then that the other says that he is not satisfied; is this final? The terms of
the contract so indicate. Yet most courts make a distinction. Where the contract is to furnish something that chiefly
appeals to one's fancy or personal taste and is entered into for the purpose of pleasing that personal taste and fancy,
then one can say finally without respect to the merits of the performance that he is not satisfied. This is true where one
orders a suit of clothes, a portrait, a bust, or other work of art.172 Bear in mind, however, that even in such a case
there must have been an agreement to perform to one's satisfaction. Otherwise, even in such cases, one would have
no right to be dissatisfied where, judged as a reasonable man, he ought to be satisfied.
Where one claims he is not satisfied, he cannot at the same time accept and retain the goods.
But in cases where the element of personal taste and fancy does not enter, he cannot assert breach where the
performance is such that a reasonable man ought to be satisfied. If a reasonable man ought to be satisfied, as
determined by the jury, the court will say that this particular man is satisfied. This is true of all contracts whose
performance involves mechanical execution, such as grading a dock, putting in a furnace, etc.173
172. Brown v. Foster, 113 Mass. 136.
173. Duplex Safety Boiler Co. v. Garden, 101 N. Y. 387.
Sec. 132. Of The Performance That Will Not Discharge And Therefore Constitutes Breach
A performance is not even substantial and in good faith, or, if there is no performance, this constitutes breach, unless -
1st, - there is impossibility of performance in those cases where that will discharge, or unless 2nd, - there is
acceptance of the incomplete performance in lieu of full performance, or, unless 3rd, - there is some other mode of
discharge which excuses performance.
If the performance is not even substantial in the manner that has been discussed, then the party alleging performance
must either admit breach, or else rely on some fact that discharges contract besides performance, or else he must
show, that although the performance was defective, nevertheless it had been received and accepted as full
performance.

Discharge By Performance, Tender And Breach. Continued

Sec. 133. Effect Of Acceptance Of Performance Which Does Not Fulfill Requirements Of
Terms
If defective or part performance is accepted, with knowledge of the breach, such acceptance, when voluntary, usually
operates to waive the breach, especially if the breach consists merely in not doing something provided for the other's
benefit, but not preventing substantial performance. If the circumstances show no intention to waive damages in the
acceptance of a part or delayed performance, then such damages may be recovered; but if acceptance is forced upon
one, he may aver breach as an entire defense if sued on the contract. Some courts, however, allow a reasonable
compensation even in that case.
Where there is a breach which one might insist upon but does not do so, and accepts performance notwithstanding the
breach, this usually operates as a waiver of the breach. Thus, suppose that one has a suit of clothes made which does
not conform to the order, yet he nevertheless accepts it; this precludes him from insisting that the contract was broken.
Or suppose that an employer continues in his employment a clerk who does his work in such an incompetent or
negligent manner that he could have been discharged therefor; this is a waiver of the breach and the clerk could collect
the salary agreed upon. Or suppose that one having a house built is entitled to an architect's certificate before he
accepts, yet accepts without such certificate, he cannot aver that there has been any breach.174
If at the time one accepts he does not know of the breach, he will not be considered as having waived it. Thus, if the
employer was absent during the rendition of his clerk's incompetent and negligent service, and the breach was
material, he might have a good defense to a suit for the salary agreed upon. Or suppose he accepts goods which are
not as warranted, yet this defect is not at the time of the acceptance discoverable upon ordinary inspection, as, for
instance, where canned goods contain a deleterious substance that soon destroys them, or a piece of machinery will
not do the work agreed upon, there is no waiver.
Sometimes the circumstances practically force one to accept, as where a building not even in substantial compliance
with the contract is put on one's land. In such case one may insist upon the breach unless the circumstances show that
he waived it.175
Where there is a waiver of the breach, there may or may not also be a waiver of the right to insist upon damages. If
one accepts under protest and in order to save himself or the other party from greater damages, he does not
necessarily waive his right to have his damages, although it might be said that he has waived the breach in the sense
that he did accept what was offered. Thus, if one orders ice from a distance and a poorer quality than that ordered is
received, he may in order to stop further waste or loss accept the ice, but have his damages. So where performance is
delayed, one may still accept but have damages for the delay unless the circumstances show that he waived prompt
performance. The same may be said of partial performance.
174. Smith v. Aiker, 108 N. Y. 87.
175. Eldridge v. Rowe, 7 111. 71.
Where one has no option but to accept, as in the case of the improvement of one's land, or the acceptance of services
from one who afterwards breaks his contract, if there has been a performance whose benefit without compensation
would amount to an unjust enrichment at another's expense, the courts often allow a reimbursement entirely
independent of the terms of the contract. In such a case, one could not plead and assert his express contract, but out
of the justice of the matter, and on a quasi-contractual basis, compensation is allowed, if, from the facts, justice
demands it. However, there is a division of authority on this point. Thus, in an Illinois case where one was employed for
a certain time and unjustifiably quit before that time, the court said he could have nothing.176

Sec. 134. Performance, Or Tender Of Performance, Required Of One Party Before He Can
Require Performance By The Other
To substantiate an averment of breach one party must show that he has done all that the contract required him to do
before he could require performance by the other, or that he has made a tender where the performances were to have
been concurrent.
176. Eldridge v. Rowe, 7 111. 71.
Where one party is alleging breach by another, it is to be inquired whether he has himself progressed far enough in the
performance of a contract to charge the other. Thus, if one was bound by his contract of sale to deliver goods to a
certain place, he could not charge the other with breach, so long as he had not delivered them at that place. In a great
majority of cases one does not have to fully perform his contract before he can charge the other with non-performance.
How far he must go depends on his undertaking by the terms of his agreement. Then if he does not go that far he has
no right to charge the other party, but on the contrary has himself committed a breach. But where one was not to
perform in whole or in part except as the other also performed, he need only tender performance. If one agrees to sell
goods for cash, he need not deliver those goods in order to charge the other party; he need only tender them at the
proper time and place.
Tender of performance need not be kept good, except where it consists in payment of a debt. Thus, one who is to sell
goods need only make tender when the time comes, and then his obligation is gone; but it is otherwise with the
payment of money; a tender thereof does not discharge a debt, although it may stop the running of interest and accrual
of damages.

Sec. 135. Breach Op One Part Of A Severable Contract Not A Breach Of The Contract
A severable contract is really a number of independent contracts embraced in one agreement. A breach of one of the
parts thereof is not a breach of the other parts thereof because each is independent of the other. But if a contract is
entire, a breach of any part of it is a breach of all of it. It is often difficult to tell whether contracts are severable or
entire.
If A has contract No. 1, and contract No. 2, with B, his breach of No. 1 will not be a breach of No. 2. B cannot refuse to
go on with No. 2 because No. 1 was broken. Each is independent of the other. Now suppose that contract No. 1 and
contract No. 2 were both made at one time and in the same transaction and, indeed, both in the same paper. Then
would the result be changed? It would depend on the intention of the parties, whether they were making one entire
contract, or really several contracts in one agreement. This is often a very hard matter to say. The usual contract is of
course entire. The question arises most frequently in installment contracts. Suppose one hundred tons of coal are to be
delivered each month for twelve months; is this really twelve several contracts, or one entire? If A fails to deliver the
first installment, can B refuse to receive the other deliveries? It is well settled that the mere fact that a contract is
performable in installments does not prevent it from being an entire contract. But aside from this, the courts differ as to
rules to apply and as to the application of rules of them.177
Whether a contract is entire or severable rests on the evident interdependence of the parts. If A agrees to build B three
houses at a stated price for each house, and the three undertakings are independent, each of the others, there would
be a severable contract. But if A were to agree to paint the walls of one house for a certain price and the floor for
another price and the ceiling for yet another, this would seem to be an entire contract, and a breach of any one of the
undertakings would discharge the contract. So the contract in respect to the three houses could be made entire. This
subject is very confusing and cannot be fully explained here.
177. See subject "Sales" in this series.

Sec. 136. To What One Of Several Contracts Performance Relates - Application Of Payments
Where one makes a performance equally applicable to one of several contracts he has a right to direct its application,
but where he does not direct it the other party has a right to apply the performance to whichever contract he desires.
The rule now under discussion relates chiefly to a payment made by one to another to whom he owes several debts.
Suppose A owes B $500 and the debt is unsecured. He also owes B $500, secured by chattel mortgage. A pays B
$100. Naturally B would much prefer to apply this to the unsecured debt. But if A in making the payment made no
direction, B may apply it as he pleases. But A may direct the application.

Sec. 137. Breach Of Contract By Renunciation Prior To Time Of Performance

If one announces definitely before time of performance that he will not perform, or voluntarily does an act which makes
it impossible for him to perform, the other party may treat the contract as broken and sue at once. But this applies only
to bilateral contracts. If one does not act upon this anticipatory breach, he keeps the contract open for the benefit of
both parties, and the other party may change his mind and perform the contract.
One may break his contract by anticipation. He may do this by definitely announcing that he will not perform when the
time comes, or by doing something which puts it out of his power to perform. This gives the other party the right to sue
at once.178 But if this anticipatory breach is not acted upon, the party who declared his intention to break the
agreement may change his mind and perform it. Or if anything occurs to discharge him of his performance, he can
depend on that ground notwithstanding prior to that time he has said that he would not perform, when the other party
did not prior to such cause of discharge accept and act upon the breach. The reasoning under this section does not
apply to a unilateral contract. Thus, an announcement that one would not pay a note when due would give no
immediate right of suit upon it.
178. Hochster v. De La Tour, 2 El. & Bl. 678 (Contract of employment to begin June 1, 1852. May 11, 1852, defendant
wrote he could not perform and suit was brought at once. Plaintiff was allowed damages). Kadish v. Young, 108 Illinois
Reports, 170.

Chapter 16. Discharge Of Contracts By Other Means Than Performance Or Breach

Sec. 138. Discharge By Impossibility Of Performance
If an event transpires rendering performance impossible this will discharge the contract where it may be said to have
been the mutual intent of the parties that the contractual obligation was not to endure if such event did transpire.
Impossibility of performance will not always discharge a contract. Very often one is held liable upon his contracts when
it had become utterly impossible for him to perform. Yet, whenever the impossibility springs from the occurrence of an
event which we must from the nature of the case look upon as having been in the minds of the parties as an event
which should put an end to the contract, such event will discharge. Thus it comes down to a question of intention. We
may say as a general rule that where the contract is to operate on a particular subject-matter and that subject-matter is
destroyed, the contract becomes impossible of performance in a way that will discharge any further liability upon it.
Thus, if one were to deliver coal of a certain quantity out of his mine, the exhaustion of the mine would excuse him.179
So where the contract calls for personal services, obviously the continued existence and fit condition of health of the
party is contemplated. Thus, A agrees to work for B for one year, and one month thereafter A dies; B cannot sue A's
estate for breach of contract.
179. Walker v. Tucker, 70 111. 527.
But in cases where there cannot be said to be this mutual intention there is no discharge, though there is as a matter of
fact impossibility. Thus, if one's employees strike or he cannot obtain necessary workmen, or secure the necessary
funds, or material, these are matters which will not discharge, unless it was so stipulated in the contract. And mere
hardship is never impossibility.180

Sec. 139. Discharge By Alteration Of Written Instrument

Where one of the parties to a contract expressed in a written instrument purposely alters it in a material part, this will
discharge the other party of his liability upon it.
Where an instrument is intentionally altered in any material part without the consent of the other party, this operates to
relieve the other party of his liability upon the instrument. A material alteration is any alteration which changes any
material or substantial part of the contract and changes its effect.
The rule is the same whether the alteration was innocent or fraudulent, so far as the effect on the instrument is
concerned. Yet it is held in many cases that if there was an alteration by one without any fraudulent intention he may
sue the other for benefits received where there would have been a right to sue independently of the written instrument,
in spite of the alteration, for instance, where there is a debt.
Where an instrument is altered by some third party this cannot destroy the rights of the parties.
180. Id.

Sec. 140. Discharge By Novation

Discharge by novation is discharge of a party to a contract by agreement of all the parties whereby some other party
supersedes him, or discharge of a provision in a contract by an agreement eliminating it or superseding it by another.
There are two sorts of novation: novation of parties, and novation of terms. The word "novation" signifies a change. It is
generally used to describe those cases in which a person to a contract is by agreement superseded by another who
assumes his place therein ; or those cases in which a term in a contract becomes discharged by its elimination in favor
of another one.
Novation of parties signifies the agreement of all concerned that one may be substituted for another. It differs from
assignment materially. Assignment may be in many cases with or without the consent of the other party to the contract,
and whether with or without consent it does not discharge the assignor of his liability for the payment of indebtedness if
the assignee does not pay it. But novation assumes an agreement by all parties to the contract that another may be
substituted for him and that he be let out entirely from then on.

Sec. 141. Discharge By Merger

By merger is meant the cessation of one contract by its inclusion in a subsequent one, whether to the same effect or to
another, which was meant to supersede it.
If one is sued upon a contract or sues upon it himself, he may claim, or the other side may claim, that while such a
contract once existed, it was merged into another made later, and meant to supersede it. This is a species of discharge
by agreement.

Sec. 142. Discharge By Agreement

The parties may at any time before or during the performance of the contract discharge it by agreement.
What parties have agreed to do, they may of course thereafter agree not to do. If they mutually abandon the contract
by agreeing to giving up their undertaking, or put a new one in its place, this will discharge the abandoned agreement.
It has no longer any force. A written contract may be discharged by an oral agreement ; but by the old common law
and even now in some states, a contract under seal could only be altered by agreement under seal,181 although if the
alteration were carried out as agreed upon the courts would not disturb it. The safest plan is to put any new agreement
changing an old agreement under seal also under seal.182

Sec. 143. Discharge In Bankruptcy

Indebtedness arising out of contracts may be discharged in bankruptcy whether due or not.
The National Bankruptcy law provides that one may by conforming to its provisions and by surrendering his assets for
the benefit of his creditors, discharge his indebtedness which arises out of his contracts. Thus liability on a note would
be discharged whether the note were mature or not.
One's executory contracts, as an agreement to perform services, etc., are not dischargeable in bankruptcy.
A new promise, made after the bankruptcy, to pay the debt, will revive it. In some states this new promise must be in
writing. See Bankruptcy in this series.
181. Alschuler v. Schiff, 164 111. 298.
182. Id.

Sec. 144. Discharge By Statute Of Limitations

The various states have statutes providing that a debt cannot be sued upon after a certain length of time from its
maturity. The period varies in different states. And in the same state is usually longer for written than for oral contracts.
Making a new promise, or a part payment or a payment of interest revives the debt and the statute begins to run again
as of that date.
The statute of limitations may be considered at this point, although perhaps in strict theory it does not belong here. For
the statute of limitations does not really operate to discharge a contract or indebtedness arising out of the contract or
the breach thereof. It only creates a bar, so that the defendant can say, "What you claim in reference to the existence
of a contract may be true, but you have waited too long to maintain your suit." The policy of this statute is to prevent the
putting forward of stale claims as to which the evidence may have become lost by lapse of time. The law considers that
if a man has a claim he ought to assert it in some reasonable time.
If a payment is made after a statute runs, or after it has begun to run, this stops the running and it will not be a bar until
the full period after that payment. This refers to payment of the principal or interest. So a new promise operates in the
same way to revive the debt. But usually such new promise is not valid unless in writing.
If the statute is not pleaded in defense, the promise is enforceable.

Chapter 17. Remedies Of The Parties. A. Action For Damages

Sec. 145. In General

The most usual relief which one has against another for breach of contract is an action for damages in a court of law.
And wherever there is a breach of contract, the other party not being in default himself, may maintain his action for
damages.
Where a breach of contract occurs, the usual remedy and in most cases the only remedy, is by way of an action in the
court for damages. And this action always arises in every case where there has been a breach by one party, not
waived by the other party, and the other party is not in default himself.

Sec. 146. Kinds Of Damages In Contract Cases

Damages in contract cases may be referred to as nominal or actual. Nominal damages are given upon breach where
no actual damages are proved. Actual damages are such damages as are actually sustained on account of the breach.
Where there is a breach of contract no actual damages may result. This is many times the case. A verdict for nominal
damages would then be allowed and this would carry with it a right to have the costs of suit. Actual damages are such
as really occur.

Sec. 147. Rule For Computing Damages In Contract Cases

Those actual damages may be allowed which both parties at the time of the contract must be supposed to have
contemplated as likely to result from breach. Remote, contingent and uncertain damages cannot be proved.
The actual damages sustained by one may not be allowed by the court. One may only have those damages which
under the circumstances at the making of the contract must have been considered as likely to result if breach occurred.
Thus, if one is under contract to erect a building, the purpose of the building, the use to which the builder knew the
owner was to put it, whether it was to be used permanently or only temporarily, as for a fair, would all go to affect the
result. The delay in the erection of some buildings causes no damage; the delay in the erection of others causes very
much.
In the same way the breach of contracts of sales of personal property or for services, would result differently. Whatever
both parties must be considered as having contemplated as damages will be allowed.183 This prevents the proof of
remote damages.
Damages must also be reasonably certain. One cannot merely speculate on what his damages would have been. He
must have some reasonably certain proof.
B. Bill for Specific Performance.

Sec. 148. General Rule

A bill for the specific performance will lie where (1) the court considers that damages would not be an adequate
compensation, and (2) where the performance asked for is of such nature that it could be enforced by the court.
183. Hadley v. Baxendale, 9 Exch. 341.
The Court of Equity takes jurisdiction to enforce the specific performance of contract where it regards damages as the
inadequate compensation, providing the performance sought could be enforced. A Court of Equity will not enforce the
performance of a contract to work for another for a year, because it could not carry out its decree. It could not "stand
over" the man and compel him to render the services. And even if it should try to do so it would be really sentencing
the defendant to slavery. The kind of contracts whose performance a court will enforce are those contracts whose
performance calls for the execution of a deed, a mortgage, a lease, etc. But if damages are considered adequate, it will
not enforce performance. We may consider various classes of contracts.

Sec. 149. Contracts For The Sale Of Real Estate, Or An Interest Therein
A court will enforce a fair contract for the sale of real estate or for a lease or mortgage at the instance of either party,
for it considers damages inadequate compensation for the loss of a particular piece of land.
If A contracts to sell B a certain parcel of land, B can secure a decree for specific performance, that is to say, the court
will compel A to execute a deed; provided the contract on B's part was fair. This is on the theory that if B is confined to
damages, his relief would be inadequate as there is no other piece of land like this one contracted for which B could
buy with his damages.184
184. Cud v. Rutter, 1 P. Wms. 570.
As the law gives the remedy to a buyer, so it gives to a seller. Either can have specific performance.
Where this remedy exists there would also be a right to sue for damages at one's election.

Sec. 150. Contracts For The Sale Of Personal Property

A court will not usually enforce at the instance of either party a contract to sell personal property, for it considers
damages an adequate remedy; but where the property has a peculiar or rare value, specific performance will be
decreed.
If A sells B 1,000 bushels of wheat, B's damages for A's default will be an adequate remedy in the eyes of the law. The
world is full of wheat, from which A's wheat cannot be identified, and therefore B may make himself whole. Or, if B's
purpose was the profit he could have made, the judgment will be based upon that fact.
If personal property has a very peculiar or rare value the court will decree a specific performance of a contract to sell it.
Thus a contract to sell a painting of historic value would be enforced; or corporate stock not to be had on the market,
and which would have a peculiar value to the buyer.185
Of course, if in a contract of sale of personal property, title has passed, the buyer could secure it by a writ of replevin.
That would not be a specific enforcement of the contract, but only allowing the buyer to have what was his own under
the contract that had already been performed to the extent of conferring title.
185. P. & F. Corbin v. Tracy, 34 Conn. 325.

Sec. 151. Contracts For Personal Services

Contracts for personal services will never be specifically enforced.
Whether damages are adequate or not, the result is the same in this class of agreements. The court has no effective
way to compel a man to perform personal services. It could not stand constant guard over him, seeing him perform. So
the policy of the law would not permit it. The remedy for breach of contract for personal services is by way of action for
damages.
C. Bill for Injunction.

Sec. 152. When The Court Will Enjoin Breach Of Contract

A court of equity will enjoin a threatened breach of contract when such breach consists in doing something the party
has covenanted not to do, and there is no adequate remedy for such breach by way of damages.
If a party to a contract has agreed as a part of such contract to refrain from entering into competition, or performing
services, or making certain use of land, the Court will enjoin the breach, provided the breach would result in injury
which damages could provide no compensation for.186
Thus, if one agrees not to use his land for certain purposes and is about to break his covenant in that regard, a Court
of Equity will protect the other party by affording relief by way of injunction. So if one in selling out a business agrees to
restrain his competition in a manner considered reasonable the court will enjoin him from breaking his contract. In such
cases damages would be so hard to estimate that a court will not confine a party to his action for damages. A covenant
not to work for any one else than the other party to the contract will sometimes be protected by injunction. But in such
cases it must appear that the party whose services are contracted for, was of such skill or reputation that he could not
be replaced and therefore damages would be inadequate. For example, A, an actor of great skill and reputation,
appears to B's theater nightly for eight weeks, and agrees not to appear elsewhere during that period. The court will not
grant a decree of specific performance, as we have seen, and B has no way he can compel A to appear at his theater.
He is left to his action for damages. But he can secure an injunction against A appearing in any one's else theater, and
this, perhaps, will have the incidental result of compelling A to perform at B's theater.
186. Phila. Ball Club v. La Joie, 202 Pa. State 210.

Appendix. Questions And Problems. Appendix. Questions And Problems In General Survey

Chapter 1

1. What are the two great branches of political law? What is municipal law?
2. What is international law? What two forms does it take?
3. What are the branches of municipal law, as herein enumerated ?

Chapter 2
4. Define constitutional law; what is a constitutional government?
5. What is meant by the phrase "unconstitutional law"?
6. What were the Articles of Confederation?
7. When was the United States Constitution adopted? Give date and purpose of the various amendments.
8. What was decided in McCulloch v. Maryland?
9. What is the function of a state constitution?
10. Define administrative law.
11. A carelessly throws a brick from a high building into a public street below. It lights near B, who is thereby
frightened. Has A committed a crime? Has he committed a tort?
12. Define a crime. Name some crimes.
13. Define a tort. Is an act which is a tort necessarily a crime? Name some torts.
14. What is "adjective" law?

Chapter 3

15. What is written law?

16. Define a code.
17. What are the "Uniform laws"? Name some of them.
18. Define the common law.
19. What are the judicial reports?
20. State the rule of "stare decisis," and show the part it plays in the development of our law.

Chapter 4

21. What are courts?

22. State the distinction between courts of "law" and courts of "equity."
23. State the function of a court of review.
24. What is "service"; an "appearance"; a "declaration"; a "plea" ; a "bill of complaint" ?
25. In a trial of a cause, who tries the facts? the law? Is this the rule in chancery courts?

Chapter 5

26. What are the chief boards or commissions of the federal government?
27. What is the purpose of the Interstate Commerce Commission?
28. Describe the Federal Trade Commission.
29. What are employers' liability commissions?

Questions And Problems On Contracts

Chapter 1

1. Define contract; is every agreement a contract? Why? What ideas enter into contract?
2. What are the essential elements in contract?
3. Define (a) formal contracts; (b) simple contracts; is a written contract not under seal a simple contract? Define
unilateral contract; bilateral contract.

Chapter 2

4. What is meant by "party" to contract?

5. What is the general rule as to capacity to contract?
6. Who are "minors"?
7. A, sixteen years of age, makes a contract with B for the purchase of an automobile. B fails to perform. A sues B. B's
defense is that A is a minor. Will it prevail?
8. Is a minor liable for his necessaries? On what theory?
9. A, a minor, contracted for a course of stenography. Assuming (1) that she took the course, could she be made to
pay the tuition fee? (2) That she paid for the course in advance, but did not take it, could she recover the fee? (Mauldin
v. S. S. & B. U., 60 So. (Ga.) 358.)
10. "The jury found that at the request of the defendant, then an infant, the plaintiff paid for him a board bill which he
had previously contracted while attending school." Can plaintiff recover? (Kilgore v. Rich, 83 M 305, 12 L. R. A. 859.)
11. A is an infant. He asks B to loan him $100, which B does. Afterwards A spends the money for necessaries and
consumes them. B sues A and A pleads his minority as a bar. Is it a good defense? (Kilgore v. Rich, supra; 194 111.
Ap. 509.)
12. Are the following articles necessary for a minor:
(a) a horse (Rainwater v. Durham, 10 Am. Dec. 637; Hart v. Prater, 1 Jur. 623) ;
(b) a watch (Peters v. Fleming, 6 M. & W. 42) ;
(c) jewelry (Ryder v. Wombell, L. R. 3 Exch. 90; Leflls v. Sugg, 15 Ark. 137) ;
(d) a college education (Middlebury Col. v. Chandler, 16 Vt 683) ;
(e) bridal outfit (Jordan v. Coffleld, 70 N. C. 110) ;
(f) cigars and tobacco (Bryant v. Richardson, L. R. 3 Exch. 93);
(g) club dues in social club for millionaire's son; (h) automobile for millionaire's son;
(i) attorney's fees for female minor to prosecute breach of promise suit (Munson v. Washband, 31 Conn. 303) ;
(j) bicycle for boy at work, used to go and come from place of occupation;
(k) automobile for minor for use as "jitney bus" to earn his living (Lein v. Centaur Motor Co., 194 111. Ap. 509).
13. A is living at home, his father providing him with board, lodging and clothing. He needs an overcoat for the winter,
and without consulting his father buys one from M, a merchant, on credit. On his way home he leaves the coat in a car
and never recovers it. The son, being sued, pleads infancy. Is it a good defense? Could the father have been held in
this case?
14. F sues to recover purchase price of automobile bought by him from O while he was a minor. After becoming of age
he used the car several months. Can he recover? (Fried v. Overland Motor Co., 202 111. Ap. 203.)
15. A, a minor, entered into a contract to purchase real estate on installments. After becoming of age he pays two
monthly installments. Can he rescind? (Rulin v. Strandberg, 212 111. Ap. 327.)
16. What capacity to contract did a married woman have at common law? What is the rule now?
17. Plaintiff sold and deeded his land to defendant; now, shortly afterwards, brings suit to rescind the transaction,
tendering back the purchase price and alleging that at the time of the bargain, he was so drunk as to be wholly
incapable of transacting business and of knowing the nature of the instruments signed by him. He alleges no fraud,
procurement or unfair advantage by the other party. Should he have rescission? (Coody v. Coody, 39 Okla. 719, 136
Pac. 754, L. R. A. 1915 E. 465; Martin v. Harsh, 231 111. 384, 83 N. E. 164, 13, L. R. A. N. S. 1000.)
Chapter 3

18. What is meant by phrase "meeting of the minds"? Define offeror, offeree.
19. A advertised an offer in the newspapers offering a certain sum of money to any one who would furnish him certain
information. B not knowing of A's proposition, furnishes A the information. Can he recover the reward?
20. Plaintiff brings suit against the X corporation for $500, and shows that the Directors passed a resolution voting to
pay a reward of $500 to any one who would furnish certain information; that he, being a janitor of the building where
the meeting was held overheard the vote, and afterwards and within 24 hours supplied the information to the President
of the Company. Is this statement sufficient to make a case? Why? (Sears v. Kings County El. Co., 9 L. R. A. (Mass.)
117.)
21. An auction is advertised. At the hour and place B attends, expending the sum of $100 in order to be present. The
auctioneer at the hour and place announces that no auction will be held, as negotiations are in progress for a private
sale. B objects and demands that the auction be held. The auctioneer refuses. B sues the principal for $100. Can he
recover?
22. A mail order house sends out catalogues. B, a recipient, mails in an order based upon the catalogue. The house
refuses to fill the order. Has B got a case against the house? Why?
23. The X Company writes to its customers a circular letter as follows:
"The increased cost of raw materials compels us to advance the price of M. L. Oil to 45c per gallon, effective
December 1st, f. o. b. nearest shipping point. This price we cannot guarantee for any definite period unless the
consumer anticipates his wants and protects himself by a contract which we will accept before December 1st at the
price of 45c per gallon, subject to a discount of 2% ten days for cash."
M, to whom this letter is sent, orders 10 barrels on the same day he receives the letter. The X Company write him they
cannot honor his order (giving no reasons). If maintains that he has a contract. What do you think?
24. Give illustrations of offers that may be contained in circular letters ; in catalogues.

Questions And Problems On Contracts. Part 2

25. A writes B a letter offering to sell B five carloads of lumber according to terms stated - giving B five days to accept.
B replies within the five days agreeing to take the lumber on the terms proposed, but adding that It must be "surface
two sides and center matched." A, still within the five days responds that it cannot furnish lumber of this description. B,
still within the five days, then writes that he will accept the offer contained in the first letter from A to B. Is there a
contract? Why? (Shaw v. Ingram Day Lumber Co., 152 Ky. 329, 153 S. W. 431, L. R. A. 1915 D. 145.)
26. A has 1,000 bushels of grain in a granary. He offers B 500 bushels of grain of the same description. The granary is
destroyed by fire before B accepts. A claims that this relieves him from fulfilling his contract. Is the contention correct?
27. Can one revoke an offer which he has promised to keep open ? Why ?
28. How long will an offer remain open if not withdrawn?
29. When may an offer be accepted by an act?
30. A mailed an offer to B, with a request for a reply by wire; he sent an offer to C, asking for a reply by return mail. He
mailed an offer to D and E, saying nothing as to mode of communication. B replied by mail; C replied by wire; D replied
by wire, and E replied by mail, each one purporting to accept the respective offers. Were the contracts made in any of
the above cases? If so, when? In your answer assume (1) that A actually received in due course the several answers;
and (2) that the replies did not actually reach A owing to the negligence of the postoffice or telegraph company.
31. A telegraphed an offer to B, requesting acceptance by wire. B telegraphed his acceptance at once. One hour later
B telegraphed
A to ignore his first telegraph, and A got this second telegraph before the first one. A refuses to agree to B's request. Is
there a contract?

Chapter 4
32. A signed a paper without reading it upon B's assurance that it was an insurance paper. It was in fact a guaranty of
credit. A is sued by B upon the paper and the jury find (1) That A did not know the nature of the paper he was signing;
(2) that his misconception was caused by B's fraudulent statements; (3) that A was negligent in not reading the paper.
Has A a defense? (Carlisle & Cumberland Banking Co. v. Bragg, (1911) 1 K. B. 469.)
33. P while riding a bicycle was injured by a collision with D's automobile. He was assured by his own physician and
the physician for P that his injuries were slight and consisted of a few superficial injuries. With that belief in the minds of
both parties he executed the following release:
"For and in consideration of $75 to me in hand paid by D, the receipt whereof is hereby acknowledged, I hereby
remise, release and forever discharge the said D of and from all manner of actions, suits, damages, claims and
demands whatsoever, in law or equity, against the said D arising out of an automobile collision occurring Sept. 1, 1912,
I ever had or now have or hereafter can or may have for, upon or by reason of any matter, cause or thing whatsoever,
from the beginning of the world to the date of these presents." (Signed by P.) As a matter of fact P's hip was broken in
the accident. He brings suit to set aside the release. Can he prevail? (Mclsaac v. McMurray, L. R. A 1916 B. 769 N. H.)
34. A and B were stockholders in a bank. According to the books of the bank it had an unimpaired capital and a surplus
and the book value of its shares was $136. As a matter of fact, its capital stock had been impaired by the dishonesty of
its employees and its stock was actually worth $60 per share, although nobody knew this except the dishonest
employees. A sold 10 shares to B for $1,360. B now seeks to set aside the transaction on the ground of a mutual
mistake. What is your opinion? (Costello v. Sykes, 172 N. W. 907, 5 A. L. R. 250 (Minn.).)
35. A, in an attempt to sell a second-hand automobile to B, stated that its tires were good for 10,000 miles. They very
shortly wore out. Is A liable to B for fraud? (Woods v. Nicholas, 92 Kan. 258, 140 Pac. 862.)
36. A, selling land located in Alabama, called upon B in Detroit, and stated that the land he had to sell was good
agricultural land, high and dry, without mire, swamp or boggy portions. B purchased the land. He found the contrary to
be true and sues . A contends that his staements were dealer's talk. How should the court decide? (Haener v.
MeKenzie, 188 Mich. 27, 154 N. W. 59.)
37. Defendant connected a sewer from his building to a pit in the rear. He then covered the pit with clay and built a
residence over it, the pit being full of sewage up to about a foot below the level of the cellar, and sold the residence to
plaintiff, telling him nothing about the pit or sewer pipe, and plaintiff could not get tenants to remain in the house owing
to the odor. Plaintiff sues for damages. Recover? (Weikel v. Sterns, 142 Ky. 513, 134 S. W. 908, 34 L. R. A. N. S.
1035.)
38. When may silence amount to fraud ?
39. Define duress. What is duress per minas? duress by imprisonment? duress of person? duress of property? What
was the ancient test of duress? What is the test now?
40. A was accused of embezzlement from B. B threatened A with criminal prosecution unless he would make
restitution. A having no money took B to A's sister C, who being made acquainted by A and B with the threat, executed
her note for §1,000 in consideration that B would not prosecute. She now defends on the grounds of duress. Discuss.
(Kronmeyer v. Buck, 258 111. 586.)
41. In the same case A deeds his property to B under the same threat in order to make up the balance of B's claim.
Assuming (1) that A really is in default to B and (2) that A is not in default to B, would you regard as to either
assumption a suit by A to set aside the deed as well or ill-founded? (Kronmeyer v. Buck, supra.)
42. Suppose in the same case A is guilty, and instead of giving a deed gives his note and that a suit is brought to
enforce it. Has he a defense?

Questions And Problems On Contracts. Part 3

43. What is undue influence? When will it be presumed? When presumed what must the other party do to remove the
presumption?

Chapter 5

44. Define consideration. Can there be a contract without it?

45. On Oct. 27, 1898, the plaintiff sent the defendant this letter: "Dear Sir: We offer to deliver to your works, during six
months from Nov. 1, 1898, the following materials at the prices stated:
Bar iron, $1.20 flat delivered by car, $1.25 by wagon. (Here follow other items and prices.)
Yours truly,
R. C. Howes, Sec'y.
The K. C. Bolt & Nut Company,
By R. C. Howes, Sec'y."
Defendant answered this letter stating that he "accepted the offer" and ordering two cars. Can either party be held to
this proposition? (Cold Blast Transp. Co. v. K. C. Bolt & Nut Co., 114 Fed. 77, 57 L. R. A. 696.)
46. Plaintiff, manufacturer of a certain cigar, offered to sell in future to defendant, a cigar dealer, as many of such brand
as he might desire for his wants, and to continue to do so during the life of the brand, as long as defendant cared to
sell them. Defendant accepted this proposition. Is there a contract? (A. Santaella & Co. v. Otto F. Lange Co., 155 Fed.
719.)
47. The Minnesota Lumber Co. agreed to buy and the White-breast Coal Co. to sell to the former "its requirements of
anthracite coal" for season between August 5, 1896, and January 1, 1897 (terms, prices, description of coal and other
material terms given). Is there a contract? (Minnesota Lumber Co. v. Whitebreast Coal Co., 160 111. 85.)
48. "The plaintiff states that she paid out money for the education at college of her son J. A. Gooch, without any
contract or understanding that he would repay her. Years afterwards in consideration of money which she had so paid,
he voluntarily gave her this note. That is really the consideration. Is that binding to make the note enforceable?" What
is your answer? Why? (Gooch v. Allen, 37 L. R. A. N. S. 930 (W. Va.).
49. Plaintiff alleges that her husband was cruel to her and was so addicted to intoxicating liquors that she left him, that
defendant, her step-son, requested her to return to her husband, promising her that if she did so and lived with her
husband the rest of his life or her life, he would support her for the rest of her life; that in consideration thereof, she
accepted and returned but that defendant repudiates the agreement. Defendant claims that his promise is
unenforceable because of no benefit to him and because of its uncertainty, and because the wife only performed her
duty. Is he right? Discuss all defenses. (Mack v. Mack, 67 Nebr. 819, 31 L. R. A. N. S. 441; Parker v. Russell, 133
Mass. 74.)
50. A was discharged in bankruptcy. He afterwards wrote a letter to a creditor saying: "You will be paid every dollar of
it." The creditor sues. A pleads the discharge. Is it a good defense? (Herrington v. Davitt, 220 N. Y. 162, 115 N. E. 476,
1 A. L. R. 1700.)
51. A reward is offered for the capture of an accused person. The sheriff of the county captures him. Is he entitled to
the reward?
52. A contracts to assign a patent to a certain corporation for a consideration which is paid him. He fails and refuses to
assign the patent. The directors offer him $1,000 more to make the assignment.
He does so assign and now sues for the $1,000. Has the corporation any defense?
53. PI. sold and delivered to defendant goods to amount of $80.03. Defendant undertook to return a part of the goods
sold of the value of $50.02. PI. disputed the right to do so, and refused to receive the goods from the teamster. While
matters were in this condition the defendant sent plaintiff a check for $30.01, which was admittedly due, stating that it
was in full settlement of the account. Plaintiff cashed the check, notified defendant it had done so, and brought suit for
the balance claimed by it. Defendant claims there has been a settlement. How should court hold? (Whittaker Chain
Tread Co. V. Standard Auto Supply Co., 216 Mass. 204, 103 N. E. 695, 51 L. R. A. N. S. 315. Contra: Chicago, M. R.
Co. v. Clark, 178 U. S. 353. See notes, 51 L. R. A. N. S. 315, and 11 L. R. A. N. S. 1022.)
54. A's automobile strikes B. A claims the accident to have been unavoidable. B threatens suit. A offers $500 in
settlement. B accepts. B afterwards repudiates the settlement, refuses to take the $500 and sues for $1,000. A offers
no evidence except the settlement. Is it a good defense?
55. What is a composition with creditors? Is it binding?
56. A threatens suit against B for price of a ring sold by A to B. C tells A that he will pay him the price of the ring if A will
forbear suit against B. A sues C on this promise. Has he got a good case?

Chapter 6
57. The W. S. & T. Wks. was engaged in making and selling harvesting machines. It sold everything pertaining to the
business to H. Mfg. Co., agreeing "not again to go into the manufacture of harvesting machines" anywhere in the
United States. The seller had a national and international good will in its business. It now begins the manufacture of
such machines contrary to this agreement. The buyer seeks to restrain it. Will the court issue an injunction?
58. What is a monopoly?
59. J went into the employ of P, the owner of an Express Company, and signed the following agreement:
"I do hereby agree in consideration of my employment by the express company, that I will assume all risks of accident
or injury which I shall meet with or sustain in the course of such employment whether occasioned by the negligence of
said company or any of its members, officers, agents or employees." J subsequently became injured by reason of P's
negligence and brings suit. Is the above agreement a good defense? (Johnston v. Fargo, 184 N. Y. 379, 7 L. R. A. N.
S. 537.)
60. The I. C. R. Co. leased to C, a grain elevator, the lease stipulating that "the risks of all loss, injury and damage by
fire, however caused, and whether or not caused by the negligence of the lessor, its agents or servants, are hereby
assumed by the lessee." Fire caused destruction of the premises, originating as C alleges from the negligence of the
R. Co.'s servants. C brings suit. Is the provision a defense? (Checkley v. I. C. R. Co., 257 111. 491, 44 L. R. A. N. S.
1127.)

Questions And Problems On Contracts. Part 4

61. Define usury. Is it a crime to charge usury? Can usury paid be recovered? What is the penalty of charging usury?
62. A borrows money from B at usurious rates. A repays interest from time to time until he has repaid more than the
principal. B sues. A pleads usury. B claims that he is only suing for the principal which he is entitled to under the
statute, conceding the usury, that the payments have all been of interest, and that as usury paid cannot be recovered,
he is entitled to the principal. How should the court hold?
63. A desires to borrow $1,000 from B for one year. B gives him $930, and takes his note for $1,000 payable in one
year. The note also provides that if the $1,000 is not paid when it is due it shall bear interest after maturity at the rate of
seven per cent. One year after the note becomes due, B brings suit. A claims that the note is usurious. What is the
sum B can collect on this note under the laws of Illinois which makes a charge of over seven per cent usury ? (See for
citation of cases Sanford v. Lundquist, 18 L. R. A. N. S. (Nebr.) 633.)
64. M, a farmer, placed an order for 2,000 barrels of pork for September delivery, with C, a broker. A statute of the
State forbade pretended purchases of pork where receipt and delivery is not intended. M paid $400 in margins and the
pork was sold out at a profit. C refuses to account. M brings suit. Assuming that the court finds that no receipts or
deliveries were intended, can M have relief? (Carey V. Myers, 92 Kan. 493, L. R. A. 1916 B. 1056.)
65. The consul general of Turkey made a contract with a manufacturer of firearms, by which the consul general for a
certain commission agreed to effect through his influence with the representatives of the government, sales of the arms
manufactured by the concern with which he contracted. Is the contract valid? (Oscanyan v. Winchester Repeating
Arms Co., 103 U. S. 261.)
66. Is a contract made on Sunday valid?
6T. A pawnbroker does business without a license. B leaves a diamond with him and obtains $100 as a loan thereon.
Must B pay the principal and interest or either in order to obtain back ring? (Levinson v. Boas, 150 Cal. 185, 12 L. R. A.
N. S. 575.)
68. A statute of the State of Kansas prohibited pool selling and book making in that state. Kansas City, Kas., passed an
unconstitutional ordinance licensing such forbidden business to any person paying $5,000 a year. L paid $5,000 and
received a license. He outfitted a place at considerable expense and opened it for business. On the second day after
opening up, the city authorities closed him up. He sues to recover the $5,000. Can he recover? (Levy v. Kansas City,
168 Fed. 524, 22 L. R. A. N. S. 862.)
69. A sells goods to B knowing that B intends their use in an immoral and illegal business. Can A maintain a suit for the
price? (Loose v. Larsen, 161 Pac. (Nev.) 514, L. R. A. 1917 B. 1166.)
70. Plaintiff sold to defendant a quantity of candies and silverware, putting the candy in packages labelled prize candy
packages, in some of which there were tickets, with the name of an article of silverware on them. The defendant's
intent was to sell for more than the packages were themselves worth, the buyer to take his chance on getting a prize,
and plaintiff knew this. Such a sale was contrary to the lottery law. Plaintiff sues for the price. Defense, illegality. How
should the court hold? (Hull v. Ruggles, 56 N. Y. 424.)
71. Where one has lost money in gambling, may he recover it? On what theory?
Chapter 7

72. Define "seal." Is consideration necessary in a sealed contract? What legislation has there been as to private seals?
73. What was the rule as to the abrogation or modification of a contract under seal by an agreement not under seal?
74. When was the English Statute of Frauds enacted? What two sections related to contracts? What was the purpose
of the statute of frauds?
75. N, operating his automobile, ran over D, and took her in an unconscious condition to L. V. Hospital, at whose oral
request she was cared for. Bills were sent to N. He refused to pay and suit is started against him. He pleads the statute
of frauds. Is it a good defense? (Lake View Hospital v. Nicholson, 202 111. Ap. 205.)
76. An executor promises to pay a legacy which legatee could not otherwise get on account of insufficiency of the
personal estate, if legatee will not contest the will, the executor having an interest in having the will stand. In a suit to
enforce the promise the executor pleads statute of frauds. Is the defense good? (Mackin v. Dwyer, 205 Mass. 472, 91
N. E. 893.)
77. A owning a shale pit and a brick yard, orally agrees with B to deliver his entire output of brick for one year to B. A
afterwards refuses to perform and being sued claims that the statute of frauds is a good defense. Discuss the defense
under the fourth and under the seventeenth section.
78. A orally guaranteed the condition of a roof for five years. B sues A on this guaranty. Statute of frauds is plead. Is it
a good defense? (Philip Carey Mfg. Co. v. So. Construction Co., 2 Ala. Ap. 292, 56 So. 746.)
79. In what ways may the seventeenth section of the statute of frauds be satisfied? Does it differ from the fourth
section in that regard ?
80. Must both parties sign the memorandum? May an agent sign? Must the agent's authority be in writing? Is an
assumed name a good signature? Must the signature be subscribed?
81. A orders a set of teeth from a dentist. He refuses to take the teeth and defends on the ground there is no
compliance with the statute of frauds. Is the defense good?
82. "The defendant admits in his answer the execution of the subscription contract, and that he had not paid the
amount of his subscription for the reason that he had an oral contract with the promoter whereby the promoter would
re-sell his subscription for the amount for which he had subscribed and that his liability would thereby cease." Is this a
good defense? (Huster v. Newkirk Creamery & Ice Co., 141 Pac. 790 (Okla.).

Questions And Problems On Contracts. Part 5

83. A applies for Are insurance upon the house and outbuildings upon his farm. The insurance agent comes out and
looks the place over and decides to write the insurance. By mistake he mis-described the land. A fire later occurs and
A desires to bring suit. Can the courts give him any relief? (French v. State Farmers Hail Insurance Co., 29 N. Dak.
426; L. R. A. 1915 D. 766.)
84. A ships goods with the M. R. R. Co. A bill of lading is issued describing goods, termination, rates, etc. A desires to
show that another termination than that stated was orally agreed upon, and that twice as many goods were received as
stated in the contract. Assuming that the evidence is pertinent to the issues, should he be allowed to do either?
85. A entered into B's employ and undertook, for contingent fees, to detect larceny and embezzlement among the other
employees. The contract on its face does not show this. The court in deciding such agreement to be illegal, is met with
the objection that this proof would vary the terms of a written contract. Can this be shown? (42 L. It. A. N. S. 847.)
86. Give an illustration of a contract "implied in fact"; a contract "implied in law." Explain the difference.

Chapter 8

87. What is the object of a rule of construction?

88. Enumerate the various rules of construction given in the text.

Chapter 9
89. What is the meaning of the phrase "time is of the essence" of a contract?
90. Is time the essence of a contract in a court of equity?

Chapter 10
91. On September 10, 1909, the Parker-Washington Company * * * entered into a contract by which it agreed to
construct for the city of Chicago the foundations of a boiler room, auxiliary buildings and chimney of a pumping station
at One Hundredth Street and Stewart Avenue, in the city of Chicago, and to complete the same by December 22,
1909. The work was not completed until March 5, 1910, seventy-three days after the date fixed for its completion. The
contract contained the following provision: "It is distinctly understood and agreed by the parties hereto that the work to
be performed hereunder shall be completed within the time hereinabove fixed for its completion. Inasmuch as failure to
complete the same within the time herein fixed will work an injury to the city of Chicago, and as damages arising from
such failure cannot be calculated with any degree of certainty, it is hereby agreed that if such work is not fully
completed within the time fixed herein there shall be deducted from the contract price and retained by said city, as its
ascertained and liquidated damages, the sum of fifty dollars ($50) for each and every day passing after the date fixed
for the completion, until said work is fully completed as specified." When the work was completed the defendant in
error retained the stipulated sum of $50 a day for the seventy-three days as liquidated damages and the remainder of
the contract price was paid. The plaintiff in error brought suit in the municipal court of Chicago for the sum as so
retained and also for a balance due on another contract. Was the city justified in withholding this sum of $50 per day?
(The Parker-Washington Co. v. Chicago, 267 111. 136.)
92. Suit to recover $2,500 deposited pursuant to terms of a lease of a theatre building from March 11, 1912, to
February 26, 1917, at a rental of $350 per month. Default in payment of rent for part of November and all of December,
1912, and suit brought by the lessor for possession after giving five days' notice of termination by lessor for non-
payment of rent, and judgment for possession in favor of landlord ; also judgment against landlord for the $2,500 less
amount of rent due him for the months mentioned. Appeal. "Section 11 of the lease * * * provided that said sum was 'to
be held by party of the first part as security for the faithful performance by the party of the second part of the covenants
and agreements * * * which said sum * * * shall be applied by said party of the first part as rental reserved - for the said
premises for each of the last 71/7 months of the term. * * * "By section 12 it was further covenanted and agreed that in
the event that the indenture of lease to which this rider is attached shall be terminated by reason of a breach by party
of the second part * * * then * * * the party of the first part may, at his option, retain as and for full liquidated damages
the said sum of $2,500 * * * and thereafter the party of the second part shall have no further right, claim or interest in
and to the said $2,500 or any part thereof." Shall the upper court sustain the judgment of the lower court? (Advance
Amusement Co. v. Franke, 268 111. 579.)
93. A made a contract with B to convey several distinct tracts of land; on failure to convey any tract, damages to be
$10,000. Should the court enforce this provision? (Watts v. Sheppard, 2 Ala. 425.)

Chapter 11

94. State the general rule as to the operation of contracts.

Chapter 12

95. Summarize briefly the law, as given in the text, of the right of a beneficiary to sue on a contract.

Chapter 13

96. Define assignment.

97. B agreed to supply K, a cake manufacturer, all the eggs required in K's business for one year, K agreeing not to
buy elsewhere during that period. Statements of account were to be rendered every fourteen days, B to draw for the
amount at two months from date of delivery. K thereafter purchased another company, and K then transferred the old
and new business to a new company called George Kemp, Limited, of whose 20,000 shares he held all but seven.
When B heard of this amalgamation he refused to supply the eggs to the new company and claimed that his contract
was at an end. K sues, claiming breach. Can K recover? (Kemp v. Baerselman (1906), 2 K. B. (Eng.) 604, 2 British
Ruling Cases 436.)
98. A, an employee of B, is accustomed to receive his salary from B at the end of every month. On the first of July he
asks B to advance him his July salary, which B does. On July 30 A goes to the office of C, a money lender, and
borrows a sum of money from him, assigning his July salary (which is not known to C to be paid) as security therefor.
On August first A is rightfully discharged by B. On August 31st, A, not having worked during the month, goes to D,
another money lender, and purports to assign his August salary, which he represents to be earned and unpaid. C and
D having given notice, and being refused payment, begin suit against B. Can either recover ?
99. A employed by B assigned his right to money due from B. In a suit by the assignee B set up that A, before the
assignment, was liable for a failure to fulfill his contract to sell at the highest market price. C, the assignee, knew
nothing of this defense at the time he accepted the assignment, and he paid A the full face value of the money due
from B. Is the defense good against C? (Mackenzie v. Hodgkin, 126 Cal. 591.)
100. Is a check an assignment of the fund in the bank?

Chapter 14

101. A, a laundry owner, would not join a laundry association. The members thereof procured those dealing with her to
break off their contracts. She sues the members. Has she any case? (Doremus v. Hennessy, 176 111. 608.)
102. A works for M on a salary of $5,000 a year under a five year contract. N, a competitor, offers him $6,000 a year
and A quits M to accept N's offer. Has M any case against N?

Chapter 15

103. Meaning of phrase "discharge of contract"?

104. A employed B to write a legal article for an encyclopedia, at a stipulated price, subject to A's satisfaction therewith
when written. B wrote a good article, but A rejected it on the ground he was not satisfied. B sues for damages. What
result? (Walker v. Edward Thompson Co., 56 N. Y. S. 326.)
105. When is tender of performance sufficient?
106. State the rule of substantial performance.

Chapter 16

107. W agreed with H to find a purchaser within a year for a certain tract of land at $30 per acre. He is now sued on
that agreement. He defends that it was impossible to find such purchaser. Is the defense good? (Harless v. Wiley, 91
Kan. L. R. A. 1915 C.)
108. A was B's stepfather. The stepson agreed to support the stepfather for the rest of his life and keep up his life
insurance dues if A would name B his beneficiary in the contract. The stepfather lived in B's home for five years, and B
kept up the dues. A's physical condition became such that it became a great hardship upon B, and a disagreeable task
for B to care for him. A was thereupon sent to the poorhouse, where shortly after he died. After leaving B's home, A
changed his beneficiary to M. B claims that A's condition discharged him from the contract, and that he is entitled to
reasonable compensation for A's board and reimbursement for the dues; or, if that is denied, then that conceding he
broke the contract, he is entitled to the same thing as for benefits rendered on an implied agreement. Are either these
contentions sound? (Ptacek v. Pisa, 231 111. 522, 14 L. R. A. N. S. 537.)
109. A contract was made that A should manage a number of parcels of improved real estate belonging to B for the
term of five years, collecting the rents, making repairs and paying over the net balance remaining in his hands the 15th
of each month. For these services he received a commission upon the amounts collected and the use of an office. The
contract contained the provision "that the covenants in this contract shall succeed to and be binding upon the
respective heirs, executors, administrators and assigns of the parties hereto." B died. His heirs and his administrator
give notice to A that his services are no longer wanted. A sues for breach of contract. Can he recover? (Homan v.
Redick, L. R. A. 1915 C. N. (Nebr.) 601.)
110. Define novation ; merger.
111. What is the statute of limitations?

Chapter 17

112. State the rule of damages in contract cases.

113. Will the remedy of specific performance be given in every case? State the rules and give illustrations.
114. When will a court enjoin the breach of a contract?

Law Of Agency. Part I. Nature And Formation Of Agency. Chapter 1. Definitions

Sec. 1. Nature Of Agency

If one appoints another to do an act for him as the act of the appointing party, such appointing party is known as the
principal or master and the other party the agent or servant - agent if the work he is appointed to do is that of
contractual negotiation with others; servant, if the work he is appointed to do does not involve contractual negotiation.
When a person procures another to do something for him, we have the following possibilities:
First: The person procured to do the work may undertake results in the accomplishment of which he acts as
independently of the one procuring him as such party does of him - they are independent contractors.
Second: The person procuring the work to be done may by his arrangement with the other establish a more or less
general control over the work to be done in the nature of a proprietary interest in the services rendered, so that such
work, though done by another, is really, as to the responsibility therefor, the work of the appointing party. In such case
(1) The work appointed to be done may be to negotiate contractually with others - and then we call the appointing party
the principal and the appointee the agent;
(2) The work appointed to be done may be of a different character, being perhaps (but not necessarily) work done in
the performance of the principal's contracts with others, but not creating those contracts. In such case we call the
appointing party the master, and the appointee, the servant.
It is seen at once that inasmuch as the work of the agent is to negotiate contractually with others, the rights of the
principal against, and his obligations towards, such others arising out of the contracts made by the agent make up a
big subject which is necessarily lacking in the relationship of master and servant. In the two relationships we have
these principle considerations:
In Agency
1. The rights and duties between the principal and agent - in contract - in tort.
2. The rights and duties between the principal and third person arising out of contracts made by the agent pursuant to
his authority;
3. The obligations of the principal to third persons for the torts of his agent;
4. The rights and obligations between the agent and third persons.
In Master and Servant
1. The rights and obligations in contract and tort
(and also under workmen's compensation acts) between master and servant.
2. The obligations of the principal to third persons for the torts of his servant.
Thus we see that the scope of the work of the servant and the scope of the work of the agent takes us into a field
which both traverse, and in a separate field of vast importance traversed only by the agent - the field that involves the
authority of the agent to make contracts for his principal. Fundamentally the relationship in either case is that of
service. And the reason that we distinguish is that in their incidents and consequences they go far apart.
The fundamental sameness of the relationships is seen in the fact that one may at one moment be agent, and in the
next moment while on the same work, be servant. Employed to purchase goods, one becomes a servant to haul them
home; employed as a store clerk, his miscellaneous duties are now those of agent, now those of servant.1 The
examples below will illustrate this section.
Example 1. A owns a garage and repair shop. He contracts with B, a customer, to overhaul B's car. C works for A and
assists in working on B's car. B sends his chauffeur for the car and directs him to buy a new tire from A on B's credit. A
has what is called an authorized agency for these tires, but as a matter of fact he buys the tires from the manufacturer
under a contract by which for a period the manufacturer agrees to supply what A orders. In this illustration A and B are
independent contractors. C is A's servant. The chauffeur is B's agent to get the car from A, and to purchase the tire,
and B's servant to drive the car home. A is not an agent of the tire manufacturer, though so called, being merely a
purchaser from him for purposes of retail. If A received such tires from the manufacturer to resell upon a commission,
A would be the kind of agent known as a. factor (see post herein).
1. Kingan v. Silvers, 13 Ind. Ap. 80; 37 N. E. 413.
Example 2. Echols was charged with having embezzled, as. an agent or servant, money belonging to his employer,
Echols was a tailor, and had undertaken to make a suit of clothes for his customer who had paid him money in
advance. He did not make the clothes or return the money. The charge must fail. The money when paid to Echols
became his. He was liable civilly to the customer for breach of contract, but not criminally liable for embezzlement. If
the customer had given Echols $10.00 with which to buy cloth for him, and he had misappropriated it, he would then be
taking the customer's money.2
Example 3. A manufactures sewing machines. He sells some machines to B, who resells to customers. He gives C a
contract, whereby C sells sewing machines for A from house to house. B is not A's agent. C is, and A is liable for his
acts within the scope of the employment.3

Sec. 2. The Responsibility Of The Principal Or Master

The underlying idea in the law of agency is that the principal (or master) is responsible for that which the agent (or
servant) does in the line of his employment.
"Qui facit per alium qui facit per se," runs the Latin maxim. "Respondeat superior' is another one. That which the agent
or servant does within the scope of his agency renders the principal or master responsible therefor. It is his act, done
by him, through another. The principal is therefore liable for the contracts made by the agent which the principal has
authorized, and for the torts of the agent or servant, though he has not authorized them, and has in fact forbidden
them, when they are a part of the act done.
2. Echols v. State, 158 Ala. 48.
3. Singer Mfg. Co. v. Rahn, 132 U. S. 518.

Sec. 3. The Principal And Agent As One Person

The principal and agent and master and servant are in law deemed to be one person for the purposes of the agency.
Carrying the idea of the last section a little further, we may think of principal and agent or master and servant as one
person in the fiction of the law. "They are famed to be all one person."4 The principal is presumed to be present in the
person of his agent doing the act, so that in the phraseology of the law we may say "Now comes John Smith, in his
own person, and comes Henry Jones by his attorney or agent." In such a case John Smith and Henry Jones are both
legally present. Thus in a stockholders' meeting some are present in person, some by proxy, but all are there who
come either way. For this reason that act which the agent does for his principal, the principal is chargeable with as
soon as it is done, and before any communication thereof to the principal. The collection made in New York for a
Chicago principal is collection by the principal, though the principal never in fact receives it. If the agent has authority to
do the act, or the act (being a tort) is done as a part of the act which the agent has authority to do, the act of the agent
is the act of the principal because their identities are merged.
4. Dempsey v. Chambers, 154 Mass. 330.

Sec. 4. Kinds Of Agencies

At this point we will merely note the following distinctions, making more particular discussion hereafter.
(a) General and Special Agents.
Courts speak of agents as being either general or special; a general agent being one to whom a line of action is
committed, as to manage a store; a special agent, one who has authority to do a certain act as to collect a note. This
distinction has been criticized, but practically, it serves a useful purpose. See, later, the authority of the agent.
(b) Agents del credere and not del credere.
A del credere agent undertakes the exceptional responsibility of answering to the principal for the responsibility of all
accounts established through his agency. The subject is developed hereafter.
(c) Classification as to skill or profession.
There are various classes of agents whom we may properly term professional agents - as brokers, factors, auctioneers
and attorneys at law. See a further discussion hereafter.
Chapter 2. Capacity Of Parties And Power Of Delegation

Sec. 5. In General
The power of a person to act as principal or to act as agent involves the general subject of the legal competency of
classes of persons. The power of any person to be principal or agent as to certain classes of acts is another subject
entirely, but the two may fitly be discussed together at this point.

A. Power To Be Principal Or Agent As Dependent Upon Capacity To Contract

Sec. 6. General Rule As To Power To Be Principal

The general rule is that whatever one has capacity to do himself he has capacity to appoint another to do for him.
If one has legal capacity and legal right to do a thing himself (though he may lack the requisite skill or knowledge) he
may do that thing through another. If he may contract himself, he may employ an agent to make the contract for him.5
If he has no legal capacity to bind himself upon a contract, he cannot acquire that capacity by employing an agent.

Sec. 7. Minors As Principals

A minor's contract, except contracts to pay for necessaries actually supplied, is voidable whether made by him or
through an agent, but according to some authorities a minor's appointment of an agent is void, and everything done by
virtue thereof is void.
5. Greenwood v. Spring, 54 Barb. (N. Y.) 375.
With the exception of his liability to pay for necessaries supplied to him, a minor's contracts are voidable, not void, that
is, he may withdraw from them if he wishes, although the other party is bound unless the minor avoids the contract. It
would seem logical that the power of the minor to contract through an agent, and the appointment of the agent itself
would be subject to the same observations.6 And such is the rule in some jurisdictions. But in other jurisdictions the
decisions are that the appointment of an agent is utterly void, and therefore everything done by virtue thereof is void.7

Sec. 8. Corporations As Principals

A corporation can act only through agents and has the power to appoint agents and servants for the purpose of doing
anything within its express or implied charter powers.
Corporations being intangible creations of the law, can act only through agents. The power of a corporation to do an
act is determined by its charter. Hence any agency created for the performance of an act beyond the corporate power
would not be binding upon it, although if the act were actually done, so that the corporation had derived a benefit
therefrom, under some authorities the act would be binding, and under others not binding, except that the corporation
would be liable upon a quasi contractual basis for the reasonable value of the benefits.8
6. Coursole v. Weyerhouser, 69 Minn. 328; 72 N. W. 697.
7. Cole v. Pennoyer, 14.111. 158; McDonald v. Spring Valley, 285 111. 52.
8. See, generally, the law of corporations, in this series.

Sec. 9. Power To Act As Agent

Any person, though without power to contract in his own right may act as an agent for another.
A person must be capable of acting in his own right (sui juris) to be principal, for the simple reason that what he has no
power to do personally he cannot acquire power to do by doing it through another. But what one may not do for himself
because he lacks capacity he may do for another who has the capacity9 He may not, of course, bind himself upon a
contract of agency if he lacks capacity to contract, but he may, if he chooses, actually perform the function of an agent.
Thus, minors may act as agents and the contracts made by them in the name of the principals and pursuant to
authority are binding upon such principals. The reason is that the agent does not bind himself but acts as a mere
intermediary through which the minds of the contracting parties meet, whereupon the agent has performed his office.
Example 4. P sends his office boy to buy supplies on P's credit from T. The boy orders the supplies according to his
authority. This makes a contract between P and T as binding as though they had contracted personally.

B. Power To Be Principal Or Agent As Dependent Upon Nature Of Act Involved

Sec. 10. Appointment Of Agent For Illegal Purposes

An appointment of an agent for an illegal purpose is void.
If the agent is appointed for an illegal purpose, the appointment is void. Obviously any agency is illegal which is for the
purpose of a commission of a crime.10 In such a case whatever the pretense, all are principals. So an attempted
agency to procure the commission of a tort would make all liable as joint tort feasors.
9. Lyons v. Kent, 45 Ala. 656.
Any agency whose tendency is to induce the agent to break faith, or to corrupt the public service, is void, although no
actual harm results. It is the tendency which makes it void. Thus, for illustration, agents appointed for lobbying
purposes,11 marriage brokage contracts,12 are illegal and void.

Sec. 11. Acts Not Delegable Because General Public Policy Forbids
Some acts are by public policy made inherently personal and therefore cannot be delegated.
(a) Official duties for whose performance the person has been chosen for his personal qualifications.
Any duty for the performance of which a particular person has been chosen manifestly cannot be delegated. Thus the
discretionary and judicial duties of public officers, cannot be delegated,13 though merely ministerial acts may be
performed by others. Thus, directors of corporations, or trustees, cannot pass on to others the powers which they have
personally been chosen to exercise. Directors cannot attend meetings by proxy; though stockholders may.14
10. Pearce v. Foote, 113 111. 228.
11. Mills v. Mills, 40 N. Y. 543.
12. Hellen v. Anderson, 83 111. Ap. 506.
13. Birdsall v. Clark, 73 N. Y. 73.
14. See subject corporations in this series.
(b) Duties whose delegation would involve evasion of personal obligations imposed by law, encourage corruption, etc.
The power of the citizen to vote at public elections is an example of acts not delegable for the reason stated.

Sec. 12. Personal Duties Imposed By Contract Not Delegable

Duties of personal service for whom one has been selected by contract cannot be delegated.
As a person may choose with whom he will contract, and the relationship of contracting parties is in all respects a
highly personal one, obviously a party to a contract cannot delegate his personal obligations thereunder without the
consent of the other contracting party. This subject is discussed hereafter.

Chapter 3. The Appointment Of The Agent. A. Authorization By Act Of Party

Sec. 13. In General

Except as considered in Part B of this chapter (covering cases not of true agency) an agent's authority must be
traceable to something the principal has said or done whereby he has actually conferred, or whereby to third persons
he seems to have conferred, the authority in question, with the qualification that he may confer the authority by
ratification after the agent has acted as well as by prior authority.
An appointment of an agent is a matter of agreement between principal and agent.15 The principal need not confer
any more authority than he wishes. The extent of the authority which in any given case is conferred, whether actual,
implied, or apparent, is considered at length hereafter.

Sec. 14. Formalities Required In Appointment Of Agent

In the appointment no particular formalities are required except that the power to execute an instrument under seal
must be under seal; and except as may be locally required by statute for particular classes of agencies.
The general rule is that an agent may be appointed by any form of appointment; no particular formalities are required.
Appointment to execute a contract in writing may be oral or in writing.
15. Central Trust Co. v. Bridges, 57 Fed. 753.
Contracts under seal when executed by an agent require authority under seal, as it is said that the authority must be of
equal dignity with the deed.16 But if the law does not require the contract to be under seal or the seal is not required by
the principal the gratuitous addition of the seal by the agent can be ignored and the contract treated as a simple,
binding contract if the agent otherwise pursued his authority.17
In those jurisdictions in which the significance of the private seal has been abolished, the reasoning above has, of
course, no application.
By the original statute of frauds, considered at length in the volume on Contracts in this series, certain classes of
contracts can not be proved in court against the objection that there is no written memorandum signed by the party
sought to be charged, or by his agent thereunto lawfully authorized. But the statute does not say that the authority of
an agent must itself be in writing, even in those classes of cases covered by the statute. Hence it has always been
considered that under the statute of frauds, an agent of the defendant may make the requisite memorandum and sign
the name of his principal, although his authority is oral. This is still the law, except that in some states it has been
further provided that in case of a contract to sell real estate, the principal is not bound upon the contract the agent may
make, even if he pursue his actual authority, if that authority is not in writing.

Sec. 15. Elements Essential In Appointment Of Agent

To establish the relationship by contract, all the elements essential to formation of contract must exist, but agency may
also result from a gratuitous appointment.
16. Watson v. Sherman, 84 111. 263.
17. Worral v. Munn, 5 N. Y. 229, 55 Am. Dec. 330.
Agency may arise out of contract, and this is the usual case. In that case there must be all the elements which are
essential to the formation of any contract, namely, competent parties to contract, offer and acceptance, legality of
object, and either a consideration or a seal. We need not here dwell to any extent on a consideration of these
elements, as that belongs rather to a treatment of contracts in general.18
The relationship, however, need not be contractual. It may be purely gratuitous. In such a case, the third party with
whom the agent makes the contract is not concerned with the contractual rights between principal and agent. All that
concerns him is the authority with which the agent is clothed, and if that sufficiently appears, that is all that is
necessary. It cannot concern him what the principal pays the agent, or whether anything.

B. Authority Conferred By Law

Sec. 16. In General

In some cases, as considered below, one person may bind another without the consent of the other, and even against
his protest. But this is a liability imposed by law and is not true agency. See following sections.

Sec. 17. Authority Of Wife To Bind Husband

A wife is given by law the authority to bind her1 husband for necessaries, where she is not, in her own fault, living apart
from him, and the husband is not actually supplying her.
18. See contracts in this series.
A husband is bound to supply his wife with necessaries and if he does not provide her, she has authority to bind him in
the purchase of such necessaries. And this authority he cannot revoke, unless she is living apart from him on account
of her own fault. If she is actually supplied, then, of course, she cannot bind the husband. Accordingly a merchant who
supplies a wife goods on the credit of her husband, must take the risk that she is not already being supplied with her
needs, unless he relies on an implied authority of the wife to bind the husband, growing out of the special
circumstances. For there may be quite an extensive authority on the part of the wife to bind the husband, quite apart
from this authority conferred by law, growing out of each case, as where the husband as a practice permits the wife to
trade in his name, and that is her custom. That authority he may at any time revoke. But the authority to bind him for
her necessaries which he is not supplying cannot be revoked. If he absents himself from her, the authority to bind him
still continues.
What constitutes a necessary depends on circumstances. The station in life is to be considered. Yet a thing is not a
necessary except it have reference to actual needs, as food, clothes, fuel, lodging, medicine, etc.

Sec. 18. Authority Of Child To Bind Parent

The law confers no authority upon the child to bind the parent. But authority to bind the parent may be implied from the
circumstances.
The law does not confer authority on the child to bind the parent, though under the circumstances of any particular
case that authority might be readily inferred.19
19. Hunt v. Thompson, 3 Scam. (111.) 179; 36 Am. Dec. 538.
In fact from very slight circumstances the courts will find an authority for the child to bind the parent for his necessaries.

Sec. 19. Statutory Liability For Family Expenses

In some states a statutory liability is provided that either husband or wife may be held for family expenses.
In some states, the statute has provided substantially to the effect that any purchases of articles for household or
family use are binding upon either wife or husband.

Chapter 4. Authorization By Ratification. A. Definition And Essentials

Sec. 20. Meaning Of Ratification

If one acts as an agent and yet without authority, the party for whom he purported to act may hold the third person, and
is himself liable to such third person, by an election to stand by and affirm what the agent has done in his behalf.
One cannot be held by the act of another unless he has really or apparently authorized that other to represent him in
the matter in question. One who acts as an agent may have no authority, or, having some authority, may not have the
particular authority requisite to the case at hand. In such a case the principal is not bound unless he cares to ratify
what has been done in his behalf. If he does ratify, he becomes bound as though the agent had had previous authority,
and the third person becomes bound to him. The lack of authority has been supplied. This is no injustice upon the third
person as it merely brings matters t6 the state in which he supposed they were or wanted them to be when he
assented to the supposed agreement. But in almost every case in which ratification is claimed, it is claimed by the third
person against an alleged principal who pleads lack of authority.
Ratification rests upon the broad general principle that as a matter of practical justice, one who has assented to the act
of his supposed agent will not be allowed to afterwards disclaim it upon the technicality that at the time the agent acted
there was lack of authority which would have justified repudiation by the principal had he chosen to disclaim.
Ratification is thus seen to be nothing technical; the rules governing the subject are given below.

Sec. 21. Essentials To Ratification

To constitute ratification there must be the following facts: (1) The agent must have acted as agent; (2) The act must
be one that could have been authorized; (3) The ratifier must have been in existence when the contract was made; (4)
The ratifier must be fully informed as to the facts; (5) Ratification must be of the entire act; (6) Must be before the other
party's withdrawal, and (7) Must be in the form required of previous authorization.
The essentials enumerated above are briefly considered below:
(1) The agent must have acted as agent.
Example 5. A, acting as principal and having no authority from P to represent him, buys on his own credit, corn from T.
P afterwards arranges with A to take the corn, and T, learning of the arrangement and of the fact that P has actually
obtained the corn, sues P. In this case T has no contract with P and seeks to hold P on the theory of ratification. But T
extended the credit to A. There was no agency or appearance of agency and P's liability is to A, not to T.21
(In the above example if A had really been P's agent, although concealing the fact, P could be held on the theory that
although the agency was concealed, still P was in fact the real party in interest, and as he takes the benefits ought to
be held to the burdens. See subject Undisclosed Agency, post.)
21. Keighly v. Durand, L. R. 1900 A. C. 240.
(2) Act ratified must be one that could have been authorized.
What one cannot authorize in the first instance, he cannot ratify. Thus, illegal agencies cannot be ratified.
In the same way one cannot become liable upon a tort merely by assenting to it afterwards, even though it may have
been done in his behalf by one who called himself, but was not, agent.22 Nevertheless, if a lawful act is done by one
as agent, and incidentally thereto he commits a tort, the principal will be liable for the tort if he adopts the act, for the
act must be adopted as an entirety, with its shortcomings as well as with its advantages.
Example 6. A, without authority, sells and delivers coal to B, ostensibly as P's agent. In unloading the coal he breaks a
window. P ratifies the sale and delivery by accepting the price. He is liable for the tort.28
(3) Ratifier must be in existence when contract is made.
One cannot be an agent of another who doesn't exist. Therefore it is said that it is essential to ratification that the
principal be in existence. But in cases of corporations yet to be formed, it is said they may become liable upon the
contracts of promoters and incorporators by adoption.
(4) Ratifier must be fully informed.
That one may be held by ratification he must be fully informed of all the material facts.24
22. Dempsey v. Chambers, 154 Mass. 330.
23. Dempsey v. Chambers, 154 Mass. 330.
24. Combs v. Scott, 94 Mass. 493.
Information, however, may be special or general. One cannot remain in wilful ignorance of details in order not to be
bound the while he knows there are facts of which he chooses to remain in ignorance, receiving the benefits.
Example 7. A makes a lease in P's name. P enters upon and enjoys the premises. Being sued for the rent he claims
that A had no authority and that during the time it is sought to hold him he did not know the terms of the lease. He is
bound.25
(5) Ratification must be of entire act.
The principal cannot divide the act into parts, ratifying those that suit him and disclaiming the balance.26 This is very
apparent if we remember that ratification merely supplies prior lack of authority and therefore must operate as prior
authority would have done had it existed.
It follows that if he ratifies part he ratifies all. Thus, if the act involves a tort, we have seen that the ratification of the act
is a ratification of the tort.
(6) Ratification must be before withdrawal by the other party.
The principal not being bound because the agent lacked authority unless he chooses to ratify, it follows that the third
party may also disclaim if he does so before the authority is ratified.27 Otherwise we would have the anomaly of the
third person being bound, and the alleged principal not bound.
25. Ermantraut v. Robinson, 52 Minn. 333.
26. See Ratification by Receiving Benefits.
27. There is difference of opinion on this subject, but the weight of authority is as stated. See Mechem, Agency, 2nd
Ed. Sec. 522.
(7) Ratification must be in the form required of previous authorization.
If the authority lacks sufficient form, the lack is there whether the authority be conferred yesterday or tomorrow. Thus, if
the execution of a sealed instrument by an agent requires a sealed authority, a ratification must be under seal.28 The
statute of frauds in some states requires the authority to sell real estate to be in writing. Held, that whether the authority
is conferred antecedently or by ratification, it must be in writing.29
But it is also held, that where a mere formality is required (as in the two illustrations given) a principal might by conduct
in receiving benefits be estopped to insist upon the formality.30

B. What Constitutes Ratifications

Sec. 22. Express Ratification

Express ratification consists in supplying the lack of authority by writing or orally.
Ratification may be expressly made. The principal might ratify by express statement in order to supply the original
defect, or because he did not care to insist on the lack of authority.
Ratification, however, is in most cases a fact to be discerned from the circumstances. We will now inquire what
conduct constitutes ratification.

Sec. 23. Silence As Ratification

Silence may be ratification. The general rule is that a principal must disclaim within a reasonable time after fully
informed of all the facts.
That silence or reiusal to disclaim, may constitute ratification is conceded by all of the authorities. Some draw a
distinction between cases in which an agent merely exceeds his authority and those in which the supposed agent has
no authority, holding that in the former case, he must affirmatively disclaim, while in the latter silence in itself will not in
law constitute ratification, although it may be evidence thereof.31 But other cases disparage this distinction as being
without merit.32 Practically, the only safe rule for a principal to follow who would not be bound on something
volunteered in his behalf is to disclaim at the earliest opportunity.
28. Reese v. Medlock, 27 Tex. 120.
29. Hawkins v. McGroarty, 110 Mo. 546.
30. Reese v. Medlock, supra.

Sec. 24. Ratification By Receiving Benefits

One who with knowledge of the facts accepts the benefits of an act done in his behalf will be held to have ratified the
act as a whole. He cannot enjoy the benefits without assuming the burdens.
The most common instance of ratification is that afforded where the principal receives and enjoys the benefit of the act.
If the acceptance is accidental or under a mistake of fact the principal will not be bound, but he cannot knowingly
accept the benefits of the contract and not be bound upon the whole contract as made.
Example 8. A in P's behalf makes a lease of P's property to T. P receives the rent a considerable period of time, but
then deciding that the lease is not good enough, seeks to set it aside on the ground A had insufficient authority. Held,
that P had ratified the act by receipt of the rents.33
If the principal is in ignorance of the facts, as we have heretofore considered, there is no ratification.
The question arises whether a retention of the benefits after he has discovered facts which he did not know at the time
of the receipt of the benefits will constitute ratification. And it is held that such retention is ratification if the principal can
return them without injury, but if he cannot, such retention will not be a ratification. Example 9. P authorized A to obtain
from T a release of T's interest in certain land. The agent obtained the release, but agreed, without authority, that P
should assume a debt of T. P afterwards sold the land, not knowing of the assumption of the debt. Held, that there was
not ratification in the failure to disaffirm.34
31. Ward v. Williams, 26 111. 447.
32. Union Gold Mining Co. v. Rocky Mt. Nat. Bk., 2 Col. 248.
33. Hyatt v. Clark, 118 N. Y. 569.

Sec. 25. Ratification By Bringing Suit

Ratification of an agent's act may consist in suit brought by the principal upon the contract.
Suit may constitute ratification if the suit is based upon the contract made by the agent.
Example 10. P authorizes A to sell goods as a traveling salesman, and furnishes him a sample. A sells the sample to
T, and receives the money with which he absconds. P sues T for the price of the sample. Held, that while A had no
authority to sell the sample, P's suit upon the contract made by A was a ratification of A's authority to sell; if A had
authority to sell and deliver possession, he had authority to receive the price. Hence P cannot recover. What P should
have done was to repudiate A's authority to sell and demand the sample, or sue in tort for its value. In that case T's
payment to P would be no defense.35

Sec. 26. Ratification Cures Original Defect

Ratification relates back and takes the place of original authority. Having established the fact of ratification the same
results follow that exist where prior authority is conferred.
34. Martin v. Hickman, 64 Ark. 217.
35. Bailey v. Pardridge et al., 134 111. 188; 27 N. E. 89.
Ratification relates back and supplies what was lacking. All the results then follow that would have followed had there
been original authority; the principal becomes bound upon the contract; the agent is not bound; the agent has the right
against his principal and the principal against the agent that would have otherwise existed.
We have already noticed how a ratification of a part of an act is a ratification of the entire act.

Sec. 27. Ratification Irrevocable

Ratification once made cannot be withdrawn.
One cannot with knowledge of the facts ratify and then change his mind. Upon his ratification a contract arises and
exists between the parties, and he cannot afterwards undo that contract. He is bound upon it. One can no more revoke
a contract effective through ratification than he can revoke any other contract after it is made.

Part II. The Duties And Liabilities Arising Out Of. Agency. Chapter 5. The Duties And
Liabilities Of The Principal To The Agent

Sec. 28. Agent's Right To Compensation

The agent's right to compensation depends on his contract, and may be either conditional upon results or absolute. His
right may be implied from the facts.
An agent may demand his compensation when he has earned it according to his contract. He may work contingently,
as for a commission, or his right may be absolute.
In the law of contract we learn that a contract will be implied from circumstances in which (there being nothing express
to the contrary) the only reasonable explanation is a contractual basis, as where a stranger works for another; but if
another explanation is more reasonable, as where a son works for his father, there is no contract, unless an agreement
be shown.36
36. Hodge v. Hodge, 91 Pac. (Wash.) 764, 11 L. R. A. (N. S.) 873.

Sec. 29. When Compensation Considered Earned

An agent earns his compensation when he accomplishes what he undertook.
When the agent has earned his compensation depends on his contract and his performance thereof. This question
arises frequently in real estate cases, which may be classified as follows:
(a) Cases in which the real estate broker was authorized to find a purchaser upon certain terms, and finds one upon
those terms who is ready, willing and able to buy. There he has accomplished all he set out to do, and the seller cannot
deny his right by refusing to consummate the sale, or by dismissing the broker and consummating it himself, or through
another broker.37
(b) Cases in which the broker is requested merely to find a purchaser, terms not being stated. Frequently an owner will
merely list his property for sale, expecting to negotiate later. In such a case the broker is entitled to no fee until a
contract is made, or a sale is made.38
If a sale is made in such a case, or even a contract which the buyer or seller will not carry out, the broker is entitled to
his commission.

Sec. 30. Agent's Right To Damages Where Principal Wrongfully Revokes

If the principal wrongfully revokes the agency, the agent may, as in the case of any breach of contract, have his action
to recover the damages he may have sustained.
If a contract is broken there arises at once an action for damages. If an agent is wrongfully discharged, he may not as
yet have earned his compensation, yet he may have what his damages are found to be. There is of course, a right to
discharge, if the agent has himself been guilty of a breach of the contract, and in that case the agent could not claim
damages or compensation. It must also be borne in mind that there are many agencies which are for no stated period,
but merely at will, and in such a case a revocation of the agent's authority might be made at any time, and no right of
damages would arise; yet, as we noted in the section above, if the agent had done, or substantially done, what he set
out to do before the revocation he would have earned his compensation. So there may be a revocable agency, in
which one is to receive a reasonable or an expressly stated, compensation for services actually performed.
37. Fox v. Ryan, 240 111. 391.
38. Fox v. Ryan, supra.
Assuming, however, that the authority is wrongfully revoked, and that the compensation agreed upon has not been
earned before the revocation, the agent is left to his action for damages. This is quite a different matter from his right
when he has earned his compensation. For instance, if I employ a man for a year, he may sue me for the year's salary
if he works for the year, but if I discharge him on the first day of the year, then he has earned no salary, yet he may
have his damages, and this might be small or large, or none at all, according to the actual circumstances.
It is said that an agent wrongfully discharged has three remedies he may choose among:
(1) He may sue for the value of the services already rendered;
(2) He may sue at any time after breach and have his damages which he has sustained up to that time;
(3) He may wait until the term has elapsed and sue for all the damages actually sustained by him.
Then suppose P has employed A for one year. A has worked one month when he is wrongfully discharged by P. He
may thereupon sue for the reasonable value of one month's services; or any time after the month and before the year
has elapsed he may sue for his damages sustained by him up to the time of trial; or he may wait until the year has
entirely elapsed and have all the damages which the breach caused him. He could not sue for his earnings (salary or
wages) alleged to accrue after he was discharged. Thus at the end of the second month, he could not sue for the
second month's salary, although it would under the contract then have fallen due, for he has not been in P's service.
But he can only sue for his damages, which might be much less than his salary or wages because he might have
employment elsewhere. And having once sued for his damages he could not sue again. Thus if he sues at the end of
the second month, he could not sue at the end of the third for damages accruing during the third. For there is but one
breach of the contract and he can have only one suit for that breach.39
In a suit for damages, such damages are allowed as have accrued up to the time of the trial. It is the agent's duty upon
discharge to use reasonable efforts to secure other employment along the same lines, and if he refuses to accept
employment offered him or which he might well have secured, his damages are reduced by what he thus might have
earned during the period.
What has been said has no reference to an agent's right to sue for his salary as it falls due when he is not discharged.
Thus he might bring suit at the end of every month for his month's salary when he continued in the service.
39. Doherty v. Shipper & Block, 250 111. 128.

Sec. 31. Agent's Right To Compensation Where He Himself Is Guilty Of Breach Of Contract
If a contract of agency is separable into independent parts, the agent may recover for the performance of any part, but
his breach of any part of an entire and indivisible contract bars him from any recovery whatever, except that in some
states, he is allowed to recover a reasonable compensation for beneficial services actually rendered as on a quasi
contract.
If a contract is really many contracts in one, a breach of one of these is no breach of the others. It has been held that if
one is employed by the month, with salary payable at the end of the month, for an indefinite period, he may recover
any month's salary notwithstanding his subsequent breach,40 but in that case the principal could set off his damages, if
any, caused by the subsequent breach. On the other hand, if an agent is employed for a year, with salary payable
monthly, this is usually held an entire contract and if the agent breaks the contract before the expiration of the year he
will be held to have broken all parts of the contract and have no right to recover.
Some decisions41 have allowed an agent in the case of such a breach to recover as on an implied contract for the
actual worth of the services rendered to the principal or master. This seems the more just rule, though in strict theory
the rule that one who breaks a contract shall have no right thereon is more logical, and that is the rule in many
states.42
40. Robertson v. Jenner, 15 L. T. (N. S.) 514.
41. Britton v. Turner, 6 N. H. 481 Mechem, Agency, 2nd Ed. SEC. 1578.
42. Stark v. Parker, 2 Pick. (Mass.) 267.

Sec. 32. Agent's Right Of Compensation When He Abandons Service Without His Own Fault
Where the agent through sickness or other cause, not from his own fault, quits the service, he may have reasonable
compensation.
If an agent or servant has under a contract of employment performed a part of the services, and then is compelled to
abandon the employment through sickness, or through any other cause that operates to prevent him from continuing,
he may sue to have his reasonable compensation for the services actually performed.43
43. Fenton v. Clark, 11 Vt. 557.

Chapter 6. The Duties And Liabilities Of The Agent To The Principal. A. The Agent's
Obligation Of Good Faith

Sec. 33. Duty Of The Agent To Use Good Faith

General rule. The agent must display and exercise the utmost good faith toward his principal.
One employs another as agent out of personal regards. The relationship is a highly personal one. The principal and
agent are, it is true, at arm's length in dealing with each other concerning the terms of the agency, but once the
relationship has been entered into, the agent then becomes the representative of the principal, the man who stands in
his stead, who, so to speak, takes upon himself the identity of the principal, who is the principal in respect to that act. It
follows therefore that the agent must establish the principal's interests as his own, and that he must not place himself in
any position which will tempt him from acting in the very way that the principal would have acted were the principal
actually present as he is by a fiction presumed to be present. It is therefore one of the most fundamental and frequently
reiterated rules in the law of agency that a principal is entitled to the highest good faith and utmost zeal of his agent,
and that the agent will not only be prevented from taking secret advantages, but will not be allowed to even place
himself in the way of temptation, though in the particular case no harm thereby resulted to the principal. In the following
sections we will note some applications of this rule.

Sec. 34. Agent Cannot Secretly Represent Both Parties

An agent cannot without consent of both parties be the agent of both of them and receive double compensation. In
such a case he loses his right to all compensation, and if either party is privy to his double dealing, the other party may
avoid the agreement.
An agent of one person cannot be the agent of the other with whom he is sent to deal. To permit this would lead him
into temptation to betray one of his principals.44 If both parties know of the double agency and consent thereto, there
then can be no objection, but otherwise the agent loses all right of compensation by either party, and if either party
knows of the double agency and knows that the other party does not know of it, the contract is voidable at the instance
of the innocent party.45
This rule is based on the fact that a principal is entitled to the utmost fidelity of his agent, and therefore is entitled to
have the agent keep himself from the temptation to betray his interests. It is entirely immaterial whether or not the
agent did betray his trust, or did anything unfair. Indeed he may have acted in all good faith and without any
disadvantage to his
44. Gann v. Zettler, 60 S. E. Reporter (Georgia) 283, in which the court said: "It is recorded of him 'who spake as never
man spake,' that, 'seeing the multitudes he went up into a mountain, and when he was set, his disciples came unto
him; and he opened his mouth and taught them, saying: * * * 'No man can serve two masters, for either he will hate one
and love the other, or else he will hold to the one and despise the other.' So, also, is our law."
45. Rice v. Wood, 113 Mass. 133.
principal. This is of no moment.46 The only safe rule to apply is the rule that the agent cannot place himself in the way
of temptation. If he does so, further inquiry need not be made; the rule will simply be applied that what he has done
shall redound to the benefit of his master, and he loses his right to compensation, or, if that has been paid, it can be
recovered.

Sec. 35. Agent Cannot Buy From Or Sell To Self

An agent employed to buy or sell cannot secretly buy from or sell to himself.
If one sells his own property it is human nature that he should desire to sell at the highest price he can get, and if he
buys property, he would buy it as cheaply as possible. If I employ an agent to sell property belonging to me, I employ
him to use his efforts in my behalf to get the highest price he can, and if I employ him to buy for me, I do so under the
implied understanding that he will purchase on the most favorable terms to me that he can get. Clearly, then, if he buys
from or sells to himself he is opposing his interests to mine. If I know he is doing this, then I am on my guard and can
protect myself, but otherwise he betrays or is tempted to betray my trust in him. Therefore, buying from or selling to
himself is forbidden, and the principal may upon discovering the facts have the transaction rescinded. And what may
not be done directly may not be done indirectly, that is, the agent acquires no further rights by acting through another
and in that other's name.
Example 11. A appointed B to sell his real estate. B reported he had sold to F. Afterwards B by assignment succeeded
to F's title, and A discovered that F was acting secretly at the time of the sale as a colorable purchaser merely and that
B was the real purchaser. A sued to set aside the sale, and the court set it aside as having been made by the agent in
breach of his trust.47
46. People v. Township Board, 11 Mich. 222.

Sec. 36. An Agent Cannot Take Secret Profits And Benefits

An agent cannot use his agency to obtain secret profits and benefits.
Upon the same principles, an agent will not be permitted to use his agency for the purpose of making secret profits and
taking secret benefits, and such profits and benefits will accrue to the principal. Thus if he uses the principal's money
for purposes of speculation, and thereby makes a profit, the principal will be entitled thereto, or if he purchases or
acquires for himself property which the principal has an interest in acquiring, it will be considered that he acquired it for
the benefit of the principal, if the principal desires to take it.
Example 12. An agent of a lessee of a theatre, acting upon the knowledge and in the advantage secured by his
agency, secured to himself a renewal of his principal's lease, and it was held that it would be considered that the agent
acquired it for the benefit of his principal.48
So profits made in the scope of agency will be considered as made for the benefit of the principal. If an agent is
employed to sell for one price and succeeds in selling for a higher one, the excess belongs to the principal.

B. Duty To Obey Instructions, Use Care And Skill, Etc

Sec. 37. Duty Of Agent To Obey Instructions

An agent must obey instructions and is personally responsible for losses resulting from disobedience and may be
discharged for disobedience.
47. Blank v. Aronson, 187 Fed. 241.
48. Davis v. Hamlin, 108 111. 39.
While it is of course true that a principal by giving instructions to his agent cannot thereby enlarge the agent's duties
beyond those he has expressly or impliedly promised to give, the agent must not disobey reasonable and material
instructions given by the principal as to modus operandi.
Example 13. An agent is instructed to ship by one route. He ships by another. Loss ensues by "Act of God." The agent
must answer.49
It is true that in emergencies where the agent cannot communicate with the principal for advice, he may not only
disobey instructions, but is under a duty to do so, where the emergency requires, as where a principal believing a
certain bank to be sound has directed deposits to be made therein, and the agent before making a deposit discovers it
to be on the eve of failure. Here he must know that the principal is acting under a misapprehension.50

Sec. 38. Duty Of Agent To Use Care And Skill

If an agent is negligent in the pursuit of his duties, he will be responsible for loss if loss occur. What constitutes
negligence depends on the circumstances.
An agent must act with reasonable diligence and skill. If he is negligent in doing the work intrusted to him he is
responsible for the losses thereby occasioned. Thus, if an attorney at law undertakes to collect a claim, and does not
act with reasonable promptness and loss thereby results, he may be held responsible for the consequences.
49. Johnson v. N. Y. Cent. Transp. Co., 33 N. Y. 610.
50. Mechem, Agency, 2nd Ed. SEC. 1262.
What constitutes reasonable diligence depends upon the circumstances. One who does not profess to be an expert or
skilled at all in the line in which he is employed cannot be held to the high standard of skill and care that is to be
expected from one who makes skill in such work a profession. If I employ one whom I know to be a common laborer, to
do, say, plumbing work, in my residence, I cannot hold him responsible where I might hold a professional plumber.
50, agents employed to sell on credit must use reasonable care to select solvent buyers; and wherever discretion is
required the agent must act with prudence and caution.
If an agent acts gratuitously, he may or may not be required to use the skill which would be required in a paid servant,
according to circumstances. If one professes to have skill in some work, and bestows that work without any reward, the
lack of reward is of no moment. Thus a physician giving his services free in a matter in which he professed to have
particular skill, must not be any more negligent than if he expects to receive a reward. But if one does an act merely as
a favor, professing no peculiar skill therein, he will be held only to the exercise of good faith.
The following example is from a case in which the duty of care and prudence was applied.
Example 14. P employs A to invest money for him. P is an attorney at law. He puts it in an unsafe second mortgage
whereby A sustains loss. A is responsible.51

Sec. 39. Agent's Duty Of Personal Performance

An agent cannot delegate to others the duties imposed upon him, except those of a purely ministerial character where
by reasonable implication such ministerial acts are not expected of him personally.
51. Whitney v. Martin, 88 N. Y. 535.
"Delegata potestas non potest delegari" (A power delegated cannot again be delegated.) That which the agent is
appointed to do he cannot appoint another to do for him unless he has been given that right in the appointment. The
agent has been selected for personal reasons and must perform the work himself. This does not prevent an agent from
employing clerks or sub-agents to help him where that is the reasonable inference from his appointment, the agent
remaining liable for their defaults. Ordinarily any ministerial or merely clerical duty can be performed by the agent's
clerks or subagents,52 but their defaults are the defaults of the agent. Purely ministerial acts, even, cannot be
delegated if the purpose of appointing the agent (or servant) is to perform them, as where one is employed to do
manual labor.

Sec. 40. Whether Agent Is Selected To Perform Or To Obtain Agent To Perform

If agent is selected to accomplish a certain object, he cannot delegate his responsibility, but if he is merely selected to
obtain another agent to accomplish such object, his duty is performed when he has used reasonable care to select
such an agent, and he is not answerable for that agent's defaults.
As seen in the last section, an agent's discretionary duties are not delegable, and when within the contemplation of the
authority he has clerks or subagents to help him, he is responsible for their acts, as such acts are his acts. But the
object for which he is employed may be to obtain an agent for the principal, and in that
52. Eldredge v. Holway, 18 111. 445.
56 Law ok Agency.
case obviously his use is fulfilled when he has obtained such an agent, and that agent is then the agent of the
principal. But the fact that it is known that he will employ others to help him does not make the act any less his.
Example 15. P employs A, a collection agency, to collect accounts, in the collection of which he knows that A will
employ lawyers located at the point of residence of the debtor. A is liable for a default by an attorney employed by
him.53

Sec. 41. Same Subject Applied To Collections By Banks

If a bank receives commercial paper for collection, in which it is known it will employ correspondents some authorities
hold that the correspondent bank is the agent of the holder of the paper, and some that it is a subagent of the first bank
for whose defaults such first bank is liable.
P employs A, a bank in Chicago, to collect a note payable in New York City. P knows and expects that A will send- the
note to a New York correspondent. If this New York correspondent is negligent in presenting the note for payment,
whereby loss ensues, is the Chicago bank liable, or must the principal have his recourse against the New York bank,
and if that fails, be without remedy? It is simply a question whether the New York bank is to be regarded as an agent of
the Chicago bank or an agent of P secured for P by the Chicago bank. The courts are at variance on this question. In
Colorado, Georgia, Kansas, Michigan, Minnesota, Montana, New Jersey, New York, Ohio, and some other states, and
in the United States Supreme Court, the rule prevails that the correspondent bank is the agent of the bank employing it
and that the latter is responsible to the client for the negligence of the former. In Alabama, California, Connecticut,
Florida, Illinois, Indiana, Iowa, Louisiana, Maryland, Massachusetts, Mississippi, Missouri, Nebraska, Pennsylvania,
and Tennessee, the rule is otherwise. In such a case the owner of the paper must look to the correspondent bank,
provided the employing bank used 'due care in selecting the agent. If that agent becomes insolvent, the client is
without remedy for its negligence in presenting the paper. This is the rule most broadly adopted.54
53. Weyerhauser v. Dunn, 100 N. Y. 150.
There may be a special agreement in any event that the bank shall not be liable for the negligence of the subagent.
C. Liability Of Agent To Principal For Defaults Of The Third Person

Sec. 42. General Rule

The general rule is that an agent has no responsibility for defaults of the third person upon the contract executed by the
agent.
An agent is merely an intermediary. He forms the contract for the principal, but is not himself a party thereto. His office
is to represent the principal in the contractual relationships, and that done, his office is fulfilled. He does not undertake
with his principal that the person with whom he contracts for his principal will perform the contract. If he is appointed to
sell goods for John Smith to William Jones on credit, he is not answerable if William Jones does not pay the debt. This
principle is, of course, ordinarily understood and acted upon in the commercial world, and hardly needs comment. Its
statement, however, serves as an introduction to the situation discussed in the following section in which the agent
affirmatively assumes such a liability.
54. First National Bank v. Sprague, 14 L. R. A. 498 (Nebr.), discussing the rule pro and con and reviewing the
authorities.

Sec. 43. Del Credere Agencies

A del credere agent is one who undertakes (usually for a special consideration) to pay the principal the accounts
arising out of the agency if the customer fails to do so. It is deemed a direct obligation, and the agent is immediately
liable upon the expiration of the period of credit, and is not an obligation covered by the statute of frauds.
A del credere agent undertakes that he will be responsible to the principal for the price of goods sold by him. This is an
unusual undertaking and not one that is incidental to the relationship and therefore must be positively entered into,
though inferrable if facts warrant.55
The agent is liable upon this undertaking at the end of the period of credit. It is not necessary that the principal first
resort to the debtor.56 It has also been decided that the obligation of the agent is a direct, primary obligation, and not
"a promise to answer for the debts of another" within the meaning of the statute of frauds, therefore is enforceable
although there is only oral evidence to prove it.57
55. Shaw v. Woodcock, 7 B. & C. 73.
56. Balderson v. National Rubber Co., 18 R. I. 388.
57. Wolff v. Koppel, 2 Denio (N. Y.) 688.

Chapter 7. The Duties And Liabilities In Contract Of A Disclosed Principal To Third Persons
(The Authority Of The Agent)

Sec. 44. General Rule

A principal in whose name a contract is made pursuant to authority, is liable to the third person.
We may find three situations in which a principal who is disclosed at the time of the contract and in whose name the
contract is made is liable thereon.
1. Where the principal actually authorized the agent to make the contract.
2. Where there is no actual authority, yet from the situation in which the principal places the agent, the third person
may presume there is authority. The agent is then said to have apparent authority.
3. Where there is neither actual nor apparent authority, yet the act is done in the name of the principal and the principal
afterwards ratifies the act. This situation we have already considered.

Sec. 45. Unauthorized Assertions By Agent Of His Authority

A principal is not bound by the unauthori2ed assertions of authority made by the agent.
It is very clear that no one can hold another as principal merely because a certain person has represented himself to
be an agent. If that were the case no man could know what obligations another might fasten upon him. Just as no
man's property can be taken from him by forgery or theft, so no contract may be fastened upon him by another's
unauthorized representation of him. All authority to act as agent must be traceable back to some word spoken or some
act done by the principal, upon which the third person is entitled to rely as a representation not only that the agent is an
agent, but also that as such agent he has authority to bind the principal upon this very contract. The agent may in such
a case exceed his real authority; he may disobey secret instructions, he may do things that the principal never
contemplated that he should do, and the principal may be held; yet in such a case there must still be something said or
done by the principal upon which a third person may reasonably base a belief that the agent had the power in question
"It is to be remembered that " persons dealing with an assumed agent are bound at their peril to ascertain not only the
fact of the agency, but the extent of the agent's authority."58

Sec. 46. Express, Implied And Apparent Authority

Express authority is that set forth literally. Implied authority is authority actually conferred by implication. Apparent
authority is the authority which the agent seems to have from other circumstances whether he actually has it or not and
includes implied authority.
Authority of an agent to bind his principal, may be thus arranged:
1. Actual authority.
(a) Express.
(b) Implied.
2. Apparent authority.
58. Merchant's National Bank of Peoria v. Nichols, 223 111. 41.
The law of the agent's apparent authority is frequently treated as synonymous with his implied authority; but there is a
distinction. It is true an agent has apparent authority to do a certain thing because he has implied authority to do it, but
in that sense apparent authority would also cover express authority. But the term apparent authority would seem to be
more correctly employed to denote an appearance of authority as to third persons independent of the question whether
there is authority as between the parties themselves.
It is a usual rule of construction applied to all grants of power that the grant carries with it by implication all that is
necessary, convenient and reasonable to carry out the purpose of the grant. In general agencies, this is necessarily
quite large. In special agencies, it is narrow. As appointment of an agent to operate a general store, carries with it by
implication all that is necessary and usual to that end, although not enumerated. But apparent authority may exist
where there is neither express nor implied authority. One behind a counter apparently as a clerk might be there in fact
as a detective with instructions to make no sales. Yet he would have apparent authority to make sales, and do
whatever one in that position usually has power to do.
Secret instructions derogatory to the seeming authority are not binding on third persons. Thus I might give an agent a
power of attorney to borrow money for me and instruct him not to use it until he heard further from me, but if he did use
it I would be bound.

Sec. 47. Implied And Apparent Authority In General And Special Agencies
In a general agency there is necessarily much more implied and therefore apparent agency than in a special agency.
The courts have very frequently referred to agencies as being general or special for the purpose of determining the
question of implied or apparent authority. The distinction has been criticized upon the ground that the real question is
merely what implications can properly be made from the facts in each case, but as a matter of fact in a rough way the
distinction carries a real meaning. A person employed to manage a mill would be called a general agent. Necessarily
there is in his appointment much left to be implied, while an agent appointed to collect a note has practically no
authority save that which has been expressly conferred upon him. But suppose he is employed to collect notes
generally. Is he a special agent or a general one? His authority would be confined to the collection of notes. He could
no more extend time of payment on one than if he had been appointed to collect only that one. After all the question is
- what reasonably may we infer from the appointment conferred upon him, and the use of the distinction into general
and special agencies must not confuse us on this point.

Duties Of A Disclosed Principal To Third Persons. Part 2

Sec. 48. Construction Of Special Appointments

Special powers of attorney or appointments will not be extended by implication to include any act not necessary or
reasonable to carry into effect the purpose of the grant.
On the general principle that a person need not give another any power to represent him, and if he does give him
power, need not give him more than he desires, an appointment of an agent is not to be extended beyond reasonable
implication. Of course it is true that an ambiguously worded authority will be most strongly construed against the
maker, but nothing will be read into the power that is not fairly there59
59. Reese v. Medlock, 27 Tex. 120.
A few examples illustrate this rule.
Example 16. P gave A a power of attorney to collect his debts, calling A his "general agent" to transact his business. A
assigned the debts to B who brought suit against one of P's debtors. The debtor questioned B's right to bring the suit.
Held, that A's authority was confined to the collection of debts and that he had no authority to assign a claim to B even
though he was called a general agent. His authority will depend entirely upon that which was actually given him.60
Example 17. P gave A a power of attorney to make, indorse, draw and accept commercial paper in A's behalf. T served
on A a notice of dishonor of commercial paper. Held that A had no implied authority to receive such notice to bind P.61

Sec. 49. Implied (Or Apparent) Power Of Agent To Borrow Money

An agent has no implied or apparent power to borrow money unless it is practically indispensable to enable him to
carry out the express power.
It will readily be seen that the power of an agent to borrow money is one by which he can readily work hurt to his
principal; and while the principal may confer it, and very frequently does, it is not a power that will be readily inferred.
To be implied "it must be practically indispensable to the execution of the duties really delegated in order to justify its
inference."62 It is noteworthy that in a search of the cases the courts have very rarely held the power to be implied. It is
practically necessary to the protection of a lender that he have the principal's word for it that the agent has power to
borrow money.
60. Wood v. McCain, 7 Ala. 800.
61. Wilcox v. Routh, 9 Smedes & Marsh (Miss.) 476.
62. Consol. Nat. Bk. v. P. C. S. S. Co., 95 Cal. 1.
Example 18. N appointed H a general manager giving him charge of one of its eleven agencies, with power to sell, to
employ assistants, to collect accounts, to pay bills and to rent a building. He borrowed money from the bank in which
he kept his agency account. Not repay-ingfthe loan, the principal was sued. Held, that from the facts shown no power
to borrow money in his principal's behalf would be inferred. The fact that defendant carried on the sale of its products
through the medium of agencies distributed over the country would be no ground for a conclusion that the various
agents for making sales of machinery and collecting the proceeds were clothed with authority to borrow money.63
The fact that an agent has actual power to go into debt for the purchase of supplies, renting premises, etc., gives him
no implied or apparent power to borrow money for those purposes. For such borrowed money may be diverted from its
rightful purpose. Surely I can give an agent an authority to buy goods from A without giving him power to borrow
money with which to pay for such goods.

Sec. 50. Implied (Or Apparent) Power Of Agents To Bind Principal Upon Commercial Paper
The implied power to make or indorse negotiable instruments is strictly confined to those cases in which it is necessary
in order to enable the agent to carry out the main power conferred upon him.
The power to bind a principal upon commercial paper is, like the power to borrow money, a dangerous power. It will not
lightly be inferred. It will however, be upheld where reasonably necessary to the execution of the powers conceded.
63. Merchant's Nat. Bk. v. Nichols, 223 111. 41.
The power to collect a debt, even if it be collectable in cash, gives the agent no authority to endorse a check given in
payment of it and a bank will be held liable for cashing the check for the agent; for the bank has no right to increase the
principal's risk of loss by converting such paper into cash.64
The power to collect gives the agent no authority to take paper payable to himself, even though he could have
collected in cash.65

Sec. 51. Implied (Or Apparent) Power Of Agent To Sell Personal Property
An agent has no apparent power to sell personal property from the mere fact of the principal's giving him possession.
An agent, or for that matter, any bailee, to whom personal property has been entrusted has thereby no apparent
authority to sell the same, even though he be a dealer in that line of goods.66
So, it has been held that a travelling salesman entrusted with a sample case has no apparent right to sell it.67 And see
the subject developed in Sales in this series to the effect that clothing another with mere possession of goods without
more, does not establish the true owner to assert his title against a purchaser.

Sec. 52. Implied (Or Apparent) Power Of Agent Who Has Indicia Of Title To Sell Goods
One who clothes another with the indicia of title is estopped to set up his ownership against an innocent purchaser for
value of the property represented by such indicia.
64. Jackson Paper Bag Co. v. Com. Nat. Bk., 199 111. 151.
65. Baldwin v. Tucker, 112 Ky. 282, 57 L. R. A. 451., 65 S. W. 841 (Contra: Galbraith v. Weber, 107 Pac. 1050
(Wash.), a case which seems unsound).
66. Levi v. Booth, 58 Md. 305, 42 Am. Rep. 332.
67. Kohn v. Washer, 64 Tex. 131, 53 Am. Rep. 745.
Upon the principle of estoppel one who not only confers upon another the possession of goods, but clothes him with
indicia of title, that is, warehouse receipts, bills of lading or other documentary insignia in the agent's name with the
principal's consent, confers an apparent ownership which prevents the true owner from asserting his title against one
who has dealt with the agent as owner provided he relied on the appearance of title, was innocent of the truth, and
gave value.68
68. Calais Steamboat Co. v. Scudder, 2 Bl. (U. S.) 372, Pickering v. Busk, 15 East. 38.
The above situation can hardly be called one of agency in any phase. It is a doctrine of estoppel to assert ownership.

Duties Of A Disclosed Principal To Third Persons. Part 3

Sec. 53. Implied (Or Apparent) Power Of Agent To Sell To Receive Payment
An agent who has power to sell does not have implied or apparent power to receive the price unless (1) he has and
delivers possession of the property sold, or (2) is otherwise placed in a position from which a person would reasonably
presume he had such power.
It has been said that there is no apparent power in an agent to receive the price of an article sold by him unless he
delivers the thing as he sells it, or is "behind the counter," that is, occupies a position with the principal's assent from
which it is reasonable to presume that he is placed there to receive the price. If he is "behind the counter" he has
apparent authority to receive payment wherever it reasonably appears he is there for that purpose whether he or some
other agent took part in the original transaction.
Example 19. L is an importer of earthenware. A is his salesman. A sells goods to S a hotel keeper. Afterwards A goes
to S's place of business and collects, and does not account for the money. L sues S, and held that he can recover.69
Example 20. G, a dealer in safes, employed B to travel and take orders for safes. B took an order from K which was
transmitted to G. Afterwards B collected from K and did not account to G. G sued K. Held, he could recover.70

Sec. 54. Implied (Or Apparent) Authority Of Selling Agent To Extend Credit On Sales
An agent to sell has no implied or apparent authority to sell on credit unless it is a custom of the trade or under the
facts it is reasonable to presume he has such power.
An agent does not have implied or apparent authority to sell on credit unless the facts are as above stated.71

Sec. 55. Implied (Or Apparent) Power Of Buying Agent To Buy On Credit
An agent with power to buy has impliedly power to buy on credit unless he is furnished cash, and has apparent power
even when furnished with cash if there is a custom of the trade to buy on credit, or if the circumstances justify a belief
in such power.
The power to sell on credit is not fraught with much danger to third persons, as the third person has not paid the price
and at most can be made only to account for the goods or the price; but the power of an agent to buy on credit is more
dangerous. In such case the third person may have parted with his goods to an agent who had cash to pay for them
who absconds with both goods and cash, leaving the third person with no claim against the principal unless he can
maintain a position that the agent had power to buy on credit. If an agent is furnished with the cash he has no implied
power to buy on credit, at least generally speaking.72 But does he have apparent power? It has been held that if he is
a general agent he has such power.73 The true rule would seem to be that if the extent of his agency and all the
circumstances fairly indicate that he has such authority the third person may rely upon such appearance of authority.
69. Law v. Stokes, 3 Vroom (N. Y.) 249-.
70. Greenwood v. Keaton, 9 111. Ap. 183.
71. Norton v. Nevills, 174 Mass. 243, 54 N. E. 537.

Sec. 56. Implied (Or Apparent) Power To Warrant

An agent having authority to sell has implied or apparent power to make only those warranties usually made in the
usage of the trade.
Whether an agent having authority to sell personal property has the power to warrant the same when that power has
not been expressly conferred, has caused a difference of opinion among the authorities. It is perhaps more generally
held that there is an implied and therefore an apparent authority of the agent to bind the principal upon warranties of
articles sold by the agent under the authority of the principal where such warranties are customary in the trade.74
In this connection it must be remembered that a seller of an article impliedly warrants as to its merchantability, fitness
for purpose purchased, etc., under the general law of sales according to the rules which we develop in connection with
that subject, regardless of the fact whether the sale is by the principal or his agent. A study of the cases will reveal that
the courts have not always kept this fact in mind. The authority of the agent cannot be in question and ought not to be
considered where were the same sale made by the principal there would be an implied warranty of quality. The
question now under consideration is the power of the agent to expressly warrant in cases in which the same warranty
would not be implied. If it would be implied the fact that the agent puts it in words ought to be immaterial and add
nothing to the case one way or another.
72. Komorowski v. Krumdick, 56 Wise. 23.
73. Pac. Biscuit Co. v. Dugger, 40 Oreg. 362, 67 Pac. 32. (General agent was instructed not to use credit.)
74. Johns v. Jaycox, 67 Wash. 403.

Sec. 57. Admissions Of Agent

The admissions of the agent are binding on the principal when made in reference to and as a part of the act which he
is authorized to do.
If the agent makes admissions in reference to the act which he is authorized to do, as a part of the transaction, the
principal is bound by such admissions and they may be used against him. It is essential that the admission be made as
a part of the act which he is authorized to do, and from this it follows that admissions made after the act is over, so that
they do not form a part of the act are not binding upon the principal. So they are not binding if made before the act is
begun; they are not a part of it and therefore are not admissible. It does not follow from this that there may not be some
little separation between the doing of the act and the making of the admission, so long as it is made as really a part of
it. Each case must be decided on its own peculiar grounds and the court must consider whether the admissions are a
part of the thing done - the res gestae - or are an afterthought, or independent of the act. The reason of the rule is that
a principal ought not to be bound by assertions made at any time and possibly out of wrong motives, and when the
truth may be consciously or unconsciously departed from, as a result of deliberation; but if they are spontaneously
uttered by the agent at or about the time the act is done and as a part of it, they possess the likelihood of truth.75 The
agent may, of course, testify at the trial for or against the principal. We are considering above the right of other
witnesses to testify to the prior admissions of the agent as binding upon his principal.

Sec. 58. Authority Of Agent To Receive Notice

Notice given to an agent while acting as such is notice to the principal and the knowledge of the agent which he
possesses at the time of the transaction will be imputed to the principal, (1) unless it is his duty not to disclose it, or (2)
unless he is known to be acting adversely to the principal.
A principal is constructively present when the agent acts for him and in the act the agent and the principal are identified
together. Whatever notice the agent receives in respect to the transaction which he is carrying on is notice to the
principal, and whatever knowledge the agent has in respect to that transaction is presumed to be the knowledge of the
principal.
If the knowledge which the agent has is knowledge that he is not at liberty to disclose to his principal, it will not be
imputed to the principal. Thus disclosures confidentially made by one client to an attorney at law cannot rightfully be
disclosed to another client, and therefore will not be imputed to that client, though they affect the matter of the agency.
So if an agent is known to be acting adversely to his principal, it is not to be presumed that notice given to him or
knowledge in any way acquired by him will be imparted to the principal, and therefore the principal is not bound
thereby.76
75. Shafer v. Laycock, 168 Pa. 497.
76. Cowan v. Curran, 216 111. 598.

Chapter 8. Undisclosed Principals

Sec. 59. General Rule

If the principal is undisclosed at the time of the transaction, but subsequently discovered, the third person may elect to
hold such principal because he is the real party in interest.
We have heretofore noticed that an agent may keep his principal undisclosed, and bind himself upon the contract. He
may do this because he acts under instructions to that effect, or because he is careless in the manner in which he
performs his agency, or because for some reason he chooses to bind himself. In such a case, he becomes, as we
have seen, personally liable to the third person. But the third person, upon discovering the identity of the principal,
may, subject to the exceptions hereafter stated choose to hold the principal. This arises out of the consideration that
the principal is the real party in interest and identified in the transaction with his agent, and that as he is the real party,
it ought to be the third person's right to hold him as such.77
Thus we may suppose that A is about to buy goods of C for P. He chooses however, to act in his own name and either
to keep the fact concealed that there is another person who is principal, or if he discloses the fact that there is a
principal, then to keep that principal's identity concealed. He therefore makes a contract with C, whereby for certain
goods which C delivers him, he promises to pay C a certain amount of money. This is, say a written contract executed
in A's name as though he were the real principal. C can hold A on this contract, whether he knows that A is only an
agent or not.78 And if at the time, he does know that A is only an agent and knows the identity of A's principal, he
cannot afterwards hold P, because in that case he may be said to have deliberately chosen to make his contract with A
and not with P. If, however, at the time he does not know that A is merely an agent, or if he does know he is an agent
but does not know the principal's identity, then he may upon discovering the identity of the principal, either continue to
hold A or elect to hold P.
77. Violett v. Powell's Adm'rs, 10 B. Monr. 347.
This rule, however, is subject to some exceptions which we will notice.

Sec. 60. First Exception To Rule

Third person cannot hold principal on election to hold agent. If the third person after discovering the principal's identity
elects to hold the agent, he cannot afterwards hold the principal. The third person must elect to hold the principal within
a reasonable time, but his election need not be verbal. It may be inferred from his conduct.
The third person has contracted with the agent as a principal. He may hold the agent as the contracting party, because
the agent has seen fit to keep the principal concealed, and to bind himself. Upon discovery of the identity of the
principal the third person may hold him as such. But he must make his election, and having made it must stand by it.79
A failure within a reasonable time to indicate by word or act that he chooses to hold the principal will be taken as an
election to hold the agent and he cannot afterwards say he will hold the principal. A third person, however, cannot be
said to have made his election so long as he is unadvised as to the facts. Thus, billing the agent as the real debtor,
taking notes from him, etc., would be immaterial to show an election before the facts has become known to the third
person. If, however, he continues in these or other ways to treat the agent as the real debtor after discovery of the
facts, that will constitute an election.
78. Kayton v. Barnett, 16 N. Y. 625.
79. Kingsley v. Davis, 104 Mass. 178.

Sec. 61. Second Exception To Rule

Third person's right to hold principal subject to state of account between principal and agent. If the state of accounts
between the principal and agent, as where the principal has paid money over to the agent to pay to the third party,
renders it inequitable to allow the third person to hold the principal, he cannot hold such principal and must be satisfied
with his recourse against the agent.
Giving the third person the right to hold the undisclosed principal when discovered, is giving him a right to rely upon a
source which he did not rely upon when the contract was made. It would be really no hardship upon him to deny him
the right altogether for it would not be depriving him of anything which he had relied upon. Therefore the rule is not
extended where it would operate as a hardship upon the principal. Thus if the principal believing that the agent has
settled with the third person, or in order that he may settle with the third person, pays the agent money, so that if he
had to pay the third party it would amount to paying the account again if the agent were not responsible, then the third
person cannot hold the principal, but must look to the person to whom he looked when the contract was made. It is
consequently declared that the rule is subject to the state of accounts between the principal and agent.80 The payment
or settlement must, however, have been made in good faith, and it must have been made before the third person
elected to hold the principal.

Sec. 62. Third Exception To Rule

Rule does not apply to sealed instruments. Only those in whose name a sealed instrument is executed can be held
liable thereon.
We have already seen that one cannot be held on a sealed instrument if he is not named therein, or indeed unless it
may be said to be executed by him in person or by agent. Consequently the rule we are now considering does not
apply if the contract is under seal.81
In some jurisdictions the seal has lost some of its ancient force and in some has been altogether abolished. In such
states the rule would apply as well to a sealed instrument as to any other.

Sec. 63. Fourth Exception To Rule

Rule does not apply to negotiable instruments. Only those in whose name a negotiable instrument is executed can be
held liable thereon.
We have noted, also, that one cannot be held liable on a negotiable instrument unless it is made in his name.
Consequently the rule we are now considering has no application to negotiable instruments.

Sec. 64. Where Alleged Undisclosed Principal Had Not Conferred Authority
Third person cannot hold undisclosed principal except in cases of actual authority previously conferred. An undisclosed
principal cannot ratify. He can be held by the third person only in case he gave actual authority to the agent prior to the
time the agent acted, to do the very act that the agent did.
80. The law on this subject is not so well settled as is desirable. See Mechem, Agency, 2nd Ed. SEC. 1749.
81. Huntington v. Knox, 7 Cush. (Mass.) 374.
It is discussed in another connection, that a third person may hold a disclosed principal where the agent lacked real
authority, but had apparent authority to do the act by reason of the situation in which the principal placed him. We have
also noticed that where there is no authority, either actual or apparent, a disclosed principal may cure the defect and
become bound by ratification. None of this reasoning applies to the case of an undisclosed principal. The third person
can hold him only in cases where the agent pursued the actual authority given him. There is no room for the doctrine of
apparent authority, for there can be no apparent authority where there was not known to be any authority, or any
particular authority. And it is also settled that the third person cannot claim that the undisclosed principal ratified the
act. An undisclosed principal cannot ratify.

Sec. 65. Undisclosed Principal's Right To Hold Third Person

If the principal is undisclosed, the principal may at his election hold the third person on the contract, except, (1) where
the state of accounts between third person and agent would make it unjust, or (2) where the contract is under seal, or
(3) is expressed in the form of negotiable paper, or (4) also where the rights sought to be asserted by the principal are
rights to personal service, or the performance of personal obligations.
We have seen how an undisclosed principal can be sued when discovered by the other party. There is the
corresponding right of the principal to step into his agent's shoes, disclose himself and assert his rights under the
contract. This rule is subject to exceptions.
First. If the third person has already paid the agent he will not be compelled to repay the principal, but the principal
must look for settlement from the agent.
Second. The reasoning concerning instruments under seal set forth in section 64 is applicable here. Third. The same
may be said where the contract is in the form of a negotiable instrument.
Fourth. The third person can only assert rights which do not involve the performance of services personal in nature, or
involving the personal skill or credit of the undisclosed principal. Thus if C deals with A, as a principal, whereas A is in
fact an agent, P, the principal can only step in where that would not affect C's rights any more than if A had made an
assignment to P of rights under his contract. But A cannot assign nor can an undisclosed principal assert rights to
personal services, nor obligations personal in nature. If C had dealt with A he has a right not to have another party to
the contract thrust upon him. One may choose with whom he will contract.82 Yet as to rights growing out of such
contract which are not personal in nature, as a right to receive money, just as they may be assigned, so they may be
asserted by an undisclosed principal.
82. Cowan v. Curran, 216 111. 598.

Chapter 9. Principal's Liability For Torts Of Agents

Sec. 66. Authorized Torts

If the principal authorizes the tort, he is liable.
If before the commission of a tort by an agent the principal authorizes or counsels its commission he is liable as a tort
feasor.

Sec. 67. Ratified Torts

A principal is liable for a tort which was committed as part of an act which the principal now ratifies.
See this subject discussed elsewhere.83

Sec. 68. Liability For Torts Within Scope Of Authority

The principal is liable for the torts of the agent which are committed within the scope of the authority.
When an agent does an act for the principal, the principal is theoretically present doing it. If while engaged in the
performance thereof the agent commits a tort which may be said to be a part of it, the principal will be held as though
he had himself committed the tort or counselled its commission. The tort, however, must be a tort which really forms a
part of the act which the principal authorized; it must be done in the course of the employment and within the scope of
the authority given him.
83. See Section 21.
The fact that a principal will be held for the torts of the agent is based upon sound policy. It results in making a principal
careful in choosing his agents, and it prevents secret arrangements between the principal and agent that the agent
shall commit a tort apparently unassented to by the principal. But the real basis for the rule is probably that the
principal and agent are in law, one.84

Sec. 69. What Torts Within The Scope Of The Authority

A tort is within the scope of the authority so as to render the principal liable to third persons therefor when it occurs
while the agent is engaged in his work, as a part thereof.
The principal is liable for an agent's torts when they are within the scope of the authority. This implies two things. First,
that the tort occur during the time of the employment, and second, that it be a part of the act done in the principal's
behalf and not independently thereof. Let us consider each of these tests.
(1) Principal (or master) not liable for agent's (or servant's) tort unless it occurs during the performance of the
employment.
It is very clear that I am not liable for another person's tort merely because he is one who works for me. He may
assault a person - after hours, and far, perhaps, from the scene of his work. I am not answerable. He must be at work
when the tort is committed, but some interesting questions arise in this connection.
Example 21. In an early English case, one Joel was crossing a street and was knocked down by a cart and horse
belonging to Morrison. Joel sued Morrison and there was conflicting evidence whether the servant was on an errand of
his own or about his master's business. And the court said that the master was liable even if the servant was going out
of his way at the time and against his master's business, if he was still about that business, but if he had the cart out for
a "frolic of his own" the master would not be liable.85
84. Dempsey v. Chambers, 154 Mass. 330.
Translating the above example into a picture of today, with the term "joyriding" for "frolic of his own," we have a
situation fraught with much greater danger, but which needs the same distinction. The cases are numerous.
Example 22. One Fairman was driving a car belonging to Windsor Motor Car Co., by which he was employed. He was,
however, at the time, driving upon a pleasure trip of his own. Plaintiffs intestate was killed by Fairman's alleged
negligence. The court said, "If he was not acting at the time within the scope of his employment, but was on a purely
pleasure trip of his own, the company cannot be held liable.86
In another case87 the evidence was that the delivery boy driving the automobile by which plaintiff was injured had
made his last delivery and was going in a longer route than was necessary to the garage, permitting guests to ride with
him, was not conclusive evidence that the master was or was not liable and the question was for the jury to determine
whether he was about his master's business, or upon a trip of his own and a verdict for plaintiff against the master was
sustained.
85. Joel v. Morrison, 6 C. & P. 501.
86. Stern v. Intern. Rwy. Co., 153 N. Y. 520; see, also, Cunningham v. Castle, 111 N. Y. Suppl. 1056.
87. Maloy v. Rosenbaum Co., 260 Pa. 466, 103 Atl. 882.
(2) The tort must be a part of the act done in the furtherance of the principal's business.
Even if the tort is committed concededly while the employee is at work, it may not be attributable to the principal. This
question requires the consideration of the nature of the work which the employee is authorized to do, and the nature of
the tort committed by him. Perhaps we can make one exception to this, that is, the case of negligence. A negligent
performance of his duties by the employee will render the principal liable to the party damaged by the causal operation
of such negligence, no matter what the nature of the work.88 In this connection, however, very difficult questions arise
as to what is the duty of the employee, for if he performs some act negligently which he had no duty to perform the
master is not liable.
Fraud. If the employee is an agent to deal with third persons, the principal is liable for the agent's frauds by which he
performs his authority.89 But whether the principal must answer, depends on whether the fraud has a part of
authorized acts.
Assault and Battery. False arrest. Whether the principal is liable depends entirely on the agent or employee's duty. If
put to guard the property as a watchman or detective, or if generally he has a duty of protection, the employer is liable
for a wrongful arrest or assault and battery.90
Thus a wrongful arrest by a detective would make his employer liable,- but the same arrest by a window washer, would
not make him liable.
Defamation. Defamation by an agent may or may not render an employer liable. If connected with a sale or attempted
sale by a general manager,91 the employer will be liable. Newspapers are liable for defamatory statements of their
editors, published therein.
88. See cases cited in the notes just above.
89. Lloyd v. Grace, (1912) A. C. 716 (Eng.).
90. Staples v. Schmidt, 18 R. I. 224.
91. Pa. Iron Works v. Henry Voght Machine Co., 29 Ky. L. R. 861, 96 S. W. 551, 8 L. R. A. (N. S.) 1023.

Chapter 10. The Duties And Liabilities Of The Agent To The Third Person

Sec. 70. General Statement

Where the agent regularly pursues his authority and acts as an agent and not as principal, and is guilty of no wrong, he
is not liable to the third person with whom he acts for the principal.
We have already considered that an agent is an intermediary, a mere representative, employed to make or in some
way affect contractual ties between his principal and third persons. That done, he drops out; no liability attaches to him.
This is a matter of common knowledge; the agent who writes insurance does not become liable on the policy; the real
estate agent who sells the land of another, assumes no responsibility upon the contract; the agent who procures a loan
for his principal is not liable if the principal does not repay. The agent is not surety for the principal.
An agent may bind the principal when the principal holds out, expressly or impliedly, that the agent has authority. This
authority the agent may not actually have; it is enough that the principal places the agent in such a position that a third
person may assume him to have such authority. There is a holding out by the principal, and it is on that holding out that
the third person relies in dealing with the agent. But we may have another set of circumstances. There may be a
holding out by the agent, and none by the principal, upon which the third persons relies. The agent may come to me
and say, "I am P's agent for this purpose," and I may rely on that alone. In that case I cannot hold P if A was not
authorized by P, and furthermore I cannot hold A, the agent, on the contract, because I did not purport to make that
contract with him, but with P, through him. Yet A has represented to me that he was P's agent, and acting upon that
representation I have done things whereby I am damaged unless I can hold somebody. Therefore the law gives me the
right to hold A, upon a warranty by him that he has authority. We will consider this liability and also the other cases of
the agent's liability to third persons.

A. Liability Of Agent In Contract

(a) The agent warrants his authority.

Sec. 71. Warranty Of Authority By Agent

If an agent expressly claims to have authority or by his acts indicates that he has authority, he warrants his authority;
but if the third person knows the facts as well as the agent, there is no warranty.
An agent may expressly state that he has authority. He may do this because he thinks he has authority or because he
intends to deceive. In either case he is liable to the person who thus deals with him, and who on account of lack of
authority, apparent or real, could not hold the principal, and therefore suffers damages. Thus suppose that A states to
C that he has been sent by P, to purchase C's cattle. C thereupon delivers his cattle to A, to deliver to P. The cattle die
on the way through no fault of A. In this case if A had had actual or apparent authority, he could not beheld, as the
contract would be between C and P, with A as a mere representative of P. P would be responsible as delivery to his
agent would be delivery to him. But if A lacks authority C is not without remedy. He can hold A upon his statement that
he has authority, on the strength of which he parted with the cattle.
If, however, in this case, C was in possession of all the facts, and in common with A, misconstrued them, he could not
hold A. Thus if A had said: "I have here a letter which P has sent me, in respect to the purchase of cattle, and I think
from it that I have authority to buy cattle," and C, upon reading the letter, had assented to that view, yet the legal effect
of the letter was not to give A authority to buy cattle, but merely, say, to make inquiries concerning their purchase, here
there would be no warranty by A of his authority, for there would be no reliance upon A's assertions that he had
authority.
It is not necessary that the agent expressly state that he has authority. An implication to that effect may arise from the
facts, and this would, perhaps, be the more usual case. Indeed, the agent by acting as agent and by purporting to bind
another person as principal, holds himself out as having the authority to so act and thereby warrants himself to have
authority.
Example 23. The P bank by A, as Vice President, guaranteed a commercial account. The bank being sued on the
guaranty defended that it had no power as a bank to make such an engagement, not being proper banking business.
The court sustained the defense. The plaintiff then sued the Vice President upon the ground that he warranted his
authority. But the court held that inasmuch as the third person was chargeable as a matter of law with the power of a
bank and therefore must be taken to have known that the Vice President had no powers to bind the bank upon this
guaranty, there was no warranty of authority.92
(b) Agent having authority to bind principal may instead bind himself.

Sec. 72. General Statement

One who is an agent and has full power to bind his principal may nevertheless bind himself.
There is nothing to prevent an agent from binding himself upon a contract made by him. He may do this for a variety of
reasons. He may be careless in the execution of his authority. He may not disclose the principal, preferring for some
reason to let only his own identity appear. Or it may be that his principal has not sufficient credit with the person dealt
with and therefore the agent binds himself.

Sec. 73. Principal Undisclosed

If the principal is undisclosed by the agent the agent is liable.
If the agent does not disclose his principal, the agent is liable. In some such cases the third person upon discovering
the principal may elect to hold him, because he is the real party in interest, as we note in another connection; but he
may, if he choose, in all cases, hold the agent for it is with the agent that he has dealt as principal.
Example 24. W sold flour to R. R sues for breach of warranty of merchantability of the flour. W defends that he was an
agent. On the deal W did not disclose the name of his principal, although he was known to be
92. Thilmany v. Iowa Paper Bag Co. and William Daggett, 108 la. 357.
a broker. The transaction was oral. Held, that W was liable.93

Sec. 74. When Agent Bound On Sealed Instruments By The Form Of His Execution
It is a long established rule that only those who are named or described in and sign a sealed instrument are bound
thereon. If the agent signs his own name only, though he describe himself as agent, he will be bound and the principal
will not be bound.
By the law of sealed instruments, only those can be sued thereon who are parties thereto. An agent may, by careless
execution of a sealed instrument, bind himself when he intended only to bind his principal. We may indicate here the
proper form one should use and that will be about the extent to which in this discussion we can go. The books are full
of discussions of particular sets of facts and courts are at some variance upon similar cases. But there are well
established forms of execution which everyone should have in mind when he executes such paper.
First let us note that it is everywhere agreed that if one merely describe himself as agent, that in itself is not sufficient to
bind his principal. Thus if he signs "John Brown, Agent," or "William Smith, President," or "Harry Jones, Trustee," etc.,
these descriptive words are merely words of description and in no way qualify the liability of the party signing.94 And it
is also everywhere agreed that if one go further and say "John Brown, Agent of Thomas Anderson," the deed is the
deed of John Brown. So one can go into a multitude of form. The proper and safest mode of description and signature
is as follows: to recite in the body of the instrument "Thomas Anderson, by John Brown, his agent," or the "Harris
Manufacturing Company, by William Smith, its President," etc.; and to sign as follows: "Thomas Anderson (seal), by
John Brown, Agent," or "Harris Manufacturing Company (seal), by William Smith, President."
93. Wheeler v. Reed, 36 111. 81.
94. Casco Nat. Bk. v. Clark, 139 N. Y. 307.
These forms have been held good to bind the principal, but they are not such good usage - "A. B., for C. D.," "for C. D.,
A. B."
It is not absolutely essential that the agent's name should appear. Yet it is highly desirable, in order that the evidence
may be the more surely preserved and other reasons of convenience. It is therefore common and the better usage for
the agent to set forth that the execution is by him as agent. Even in those states where statutes have abolished the
seal, the above form of signature is the only safe one to use.

Sec. 75. When Agent Bound On Negotiable Paper By The Form Of His Execution
Only those described in and who sign negotiable paper are bound thereupon.
What has been said in respect to sealed instruments is also true of negotiable paper. If an agent signs negotiable
paper in which only his own name appears, he is personally liable upon it. The forms indicated in the preceding section
are subject to the same considerations here, except that a negotiable instrument should not be sealed.
The courts have been very technical in this respect, frequently making an agent liable, where quite apparent from the
facts that the agent never intended to bind himself. The uniform negotiable instruments shows a departure from this
rigid rule,95 but the only safe rule is to follow the form approved in practice and courts of law.
Example 25. A and B made a note which read "We promise to pay," etc., and signed it, "A, President," "B, Treasurer."
The name of the corporation did not appear in the body of the note, but it was upon the corporation's letter head. Held:
to be the note of A and B, the words President and Treasurer, being mere words of description.96

Sec. 76. When Agent Bound On Other Contracts By The Form Of His Execution
An agent is bound if he in terms charges himself on any contract, but if from all the language used, it appears that he
did not intend to charge himself, but a principal therein named, he will not be personally liable.
An agent should be careful in the case of any contract, sealed or unsealed, negotiable or not, to make it appear that his
principal and not himself is bound. Yet simple contracts are often hastily made and ambiguously worded and it may be
hard to state what the intention was. It is clear that if the agent uses only his own name, though he may use the word
agent, he only will be bound and he cannot show that he intended to bind some one else in order to free himself
(although as we have seen the other party may hold the real principal or the agent at his election where the principal is
undisclosed). But if the name of the principal appears in the body of the instrument or in the signature and from the
entire contract it may be gathered as a reasonable inference that the agent intended to bind the principal, then the
agent can plead that he is not personally bound. No fast rule can be laid down in these cases except that where the
agent uses approved forms as heretofore indicated, there can be no question that he is not held, and the further rule
that if he does not name the principal at all, though he describes himself as agent, and even though it appear that the
principal was known at the time to the other party, the other party may hold him personally.97
95. See Law of Nego. Instru. in this series.
96. Id.

Sec. 77. Agent Bound Where No Definite Or Responsible Principal

If a person represents a large, unorganized or irresponsible body, it will be presumed, unless the contrary appears, that
the representative was given the credit.
If a committee representing a large public gathering as a political party, an unincorporated club, etc., deals with others
for supplies, it is reasonable under the circumstances to presume that it is the committee to whom the credit is given,
and such committee will usually be personally responsible. Wherever there are situations of that sort in which the credit
appears to be given the agent and he must have known it was so given, he will be responsible.98

B. Liability Of Agent In Tort

Sec. 78. Agent Responsible For His Torts

An agent is responsible to third persons for torts committed by him, whether the principal is liable or not for them.
An agent is responsible for his torts committed by him whereby third persons are injured. In such a case the principal
may be also responsible, as we have seen.
97. Tyron v. Clinch, 186 Pac. (CaL Ap.) 1042.
98. Clarke v. O'Rourke, 111 Mich. 108.
Thus, for his fraud, his negligence, his conversion of another's goods, and generally for his misfeasance or
nonfeasance of any sort, the agent is liable. The third person injured by such tort need not elect whom he will sue. He
may sue the agent for a tort committed by him whether such tort is such as will render the principal liable or not. If
within the scope of the employment, the principal is liable; but the agent is liable also, for he has committed it though
he did it for another.99
99. Tippecanoe Loan & T. Co. v. Jester, 180 Ind. 357.

Part III. Professional Agents. Chapter 11. Professional Agents. A. Factors

Sec. 79. Definition Of Factor

A factor, or commission merchant is an agent, who receives goods from the owners thereof to sell for a commission.
Where he sells upon a guaranty of payment of debts arising in the course of the agency he is called a del credere
factor. He has the possession of the goods that he sells, and usually sells them in his own name.
A factor, or a commission merchant, is one who for the various owners who choose to employ him, takes possession of
their goods and sells them upon a compensation known as commission.100 He differs from a broker in that he has the
possession of the goods and has broader powers. A broker brings buyer and seller together, does not have possession
of the goods, and usually does not act in his own name. We have defined, heretofore, a del credere agent. The factor,
more than other agents, sells upon a del credere commission.
The term "factor" is also frequently used to describe agents who are in possession of goods to be sold, though not in
that business generally, but in its more correct sense, it describes the professional agent.
100. Turner v. Crumpton, 21 N. Dak. 294.

Sec. 80. Duties Of Factors

A factor is held to the exercise of reasonable care in the custody and sale of the goods and must follow instructions.
(a) Duty in respect to care of goods. A factor must use that degree of care for the safety of the goods which a
reasonable man would use in the care of another's goods.
Example 26. A commission merchant to whom cotton was consigned allowed it to be stored in a non-fireproof
warehouse to which it had been sent by mistake instead of a fireproof warehouse owned by him and to which he could
have removed it. The warehouse burned down and the cotton was consumed. Held, the factor was responsible for the
loss.101
(b) Duty to insure. The factor need not insure the goods unless (1) he is so instructed, or (2) there is a custom in that
mart to do so.102
(c) Duty to obey instructions. The factor must obey his principal's instructions.
Example 27. A factor is instructed to "sell on arrival." He delays doing so and loss ensues owing to a drop in prices.
Held, the factor is liable for the loss.103
But he is entitled to disobey such instructions if the protection of the principal requires it where it is to be assumed that
the principal is acting under a mistake as to conditions.
101. Vincent v. Rather, 31 Tex. 77, 99 Am. Dec. 517.
102. Sturtevant Co. v. Dugan, 106 Md. 587; Schoenfeld v. Fleischer, 73 111. 404.
103. Evans v. Root, 7 N. Y. 186, 57 Am. Dec. 512.
(d) Duty to sell for best obtainable price. A factor must use reasonable care to get the fair or market price for the goods
sold by him in the absence of contrary instructions.104 For duty in respect to extending credit, see next section.
(e) Duty of good faith generally. The factor is under the same duty as any other agent to use the highest good faith as
exemplified in the duties not to represent two adversary masters, not to sell to himself, etc., as has been generally
discussed elsewhere.

Sec. 81. Implied Authority Of Factor In Cases Between Himself And Principal
The factor's implied authority is discussed under the several headings below.
The inferences that a factor may fairly make from his appointment depend upon the nature of his relationship and
customary practices.
(a) Implied authority to barter or exchange. A factor has no implied authority to barter the goods for other goods or for
anything other than cash or proper credit.105
(b) Implied authority to sell on credit. A factor may sell on credit unless instructed to the contrary,106 but has no
authority to extend credit beyond the usual term, and cannot grant an extension of the original credit.107 And in
extending credit must use due diligence to ascertain the solvency of the party to whom he sells.108 If there is a usage
to sell only for cash, he must not sell on credit unless so directed.109
104. Bigelow v. Walker, 24 Vt. 149, 58 Am. Dec. 156.
105. Potter v. Dennison, 10 111. 390.
106. Brown v. Funck, 89 Kas. 601.
107. Killy v. Logan, 2 Mart. (N. S.) 196.
108. Brown v. Funck, supra,
109. Harbert v. Neill, 49 Tex. 143.
(c) Implied authority to deal in his own name. A factor may act in his own name and need not disclose the name of his
principal. This is one of the characteristics of a factor whereby he is distinguished from a broker.

Sec. 82. Apparent Authority Or Title Of Factors As To Third Persons

The rights of third persons arising out of the apparent ownership by the factor or his apparent authority are considered
below.
(a) Title of purchaser or lienor who relies on factor's apparent ownership. A factor has possession of the goods and
therefore may accomplish their sale as goods belonging to him, contrary to the advices of the principal, or may borrow
money upon them. Has the purchaser or lienor a superior right to the unknown owner?
It is a general principle of the law of personal property that he who deals with respect thereto does so at his own peril in
that one with a superior title may claim them. The Uniform Sales Act provides that only the true owner may convey title.
True, he may be estopped by his conduct from asserting his title, but it is everywhere considered that merely placing
the possession of property with another does not estop him. If he sends them to a factor with a general power of sale,
or if the factor complies with a limited power of sale, the purchaser of course gets title, as the actual authority has been
followed. But if the authority has been ignored, the general rule permits the true owner to disregard the sale, unless
some exception based upon factorage exists. The sounder rule seems to be that no distinction exists in the absence of
legislation to that effect.110
If, however, there is in addition to the possession of the goods, a clothing of the factor with documentary indicia of
ownership (or permitting him to so clothe himself), as with bills of lading, warehouse receipts and the like, the principal
is estopped to deny the factor's title as against innocent purchasers for value, no matter how widely the factor may
have departed from his instructions. (See Sales in this series.)
110. Kaufman v. Beasly, 54 Tex. 563.
Legislation (factor's acts and the like) has in some jurisdictions been directed toward giving pledgees and purchasers
the right to rely on mere possession by a factor where such factor acts in his own name, and the true state of the title
or of the authority is unknown.
(b) Apparent authority of factor to warrant. A factor has apparent power to make the usual warranties.111
(c) Apparent authority of factor to give credit, to receive the price, to receive commercial paper in payment, etc.
The factor may sell on usual terms of credit, receive the purchaser's commercial paper as evidence of the liability, and
may receive payment where he sells in his own name, or sells for cash.
Sec. 83. Factor's Lien
A factor has a general lien on the goods which are not sold and on the price and securities of such as are, for his just
charges and expenses.
For his advances and expenditures a factor has a lien by the common law and under the statutes. He may sell enough
goods to satisfy this lien. He loses his lien by voluntarily parting with the goods. The lien does not exist unless he has
possession of the goods.112
111. See SEC. 56, supra.
112. Straholm v. Union Stock Yards Co., 43 111. 424.

B. Brokers

Sec. 84. Definition

A broker is one whose business is to bring parties together to contract, or in their name to contract for them, in some
line of business.
A broker makes it his business to bring parties together to contract, or to make contracts for them. Thus a real estate
broker makes it his business to find buyers for sellers and sellers for buyers of real estate. He may in one case simply
bring the parties together leaving them to make their own contract, or in another case he may have the larger authority
to bind one of them by a contract executed by himself as an agent.
A broker, unlike a factor, does not usually have possession of the goods. His authority is not so broad, and his
contracts are generally made in the name of his principal.

Sec. 85. Kinds Of Brokers

A broker usually chooses some one line of trade in which to carry on his business, and he is described in reference to
that trade.
There are many sorts of brokers. The common sorts are here briefly discussed.
(1) Real Estate Brokers. A real estate broker brings buyers and sellers of real estate together or makes contracts for
them. This is a very numerous class, and their general activities are commonly understood. A real estate broker has no
authority to contract for the purchase or sale of real estate or to buy or sell real estate, except as this authority is
specially conferred. Often he does not execute the contract himself. He writes up a contract and has the owner sign it
and then takes it to the buyer for his signature, or vice versa.
113. For compensation of broker see SEC. 27, supra.
So when a deed is given, the broker's name may not at all appear. Yet in many cases, a power of attorney is conferred
on the broker to sign contracts and execute deeds.
Real estate brokers often collect rents, procure insurance, and otherwise concern themselves with the management of
real estate.
(2) Insurance Brokers. An insurance broker is one who makes it his business to secure insurance, for those who
employ him, from various companies. He differs from an insurance agent who works for and represents a certain, or
perhaps several, insurance companies, while the broker is the agent of the insured rather than of the insurer. He does
not have as broad authority as a general insurance agent, who may bind the company. A policy is secured by him from
the company, rather than executed by him for the company. Consequently there is not usually any act which he can do
in signing policies, waiving or inserting provisions therein which can bind the company, although a general insurance
agent would have such powers.
(3) Merchandise Brokers. A merchandise broker is one who represents buyers and sellers of merchandise without
having possession of it. He usually deals in some one line and is described and known in reference to that line, as for
instance, a cotton broker, a sugar broker, a tea and coffee broker, a grain broker. He does not have the authority of a
factor from whom he essentially differs in not having the possession of the goods.
(4) Stock Brokers. A stock broker buys and sells stock of corporations for customers. He often differs from the other
kinds of brokers and comes to have more the character of a factor. He often has possession of the stock, and buys and
sells in his own name. A common practice is for him to sell stock on margin. In that case the buyer becomes the owner
of the stock, which is bought by money loaned by him to the customer and the customer's own money in proportions
usually of about 90 per cent and 10 per cent. The amount put up by the customer is said to be put up on margin.

Sec. 86. The Authority Of The Broker

The broker usually acts in each instance upon a special authority and has very little implied authority to bind his
principal.
A broker does not have possession of the subject matter of the contract as in the case of a factor. His authority is
specially conferred and therefore limited. For instance, if one deals with a real estate broker he cannot usually assume
that the broker's authority is extensive. He must look to the actual authority that has been expressly conferred. Thus C
cannot assume that A, a real estate broker, has any authority to sell B's land. He may take A's word for it, but he is not
really protected except upon B's word to that effect, which he should have in writing. Many times indeed a broker has
no actual authority but simply brings parties together, whereupon they arrive at their own terms.
Where a broker has actual authority, it is usually to be construed in the light of customs and usages which are of
universal use in that locality and trade. If one goes by means of his broker into a market or exchange he usually must
be taken to have instructed the broker to proceed in respect to the well known customs and rules that prevail there,
and he will be bound by these. This is perhaps more true of stock brokers than of other kinds, because it is their
business which is so largely governed by customs, usages and rules.
A broker usually has no authority to receive payment, or to extend credit, as the factor may. In any particular case,
however, this authority might appear either expressly or from the circumstances.

C. Auctioneers

Sec. 87. Auctioneer Defined

An auctioneer is an agent who makes it his business to represent owners of property in selling the same to the highest
and best bidder among those who attend the sale.
Property is said to be auctioned when it is offered to the one who shall by his bid make himself the most desirable
purchaser. Usually this would simply mean that he should bid more than anyone else. But if the sale was upon credit, it
might also mean that he should qualify as one of fair credit. Customarily, therefore, it is announced that sales will be to
the "highest and best bidder."
An auctioneer pursues a public calling. He makes it his business to represent any one who will employ him to sell the
line of goods he handles, or perhaps any sort of property, whatever.
Auctions are usually public. An auctioneer is often defined as one who sells at public sale. Yet he might sell at private
sale where there were two or more of a selected group who desired to buy. In such a case he would seem still to be
pursuing the calling of an auctioneer. But his business as a whole is a public one. For this reason it is often required
that he secure a license before he shall be entitled to act as auctioneer.
An auctioneer is agent of the seller, except in the matter of making book entries, etc., in which case he is agent for
both. That is, he is the seller's agent and he is not the buyer's agent except for clerical purposes. This might be
important from the standpoint of the statute of frauds requiring a signed memorandum in writing in order to make a sale
enforceable, which is in force in many states. The entry of the sale in the books with the buyer's and seller's name
would be a memorandum made and signed by the buyer and seller because made by their agent.

Sec. 88. The Auctioneer's Authority

An auctioneer has no authority to sell except upon the terms given by the owner. He cannot warrant except with actual
authority.
The terms upon which the sale at auction is to be made are openly stated by the owner or by the auctioneer with the
owner's sanction. The auctioneer cannot transcend his authority thus given.
An auctioneer has no authority to warrant unless the owner actually gives him such authority.

Sec. 89. When The Sale By Auction Takes Place

A sale by auction is complete when the auctioneer signifies his acceptance of the bid. Unless a sale is "without
reserve" (and even then in some jurisdictions), he may refuse any bid and withdraw the article from sale.
If an auction is not advertised to be without reserve, an auctioneer may withdraw the property from the sale at any
time; for there is no contract made until the auctioneer accepts the bid. A, as auctioneer puts up a horse for sale, B
offers $50, C, $55, and D, $60, for it; but until A signifies his acceptance to the bid no contract is complete; no sale or
contract of sale has been made. Consequently, neither B, C, nor D, may complain in such a case. However, the owner
of the property might have just cause for holding A liable for refusing a bid he might have accepted and thereby losing
the sale. But in some states (and the Uniform Sales Act so provides) if an auction is advertised to be "without reserve,"
the article cannot be drawn from sale after an offer has been made which comes within the terms of sale.

Sec. 90. "By Bidding."

This consists in secret bidding by the owner or his agent in order to puff the price. It is illegal and a sale so induced is
voidable. But an owner may openly bid for this only amounts to withdrawing the former bid, unless the sale was without
reserve in those states where auctions without reserve prevent withdrawal.
Secret "by bidding" is fraudulent. If one discovers that his bid was induced because of a bid made apparently by a
would-be buyer, but in reality by the owner or his agents, he may have the sale set aside. But an owner can always bid
openly unless restrained by the announcement that the sale is without reserve, as discussed in the last section.

Part IV. Termination Of Relationship. Chapter 12. Termination By Act Of Parties

Sec. 91. By Terms Of Original Agreement

Where the authority is stated to be for a limited period, the passing of the term terminates the agency.
If one is employed as agent for a certain time, the passing of that time terminates his authority. The parties may of
course stipulate for a continuance and this might be shown by circumstances.

Sec. 92. By Accomplishment Of Object

If the object of the agency is accomplished, the agency ceases.
If one is employed to do a certain act, as to sell a piece of real estate, his authority then ceases when the act is done.

Sec. 93. Revocation By Act Of Principal

Unless an agency is coupled with an interest in the agent it may be revoked at any time by the principal, though he
may have no right to revoke.
Agencies may be divided into those which are revocable and those which are irrevocable. In considering whether an
agency is revocable, we do not consider the right of revocation; we consider only the power, which is quite without
respect to the right to revoke. I may revoke an agency whether I have any right to do so or not, just the same as I may
discharge an employee, regardless of my right to do so. In such a case I may have to pay damages, but I cannot be
compelled against my will to keep any certain person in my employ. But all agencies are not revocable. If the agent has
an interest in the agency so that the agency must continue in order to protect that interest, the principal cannot revoke
it. What constitutes an irrevocable agency is further considered in the following section.

Sec. 94. Irrevocable Agencies

If an agency is coupled with an interest it cannot be revoked by the principal. It is coupled with an interest only when
the agent has some interest or estate in the subject matter of the agency.
An agency is irrevocable when the agent has an estate or interest in the subject matter of the agency. His interest in
the agency itself, no matter how extensive it may be, is not sufficient to prevent even its wrongful termination.114 In
that event the agent is in the same position as any other party to a contract which the other party has broken and may
sue for his damages. But if besides that interest, he has an interest in the thing itself, his agency can no more be
revoked than any property can be taken from a man without his consent. Thus if the agency must continue in order to
reimburse the agent for expenditures made by him, or loans made by him to the principal or others, then in case the
agency has been granted for the purpose of securing the lender, the agency is irrevocable. Thus if A should loan P
$1,000, and a security for the loan should be given by P the authority to collect certain debts, P could not deprive A of
this security by revoking the agency. But if P should employ A to sell land on commission, he could revoke the
authority at any time, even though thereby depriving A of his fees, for A could have his damages and this right is as
great a protection to him as though the agency had continued.
114. Chambers v. Seay, 73 Ala. 372.
If an agency is stated to be "irrevocable," it may nevertheless be revoked, unless coupled with an interest.115 But of
course if there is no right to revoke it, its revocation will give rise to an action for damages.

Sec. 95. When Principal Has Right To Revoke

A principal has the right as well as the power to revoke whenever the agency is for an indefinite period or without
consideration, or where the agent has on his part broken his contract, or where it is in terms revocable.
If the agency is for an indefinite period it may be brought to a close at any time by either principal or agent; so even if a
time is definitely stated, still if there is no consideration for its continuance it could be revoked at any time. Thus if the
agent did not promise and so could not be held to do anything during such term, but had in substance or in terms
agreed to act as he might see fit or desired, there would not be any contract for any definite period though the authority
might so state. Sometimes an authority is given upon condition that it may be terminated at any time, or upon the
happening of a certain contingency, or upon a certain notice to be given.
Example 28. A manufacturer of motor cars granted to H exclusive right to sell cars in a specified territory, but was not
for any definite term and provided that the manufacturer could terminate whenever he believed H was not diligent in
selling cars. Held, such agency was terminable at will.116
115. Todd v. Superior Court, 184 Pac. (Cal.) 684.
If an agent turns out to have less competency than the principal was justified in supposing he had, the principal may
revoke the agency. Professional agents especially hold themselves out as having a certain degree of skill, and if they
are wanting in that respect they need not be retained.
If the agent breaks his contract in any material way the principal may thereupon terminate the agency, or waiving the
breach he may continue the agent in the agency. After he has once waived the breach, he could not afterwards rely on
it as an excuse for terminating the agency.
Where an agent is employed for a specified period, but it is provided that the principal may discharge him if the agent's
services become unsatisfactory, it is generally held that the dissatisfaction expressed must be genuine and in good
faith, not a mere excuse for discharge. - (Atlanta Stove Works v. Hamilton, 83 Miss. 704).

Sec. 96. Termination By Agent

An agent has the power, whether or not he have the right, to terminate the agency at any time. His right to terminate
depends upon the same reasoning that governs the principal's right to terminate.
An agent has always the power to terminate the agency. But he may not have the right. That depends upon his
contract and upon his principal's breach thereof. Agencies at will, or for an indefinite period, or for a definite period but
without consideration, could be terminated by the agent at any time, just as they can by the principal.
116. Huffman v. Page-Detroit Co., 262 F. 116.

Sec. 97. Notice Of Revocation To Agent

The principal must notify the agent when he revokes and usually the revocation consists in such notice.
An agent is entitled to notice when his authority is revoked. Usually the notice itself would constitute the revocation.

Sec. 98. Notice To Third Persons

Where the agency is general, revocation does not usually operate as to third persons except upon notice to them, but
no notice is usually necessary in special agencies, except where negotiations are actually being entered into
thereunder.
Third persons who would under the circumstances be justified in dealing with an agent under the belief that his agency
continued to exist are entitled to notice. Notice might be given them by the circumstances, as where an agent has been
put out of possession of the office and others are in his place. Notice would seldom be required except in general
agencies.

Chapter 13. Revocation By Operation Of Law

Sec. 99. By Death Of Principal
The death of the principal terminates the agency, except when the agency is coupled with an interest. This is true
though the death is unknown when the contract was attempted to be made.
Agency, as we have seen, is a personal relation and is entered into subject to the continued existence of the principal
and agent. If the principal dies, the agency is thereby terminated. The estate or the heirs cannot claim a continuance of
the agent's services.
If, however, the agency is coupled with an interest, as we have seen, it is irrevocable. There death of the principal does
not terminate it for the same reasons that protect the agent in an attempted revocation by the principal.

Sec. 100. By Death Of Agent

The death of the agent terminates the agency except where the agency is coupled with an interest.
If the agent dies, the agency is terminated. The personal representative or the heirs cannot step in his place. If the
agency is coupled with an interest, it may be carried out by the personal representatives for the benefit of the estate.

Sec. 101. By Insanity Of One Of The Parties

Insanity of either principal or agent terminates the agency, except when coupled with an interest.
The insanity of one of the parties removes his qualifications to act as principal or agent, except when coupled with an
interest.

Sec. 102. By Bankruptcy

Bankruptcy will not in itself necessarily terminate an agency. If it so operates upon the subject matter thereof that it
removes the purpose of the agency, the agency will be terminated.
Bankruptcy usually does not affect one's merely executory contracts. It does not necessarily affect the relation of
principal and agent, especially if the bankruptcy be that of the agent.

Sec. 103. By War

War between the country of the principal and of the agent operates to dissolve the agency in so far as communication
between principal and agent is essential.
Where the countries of the principal and agent are engaged in war, the effect of the war, in the absence of any special
legislation, depends upon the nature of the agency. An agency in which the duty of the agent is to look after an alien
principal's property is not dissolved by the war, but there can be no communication or transmission of funds.117
117. See note L. R. A. 1917 C, p. 667.

Appendix A. Forms
(It is not believed desirable to furnish forms in a book of this character, except forms commonly in use, and for purpose
of illustration. A form of power of attorney is supplied below.)
1. Power of Attorney.
KNOW ALL MEN BY THESE PRESENTS, That I, James X. Showalter of the City of Chicago, County of Cook, in the
State of Illinois, have made, constituted and appointed, and By These Presents do make, constitute and appoint Frank
O. Hazard, of the City of Peoria, County of Peoria and State of Illinois, my true and lawful Attorney for me and in my
name, place and stead, to grant, bargain, sell, release, convey, transfer, exchange, mortgage and lease any and all
lands, tenements, hereditaments, real and personal property, which I may own or hereafter acquire, possess or be to
any extent entitled to or interested in, upon such terms and conditions and under such covenants as he shall see fit
and for such consideration as he shall deem advisable ; and for me and in my name to sign, seal, execute,
acknowledge and deliver all such deeds, leases, bills of sale, and assignments, indentures, agreements, mortgages
and deeds of trusts or any other instrument necessary or desirable to accomplish any of the purposes for which this
power of attorney is given, giving and granting unto Frank O. Hazard, my said Attorney, full power and authority to do
and perform all and every act and thing whatsoever, requisite and necessary to be done in and about the premises, as
fully, to all intents and purposes, as I might or could do if personally present at the doing thereof, with full power of
substitution and revocation, hereby ratifying and confirming all that my said Attorney or his substitute shall lawfully do
or cause to be done by virtue hereof.
In Testimony Whereof, I have hereunto set my hand and seal this 6th day of January, 1921.
Signed, Sealed and Delivered in Presence of
James R. Smith,
William Odell.
County of Cook State of Illinois
James X. Showalter (Seal)
} ss. }
I, Herbert Jones, a Notary Public, in and for, and residing in the said County in the State aforesaid, Do Hereby Certify,
that James X. Showalter, personally known to me to be the same person whose name is subscribed to the foregoing
instrument, appeared before me this day in person, and acknowledged that he signed, sealed and delivered the said
Instrument as his free and voluntary act, for the uses and purposes therein set forth.
Given under my hand and notarial seal, the 6th day of January, A. D. 1921. (Notarial Seal) Herbert Jones.
Notary Public.
(Note: The above is a very general power of attorney giving authority to dispose of or contract in reference to the lands
of the principal. A power of attorney might only cover the very thing expected to be done, as to sell certain land,
described in the power of attorney, at certain price:; or upon certain terms therein named. A power of attorney giving
authority to sell or dispose of real estate is, in case of its use, recorded in the same manner as deeds are recorded. But
powers of attorney which are used as the evidence of one's authority to do things which are not matters of record, are
themselves, of course, not recorded.)

Appendix B. Questions And Problems

Chapter One

1. Define the terms "agent" and "servant" ; show in what way an agent is the same as a servant and in what respects
the two differ, and how an agent or servant differs from an independent contractor.
2. A contracts with B, a building contractor, for the erection of a garage on A's land, with the understanding that B shall
furnish all necessary material and labor. B employs, among others, C, a painter, and tells him to get all the required
paint. C does so and charges the paint to A. Can the seller of the paint hold A on the theory of agency? Is B A's agent
for any purpose?
3. What is the meaning of the maxims "qui facit per alium, qui facit per se" and "respondeat superior"?
4. A hotel Co. owning a number of cabs upon which its name is painted enters into contracts called "leases" with
drivers whereby the cab drivers shall pay a stipulated consideration per day for the use of the cabs. The cab drivers
agree to render service to the hotel guests, and are entitled to keep all fares collected by them. M while riding a bicycle
was run down and injured by one of the cabs and the accident also causes injury to a passenger, who is being driven
to the hotel. M and the passenger sue the Hotel Co. Can either recover? (MeColligan R. Co., 214 Pa. 229, 6 L. R. A. N.
S. 544 and note.)

Chapter Two
5. A employs M. a minor, aged ten years, to buy some goods for him of B upon A's credit. The boy buys the goods and
A is charged with the cost. On the way back M engages in play and forgets the goods, leaving them beside the road,
where they are stolen. In a suit by B against A for the price of the goods A defends that M had no capacity to act for
him. How should the case be decided? Why?
6. May a minor appoint an agent?
7. What is the rule as to the appointment of an agent for purposes that are illegal or opposed to public policy?

Chapter Three

8. P appoints A his agent with power to make a deed to P's real estate, Blackacre, and to enter into a contract for the
sale of Whiteacre. A's authority is in writing but not under seal. Under the law a deed to real estate requires a seal, but
a contract to make a deed does not require a seal. A puts a seal on both instruments. P seeking to get out of both acts
charges that A had no sufficient authority to represent him. Will the deed or the contract stand?
9. Under the statute of frauds requiring contracts to be proved by written memorandum, .may an agent who is duly
authorized to make a contract covered by the statute of frauds, make a sufficient memorandum to bind his principal
where the principal says nothing about it?
10. What is the authority of a wife to bind her husband?
11. What is the authority of a child to bind his parent?

Chapter Four

12. Define ratification.

13. A of the firm of A and B, bought goods in his own name and for his own personal purposes, as the seller knew. Not
having the expected use for such goods he sold them to the firm. The seller learning of this sues A and B for the price
and B claims that he cannot be held. The seller claims that B ratified A's act. Is B liable? (Fraser v. Sweet, 13 Manitoba
L. Rep. 147, 2 Brit. Rul. Cas. 254.)
14. Does a principal ratify the agent's act by accepting the benefits thereof where he does not know all of the facts, but
could ascertain them by diligent inquiry? Do you make any distinctions here?
15. A college authorizes its President to borrow money. In order to accomplish the loan he pledges collateral belonging
to the corporation. The corporation knowing what he has done accepts the money, but brings suit to recover the
pledged property as having been pledged without authority. Will it prevail? Why?
16. An agent makes a contract in the name of his principal, by whom he represents he is authorized. The third person
discovers the agent has no authority and seeks to withdraw, but the principal replies that he authorizes the act. Can the
withdrawal be made?
17. Is silence (no benefits being received) in itself ratification?

Chapter Five

18. A authorizes B, a real estate broker, to sell his property on certain specified terms. B procures C, but A refuses to
deal with C. On what conditions, if any, can B compel A to pay him a commission?
19. A authorizes B, a real estate broker, to sell his property on certain specified terms. B procures C, with whom A
makes a contract of sale. C is, however, financially irresponsible and fails to perform his contract. Is B entitled to his
commissions?
20. A advises B, a broker, that he wants to sell his home and directs B to procure him a buyer. No terms are, however,
proposed, as A wants to bargain with the prospective buyers. B procures C, who offers A a good price, and A refuses
to sell to him. C is ready, willing and able to buy at a good market price. Is B entitled to his commission?
21. Suppose in the case last cited A had accepted C and made terms with him and entered into a contract. Would B be
entitled to his commission?
22. P employs A for one year. At the end of six months P discharges A, without proper cause, owing A one month's
salary. A sues for the salary due and recovers. Afterwards he sues for breach of contract. Can he recover?
23. An agent is employed for a year at $100.00 per month, payable monthly. He quits in the middle of a month. Is he
entitled to recover for his services during previous months, and during the half month ?

Chapter Six

24. W employed J to sell W's property for $3,000, reserving the right to sell himself if he found a purchaser. W entered
into negotiations with one H for the sale of the property for $3,300, but H learned that the property was offered for
$3,000 by J, whereupon he dropped his negotiations with W and dealt with J. J by a roundabout method sold to H. W
now sues for $100 commission retained by J on the ground of breach of faith. Can W recover? (James v. Williams
(Nebr.), 20 L. R. A. 207.)

Appendix B. Questions And Problems. Part 2

25. A employed B to purchase property for her for $5,000. B negotiated with the owner and found he could purchase
for $4,500. B thereupon bought it himself. A learning of this brings suit, tendering $4,500. B claims that he is entitled to
$5,000 or at least $4,500 and interest thereon during the time of the investment. What are his rights? (Boswell v.
Cunningham (Fla. ). 21 L. R. A. 54.)
26. A consigned butter to B, a commission merchant, for sale by B. B insured the butter. A fire occurred, doing some
damage, and the arbitrators allowed B a sum for damages and allowed B to sell the butter for what he could get. B sold
the butter and rendered an account to A, charging A with commissions and insurance premium, and not mentioning the
fire. A learning of the fire sues to get back the commission and to be allowed the insurance money. Can he prevail?
(Fish v. Seeberger, 154 111. 30.)
27. M desiring to buy land, and knowing that A was acting as agent for P, entered into an arrangement with A to buy
the land, ostensibly for M, but in reality for the joint benefit of M and A. P, the owner, after the deal had been
consummated, learned of the arrangement and now sues to set the sale aside. Can he recover? (Glover v. Layton, 145
111. 92.)
28. D was manager of a theatre for H. H had a ten year lease. Before the lease expired D secretly applied to the owner
of the building for a renewal of the lease at an increased rental. II claims the benefit of this lease. Is he entitled to it?
(Davis v. Hamlin, 108 111. 39; Essex Trust Co. v. Enright, 214 Mass. 507, 47 L. R. A. N. S. 567.)
29. P instructed A to purchase certain bonds for which he was remitting money. Before the money reached A, the
bonds had a great and unexpected rise in price. A delayed purchasing until he could receive further instructions from P
and the bonds went still higher. Is A liable for not buying the bonds upon his receipt of the money? State the principles
involved. (Bernard v. Maury, 20 Grant. (Va.) 434.)
30. What is the meaning of the phrase "Delegata potestas non potest delegari"?
31. What acts can an agent properly delegate?
32. What is the rule as to liability of banks for collections made through correspondent banks?
33. If an agent makes a contract for his principal and the third person defaults is the agent liable for such default?
34. What is a del credere agency? Does the statute of frauds apply thereto? Must the principal first have recourse
against the customer before he can hold a del credere agent?

Chapter Seven

35. T deals with A, who acts nominally as P's agent. As a general statement what must T show to hold P on the
contract made by A In P's name?
36. What is express authority? implied authority? apparent authority?
37. A general manager of a piano company publishes an offer of a reward to persons solving a certain rebus. The
company defends in a suit by M for the reward that its board of directors had voted that no such rewards be offered
and the manager had been so notified. Is the, company liable?
38. An agent was employed to establish an agency for a sale of trucks in a town, and traded a sample truck belonging
to the employer for an automobile with the persons whom he was establishing as agents for the sale of trucks for his
employer. The employer attempts to repudiate the transaction. Is he bound by his agent's act? (Davidson v. Parks, 108
Atl. (N. H.) 288.)
39. An agent had authority to collect interest on his principal's debts. With no other express authority than this he
collected a debt itself and absconded. The debtor claims that the agent bad authority to collect the debt and that the
principal is bound thereby. How should the court decide? (Thornhill v. Massucci, 216 S. W. (Mo. Ap.) 819.)
40. P conferred upon A power to manage P's real estate, and execute deeds and mortgages and the necessary
promissory notes, and pay taxes, "and generally to act in the premises as fully as I might act personally." A borrowed
money from M In P's name, for the purpose of paying taxes. He used the money for himself. M sues P on the notes
given by A in P's name. Can M recover? (William V. Dugan, 217 Mass, 256, L. R. A. 1916 C. 110.)
41. A was an agent to solicit advertising and to collect accounts in checks or cash due for advertising; he collected
certain checks payable to his principal, and had them cashed at the T bank. A absconding with the proceeds, P sues
the T Bank. Can he recover? (Dispatch Printing Co. v. Nat. Bank of Com., 109 Minn. 440.)
42. An agent had a writing from his principal reciting that the agent was "hereby authorized to transact any and all
business for the company." Having a check in his possession payable to the company, he indorsed the company's
name to the check and procured the money from the defendant bank. Assuming that there are no circumstances
showing any authority of the agent except the above writing, is the bank protected in paying this money to the agent?
(Coleman v. Seattle Nat. Bk., 186 Pac. (Wash.) 275.)
43. P had a horse to sell and gave it into A's possession with authority to go out and sell to any purchaser he might
find, but for not less than $3,000. A sold to T for $1,000. P repudiates the transaction. Is the bargain good?
44. A being employed to collect notes for P, took hay in payment, believing that the best way to get the most for his
principal. Can C repudiate the deal? (Rush v. Rush, 170 111. 623.)
45. An agent is authorized to sell lumber. He makes a warranty as to the quality of the lumber. On a sale for the price,
defense is made that the warranty was broken. The principal had no actual knowledge of the warranty. Is he bound
thereon? (Eichler v. Kahnweiler, 178 N. Y. S. 257.)
46. A had authority to receive orders for goods sold by P. M of the firm M and N, customers of P, gave A notice of his
withdrawal from that firm. N thereafter bought goods from P in the old firm name. A did not inform P of the notice given
him. P seeks to hold M and N. Can he hold M? (Cox v. Pearce, 112 N. Y. 637, 3 L. R. A. 563.)

Appendix B. Questions And Problems. Part 3

47. In a personal injury case, caused by breaking of chains, plaintiff offers to testify as evidence against the defendant
that defendant's foreman an hour after the accident stated to plaintiff "that he (the foreman) had been after the
company a year to furnish him with new chains and they would not do it." Defendant objects. Is the evidence
competent? (Usry v. Augusta Southern Rwy. Co., 102 S. E. (Ga.) 184.) Would the foreman be a competent witness on
the stand against defendant?

Chapter Eight

48. If an agent acts ostensibly as principal, but in reality represents a principal who later becomes known, can the third
person hold the undisclosed principal?
49. In such a case, must the third person hold the undisclosed principal rather than the agent?
50. A makes a contract with T. Ostensibly he acts in his own behalf but really he is P's agent. P remits proceeds to A to
pay T. Later T discovers P's existence and identity. A does not pay T. T sues P. Can T recover in this suit?
51. Can an undisclosed principal be held on negotiable paper signed by the agent in his own name?
52. State the right of the undisclosed principal to hold the third person.

Chapter Nine

53. Defendant's teamster finished his day's work and having driven to the stable to put the horses away, changed his
mind and drove off again on an errand of his own, and in doing so by his negligent driving injured plaintiff. Is defendant
liable for this tort of the teamster? (Mitchell v. Crasweller, 13 C. B. (Eng.) 237.)
54. Defendant's teamster coming from town with a load of fertilizer for defendant's farm went a round-about way to stop
at a. shoe shop on an errand of his own. While doing so, plaintiff was injured by the teamster's negligent driving. Is the
defendant liable? (Ritchie t. Waller, 63 Conn. 155, 27 L. R. A. 161.)
55. The M. R. Co. employed A, as a ticket agent. H purchased a ticket and paid therefor a coin, which the agent
immediately after taking, pronounced as counterfeit and detained her for arrest. Was the company liable? (Pamori v.
M. R. Co., 133 N. Y. 261.)
56. A left home with the intentions of going to R's store to trade. Before she entered the store and while she was
standing looking into a show window, a detective employed by the company caused her arrest, accusing her of
shoplifting. Is Reliable? (Vrchotka v. Rothschild, 100 111. Ap. 268.)
57. A is agent of the P. Insurance Co. with authority to suspend, check up, and settle with, the local agents of the
Company. B, one of such local agents, was deemed to be in default. A attempted in various ways to settle up and
finally had him indicted of embezzlement, a crime for which he was found not guilty. Assuming that A acted without
reasonable grounds, is P liable? (Russell v. Palatine Ins. Co. (Miss.).)
58. A salesman of P. Co. in attempting to make a sale, slanders a rival concern. Is P. Co. liable to that concern for the
slander?

Chapter Ten
59. A as Vice President of a bank guarantees in the name of the bank an account between B and C. Can the bank be
held? Can A be held? Why?
60. A is acting as agent for an unknown principal. T knows that A is a mere agent but does not know A's principal. A as
such undisclosed agent makes a contract with T. T asks to hold A personally. A defends that T knew he was a mere
agent. Is the defense good? (Siler v. Perkins, 126 Tenn. 380, 47 L. R. A. N. S. 2432.)
61. Following note given : "Chicago, July 6, 1886. On Aug. 1, 1886, we promise to pay to order of S. & C. Co. One
Thousand Dollars.
(sd) M. M., Pres., W. P. & Co.
A. F. D., Sec'y." M. M. and A. F. D. are personally sued. They defend that they are not personally liable. What is your
opinion? (McNeil v. 8. & C. Co., 144 111. 239. Note 21, L. R. A. N. S. 1045.)
62. What is the rule as to liability of agent for his own torts committed in performing the agency?
63. A was agent of an apartment building with full authority to keep it in repair and hire the employees. B, a tenant of
the building, was injured through A's negligence in allowing the door of the elevator shaft to be out of repair, so that it
would stand open when the elevator was not at the floor. B sues A. Defense that A is a mere agent of a disclosed
principal. Is defense good? (Tippecanoe Loan & T. Co. v. Jester, 180 Ind. 357.)

Chapter Eleven

64. Define a factor.

65. When should a factor insure goods received under his agency?
66. Has a factor any implied or apparent power to barter goods?
67. May he sell on credit? May he extend credit originally given ?
68. Can a factor who has possession of goods give a good title by a sale which is contrary to instructions where such
sale is to a person who does not know that the factor is not owner?
69. What is the factor's lien?
70. Define a broker? What various kinds? Define each kind.
71. What, generally speaking, is the authority of the broker?
72. Define auctioneer.
73. When does sale by auction take place?
74. What is by-bidding?
Chapter Twelve

75. In what various ways may an agency terminate?

76. Distinguish between right to terminate and power to terminate.
77. A borrowed from B $1,000, and as part of the same transaction appointed B his agent to collect debts due A, as
security for the loan. A dies before the loan is paid. Is B's authority to collect thereby revoked?
78. A has an agency for one year to sell automobiles for M. It is an extremely valuable agency, and its loss will cause A
great damage. M attempts to revoke. A insists M has no power to do so. Can M revoke?

Chapter Thirteen

79. What effect has death of principal on agent or agency? Insanity?

80. How does bankruptcy affect agency?
81. State effect of war upon agency.

Preface To Volume II
In preparing this book the author considered the plan of setting out the Negotiable Instruments Act, section by section,
following each section with an explanation and illustrations. But for several reasons it finally appeared advisable to
follow the plan which has been used, giving the text of the Act in an Appendix, with frequent reference to it. This
involves some repetition, but not enough to materially increase the size of the book.
The Negotiable Instruments Act has now been adopted in a great majority of the States, and this has given such
uniformity to the law that a book of this sort gains more value than it might otherwise have. The States in which this
uniform act is in force, are named in the note at the foot of page 40

The Law Of Negotiable Paper. Part I. General Nature And History. Chapter 1. What Is A
Negotiable Instrument. A. General Description Of Negotiable Paper

Sec. 1. Technical Significance Of The Term "Negotiable."

By the term "negotiable" we Indicate that certain instruments, so described, are given by law a property by virtue of
which they may be transferred by the payee therein, and his transferees successively, to vest in each succeeding
transferee the title thereto, unaffected by certain defenses to which they might have been subjected in the hands of the
Immediate or any transferor, and to which non-negotiable paper would be subject notwithstanding such transfer;
provided the transfer is made according to the rules established to govern commercial paper. And in addition to such
transferability such paper has other peculiar properties, chiefly for the purpose, however, of aiding such transferability.
We cannot get a very adequate understanding of the nature of a negotiable instrument except through a detailed
consideration of the subject, yet we may hope to know at the outset in a general sort of a way what the term
negotiability means. It at once suggests the idea of transferability, and that is indeed its most important and governing
characteristic. It is a principle of the law of contract, that contractual rights, except rights for personal services, may be
assigned to another; but they cannot be negotiated unless put in a certain form. If put in that form, they may be
negotiated simply because the law has so established it for the conveniences of trade.
When one makes a contract with another whereby he secures, or seems to have secured, a certain right, as for
instance, to have a salary paid him upon a certain date, the law permits him to assign that right to another. This cannot
injure the debtor, for the assignment is in effect no more than a direction by the creditor for the debtor to pay the salary
to another person; the contract which exists between the employer and employee is unaffected in its obligations and
duties. Suppose, however, it happens that the debtor (the employer) has defenses or counter-claims which he may set
up against the claim for such salary, as, that the employee has been advanced a part of it, or that he has not
performed the services. It would not be just to permit the employee by selling his claim, or apparent claim, to prevent
the employer to set up his defense or counterclaims, for the simple reason that such assignment was not contemplated
by the parties as an object of the contract. It was not contemplated by them that a purchaser of the debtor's promise
could take that promise without reference to the transaction out of which it arose. The employer did not mean to
consent that he would pay the salary whether earned or not, whether he has counterclaims or not, by reason of its
assignment to a stranger, leaving the employer to his perhaps doubtful, and at any rate, circuitous, remedy against the
employee. The law therefore says that though rights of this sort may be assigned, yet they must be taken in reference
to the transaction out of which they arise. The assignee must step into the assignor's shoes and can claim no larger
rights than that assignor could claim.
Yet for special reasons, it may be the desire of this employer and this employee to create a form of obligation which
may pass upon its face for its full face value, upon which the apparent debtor shall have in effect written: "This promise
of mine, while subject to defenses so long as not transferred, is put in this form in order that a transferee for value and
in good faith, may take it without reference to the transaction out of which it arose. I hereby authorize my seeming
creditor to separate this promise from his obligation, and it need not concern a purchaser what was given, or whether
anything was given, so long as he does not know when he purchases this promise that I have any defenses against its
enforcement. I have put my promise in this form so that my promisee may by selling it virtually separate it from and
make it independent of his corresponding obligation to me."1
1. There are, however, gome few unusual defenses which may be set up against even the innocent purchaser of a
negotiable instrument, as we shall note hereafter.
In order to accomplish this result, and give to promises a quasi-monetary value, that is, to make them instruments of
credit, the law provides certain forms, which indicate, when adopted by a party, that he means and contemplates their
transfer by the promisee or holder, and this is the reason why we came to have negotiable instruments. But a great
body of rules has grown up which governs the drawing of such instruments and governs their transfer.
Inasmuch as the assignment of rights under a contract is not contemplated except incidentally by the parties, neither
party need question whether there has been any assignment and is not affected by any assignment until he has
received notice of the assignment. Thus if after assignment of a salary by an employee, the employer, having no notice
of such assignment, pays it to the employee, he cannot be made to pay it over again to the assignee. But the maker of
negotiable paper has put his promise in that form so that it may be negotiated if desired, and he* must always act with
that possibility in mind. Consequently no notice need be given him, and he must protect himself by always seeing to it
that the party to whom he pays money has in his possession the paper which evidences the liability, properly indorsed,
and if he pays that paper before maturity he must take it up, lest it be further negotiated.
We may take another illustration to make the paragraph plainer:
A, a jeweler, has sold and delivered to B a stone, known to him to be a topaz worth a few dollars, but which he has
fraudulently represented to be a rough diamond, worth $500.00, and for which B, relying on the representation, has
agreed to pay him $500.00. We may suppose that B has not put his promise in writing, or that if he has done so, the
writing does not contain the elements established by custom and law as indicative of the parties' intent to make the
contract negotiable. Now the law permits A to transfer his rights under a contract of this sort and this transfer is called
an assignment. A accordingly does assign to C, who knows nothing of the fraud and who pays A $500. B, however,
learning of the fraud, can make his defense against C as readily as he could have done against A, for though A could
transfer his rights under such a contract, he could transfer no more than his rights. C stands in A's shoes. But let us
suppose that when B purchased and obtained the stone, he had given a promissory note to A in the sum of $500,
containing all of the elements required to make an instrument negotiable, and that before its maturity A had sold the
note for value to C, who was ignorant 6f the fraud. Under this assumption B cannot make the defense against C that he
could have made against A. A can by negotiation transfer a better title than he had. In other words, putting the
obligation in negotiable form may be said to separate and set it apart from the rest of the transaction for purposes of
negotiability.
Negotiable instruments differ from other simple contracts in this threefold manner:
First: In the quality of their transferability as indicated;
Second: In the fact that a consideration will be presumed until the contrary is shown;
Third: In the fact that three days if grace were allowed by the common law, meaning that the instrument could not be
sued on until three days had elapsed after the date named in it for its maturity. But this has been abolished by statute.
Let us now consider certain particular instruments to discover whether the law impresses upon them the property of
negotiability. The chief of these, we will find, are promissory notes, bills of exchange, and checks; the law merchant
being sometimes referred to as the law of bills, notes, and checks. But even such instruments are not negotiable
unless drawn according to the rules established - containing all of the elements of negotiability hereinafter discussed.
Yet it does not follow that because they may be non-negotiable, that they are for that reason ineffective as contracts.
Thus we shall hereafter see that _a promissory note payable when one becomes of age is non-negotiable, but it may
well be the expression of a good contract between the parties.

B. Negotiability Of Various Instruments Considered

(a) The instruments which are negotiable by and subject to the negotiable instruments law or law merchant.

Sec. 2. Promissory Notes

"A negotiable promissory note within the meaning of this act is an uncon-ditional promise in writing, made by one
person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a Sum
certain in money to order or to the bearer. When a note is drawn to the maker's own order, It Is not complete until
indorsed by him."2
A promissory note, as the name indicates, is the expression of a promise. To be valid as a contract between the
parties, there must be all the essential elements necessary to the formation of a contract. To be a negotiable
instrument, it must contain other elements. What those elements are is indicated in the definition above, but as they
are hereafter more particularly discussed, they will not be further noticed here.
The parties to a negotiable promissory note are: the maker, who is the promisor, and the payee, or the one to whom
the promise to pay is made. But the payee may be described as "the bearer," in which event the instrument may be
transferred with or without indorsement. If the payee is named he must indorse, and he is then called an indorser, as
are all other subsequent transferors who place their names on the back of the instrument.
The power to evidence a debt in the form of a negotiable promissory note secures to one a better credit than perhaps
he could otherwise obtain. For it may in any particular instance enable his creditor to immediately realize on the debt
by a sale to another, who purchasing before maturity and with no knowledge of any defense against the note, knows
that he can enforce it according to its tenor, restrained only by the insolvency of both the maker and the payee, who is
now indorser, and even this restraint would be removed were the note adequately
2. Uniform Negotiable Instruments Act, SEC. 184. (Appendix A.) secured. And this advantage of securing credit that
might not in a particular case be otherwise obtainable, comes of the fact that a promissory note has some of the
attributes of money, and to a limited extent, may serve in place thereof. And in a suit upon a promissory note it is not
necessary to prove the consideration, that is, the transaction out of which it arose, unless a defense is made denying
consideration.
Forms of negotiable promissory notes are set out in Appendix B.

Sec. 3. Bills Of Exchange

"A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a
sum certain in money, to order or to bearer."3
A bill of exchange is an order drawn by one person, in favor of another upon a third. To be negotiable it must contain
the elements indicated in the definition, but as these are discussed hereafter, they need not be further noticed here.
There are two sorts of bills of exchange, foreign and inland. "An inland bill of exchange is a bill which is, or on its face
purports to be, both drawn and payable within this state. Any other bill is a foreign bill. Unless the contrary appears on
the face of the bill, the holder may treat it as an inland bill." The importance of distinguishing between foreign and
inland bills will appear later herein.
3. Uniform Negotiable Instruments Act, Sees. 126-131.
The party who makes the bill of exchange is called the drawer; the person in whose favor the order is made is called
the payee; the party upon whom the order is made is called the drawee; if he accepts he is called the acceptor, and he
is not liable upon the instrument until he does accept. The instrument may be indorsed either before or after
acceptance.
Bills of exchange are sometimes drawn in "sets." This is usually true only of foreign bills drawn on distant parties, and
means that there are several papers, called "parts," usually three, similarly drawn, numbered consecutively, and
referring to each other ; and altogether constituting only one bill. The purpose of drawing a bill in a set is to insure the
prompt arrival of the bill at its destination. This is accomplished by sending each part separately. The parties are
protected from becoming liable on all parts by the fact that each refers to the others, and their outstanding existence is
thereby made known. If the drawee accepts one part he accepts the bill, and should not write his acceptance on more
than one part, for he may become thereby liable to pay the bill to purchasers of the various parts. So in paying the bill
he should take up the accepted part. The idea of drawing bills in sets is that any part may be treated as the bill of
exchange; if any part is accepted, that is an acceptance of the bill; if any accepted part is indorsed, that is an
indorsement of the bill; if any part is paid or otherwise discharged, that is a payment or other discharge of the bill.
There is no especial danger in drawing a bill in parts if the rules are complied with; but by careless treatment of the
various parts, a two or three fold liability might be incurred.
The right to draw an instrument in the form of a bill of exchange, given by the law this property of negotiability, gives
one, as in the case of promissory notes, and for similar reasons, a better means of securing credit than he might
otherwise have, and that springs from the fact that the bill of exchange, like the promissory note, has a quasi-monetary
value, and the liability of several parties, primary, or secondary, may go to support its credit. But it also has the great
advantage of serving to adjust accounts or draw credit from one place to another without the actual transfer of funds.
To illustrate some uses of the bill of exchange, we may suppose these situations:
A, being in immediate need of funds, and being informed by B, to whom he has applied for a loan, that B will be able to
get the money for him if the security or credit furnished is satisfactory, thereupon draws a bill of exchange on C, a
business friend, requesting C to accept it, and advising C that he, A, will have ample funds to pay the bill before it
matures. C thereupon accepts the bill. By means of C's acceptance whereby C loans A his credit, A is thus enabled to
secure from B the money needed. This bill may pass through a number of hands before it matures, being supported by
the credit of C, and of A, and of every one indorsing it. Or, Again;
A is B's creditor and C's debtor. He draws a bill of exchange on B in favor of C. B accepts this and thus A pays his
account without any transfer of funds. Again;
A has a place of business in Chicago, and often finds it necessary to transfer funds to parties living in or around New
York. B has a place of business in New York and often finds it necessary to transfer funds to parties, living in or around
Chicago. They arrange that each shall accept the paper of the other. In this way they accomplish their purpose of
putting the various payees in funds, without any transfer of coin or currency between New York and Chicago, except
upon accountings made between them at stated intervals.
A form of bill of exchange is set out in Appendix B.

B. Negotiability Of Various Instruments Considered. Continued

Sec. 4. Checks
"A check Is a bill of exchange drawn on a bank, payable on demand."4
A check may be called a kind of a bill of exchange. It differs from other bills of exchange in these particulars:
(1) It is drawn on a bank or banker.
(2) It is payable on demand; bills are either payable on demand or at a fixed or determinable future time.
(3) It is drawn by one who thereby asserts that he is a depositor in the bank or with the banker and that he has funds
there sufficient to cover the check.
Checks are as far as possible governed by the same rules which govern bills of exchange.
4. Uniform Negotiable Instruments Act, Sees. 185-189 (Appendix A).
(b) Special forms of the above instruments.

Sec. 5. Certificates Of Deposit

A certificate of deposit is an instrument issued by a bank reciting a deposit of a certain sum of money, payable on
demand or at a fixed time. It is negotiable, if drawn properly, being a form of promissory note.
Banks issue certificates of deposit, bearing interest, and payable either on demand or at a time fixed. They are
negotiable if containing the elements of negotiable paper, for the simple reason that they are then negotiable
promissory notes. Therefore we may say that a negotiable certificate of deposit is a promissory note made by a bank to
the order of its depositor.

Sec. 6. Bonds
A bond Is an evidence of Indebtedness issued by a municipal, public or private corporation payable at a date certain
and is negotiable when drawn In accordance with the rules governing commercial paper.
A bond is an instrument evidencing the indebtedness of a corporation, issued under the seal thereof, usually referring
to some mortgage or trust deed given to secure the debt whereof it is the evidence. If it contains sufficient words of
negotiability and is not clogged with any condition or stipulation rendering it conditional or uncertain, it is negotiable for
the reason that it is then a promissory note.
Bonds are of two sorts:
(1) Registered bonds: or bonds which are transferable by registration of the name of the transferee on the books of the
company where the payee's name is registered. Their negotiability is said to be temporarily withdrawn.
(2) Coupon bonds: or bonds to which are attached interest coupons to be clipped off and presented for payment when
due. These coupons are usually in form and effect promissory notes, and may circulate as such before or after due,
independent of the main instrument. Coupon bonds are negotiable.
Bonds are issued in series. They are usually secured by a mortgage in the form of a trust deed, to a certain person,
who represents the bond holders as trustee.

Sec. 7. Bank Drafts

A bank draft is a bill of exchange payable on demand, drawn by one banker or bank upon another banker or bank to
the order of a person therein named. It is negotiable as usually drawn.
If one being in Chicago desires to send money to New York and for some reason does not or cannot accomplish his
result by use of his personal check, he may buy a draft on a New York Bank. This is simply a bill of exchange in which
drawer and drawee are banks and bankers. As usually drawn such drafts are negotiable.
(c) Documents of title made negotiable by special statute but not subject to negotiable instruments law or law
merchant.

Sec. 8. Bills Of Lading

A bill of lading is an Instrument issued by a carrier of goods reciting receipt of certain goods therein described and
evidencing the contract between the parties as to the details of transportation. It is not negotiable unless specially
made so by statute, and even then it is not governed by the peculiar rules of the law merchant but is negotiable only In
a limited way.
A bill of lading is transferable to effect the transfer of the title of the goods whereof it is the symbol. By the common law,
bills of lading are assignable, not negotiable. Now in many of the states statutes have been passed conferring a
peculiar and limited negotiability on bills of lading when drawn in a certain way. When such is the case such
instruments are not negotiable in the sense that a promise or order to pay money may be negotiable and they are not
governed by the negotiable instruments law. These statutes provide that a bill of lading may be drawn to the order of a
certain person therein named, or bearer, or they may be drawn simply to a certain person. In the first case the goods
are deliverable "to A, or his order," or "to the order of A" or "to bearer;" in the second case the goods are deliverable "to
A." In the first case the bill of lading is known as an "order bill," and is negotiable in this limited sense mentioned; in the
second case the bill of lading is known as a "straight bill" and is not negotiable, but simply assignable. If an order bill of
lading is issued by a carrier it must take notice that such bill may be negotiated and therefore must not deliver up the
goods to any one unless the bill of lading is produced by such party, properly indorsed. If a straight bill of lading is
issued by a carrier, it need not assume that the bill of lading has been assigned and may therefore deliver up the
goods to the consignee named in such bill of lading without his production of the bill of lading, unless it has received
notice from the assignee of such bill that such bill has been assigned to him, and such assignee may then obtain the
goods upon his production of the bill of lading as evidence that he is the assignee thereof. See Volume 3 of this Series.
Sec. 9. Warehouse Receipts
A warehouse re-reipt Is not negotiable by the common law. Some states have passed statutes conferring upon such
Instruments when drawn In a certain way the same sort of limited and peculiar negotiability possessed by a bill of
lading as described in the section above.
Many of the states are adopting the uniform warehouse receipt law. Such law divides warehouse receipts into order
receipts and straight receipts, just as the uniform bills of lading act divides bills of lading. What has been said of bills of
lading in the above section may be applied here. Warehouse receipts are not negotiable except by the aid of such a
statute and then are negotiable in the limited way mentioned. See Volume 3 of this Series.
It is better to refer to bills of lading and warehouse receipts as Negotiable Documents of Title and to bills, notes and
checks as Negotiable Instruments or Negotiable Paper.
(d) Sundry instruments assignable but not negotiable.

Sec. 10. Certificates Of Corporate Stock

A stock certificate Is an Instrument Issued by a corporation reciting that the bearer or person named therein
Is the owner of the number of shares in the corporation as therein stated. It Is freely transferable but not negotiable.
One of the objects of incorporation is to secure a free transfer of shares without affecting in anyway the existing order
of affairs in the corporation. This transfer is accomplished by means of the certificate of stock which is issued to every
stockholder. Yet it cannot be said that a stock certificate is negotiable; it is simply assignable. It is not subject to the
rules governing commercial paper. A further consideration of such instruments should be sought in the Law of
Corporations. See Volume 5.

Sec. 11. Mortgages

A mortgage is conveyance or lien given on real or personal property as a security for a debt. It Is not negotiable, but in
some states statutes confer a quasi-negotlability.
Mortgages are assignable by the mortgagee, but not negotiable, being securities for debts, and not the evidences
thereof. But the notes which accompany mortgages are negotiable if correctly drawn, and indorsement of such notes
operates to transfer the mortgage. In some states, statutes have been passed to the effect that if a mortgage secures
and refers to a negotiable promissory note, it shall also be negotiable in the sense that the defenses shall not be set up
to defeat foreclosure proceedings which could not be set up in a suit on the note on account of the note's negotiable
character.
(e) The instruments within the scope of this text.

Sec. 12. The Negotiable Instruments Herein Considered

The negotiable Instruments hereinafter discussed are only those properly falling under the uniform negotiable
instruments law, and not under special statutes, that is, bills, notes, and checks and special varieties thereof. These
are the instruments which constitute the proper subject-matter of "The Law of Negotiable Paper."
While various statutes in different states have attempted to confer upon various instruments a negotiable or quasi-
negotiable character,, the discussion of them does not, after all, fall properly under a treatment of the law of
commercial paper. "Commercial paper" as it is commonly understood means paper evidencing a debt ultimately
reducible to money, and not calling for the delivery of other property. It treats of the law of bills, notes, and checks. We
shall hereafter consider only those three forms of instruments. What is said shall refer to bonds, certificates of deposit,
bank drafts or any instrument payable in money, simply for the reason that they are bills, notes or checks. The
discussion will have nothing to do with and will not apply to warehouse receipts, bills of lading, or any instrument which
does not contain a promise or order to pay money.

Chapter 2. History And Origin Of Negotiable Paper

Sec. 13. Continental Origin And Adoption In England

Bills of exchange originated among the Florentine and Venetian merchants. They came into use in England and with
promissory notes became negotiable by the custom of merchants.
Foreign bills of exchange are thought to have been invented by the Florentine and Venetian merchants in the 12th or
13th century as a means of transmitting credit from one country to another without the need of actually transfering
money. The time of their first use in England is uncertain. Bills of exchange were not at first negotiable, and did not
pass from hand to hand as they now do, but became so in the 16th or in the early part of the 17th century.
Inland bills and promissory notes came into use in England about the middle of the 17th century. One of the Judges of
England, Lord Holt, in the early part of the 18th century, doubted the negotiability of promissory notes, and the Statute
of 3 and 4 Anne, c. 9, was passed to declare them negotiable.
Bills and notes were first negotiable by the custom of merchants and then by reason of the universality of such custom,
by the common law. Many statutes have since been passed in respect to such instruments, but are in declaration of or
addition or amendment to the common law whereby they were first negotiable. Lord Holt's opinion in respect to
promissory notes is believed to have been error. In 1878 Judge M. D. Chalmers published a Digest of the English Law
of Bills, Notes and Checks. His work attracted much attention and praise, and his services were procured to draft a bill
which should put the law of England in the form of a Code, and in 1882 the English Bills of Exchange Act was enacted
by Parliament.

Sec. 14. Negotiable Paper In The United States

By the adoption of the common law the American states adopted the law of negotiable paper. And the law has
developed therein according to the needs of the commercial world.
The American commonwealths adopted the English common law. They thereby adopted the law of negotiable
instruments as it was at the date which governs the adoption. Statutes have been passed from time to time which
amend the common law, but this legislation up to very recently has been of a detached sort. After Judge Chalmers' Act
was passed in England, the need of a similar codification was felt in this country. It was really much more needed on
account of the arbitrary division of our country into various legislative jurisdictions. In 1890 the legislature of New York
had authorized the appointment of commissioners to confer with commissioners from other states in respect to
uniformity in legislation. Shortly afterwards commissioners were appointed by other states and the Commissioners on
Uniformity of Legislation came to be widely representative. These commissioners procured in 1895 the services of Mr.
J. J. Crawford to draw up a Code; and the results of his labors were adopted in 1896 and recommended to the various
states for passage. New York was the first state to act upon such recommendation but the Uniform Negotiable
Instruments Law, with some minor changes in various instances is in force now in the states set out in the note below.5
The text of the Uniform Act is given in Appendix A and should be carefully studied in connection with the Study.
5. The Negotiable Instruments Act has been adopted in the following states: Alabama, Arizona, Colorado, Connecticut,
District of Columbia, Florida, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts,
Michigan, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Utah, Virginia,
Washington, West Virginia, Wisconsin, Wyoming.

Part II. The Formation Of The Contract. Chapter 3. Expression In Negotiable Form. 1. Formal
Requisites

Sec. 15. In General

Certain elements are required by law to be present in any instrument, as essential to negotiability. While it cannot be
said that there are any particular words, exclusively necessary to express these elements, still strict adherence to the
forms of expression approved by usage is advisable, that there may be no room for doubt.
The law merchant requires that certain elements be present to render an instrument negotiable. What these essential
requirements are, it is the object of the present chapter to enquire. It may aid in the comprehension of the subject,
however, to set them briefly forth here at the beginning, as follows:
(1) "It must be in writing and signed by the maker or drawer;
(2) "Must contain an unconditional promise or order to pay a sum certain in money;
(3) "Must be payable, on demand, or at a fixed or determinable future time.
(4) "Must be payable to order or to bearer;
(5) "Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty." 6
In the expression of these elements, there is customarily no great variety of form. By usage certain forms have become
well known, and it is highly advisable that recognized forms be used, if the intention is to create a negotiable
instrument. For it is highly important that the negotiability of a document be easily determinable. Such instruments,
having some of the qualities of money and being purchased in the way of trade, should have their character plainly
impressed upon them; therefore the simpler the form, the better, so long as it express all the elements. As the Illinois
Supreme Court has said: "By the law merchant and by the statutes of the states in aid thereof, negotiable instruments
occupy a highly useful and valuable place in the commerce and business of our people. There is no other form of
contract known that in so few words may contain so many well understood and thoroughly established legal rights and
liabilities" 6a
Often the negotiability of instruments is prevented by the use of too many words rather than by the use of too few. It is
sometimes said that a negotiable instrument must not "carry luggage;" it must not be clogged with burdens. We shall
see therefore that it must not contain qualifications, stipulations, etc., whereby conditions or uncertainties are imported
into it. Perhaps in any particular case it is desired to make conditions and qualify the promise or order. Then, of course,
it should be done; but it should likewise be understood that the instrument so made is not negotiable.
6. Uniform Negotiable Instruments Act, Sec 1. 6a. Smith v. Myers, 207 Illinois Reports, 126.

A. "It Must Be In Writing And Signed By The Maker Or Drawer."

Sec. 16. Writing And Signature

A negotiable instrument must be written and signed.
Rights secured through oral promises may be assignable but never negotiable, no matter what words are used to
express them. The term "writing" includes "print." The writing may be in lead or ink, though it is hardly necessary to say
that the latter is preferable.
So it must be signed. It is a rule that no party can be liable on a negotiable instrument as maker, drawer, or acceptor
unless he has signed it, by himself or his duly authorized agent. The name signed, however, may be an assumed one.
Thus if a note should be signed by the namee of a partnership, containing, say fifty partners, thus "General
Manufacturing Company, by John Jones," all the partners would be individually liable thereon, for they would all be
named in this fictitious name; assuming, of course, that the person signing the note had real or apparent authority to
bind the firm, as stated. A signature should never be typewritten or printed.

B. "Must Contain An Unconditional Promise Or Order To Pay A Sum Certain In Money."

Sec. 17. Unconditional Promise Or Order

A negotiable Instrument "must contain an unconditional promise or order-------."
(1) In general. Absolute promise or order is essential.
A note must contain an absolute promise, a bill or check, an absolute order, to make them negotiable. The introduction
of any condition in an instrument is fatal to its negotiable character, and the performance or happening of the condition
does not confer negotiability. The certainty or absoluteness of the promise or order must appear from the language of
the instrument, not from external events. Any condition inserted in the instrument is fatal to its negotiable character
(though it may well be the statement of a good non-negotiable contract), but we may briefly discuss the chief ones
under the headings just below.
(2) Reference to the transaction or consideration. If the promise or order is made conditioned upon the performance of
consideration, negotiability is destroyed; but a mere reference to the transaction which gives rise to the instrument,
whether executed or executory, does not in itself condition the promise or order.
Of course as between the parties themselves, where the consideration consists in a promise to do some act or to
deliver some thing and that act is not done and that thing not delivered, the party promising to pay may set up the
failure of the other party to do or deliver what he promised, notwithstanding that the promise or order is absolute in its
terms according to the requirements of the negotiable instruments act. But it is to be considered that if the maker or
drawer or the acceptor inserts express terms in the instrument that it is not payable except upon certain conditions, he
thereby intends to notify any possible purchaser that he must take it subject to the conditions imposed and that such
instrument is not meant to have a negotiable character.
One who becomes the transferee of negotiable paper knowing that there is no consideration to support the paper, or
that it has failed or that the contract has been broken, is subject to these defenses. One of the main purposes,
however, for putting a promise into negotiable form is to prevent those apparently indebted thereon from setting up that
the contract out of which the paper arose has been broken by the payee, or that there was no contract upon which the
paper was founded. A purchaser of negotiable paper is entitled to presume that which is generally the fact that a
negotiable instrument has been given for "value received," either in the shape of an act now performed or a promise of
a future act. That this consideration may fail or that the contract may be broken by the payee is a possibility, as the
purchaser must know, yet it does not concern him whether this has occurred or is occurring so long as he has no
actual knowledge that that is the case. The law protects him unless he knows of the defense of no consideration,
failure of consideration, or breach of contract. He may say in effect: "I am buying from B a note made by A to B's order.
Inasmuch as this note has been put in negotiable form the law allows me as a purchaser to presume that B gave A
something for which A made his note to B. The thing given may have been a horse, or a loan of money or a promise to
perform work or any other thing for which parties may bargain. B may have given A the thing, or he may merely have
given his promise thereafter to give the thing. This is no concern of mine. B may have broken his contract. The horse,
or whatever it was, may have been worthless, the promise may not have been kept. This does not concern me so long
as I did not know before I purchased this paper that such was the fact." Now suppose that the purchaser of this paper
is informed at the time the note is purchased, and it is so stated in the note, that it was a horse for which the note was
given. Does the fact that he has knowledge of the particular sort of transaction instead of a general presumption that
there was a consideration, affect his rights? Obviously it makes no differ-ence. He need no more assume that the
particular contract of which he is informed has been broken any more than he need assume that the contract whose
existence he is entitled to presume in the absence of such knowledge has been broken. Consequently it is well settled
that the mere fact that the particular transaction out of which the instrument arose, or the consideration, is stated, does
not affect the negotiability if the instrument is otherwise correctly drawn. If however, the terms of the instrument provide
that its operation is to depend upon the performance of the contract as recited, this is obviously a provision made for
the purpose of qualifying its character and depriving it of negotiability for it places a condition upon its operation. The
promise then becomes conditional. The mere recital, then, of the consideration does not affect the negotiability of the
instrument. But a provision that in any way makes the instrument subject to the performance of the consideration
destroys negotiability, and the instrument becomes the expression of a non-negotiable contract.
One should be warned however, to scrutinize with the utmost care any instrument which sets forth the transaction and
be very sure that the statement no way qualifies the promise or order.
In one case7 these facts appear:
Siegel, Cooper & Co., merchants of Chicago, contracted with one D. Dalziel, for street car advertising to be placed by
him, and gave in consideration for his undertaking the following note:
"$300. Chicago, March 5, 1887.
On July 1, 1887, we promise to pay D. Dalziel, or order, the sum of three hundred dollars, for the privilege of one
framed advertising sign, size - x - inches, one end of each of one hundred and fifty nine street cars of the North
Chicago City Railway Co., for a term of three months, from May 15, 1887. Siegel, Coopeb & Co."
On the day of the date of this instrument when Dalziel received it, he indorsed it for value to the Chicago Trust &
Savings Bank.
The advertising promised by Dalziel was never done, and the instrument was refused payment for that reason. But the
bank contended that this defense of failure of consideration could not be asserted against it as a purchaser in good
faith and for value of a negotiable instrument, and on this theory brought suit. The defense of the makers was that the
instrument was not negotiable because it showed (as they claimed) that the payment depended upon a contract to be
performed, and therefore, because non-negotiable, the transferee took it subject to such defenses as might be
interposed against his transferror.

"Must Contain An Unconditional Promise Or Order To Pay A Sum Certain In Money.".

Continued
7. Siegel v. Bank, 131 Illinois Reports, 669.
The court decided that the note was negotiable and allowed the bank to recover judgment thereon; saying in part:
"If it be conceded, as it must, that a condition inserted in a promissory note, postponing the day of payment until the
happening of some uncertain or contingent event, will destroy its negotiability * * * yet under the authorities, if by the
instrument the maker promises to pay a sum certain at a day certain, to a certain person or his order, such instrument
must be regarded as negotiable, although it also contains a recital of the consideration. * * *"
In another case,8 a suit was brought on a promissory note in the usual form, except that it contained the words "given
for a patent right." It was sold by the payee and when suit was brought by the holder, the maker set up that the note
was secured through fraud by which he was sold a worthless patent right, and claimed the right to assert this defense
against the purchaser of the note on the theory that this recitation made it non-negotiable, or put the purchaser on
notice.
The court in deciding that the note was negotiable, said in part: "Mercantile paper by legal inference imports a
consideration. But if this implication is strengthened by a statement on the face of the paper that there was a
consideration, and in what the consideration consisted, can it be said that this will impair or degrade the security?"
8. Hereth v. Meyer, 33 Indiana Reports, 511.
The following cases show a different result.
This instrument was given:9
"Chicago, July 12, 1877. Mrs. Martha A. Miller:
Please pay to the Excelsior Stone Company, or order, for stone in your buildings, $600 in installments, as follows: $200
when first floor joists are in; $200 when building is ready for the roof; $200 when stoops are finished; and charge same
to my account. James Parrott.
Accepted July 12, 1877.
Martha A. Miller."
This instrument is not a negotiable instrument, as payment is to be made only as work progresses and upon certain
things being done. Anyone taking this instrument, though giving value, having no notice and acquiring it before
maturity, would take it subject to the defenses which might have been made against the payee therein.
Another note10 read "12 months after date, we promise to pay to ourselves or order $321.25 for value received,
payable in Boston and subject to a policy." The court held that this reference to a policy rendered the note non-
negotiable and impressed it as a contract merely assignable and subject to defenses in the hands of the assignee.
The principle is illustrated by these cases, that a mere recital of the consideration, even though that consideration
appears to be executory in nature, does not in itself destroy negotiability, but if the promise is in any way qualified by a
reference to the consideration, the instrument may express a good contract and be assignable but it is not negotiable.
9. Miller v. Excelsior Stone Co., 1 Illinois Appellate Reports, 273.
10. Am. Exch. Bank v. Blanchard, 7 Allen (Massachusetts), 333.
(3) Reference to particular fund, account, credit, etc. A promise or order to be negotiable must be on the general credit
of the maker or drawer, and not of a particular fund or account. Yet a mere reference to a fund or account to indicate
the source of reimbursement or for bookkeeping purposes does not hinder negotiability.
If a promise or order is made to pay out of or by means of a certain fund, negotiability is prevented, for the reason that
the fund may not be ample. That it is, in fact, ample, is immaterial; the negotiability of an instrument cannot rest upon
such extrinsic circumstance. One having funds with another, or being a creditor of that other, may give an order upon
such other to transfer the funds or pay the debt to a third. That could not be a negotiable bill of exchange; it would
operate as an assignment (which a bill of exchange does not) ; but it would not be drawn on the general credit of the
drawer.
It is no objection however that the fund or an account be referred to in order to indicate how the drawee shall upon
payment re-imburse himself, provided that there would still be a right of recourse to him if the fund were not sufficient.
The negotiable instrument law in this respect provides, that the promise or order is unconditional when there is "an
indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the
amount."11 An order read as follows:12
"StaRkey, N. Y., Jany. 6, 1869. To A. You will please pay to M., or order, the sum of $2,000.00, on demand, and
deduct the same from my share of the profits of our partnership business in malting.
(sd) B." on which was indorsed: "Accepted, Feb. 6, 1869. (sd) A."
This was a direction to pay out of a particular fund and was not on B's general credit. In other words, had there been no
profits, or not sufficient profits, A could not have charged the deficiency to B, for B could have replied: "I directed you to
pay out of a certain fund but you saw fit to advance money to supply the deficiency of that fund. This my order did not
authorize, nor your acceptance bind, you to do."
The court said in part: "The true test would seem to be whether the drawee is confined to the particular fund, or
whether though a specified fund is mentioned, he would have the power to charge the bill up to the general account of
the drawer, if the designated fund should turn out to be insufficient. In the final analysis of each case, it must appear
that the alleged bill of exchange is drawn on the general credit of the drawer."
11. Uniform Negotiable Instruments Act, See. 3.
12. Adapted from Munger v. Shannon, 61 New York Re-ports, 251.
In the case of an assignment of a fund or debt, there is a direction to the debtor to pay it to the assignee named. In the
case of a bill referring to a fund, there is a direction to the drawee to pay a certain amount, and having done so, then to
reimburse himself out of the fund mentioned, or if insufficient, to charge the balance up to the general credit of the
drawer.
It may be noted here that if an order is really an assignment of a fund or credit it needs no acceptance to give the
assignee a right to sue the debtor upon it, as the right of assignment by the creditor is not dependent on the debtor's
assent. But a drawee of a bill of exchange cannot be made liable on the instrument until he accepts it, and this even
though it amounts to a breach of contract or duty as between himself and the drawer. This is illustrated in the case of a
bank check. The bank is under contract with the depositor to pay his checks if his deposit is ample to cover them. Yet
the payee of the check can take no action against the bank if it refuses to accept or pay the check, but is left to his
rights against the drawer. If the giving of the check amounted to an assignment, the assignee could demand payment
of the bank and have judgment if it refused to recognize the assignment without cause.

Sec. 18. Certainty Of Sum Payable

Promise or order must be "to pay a sum certain."
(1) In general. Certainty of amount payable, determinable from the language of the instrument it-self, is essential to
negotiability.
Certainty of sum payable must appear from the Instrument to render it negotiable. Thus a note read:
"Waterbuby, Conn., Aug. I, 1893. One year after date I promise to pay to the order of Norman D. Grannis, thirty five
hundred dollars at the Fourth National Bank. Value received, with interest at the rate of 6% per annum and taxes. W.
C. Myers."
The court held that though this instrument might be the expression of a valid contract between the parties, it was not a
negotiable instrument for the reason that the words "and taxes" made the amount payable uncertain.13
(2) When sum held not uncertain.
"The sum payable is a sum certain within the meaning of this act, although it is to be paid: 1. With interest; or
2. By stated installments; or
3. By stated installments, with a provision that upon default in payment of any installment or of interest, the whole shall
become due; or
4. With exchange, whether at a fixed rate or at the current rate; or
5. With costs of collection, or an attorney's fee, in case payment shall not be made at maturity.14
Instruments often provide for payment in fixed installments, and often also contain a provision that on the failure of the
payment of any installment or of interest, then the entire sum shall become due and payable; and these are valid
provisions and do not affect the negotiability of the instrument.
13. Smith v. Myers, 207 Illinois Reports, 128.
14. Negotiable Instruments Law, SEC. 2.
Instruments often contain provisions as to payment of exchange, sometimes expressing the rate, sometimes merely
stating "at current rate," and this does not make the amount uncertain within the meaning of the law.
Where a provision is to pay an attorney's fee, stating or not stating the amount thereof, if payment is not made at
maturity, this does not render the amount uncertain within the meaning of the law. The costs of collection and the
attorney's fee never become chargeable or of any effect if the instrument is paid at maturity. It is only in case it
becomes necessary after maturity to incur liability for costs or an attorney's fees, that they may be added.
If the amount of the attorney's fee is not stated, a reasonable amount is allowed by the court.
Aside from the provisions stated, any provision whatsoever that renders the sum payable uncertain in amount destroys
negotiability.

Sec. 19. Payment In Money

Promise or order must be to pay a sum certain "in money."
The payment promised or ordered must be in money. Promise or order to pay in notes or other evidences of
indebtedness or in securities of any sort, or in goods, or in money and goods, or in money or goods at the option of the
maker or drawer or acceptor, prevents negotiability.

C. Must Be Payable On Demand Or At A Fixed Or Determinable Future Time

Sec. 20. Demand Paper

Instrument may be payable on demand.
It is a common practice to make negotiable paper payable on demand.
It is payable on demand:
"1. Where it is expressed to be payable on demand or at sight, or on presentation;
"2. In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it
is, as regards the person so issuing accepting, or indorsing it, payable on demand." 15

Sec. 21. Fixed Or Determinable Time

If not payable on demand, instrument must be payable at a fixed or determinable future time.
(1) In general.
An instrument must be payable either on demand or at a time certain to occur. If there is any uncertainty whatever
about the arrival of the time that destroys negotiability.
(2) What constitutes determinable future time.
"An instrument is payable at a determinable future time within the meaning of this act, which is expressed to be
payable:
1. At a fixed period after date or sight; or
2. On or before a fixed or determinable future time specified therein; or
15. Negotiable Instruments Law, SEC. 7.
3. On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of
happening be uncertain.
An instrument payable upon a contingency is not negotiable and the happening of the event does not cure the defect."
16
In one case the plaintiff sued on an instrument to which he claimed title, as indorsee, which was to become due and
payable when Henry D. Kelley became 21 years of age. The plaintiff proved that said Kelley did become 21 years of
age before the suit was started. It became material in the case to establish whether this instrument was or was not a
negotiable instrument. The court in deciding that it was not negotiable said, in part, "* * * "Was the instrument in
question a [negotiable] promissory note? To constitute a promissory note, the money must be certainly payable, not
dependent on any contingency, either as to the event or the fund out of which payment is to be made or the parties by
or to whom payment is to be made. If the terms of an instrument leave it uncertain whether the money will ever
become payable, it cannot be considered as a promissory note. Thus a promise in writing to pay a sum of money when
a particular person shall be married is not a promissory note, because it is not certain he will ever be married. So of a
promise to pay when a particular ship shall return from sea, for it is not certain she will ever return. But if the event on
which the money is to become payable must inevitably take place it is a matter of no importance how long the payment
may be suspended. * * *
16. Ibid, SEC. 4.
"The fact that the payee lived till he was 21 years of age makes no difference. It was not a promissory note when made
and it could not become such by matter ex post facto." 17
An instrument payable at or after one's death may be negotiable, for death is certain to occur.

D. "Must Be Payable To Order Or To Bearer."

Sec. 22. Necessity Of Words Of Negotiability
A negotiable instrument must contain words of negotiability. These stamp its character.
The intent of the parties as to the negotiability of the instrument is indicated by their use of "words of negotiability."
These words must be present in every negotiable instrument. Of course they do not in themselves make an instrument
negotiable, that is, are of no effect where other elements are lacking. But they, too, must be present. It contains words
of negotiability when (1) it is payable to order; (2) when it is payable to bearer. In the two following sections we
consider what language makes an instrument payable to order and what, payable to bearer.

Sec. 23. When Instrument Payable To Order

"The instrument is payable to order where It is drawn payable to the order of a specified person or to him or his order."
"It may be drawn payable to the order of 1. A payee who is not maker, drawer, or drawee; or
17. Kelley v. Hemingway, 13 Illinois Reports, 604.
2. The drawer or maker; or
3. The drawee; or
4. Two or more payees, jointly; or
5. One or some of several payees; or
6. The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable
certainty." 18
Instruments to order, customarily read "Pay to the order of John Brown" or "Pay to John Brown, or order."
It will be noticed that the person to whose order it is made may be the drawer or maker himself. In connection with this
provision, one should recall the provision that "Where a note is drawn to the maker's own order it is not complete until
indorsed by him."

Sec. 24. When Instrument Payable To Bearer

"The instrument is payable to bearer:
1. When it is expressed to be so payable; or
2. When it is payable to a person named therein or bearer; or
3. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making
it so payable; or
4. When the name of the payee does not purport to be the name of any person;
5. When the only or last indorsement is an indorsement in blank." 19
18. Uniform Negotiable Instruments Law, SEC. 8.
19. Ibid, SEC. 9.
American Commeecial Law. 59
(1) When it is expressed to be so payable.
In such a case the instrument simply reads "Pay to bearer."
(2) When It Is payable to a person named therein, or bearer.
In such a case the instrument reads "pay to John Brown, or bearer." In that event it can be transferred by mere delivery
without the indorsement of John Brown.
(3) When it is payable to the order of a fictitious or non-existing person and such fact was known to the person making
it so payable.
If an instrument is made payable to a fictitious person, and this is known to the person making the instrument, it is
considered as payable to bearer, and may be transferred without indorsement. From the fact that the payee is fictitious,
the knowledge of that fact by the maker will be rebuttably presumed.
(4) When the name of the payee does not purport to be the name of any person.
Instruments payable to "cash," "bills payable," or any impersonal payee are negotiable and payable to bearer.
(5) When the only or last indorsement is an Indorsement In blank.
If an instrument, whether payable to bearer or not, is indorsed in blank, or if the last indorsement upon it is in blank, it
may then pass by delivery without indorsement. That is to say it is payable to bearer. Thus suppose an instrument is
payable to John Brown, or order. Its negotiation requires indorsement by John Brown. Let us say he indorses it "Pay to
William Smith, (sd) John Brown." Then its further negotiation requires the indorsement of William Smith. Suppose that
William Smith endorses it in blank, that is to say, by simply writing "William Smith." Its further negotiation may be
accomplished by mere delivery or, if the parties choose, by indorsement.

Chapter 4. Expression In Negotiable Form. 2. Non-Essential And Non-Vitiating Matter Of

Form And Rules Of Construction

Sec. 25. Authorizing Sale Of Collateral Securities

A provision which authorizes the sale of collateral securities in case the instrument is not paid at maturity, is valid and
does not affect negotiability.
Securities may be pledged to secure a negotiable instrument and a provision in the instrument which refers to them
and authorizes them to be sold does not prevent negotiability. It aids rather than clogs the instrument, and facilitates its
transfer. The right to the securities goes with the negotiation.
In the same way a reference in a note to a chattel mortgage or to a real estate mortgage given to secure the debt
which the note evidences, is not destructive to negotiability, but aids it rather.

Sec. 26. Authorizing Confession Of Judgment

A provision which authorizes confession of judgment on the Instrument Is valid and does not affect negotiability.
Notes frequently contain a provision whereby some attorney or any attorney is authorized to confess judgment on the
note. Such a note is called a judgment note. Its value lies in the fact that the note may be converted into a judgment
without the formalities necessary or the time required to take judgment in the ordinary case. The defendant does not
have to be served or notified, and judgment can be secured the same day that suit is entered. No evidence is required
save of the signature and the amount due, for the attorney whom the note names is empowered to confess judgment.
20. Uniform Negotiable Instruments Law, Sees. 5-6.
Any holder of the note may have the confession of judgment thereon. This form is not in use in many states.
Sec. 27. Waiving Benefit Of Exemption And Similar Laws
A provision whereby the debtor waives the benefit of any law In his favor does not affect negotiability but whether the
waiver is effective depends on the law of the state.
A waiver of laws intended for a debtor's benefit, does not have any effect upon the negotiability, but the waiver's effect
depends on local law. Theoretically it would seem one ought not to be allowed to waive a law which is to protect him as
a debtor, for such law is passed as much for the good of the community, as for him. Yet in most states it is held he may
waive the benefit of such laws, except such as are for the benefit also of his family, and these he cannot waive.

Sec. 28. Giving Holder Option To Require Money Or Something Else

Giving holder option to require money or to have something else given or done does not impair the negotiability of an
Instrument.
We have already seen that an instrument to be negotiable must be payable in money, and (1) that an agreement to
pay money and do something else, and (2) an agreement to pay money or at the maker's or acceptor's option, do
something else, are not negotiable. But if an instrument provide that the holder may require payment of money or that
something else be done or given, in other words, requires the obligator to pay a sum certain in money if the holder so
elects, and the debtor himself have no right to govern that election, the instrument is negotiable.
The following note was given:
"Boston, April 1st, 1850. In 4 years from date for value received the R. & B. Rwy. Co. promises to pay in Boston, to A,
or order, one thousand dollars with interest thereon, at the rate of 6% per annum, payable semi-annually; or upon the
surrender of this note, at any time until within six months of its maturity, the maker shall issue to the holder thereof 10
shares in the capital stock in said company in exchange therefor.
(sd) R. & B. Rwr. Co.,
Per X, Pres't. Y, Treas'r."
This note is negotiable; the promise to pay a certain sum being absolute, though the holder may choose to have
something else done in lieu thereof.
"The instrument upon which the action was brought has all the essential qualities of a negotiable promissory note. It is
for the un-conditional payment of a certain sum of money, at a specified time to the payee's order. It is not an
agreement in the alternative to pay in money or railroad stock. It was not optional with the makers to pay in money or
stock and thus fulfil their promise in either of two specified ways; in such a case the promise would have been in the
alternative."21
21. Hodges v. Shuler, 22 New York, 114.

Sec. 29. Seal

Putting a note under seal destroyed at common law its negotiable character; but by the uniform negotiable instruments
act, sealing an instrument does not destroy its negotiable character.
By common law a seal destroyed negotiability. This the law has now altered. If an instrument has the other
requirements essential to negotiability the seal is ineffective to change its character.

Sec. 30. Omission Of Date

The omission of the date of the instrument does not impair its negotiability.
The date is a material part of the instrument but not a formal requisite. The instrument is still negotiable
notwithstanding the lack of a date. In this respect the negotiable instrument law provides:
"Where an instrument expressed to be payable at a fixed period after date, is issued undated, or where the acceptance
of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or
acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not void the
instrument in the hands of a subsequent holder in due
course, but as to him the date so inserted is to be regarded as the true date."22

Sec. 31. Ante-Dating And Post-Dating

Dating instrument before or after its issue, if not for fraudulent purposes, does not invalidate It.
The negotiable instrument law provides: "The instrument is not invalid for the reason only that it is ante-dated or post-
dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is
delivered acquires title thereto as of the date of delivery." 23

Sec. 32. Technical Rules Of Construction

Where an instrument is ambiguous the following rules of construction are applied.24
(1) Where the sum payable is expressed in words and figures, the words govern, in case of discrepancy.
(2) Interest provided for runs from the issue of the instrument in case no date is stated.
(3) Where the instrument is undated, it will be considered to be dated as of the date of its issue.
(4) Writing prevails over print where in conflict.
22. Uniform Negotiable Instruments Act, SEC. 13.
23. Ibid, SEC. 12.
24. Ibid, SEC. 17.
(5) If the instrument is so ambiguously drawn that it is doubtful whether it is a bill or note, the holder may treat it as
either.
(6) Where one signs in such a manner that his intention is doubtful, he may be treated as an endorser.
(7) If two or more persons sign a note reading "I promise to pay," both are jointly and severally liable thereon.

Chapter 5. Execution And Delivery. Parties Bound

Sec. 33. Delivery Essential; When Presumed

The Instrument Is Ineffectual between the parties until delivery thereof, which consists of a parting with the control over
It, with an Intention to be bound thereon; but where an Instrument complete and regular on Its face, comes into the
hands of a purchaser in due course, delivery will be presumed.25
25. Uniform Negotiable Instruments Act, Sec Id.
A negotiable instrument though complete and regular in form cannot take effect until it has been unconditionally
delivered with the purpose of giving effect thereto. If it has passed out of the hands of the party whose name is upon it,
a delivery by him even as between the parties will be presumed until the contrary is shown. In such a case it may be
shown to overcome the presumption that the instrument was not parted with for the purpose of giving it effect; or was
delivered conditionally or for a special purpose only.
But if the instrument, complete and regular on its face, has come into the hands of a person who acquired it before
maturity, for value, and without notice of its lack of delivery, the delivery will be conclusively presumed.
Thus, suppose that A made out a promissory note payable to B for the purpose of delivering it to B in a bargain he
expected to make with B. The bargain, however, failed and A was about to destroy the note when B snatched it from
his hand. The defense of lack of delivery could of course be interposed as against B. B, however, sells the note to C. If
the note lacks any element of negotiability, the defense could also be made against C. But if the note was in negotiable
form, and C was a purchaser before its maturity, for value, and without notice, the lack of delivery could not be set up
against him. If the note had been in such form when secured by B that a forgery would have been necessary to
accomplish its further transfer, as where it had been made to A's own order, but not indorsed by him, the defense could
have been made even as against C.

Sec. 34. Execution In Blank. Authority To Fill

If an Instrument Is Issued, wanting in any material particular, any holder has a prima facie authority to fill up the blanks.
But blanks must be filled up In accordance with authority. One acquiring the instrument after its completion, and as a
purchaser for value without notice and before maturity, can enforce It as filled up, notwithstanding the authority was
exceeded.26
26. Uniform Negotiable Instruments Act, SEC. 14.
The text is shown in the following illustration: B has in his hands A's note payable to A's order, and by A indorsed in
blank. A has given this to B for the purpose of borrowing what money he can up to $500.00. B in C's presence fills up
the note for $1,000 and delivers it to C of whom he receives that amount of money and then absconds. A is not liable.
C is bound to know B's authority. Had B filled in the amount and thus completed the instrument without C's knowledge,
A would have been bound for any amount (within reason) filled in.

Sec. 35. Execution By Agent When Agent Personally Bound

An agent can bind his principal only by executing In the principal's name. By signing his own name and describing
himself as agent, he binds himself; except when acting in capacity of public official.
The authority, real and apparent, of an agent to bind his principal on negotiable paper is governed by the rules of the
law of agency. Assuming, here, that he has such authority we may inquire into the manner in which it shall be
exercised.
First, let it be noticed that even though one lets it be known he is an agent and indeed so describes himself in the
instrument itself, he may still be personally bound upon the instrument; upon the broad general principle, that even
though an agent have authority to pledge his principal's credit, he may if he choose, pledge his own.
The most approved manner in which an agent should sign to bind his principal on negotiable paper, is to recite in the
body of the instrument the principal's name as the promisor therein, signing the principal's name, by himself as agent.
The following illustrations will indicate whether the agent binds his principal or himself.
Illustration:
"I promise to pay, etc.
Wm. Smith, Agent." or
7O Negotiable Paper.
"Wm. Smith, Executor." or "Wm. Smith, President." binds Wm. Smith, personally, though he had authority to sign for
the principal and intended to bind him or it. Illustration:
"John Jones promises to pay, etc. John Jones,
By William Smith, Agent." or "I promise to pay, etc. John Jones,
By William Smith, Agent." or "We promise to pay, etc. General Manufacturing Co.,
By William Smith, President." binds the principal and not the agent, (assuming there was real or apparent authority.)
One should be very careful not to leave out the word "By." Otherwise he might be personally bound with the other
party, even though he should add "agent."
To go into other possible varieties upon which the Courts have differed would only tend to confusion. The cautious
business man will be careful to see that the name of the principal is in the body of the note and that the agent
subscribes such principal's name by himself as agent.
The rule varies as to public officials. They are not personally bound in making negotiable paper in the performance of
their duties and in the scope of their authority though they sign merely in this manner, - "John Jones, Commissary
Agent."

Chapter 6. Consideration For Execution.27

Sec. 36. Necessity Of Consideration

Every negotiable Instrument to be enforceable between the parties must be supported by a consideration. But lack of
consideration cannot be availed of against a holder In due course.
As every simple contract must be supported by a consideration, it necessarily follows that negotiable instruments must
as between the parties be so supported. But if the instrument is negotiated before maturity, and for value to a holder
without notice of the want of consideration, the defense cannot be made against him.
Thus, A, expressing his purpose to make B a gift gives B his promissory note, for which B gives no return. This
instrument cannot be enforced by B, but if B sells it to C, in due course, C can enforce it.
A pre-existing debt may constitute consideration for negotiable paper.

Sec. 37. Consideration Presumed

In the absence of proof to the contrary, a consideration In negotiable instruments will be presumed. No recital of
consideration Is necessary.
It is a peculiar characteristic of negotiable instruments that a consideration will be presumed until the contrary is
shown. It is not necessary to recite
27. Uniform Negotiable Instruments Act, Sees. 24-29 the consideration, nor to recite that there has been a
consideration. The words "value received," or their equivalent are not necessary.

Sec. 38. Adequacy Of Consideration

Whether consideration Is adequate or inadequate will not in the absence of fraud be inquired into, except In cases
where the consideration was money loaned and the amount promised in return is enough greater to render the
transaction usurious.
In this, as in other forms of contract, the adequacy or inadequacy of the consideration is in itself of no importance and
will not be inquired into. If there is an allegation of fraud and other evidence to prove it besides the mere inadequacy,
the Court may in a proper case take into account the inadequacy of the consideration.
If one loans money and gives his note in return for an amount enough larger to make the transaction usurious, in that
sense the inadequacy of the consideration will be gone into. The effect of taking usury varies in the different states.

Chapter 7. The Formation Of The Acceptor's Contract

Sec. 39. Definition Of Acceptance

"The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance
must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other
means than the payment of money."28
We have heretofore noticed that the person in a bill of exchange upon whom the order is drawn is called the drawee
until he accepts, whereupon he becomes the "acceptor." We shall see hereafter that in many cases there is no
presentment for acceptance prior to presentment for payment. In the present chapter we are concerned only with the
formation of the acceptor's contract, leaving other points in reference to acceptance to discussion elsewhere.
Acceptance consists in the expression of the drawee's assent to the order and his willingness to be bound thereupon.
He then becomes the party primarily liable on the instrument, the drawer being only secondarily liable, that is to say,
liable after the acceptor.
28. Uniform Negotiable Instruments Act, SEC. 132.

Sec. 40. How Acceptance Must Or May Be Made

If the holder demand, acceptance must be on the face of the bill. Otherwise he may treat the bill as dishonored. But a
bill may be accepted by a separate paper in which case it will be binding only in favor of one who received the bill for
value. So an absolute promise to accept a bill thereafter to be drawn will operate as an acceptance in favor of any one
who on the faith thereof received the bill for value.
29. Ibid, Sees. 133-135.
An acceptance must be in writing. If the holder demand, the acceptance must be on the face of the bill, otherwise the
holder can treat the bill as dishonored, that is, unaccepted. But, otherwise there may be an acceptance by way of
extrinsic document, before or after the bill is drawn. An absolute promise to accept a certain described bill, or an
extrinsic written acceptance of a bill already drawn is a good acceptance as to any one who on the faith thereof has
received the bill for value, but not as to any one else.
Thus, C has a bill drawn by A on B. B states orally that he will pay it. B cannot be held on this oral promise. B says he
will write an acceptance of it but not on the face of the bill. C may but need not receive such acceptance. If he does it is
effective to bind B in favor of C or any one else who for value receives the bill on the faith of the acceptance. So also of
B's promise to accept it before it is drawn.

Sec. 41. Acceptance Presumed From Reten-Tion

"Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours
after such delivery, or within such other period as the holder may allow, to return the bill accepted, or non-accepted to
the holder, he will be deemed to have accepted the same."30
A case31 stating the law in this regard and construing the above provision of the Negotiable Instruments Act, reads in
part as follows:
"Upon delivery for acceptance the drawee is not bound to act at once. He has a right to a reasonable time, usually 24
hours, to ascertain the state of accounts between himself and the drawer, and until expiration of that time the holder
has no right to demand an answer, nor without categorical answer, to deem the bill, either accepted or dishonored; not
accepted, because of the right of drawee to consider before he binds himself; not dishonored, because both drawer
and drawee have the right that their paper be not discredited during such period of investigation. After the expiration of
that reasonable time the holder has a right to know whether the drawee assumes liability to him by accepting, and if
not, he has a right to return of the document, so that he may protest or otherwise proceed to reserve his rights against
the drawer. The consensus of authority is, however, that the duty rests on the holder to demand, either acceptance or
return of the bill, and that mere inaction on the part of the drawee has no effect. After expiration of this time for
investigation, the drawee may, by retention of
30. Negotiable Instruments Law, SEC. 137. Illinois has omitted this section.
31. Westberg v. Chicago Lumber & Coal Co., 117 Wisconsin Reports, 589. The Wisconsin Act adds "Mere retention of
the bill is not acceptance." the bill, accompanied by other circumstances, become bound as acceptor; not however by
mere retention. There seem to be two phases of conduct recognized by the authorities as charging the drawee: one
purely contractual, as where the retention is accompanied by such custom, promise, or notification as to warrant the
holder to the knowledge of the drawee, in understanding that the retention declares acceptance; the other where the
conduct of the drawee, is substantially tortious, and amounts to a conversion of the bill. This is the phase of conduct
which our negotiable instruments statute * * * has undertaken to define and limit as refusal (not mere neglect) to return
the bill, or destruction of it; reiterating the common law rule that mere retention of the bill is not acceptance."
This is an excellent statement of the common law rule and the reasons therefor. Some cases, however, have held that
mere retention is sufficient to constitute acceptance.

Sec. 42. Acceptance Of Incomplete Bill

Drawee's acceptance may be made while the bill is still incomplete, it being completed thereafter.32

Sec. 43. Acceptance After Non-Acceptance Or After Maturity

A drawee may accept a bill after maturity, or after dishonor by non-acceptance or non-payment. If a bill payable after
sight is dishonored and afterward accepted the holder is entitled to have the bill accepted as of the date of the first
presentments.33
32. Uniform Negotiable Instruments Act, SEC. 138.
33. Ibid.

Sec. 44. Kinds Of Acceptance

Acceptances are either general or qualified. The holder may demand a general and refuse a qualified acceptance.34
(1) What constitutes general acceptance. Any acceptance which does not vary the terms of the bill is a general
acceptance.
To this acceptance the holder is entitled. He may treat the bill as dishonored if such acceptance is refused. But if he
choose he may take a qualified acceptance. An acceptance is still general though it name a particular place for
payment, unless it expressly states that the bill is to be paid there and not elsewhere.
(2) What constitutes qualified acceptance. An acceptance is qualified which varies any term of the bill.
"An acceptance is qualified, which is: 1. Conditional, that is which makes payment by the acceptor dependent on the
fulfillment of a condition therein stated;
2. Partial, that is to say, an acceptance to pay part only of the amount for which the bill is drawn;
3. Local, that is to say, an acceptance to pay only at a particular place;
4. Qualified as to time;
5. The acceptance of some one or more of the drawees but not of all."35
34. Ibid, SEC. 139.
35. Ibid, SEC. 141.
By custom an acceptance is not deemed to be qualified which recites a place of payment unless it further recites that it
is payable only at such a place.

Sec. 45. Effect Of Qualified Acceptance

It binds the acceptor according to the tenor thereof, it discharges the drawer and previous indorsers unless they
consent thereto. They do assent thereto when after notice of such acceptance, they neglect within a reasonable time to
dissent to the holder.

Sec. 46. Acceptance (Certification) Of Check

Certification of check by the drawee bank Is an acceptance thereof; and charges the bank according to the tenor of the
check; but certification at the request of the holder discharges drawer and indorsers.
Checks are as far as possible governed by rules which govern other bills of exchange. Acceptance of a check is
sometimes termed "certification." The bank thereupon becomes primarily liable to pay the check. If at the holder's
request, the check is certified, that discharges previous indorsers and the drawer, because such holder might have
received payment. A certification at his request amounts practically to a deposit by him. If at the drawer's or indorser's
request such drawer and indorser remain secondarily liable.

Chapter 8. The Formation Of The Contract Of Parties For Accommodation Or For Honor

Sec. 47. Accommodation Party Defined

One who becomes a party to a negotiable instrument in order to lend his credit to another is called an accommodation
maker, drawer, indorser, or acceptor as the case may be.
Just as one may become surety for another in any form of indebtedness, so one may lend his credit to another by
signing a negotiable instrument. Such party is bound notwithstanding he receives no benefit from his act, and although
any one who takes the instrument for value knows that he takes no benefit. Thus a party may for another's
accommodation sign as maker of a note, drawer or acceptor of a bill or indorser of a bill, note, or check. In such a case
there are always two parties, at least, besides the accommodating party, namely the accommodated party and the one
who extends credit to him, otherwise no rights can arise. Thus I make a note to B. for B's benefit and without receiving
any consideration therefor. But unless B uses the note and sells it for value to C, I could not be held, for, should B sue
me upon the note, I could defend that there was no consideration, that is to say, that B neither gave me nor any one
else anything in return for my promise, and this would be true even though I recited that value had been received. But if
B should sell the note to C in order to use my credit I should be liable to C and could not say that I received nothing so
far as C was concerned, notwithstanding C knew that to be the fact, provided, however, it was indeed the fact that I
had signed for accommodation and not otherwise.
In the same way one may become joint maker with the accommodated party upon a note, or draw or accept a bill or
indorse any commercial paper in order that his name may give the paper a value which it would not otherwise have.
One who signs as an accommodation party and who has to pay the instrument by reason thereof has his right of
reimbursement against the person who should have paid it.

Sec. 48. Acceptance For Honor

Acceptance for honor consists in the acceptance of a protested, not overdue bill by one who is not the drawee thereof
nor other party liable thereon, for the honor of some other party thereto.
Acceptance for honor consists likewise in a lending of credit. One who accepts for honor differs from one who accepts
for another's accommodation in this respect. An accommodation acceptor is the drawee named in the bill. He accepts
for some other person's benefit but the bill was drawn on him that he might so accept it. But an acceptor for honor is
one who is no party to the bill, but becomes such by intervention, and who volunteers to assume the place of the
drawee of such bill, and to do what such drawee should have done or was expected to do.
An acceptance may be for the honor of any one on the bill, but it is presumed, if not otherwise stated, to be for the
honor of the drawer.
The acceptance for honor may be for part only of the sum for which the bill is drawn. It must state that it is for honor
and be signed by the acceptor for honor.
The acceptor for honor becomes liable to all parties who are subsequent to the party for whose honor the acceptance
is made.
The bill so accepted must be presented to the drawee when due for payment and protested for non-payment before
the acceptor for honor can be made to pay it. This is true although there may be small hope that the drawee will pay it,
as he has already refused to accept it when it was presented to him for that purpose.
The acceptor for honor will be discharged unless the bill is presented to him for payment within one day after its
maturity, or if he resides in some other place unless it is put in the mails within twenty-four hours after such date of
maturity.
In connection with this Section read Sections 161-170 in Appendix A.
Acceptance for honor is also called acceptance supra protest.

Sec. 49. Payment For Honor

Payment for honor consists in payment by some other party than the drawee or the acceptor for the honor of some
party liable on the bill accepted or for whose account such bill was drawn.
Payment for honor is for the same purpose as acceptance for honor, and consists in the intervention of some one to
take the place of the drawee or acceptor named in the bill where such bill has been presented to the drawee or
acceptor for payment, and protest for non-payment has been made. A bill might be protested for non-payment where it
had been accepted or where it had not been accepted, for we shall find that it is not always necessary to present a bill
for acceptance, but sometimes it is sufficient to simply present it for payment when due.
A payment for honor must be stated to be such and must be attested by a "notarial act of honor which may be
appended to the protest or form part of it." This notarial act must set forth the declaration of the payer that he pays the
bill for honor and for whose honor he pays it.
One who pays for honor and who properly saves his rights succeeds to the rights of the holder against the person for
whose honor he pays and parties liable to the latter.
In connection with this Section read Sections 171-177 in Appendix A.

Part III. Operation Of The Contract. Chapter 9. Negotiation. A. In General Of Negotiation And
Indorsement

Sec. 50. Meaning Of Negotiation

By negotiation Is meant the transfer of negotiable paper by the payee thereof or his transferee with the intention and
effect of constituting the transferee the holder of the legal title thereof.
To negotiate commercial paper is to transfer it to another for the purpose of investing the ownership in him. generally
or for some special purpose.

Sec. 51. Kinds Of Negotiation

Negotiation Is by delivery and by Indorsement.
Some instruments, we have noticed, are negotiable by delivery. That is when they are payable to bearer. And when
they are payable to bearer has also been stated. In such case they may also be indorsed, but this enlarges the liability
of the transferor. But when payable to order they are transferred by indorsement, and the indorsement is necessary to
negotiation. A holder of paper which must be negotiated by indorsement does not become a holder in due course until
indorsement has actually been made, no matter when he acquired the paper.
36. Uniform Negotiable Instruments Law, Sees. 30-50.

Sec. 52. How Indorsement Accomplished

(1) Must be In writing. An indorsement must be In writing on the Instrument itself or on a paper attached thereto.
An indorsement must be written on the instrument or on a paper attached thereto. This attached paper is called an
allonge. The indorsement may be on the face or the back of the paper, though in practice it is almost without exception
placed upon the back.
If a transfer is made by separate writing, it is an assignment for negotiable instruments may be assigned, as well as
indorsed. The title, in that case, is that of an assignee, that is, it is subject to defenses.
(2) Words sufficient or necessary. The signature of the Indorser Is sufficient.
The contract of the indorser is implied from his mere signature. If the indorsement is special, as noted below, there is
also the name of indorsee, and restrictive, qualified and conditional indorsements also require additional words. But
indorsement may be by signature alone, and there must be such signature. But any word or mark intended as a
signature is sufficient.
The contract of the indorser, though not expressed, except by his signature, is well understood in law. He contracts to
pay if the party primarily liable does not pay, provided the necessary steps are taken to charge him, as we shall see
later. He also contracts that he has good title and that prior parties have competency to contract, etc. All this is
contained in the mere signature on the back of the note. The indorsees contract is noted more at length, later.
The courts have differed whether "I hereby assign" written on the instrument above the signature is a good
indorsement or a mere assignment.
The most usual and the correct practice is not to attempt to set out the contract in anyway, but simply use the
signature.
Words of negotiability are not necessary in the indorsement. An indorsement "Pay to John Brown" istead of "pay to the
order of John Brown," will not restrict further negotiation provided the instrument itself is in its body in negotiable form.

Sec. 53. Attempted Partial Indorsement

Indorsement must be of the entire instrument, but if any part of the sum has been paid, there may be a good
indorsement of the residue.
An indorsement of part of an instrument is not good as an indorsement because if indorsements could be divided up it
would subject the party liable to great inconvenience and expense.

Sec. 54. Effect Of Indorsement To Transfer Incidents

An Indorsement of a negotiable instrument is effective to transfer the Incidental rights therein to aid or secure the
enforcement of the debt.
The debt expressed in the negotiable instrument is the main thing. Provisions and securities to aid in its enforcement
and which do not destroy negotiability, pass with an indorsement of the note.
Thus one who receives a note which has been secured by collateral, is entitled to the collateral for the purposes for
which it was given; and mortgages should be assigned with the debt which they secure.
So authority to confess judgment, waivers of rights, agreements to pay costs, attorney's fees, etc., all pass to the
holder of the note, because they are incidental to the debt.

Sec. 55. Presumptions As To Indorsement

(1) Presumption as to time. Presumed unless dated after maturity to have been before instrument was overdue.
Indorsements after maturity though good to transfer title, subject one to defenses, if any, as we shall note later; hence
the importance of this presumption. Indorsements are not usually dated.
(2) Presumption as to place. Presumed unless contrary appears, to have been at place where instrument Is dated.
The place of dating is important to determine what law will govern when there is a conflict.

Sec. 56. Miscellaneous Rules Concerning Indorsement

(1) Indorsement to "Cashier."
An indorsement to the fiscal officer of a corporation or bank, so describing him, is deemed prima facie an indorsement
to the bank or corporation. And may be negotiated further either by the cashier's or the institution's indorsement. This
applies to paper payable to any fiscal officer.
(2) Payee or Indorsee misdescribed or name misspelled.
If a payee or indorsee's name is misspelled or he is otherwise misdescribed he may indorse as described, adding his
correct name, if he choose, or is so required.
(3) Striking out Indorsement.
Holder may strike out any indorsement not necessary to his title. This discharges the indorser whose name is so
stricken and all indorsements subsequent thereto.
(4) Negotiation by prior party.
If an instrument is negotiated back to a prior party he may re-issue and further negotiate the instrument, but cannot
enforce payment against any party to whom he was personally liable.
B. Kinds Of Indorsement

Sec. 57. Special Indorsement

A special Indorsement Is one which specifies a particular Indorsee.
An indorsement to a certain person naming him in the indorsement is called a special indorsement. An instrument so
indorsed cannot be further negotiated except by indorsement until it is subsequently indorsed in blank. If the special
indorsee indorses in blank, the paper will then pass by delivery. (But if the instrument is payable to bearer, it may pass
by delivery notwithstanding it has been specially indorsed and there is no blank indorsement.)

Sec. 58. Blank Indorsement

A blank Indorse-merit Is one which does not specify any particular indorsee.
A blank indorsement is accomplished by merely writing the name of the indorser on the back of the instrument. It may
then pass by mere delivery, but the holder may convert it into a special indorsement by writing above it "Pay to John
Brown."
A special indorsement and an indorsement in blank carry with them the same liability. The contract in each instance is
the same. A blank indorsement is not so safe as a special indorsement, because being transferable by delivery, a thief
or finder thereof could give a good title to an innocent purchaser for value before maturity.
The three following sections relate to indorsements which modify the indorser's contract. Either a special indorsement
or one in blank may be qualified, restrictive, or conditional.

Sec. 59. Qualified Indorsement

A special or blank indorsement may be accompanied with words qualifying, that is to say, limiting the Indorser's
contract.
The indorser's contract has already been noted and will hereafter be particularly considered. The indorser may,
however, if the indorsee will consent, qualify his contract. This is usually done by adding the words "without recourse,"
but even in such case the indorser warrants certain things, as noted later. Either a blank or special indorsement may
be so limited. The qualification has no effect on the negotiable character of the instrument and it may be further
negotiated with the same freedom as though not so indorsed.

Sec. 60. Restrictive Indorsement

A special or blank Indorsement may be~accompanted with words restricting further indorsement.
A restrictive indorsement is an indorsement made not for the purpose of transferring the title to the instrument
generally, but a special purpose, that is to say, for purposes of collection, or in trust, etc. It stops further negotiation
except as authorized by the terms of the indorsement or for the purpose of carrying out the restrictive indorsement.

Sec. 61. Conditional Indorsement

A special or blank indorsement may be accompanied with words making its effect conditional.
One may indorse to another on some condition. The party compelled to pay the instrument may disregard the
condition, whether it has been performed or not, the condition being between indorser and indorsee. But the
conditional indorsee or his transferee, will hold the instrument or the proceeds thereof subject to the condition.
Chapter 10. The Title Of A Transferee Of Negotiable Paper

Sec. 62. In General

The title of a transferee of negotiable paper involves the two-fold inquiry, (1) whether the party liable on such paper had
any defense, and if so what defense, against any prior party, and (2) whether the present transferee is a holder in due
course of trade.
It has heretofore been indicated that a transferee of negotiable paper may take a better title than had his transferor;
that the transfer of negotiable paper by way of negotiation defeats the right of the maker of the paper to make certain
defenses, but does not defeat him of the right to make others; and in the present chapter we shall inquire in detail
concerning such transferee's title. We shall assume, first, that the paper in question is negotiable; second, that some
prior party has a defective title, that is to say, that some defense could be made against him by the party or parties
liable on such instrument; and third, that the present transferee acquired the paper by way of sufficient negotiation
(indorsement or delivery) and not by way of assignment. We shall assume the defect of title in a prior party, that is to
say the existence of some defense to which he would be subject, because otherwise our inquiry would lose its
pertinence. If the party or parties apparently liable on an instrument have no defense to make against any prior party,
the present holder has the admittedly good and sufficient title of such prior holders, no matter whether he acquired title
in due course or not. In other words, though a transferee in order to shut off certain defenses that could have been
made against prior parties, must be, as we shall find, a holder in due course, that is to say, a purchaser, in good faith,
for value, and before maturity, yet if there are no defenses to be made against any one, these things become
unessential. Thus the holder may in such case acquire the paper after maturity, or for no value, that is to say, as a gift,
but no point can be made of this unless there was a defense that could have been made against the transferor.
Making these assumptions let us first inquire, under what circumstances a transferee can claim to be entitled to all the
peculiar advantages of a purchaser of negotiable paper, in other words, who is a holder in due course, and secondly to
what defenses he is not, to what defenses he is, subject

A. Transferee Must Be A Holder In Due Course To Claim Full Benefit Of Law Merchant

Sec. 63. Holder In Due Course, Who Is

In order to claim the peculiar advantages of the law merchant, the holder must be a holder in due course; that is, he
must have acquired (1) paper complete and regular on its face, (2) for value, (3) in good faith, and (4) before the paper
was overdue.
It is essential that all of these circumstances coexist to make one a holder in due course. They are discussed in order.

Sec. 64. Complete And Regular Instrument

To constitute one a holder in due course the instrument must have been complete and regularly issued.
The instrument must have been complete and regular. This requirement is sometimes stated that it must have been
acquired "in the regular course of business." The idea is that there must not be such incompletion or irregularity about
the instrument when transferred as practically to give notice of something wrong.

Sec. 65. Transferee Must Give Value

One is not a holder in due course unless he has given value in consideration of the transfer.
A negotiable instrument may be the subject of a gift to the transferee, but in that event the defenses, if any, that could
have been made against the transferor can be made against the transferee. But if the instrument has been acquired for
value, and the other elements necessary to make one a holder in due course exist, certain of such defenses cannot be
made against the present holder.
A holder has given value when he has actually parted with anything of value in the eyes of the law, that is, anything
which he has a legal right to retain. We cannot say that it is synonymous with "consideration" because in the law of
contracts an executory promise to part with something of value as well as the actual parting with value constitute a
good consideration. But one has not given value, as an indorsee of negotiable paper until he has actually given what
was agreed upon. The negotiable instruments law provides in such respect: "When the transferee receives notice of
any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full
amount agreed to paid therefor, he will be deemed a holder in due course only to the extent of the amount theretofore
paid by him."
Thus, A secures from B on fraudulent representations a note expressed to be payable in the sum of $500 and interest.
A indorses this note to C for $500, $250 of which C pays to A and agrees to pay the other $250 in ten days. Before he
has paid this second installment, he receives notice of the fraud. If he pays the other $250 to A it will be at his peril for
B may set up the defense against C, except to defeat the $250 first paid.
Value need not be adequate. One is a purchaser for value if he give anything of value agreed by him to be given,
though it be a sum of money much less than the face value of the instrument, and the giving of this will perfect his title
to the instrument and give him a right to recover the face value thereof.

Sec. 66. Transferee Must Take In Good Faith

One is not a holder in due course unless he has received the Instrument in good faith.
It is somestimes said that a transferee is not a holder in due course unless he takes "without notice," but it describes
the situation better to say he must be a taker in "good faith," or not in bad faith. It is now well settled, and the
Negotiable Instruments Act expressly so provides, that one receiving commercial paper, giving value therefor, and
receiving it before maturity is a holder in due course unless he have actual and not merely constructive notice of the
defect of title or purchased under such circumstances that his act amounted to an exercise of bad faith. There was in
some of the earlier decisions a test stated that he must not purchase under such circumstances that would put a
reasonably prudent man on inquiry, but this test has been abandoned. One is not put to active diligence to discover the
defect, even though the circumstances are a little suspicious provided he have no actual knowledge and buy in good
faith.
If a note is sold for much less than its face value, that may be a circumstance going, with other circumstances, to show
bad faith, but otherwise it is unimportant. That is, the mere fact that commercial paper is purchased for less than its
face value, cannot deprive a holder of his rights as a holder in due course. Yet such facts as these, that the instrument
was procurable at a large discount, though the maker was known to be solvent, or the paper was amply secured, or
was purchased from a total stranger, might all be matters of evidence going to prove bad faith.

Sec. 67. Transferee Must Take Before Instrument Is Overdue

An overdue Instrument retains its negotiability, and may still be transferred as before maturity, yet a transferee thereof
will take it subject to such defenses as existed against It In the hands of his transferor. To be a holder In due course he
must have acquired it before It was overdue.
While maturity does not take from an instrument its negotiable character, still one is not a holder in due course unless
he acquired it before it was overdue. That the instrument is overdue, puts him upon inquiry as to whether something is
wrong that it has not been paid.
Demand paper is considered as overdue after it has remained out more than a reasonable time.

Sec. 68. Transferee Of Holder In Due Course

One who purchases from a holder in due course, takes the title of that holder, even though he has notice of a defense
available against a holder prior to such holder in due course, and though he acquires the paper after maturity.
Where defenses that might have existed against a holder become no longer available to defeat suit on the instrument
because such instrument has been transferred, the defect in title never again re-attaches though one purchases under
such circumstances that had his transferor had a defective title, his also would have been defective.
Thus, A, through a fraud in the consideration, secured a negotiable promissory note from M. Before maturity A sold the
note to B who paid value and who had no knowledge of the fraud, and purchased in good faith. Concede, therefore,
that B acquired a good title, so that, if he had sued, the defense of the fraud could not have been made against him. B,
however, indorsed to C who at the time of his purchase knew of the defense that could have been made against A. C
gives no value and acquires the instrument after maturity. But this is immaterial; he acquires B's title, which was good.
Had B's title been defective, C would have had to purchase for value, in good faith, and before the note was overdue.
This is reasonable. The paper in B's hands must be paid. There is no reason therefore why its further negotiation
should be restricted. If M must pay it to B, he might as well pay it to any one else to whom B indorses it.

B. The Defenses Which Cannot Be Made Against A Holder

In due course, as above defined. Personal defenses.

Sec. 69. Payment Before Maturity

If one pays the sum or any part thereof owing, but not due, on paper which he fails to take up or upon which he falls to
see that the proper indorsement is made, and such paper Is acquired by a holder in due course such defense Is not
good as against him.
One who purchases a negotiable instrument for value, before it is overdue, without notice that it has been paid in whole
or part, may enforce it against the maker or drawer notwithstanding such payment. The defense is not good against
him. It is the duty of one paying paper before due to take it up, or to see that the payment made is indorsed upon it.

Sec. 70. Set Off

One cannot set off claims against a holder In due course which he could have asserted against his transferor.
The law customarily allows a person when sued to set off against the plaintiff counter demands which he may have,
and which may go to reduce the plaintiff's judgment or defeat it. But this right cannot be availed of in an action on a
note by a holder in due course.
sec. 71. want or failure of consideration.
If the consideration for which an instrument was given, fails, or if there was no consideration, the defense thereof
cannot be made against a holder in due course.
The lack of consideration is a good defense between the original parties. So a total failure of consideration will go to
defeat the claim and a partial failure will go to reduce it. But such defenses are cut off by a transfer to a holder in due
course. The reasoning here is similar to that which applies in sections 69 and 70.

Sec. 72. Fraud In The Consideration Or Inducement

The defense that the execution of an instrument was secured by a fraudulent representation of fact cannot be made
against a holder in due course.
This defense is unavailing against a holder in due course. See illustration in section one. This sort of fraud does not
prevent the holder from knowing that he has executed the very instrument which is sued upon, but concerns, rather,
the inducement or consideration for signing that instrument. Thus one by fraudulent representations induces me to buy
a worthless patent right for which I give him my note for $100. In this case the fraud goes to the consideration or
inducement, and not to the nature of my act. In connection with this section, read section 81.

Sec. 73. Theft And Want Of Delivery Of An Instrument Payable To Bearer

If an Instrument is In such form that It may pass by delivery, a thief or one to whom no delivery was made may pass
good title thereto to an Innocent purchaser for value before maturity.
When an instrument is payable to bearer has heretofore been indicated. It may then pass from hand to hand without
indorsement. There is no means, therefore, by which one who purchases it, may discover the fact of its non-delivery or
theft, as in the case of an instrument which cannot be negotiated without indorsement. Accordingly if such an
instrument is stolen the thief may give a good title to an innocent purchaser for value before maturity. So, where one is
not actually a thief, yet the instrument was never meant to be delivered, the want of delivery cannot be set up against
the innocent purchaser.

Sec. 74. Lack Of Authority To Complete Instrument Where Holder Does Not Know Of Its
Delivery In Incomplete Form
Where a signed instrument is delivered in incomplete form with authority to fill up the blanks above the signature and
the holder in due course is not aware of its incomplete character when delivered, the fact that the Instrument was
completed in excess of the actual authority affords no defense as against such holder.
One putting forth an instrument which he has signed with a blank therein to be thereafter filled, cannot complain
against a holder in due course that the blank was filled in excess of the authority. This is most reasonable for if one
entrusts another with an instrument which he has signed and in which he has left blanks, he who made abuse of
authority possible, ought to suffer rather than an innocent party who relied on an instrument apparently good. If such
holder knows that the instrument was incomplete, he is, we have found, put upon notice as to the actual authority.

Sec. 75. Illegality Of Consideration Except Where The Law Makes The Instrument For Such
Illegality Absolutely Void
The Illegality of consideration constituting a defense to the instrument as between the parties cannot be set up against
a holder in due course, except In certain cases where the law declares the instrument absolutely void because of such
Illegality.
Some forms of illegality, as we will hereafter note, make an instrument absolutely void, no matter into whose hands it
comes. But otherwise the illegality of a transaction out of which the instrument arose cannot be made a defense
against a holder in due course.
If the note is usurious and the usury is not apparent on the face of the instrument, usually the defense of usury cannot
be made against the holder in due course.
The effect of charging a greater rate of interest than that which is stated by law as being the highest rate which may be
contracted for, differs in different jurisdictions. In some it operates, when made a defense, as a forfeiture of all interest,
or some like penalty, but it renders the contract void only in a few states. The principal can usually be recovered. A
purchaser of a usurious note upon which the usury appeared would take subject to such defense. If it did not appear,
he usually would not be affected by it, unless the law declared that usury makes an instrument entirely void.

Sec. 76. Lack Of Authority Of Corporate Officer

Against the Innocent purchaser for value the lack of authority of the corporate officer to execute the particular
instrument purporting to bind the corporation, cannot be set up, if such officer had apparent authority to bind the
corporation upon negotiable paper for legitimate purposes.
If an officer of a corporation has actual power to bind the corporation upon negotiable paper, or has apparent power so
to bind it, by signing, indorsing, or accepting paper in its behalf, for its legitimate corporate purposes, then an innocent
purchaser for value of an instrument signed, indorsed, or accepted apparently in behalf of such corporation, has a right
to assume that the particular instrument held by him expresses a real obligation of the corporation and is not subject to
the defense of lack of authority. But if there was no real or apparent authority on the part of such officer to bind the
corporation on negotiable paper, then an innocent purchaser for value could not hope to hold the corporation.
One Modica, as Vice-President of the American Building Loan & Investment Society, accepted a draft in the name of
that corporation, drawn upon it by one Montgomery. The acceptance of the draft was evidently for the purpose of
enabling Montgomery to raise funds for his own purposes, and the acceptance was clearly beyond the real authority of
Modica, as Montgomery of course knew. It appeared however that Modica was the managing officer of the corporation
and that similar drafts, drawn by Montgomery had been accepted and paid by the corporation. The purchaser of this
draft knew of these previous dealings and relying thereon, gave value for the draft. The court in deciding that the actual
lack of authority existing in this particular instance could not be set up against the holder in due course, said:
"We are of opinion that, under the law of its creation, the American Building Loan & Investment Society had power to
execute negotiable paper. The rule is well established that corporations authorized to do a particular business, unless
especially denied the power, have implied authority to contract debts in the legitimate transactions of the business
authorized; and the right to contract debts, it is the equally well settled American rule, carries with it the power to give
negotiable notes or bills in payment or security for the debts, unless that power is expressly denied (Citing authorities.)
***
"The power of the society to execute notes or bills for the various purposes suggested being conceded and there being
no ground for questioning the authority of Modica as Vice President to sign the name of the society to such obligations,
executed in the regular course of business, the case comes within the rule that, when a corporation has power "under
any circumstances," as some of the cases say, and certainly when it has power under ordinary circumstances, or in the
usual course of its business to execute negotiable obligations, the bona fide purchaser of a particular obligation has a
right to presume that it was executed under circumstances which gave the requisite authority."37
37. Grommes et al. v. Sullivan, 81 Federal Reporter, 418.

Sec. 77. Lack Of Authority Of Partner

If a partnership Is trading in character, or if not being a trading concern, it adopts the practice of issuing commercial
paper, a holder in due course relying on its character or its custom, can hold the firm on paper signed in the
partnership name by a partner, though he exceeded his authority.
About the same rule applies in this case, as has been applied in the case of corporations. The partnership is bound by
the act of the partner in issuing negotiable paper in its name, though he exceeded his actual authority, and though the
party to whom the paper was issued could not because of his knowledge of the lack of authority recover thereupon, if
the instrument comes to the hands of a holder in due course; provided it is a buying and selling company, in which
each partner has apparent power to bind the partnership for partnership purposes, or though not being a buying and
selling partnership it has adopted a practice of issuing negotiable paper, upon which the present holder relies. The
present holder in due course can assume that the paper in question was issued in the scope of the firm business.
The following partnerships have been held "non-trading:" partnerships of attorneys, physicians, farmers, hotel keepers,
laundrymen, livery stable keepers, printers and publishers, miners; or any partnership whose main business is not to
buy and sell.

C. The Defenses Which Can Be Set Up Against A Holder In Due Course, As Above Defined.
Real Defenses

Sec. 78. Infancy

A minor can plead his non-age against a holder in due course.
The defense of minority is good against all the world. A minor's express contract is voidable by him. He is liable on his
implied contract for necessaries, but not upon any express contract even for them, unless he chooses not to make his
minority a defense. And he may set up his defense against a holder in due course.

Sec. 79. Forgery

A title cannot be acquired against one through forgery of his name; assuming there are no peculiar circumstances
estopping him to set up the forgery.
That one's name has been forged to a document gives no rights against him; assuming that there are no particular
circumstances in the case which would make it inequitable for him to set up the forgery, as where he in some measure
really encouraged the act, or thereafter ratified it or did not deny his signature when it was possible for him so to do.
See further, the next section.

Sec. 80. Material Alteration

That the instrument has been materially altered Is a defense that can be set up against a holder in due course; unless
the alteration was made possible by the careless manner in which the instrument was drawn. But a holder of an altered
instrument may recover on it according to its original tenor.
If a material alteration is made with guilty intent, it amounts to a forgery, and the same rules apply as in the section
above. If not made with guilty intent yet still purposely it is nevertheless an alteration and the maker cannot be made
liable upon the instrument as changed.
The alteration must be material in order to give the promissor any defense. The statute declares that "Any alteration
which changes: 1. The date;
2. The sum payable, either for principal, or interest;
3. The time or place of payment; 4. The number of the relations of the parties: 5. The medium or currency in which
payment is to be made; or which adds a place of payment where no place of payment is specified, or any other change
or addition which alters the effect of the instrument in any respect, is a material alteration."38
If by reason of the careless drawing of the instrument the alteration was made easily possible, the party who is guilty of
such negligence is estopped to set up the alteration against a holder in due course.
Suit was brought upon a promissory note purporting to be made by defendants and reading as follows:39 "$1300.
Kewanee, Illinois, Oct. 4, 1897.
One year after date I promise to pay to the order of ourselves thirteen hundred dollars at Kewanee, 111. Value
received, with interest at the rate of seven per cent per annum.
(sd.) L. Silverman,
H. Clay Merritt."
Indorsed on back:
"L. Silverman. H. Clay Merritt." Boyden & Son, paid $1300 for the note, acquired it before maturity and had no notice of
any altera18. Uniform Negotiable Instruments Act, SEC. 125. 39. Merritt v. Boyden, 191 Illinois Reports, 136.
tion. The defense was based on two theories: (1) That the note as originally delivered contained the figures "$100" in
the margin, and the words "one hundred dollars" in the body of the note, and that the figures "$100" were altered to
read "$1300," and the word "one" before "hundred" was erased, and the word "thirteen" inserted in its stead; or
(2) That the word "one" was not in the body of the note, but that there was a blank space in which the word "thirteen"
had been inserted.
The court in the course of its opinion said: "First, If the note was altered by (the first method) then the alteration
amounted to a forgery and appellant is not liable on the note, even though appellees were bona fide purchasers
thereof for value without notice or knowledge of the change. If the amount named in the note is raised by erasing what
is written, such alteration is a material one, and the note is thereby vitiated so as to become void. * * * Where a note is
complete at the time when it is signed by the maker, its subsequent alteration by raising the amount thereof through
obliteration of the same by the use of any chemical process, or other ingenious device, without the knowledge or
consent of the maker, will discharge him from liability upon the note. * * * (The court found this theory unsupported by
the evidence.)
"The second theory of the defense * * * was that, when he signed and endorsed the note, there was a blank space
before the word "hundred" and that this blank space was subsequently filled by inserting the word "thirteen" therein
without the knowledge or consent of the appellant. * * * When the maker of the note has, by careless execution of the
instrument left room for an alteration to be made by insertion without defacing the instrument or exciting the suspicion
of a careful man, and the instrument by reason of the opportunity thus afforded is subsequently filled up with a larger
amount than that which it bore at the time it was signed, the maker will be liable upon it as altered to any bona fide
holder without notice." (This left the contention that the marginal figures had been altered to be disposed of. For even
though the makers of the note were negligent as to the body of the note, the marginal figures must have been erased
and changed. As to that the Court said:) "The marginal figures have been held to be not part of the instrument, but to
be intended merely as a convenient index, and as an aid to remove ambiguity or doubt in the instrument itself. The
alteration or erasure of the marginal figures is an immaterial alteration and will not affect the rights of the holder of the
instrument."
For these reasons the Court gave a decision in favor of the holder in due course.
The present law provides that where an instrument is altered and is come into the hands of a holder in due course,
though the alteration is a defense against him, he may yet recover on the instrument according to its original tenor.
Sec. 81. Fraud Going To The Execution
The fraud whereby one Is induced to execute, accept or indorse a negotiable instrument under the impression that he
is performing some other act with an entirely different legal effect, gives rise to a defense good against everyone,
unless one is because of his negligence or otherwise estopped to set it up.
If one is fraudulently prevailed upon to attach his signature to a negotiable instrument, with the understanding that he is
really signing some altogether different paper, he can set up his defense against even a holder in due course provided
he was not negligent. It being the duty of every one to read what he signs, a failure to read would ordinarily constitute
such negligence that the party would be estopped to set up his defense against the holder in due course. But there are
rare cases in which this would not be true. So if by any trick or device another paper than the one read is substituted, a
defense could be made as against even a holder in due course.
The fraud here discussed differs from that discussed above in section 72 in that the fraud there goes to the
consideration or inducement and not to execution. The party in the other case signs just what he intended to sign. In
such case a true bona fide holder has a good title. Here he has none if there was no negligence.

Sec. 82. Illegality Which By 8tatute Makes Instrument Void

By statute In many Jurisdictions it is declared that if an instrument is founded upon certain illegal considerations, as for
Instance, a gambling consideration, it shall be utterly void. In such cases the Instrument is of no effect even In the
hands of an innocent purchaser for value.
If the statute declares the instrument void, it becomes so to all purposes and can give no rights to any one. The chief
case in which an instrument is declared void as to everyone is the case of an instrument executed as a part of a
gambling transaction.

Chapter 11. The Contract Of The Parties.40

Sec. 83. Of Maker Of Note

The maker's contract Is to pay the note, according to Its tenor, to the payee, or his transferee. He cannot deny the
payee's existence or his then capacity to indorse. His liability Is primary.
The maker's liability is to pay the instrument according to its tenor. Of course, if he has defenses he may set them up
where that is allowable according to the principles hereinbefore discussed. He engages to pay primarily. By this we
mean that no one else is to be resorted to.before the maker's liability will accrue.
He engages to pay the amount of the note. It is no defense that the holder did not pay the face value.

Sec. 84. Of Drawer Of Bill

The drawer's contract is that If the bill be not accepted or paid, according to its tenor, to the payee therein, or his
transferee, he, the drawer, will pay it, provided the necessary steps be taken to charge him. He cannot deny the
payee's existence or his then capacity to indorse. His liability is secondary. He may by apt words negative his liability.
A bill is drawn as an order on someone else. If that other on whom it is drawn does not accept, he may thereby incur a
liability to the drawer if he thereby break his contract, but does not incur any to the payee or other holder, unless he
has accepted. Where the holder is entitled to have the bill accepted before payment, in the cases hereafter stated, a
refusal by the drawee to accept, gives the holder immediate right of recourse to the drawer. Because the drawer must
apply to the drawee for acceptance or payment before he can resort to the drawer, his liability is said to be secondary.
The liability of a drawer of a check is governed by the same considerations.
40. Uniform Negotiable Instruments Law, SEC. 60-69.

Sec. 85. Of Drawee Of Bill Or Check

A person, firm, or corporation upon whom a bill or check Is drawn cannot be made liable thereupon unless there is
acceptance. But to the drawer there may be a liability for failure to accept or failure to pay, If such failure amounts to a
breach of contract.
One cannot be made liable by reason of the fact that a check or bill has been drawn upon him. His failure to honor
such check or bill may indeed amount to a breach of a previous contract upon his part to honor it when drawn, but his
liability in that event is only to the drawer and only upon the previous contract, not upon the instrument.
When a bank refuses to honor a check when there are sufficient funds to cover its amount, that constitutes a breach of
the implied contract that the bank will honor checks drawn upon it when there are funds to pay it and the drawer can
have damages.

Sec. 86. Of Acceptor

The acceptor of a bill of exchange, contracts to pay it according to the tenor of his acceptance. , He cannot deny the
existence of the drawer or payee, or the capacity of the first to draw, the second to Indorse the instrument, or the
genuineness of the drawer's signature. His liability is primary.
A drawee, it was stated, may accept by general or modified acceptance, if the holder consents to take a modified
acceptance. Whatever the tenor of the contract is, that is the acceptor's undertaking.
He admits the drawer's existence and the capacity to draw the paper. If the paper has been indorsed by payee, he
cannot question the capacity to so endorse. He may not question the signature of the drawer. It is his duty to know
such signature. But signatures of indorsers he need not know and if any has been a forgery he may set that up.
His contract is complete when the acceptance is made and delivered to the holder or his agent, and innocent
purchasers for value may thereafter hold such acceptor to his contract whether they became such before or after his
acceptance.

Sec. 87. Contract Of Unqualified Indorser

An unqualified Indorser warrants (1) the capacity of prior parties; (2) the genuineness of the instrument; (3) the
genuineness of his title thereto; (4) that the Instrument will not be dishonored by non-acceptance (If bill) or non-
payment; and undertakes that if for any of these reasons or otherwise the instrument Is unpaid at maturity he will pay
the amount thereof to the holder provided proper steps are taken to charge him. His liability is secondary.
An indorser who indorses specially or in blank, but without qualification, by his indorsement warrants the several things
above set out. If the instrument is not paid at maturity by reason of any defense that could be set up against a holder in
due course, as minority, forgery, and the like, the in-dorser may be sued upon the warranties contained in his
indorsement. So if the instrument is simply unpaid not by reason of any defenses, but merely because the party
primarily liable is insolvent or will not pay, the indorser may be proceeded against by the holder.
He undertakes that he will pay the amount of the instrument to the holder. It doesn't concern him whether the present
holder became such before or after maturity, or what value he gave, or that he did or did not give any value, unless
these questions become material for the reason the holder has a defense to make, and desires to show that the holder
was not such in due course or did not derive a title from a holder in due course.
An indorser must, unless he has a defense which he can interpose as above, pay the face value of the note. His
liability, when fixed, becomes similar to that of a maker of a note and is governable by the same rules except that it is
secondary and must be fixed by certain procedure hereafter discussed.

Sec. 88. Contract Of One Who Negotiates Instrument By Mere Delivery, I. E. Without
Indorsement
Such party warrants to his Immediate transferee and him only (1) capacity of prior parties; (2) the genuineness of the
Instrument; (3) the genuineness of his own title; and (4) that he knows of nothing Impairing the validity of the Instru-
ment.
In all the cases in which an instrument may be construed as payable to bearer, it may be transferred by mere delivery.
In such case the transferor warrants the things set forth in the text above, but only to his immediate transferee. If,
however, he indorses the instrument, without adding words of qualification, he then becomes liable as set forth in the
section next above.

Sec. 89. Contract Of Qualified Indorser

An Indorser who qualifies his Indorsement warrants all the things set forth In section 88.
An indorser whose liability is qualified by the words "without recourse" nevertheless warrants to all subsequent holders,
that he knows of nothing impairing its validity, the capacity of all prior parties, and the validity of his own title. But he
does not warrant that the instrument will be paid where the defense is not based on any of these grounds, but simply
refused because of the maker's insolvency, etc.
Thus, suppose A makes a note to B's order, which B indorses to C who in turn indorses it "without recourse" to D. A is
an infant and refuses payment on that ground. D can hold C. But if A is an insolvent, C cannot be held, for he has said
"without recourse."
An anomalous Indorser is liable as a general Indorser unless he provides otherwise by appropriate words.
An irregular indorsement is called an "anomalous indorser." One who makes an irregular or anomalous indorsement of
a negotiable instrument is deemed to have indorsed in order to assume the liability of a regular indorser. He may,
however, by adding other words, vary his contract.

Sec. 91. Order Of Liability Among In-Dorsers

"As respects one another indorsers are liable prima facie In the order in which they indorse; but evidence Is admissible
to show that as between or among themselves they have agreed otherwise." (Uniform Law, SEC. 68.)
Suppose that M makes a note payable to A, which is by A indorsed to B, and by B to C, and by C to D. In order to hold
any one except M, D must present the note to M for payment at maturity and save his rights against the indorsers by
notice. He then may sue A, or B, or C. If he sues B, B may sue A, but not C.

Chapter 12. The Procedure Necessary To Fix The Liability Of The Parties

Sec. 92. General Statement

In order to fix the liability of parties secondarily liable on a negotiable Instrument it Is necessary to take certain steps
provided by law for the benefit of such parties; except where owing to peculiar circumstances they are excused, and
also except where they are waived.
Parties primarily liable on a negotiable instrument know that they should pay it, and pay it when due, and therefore
there is no reason why any certain procedure should be taken to fasten the liability upon them. If the instrument is not
paid at maturity such parties primarily liable may be immediately sued or sued any time thereafter until the statute of
limitations runs, and it is simply necessary to show the maturity of the instrument and that it is unpaid. But parties
secondarily liable do not know that they will ever be called upon to pay the instrument, and their liability does not
accrue until the party primarily liable has made default in his engagement. Such secondary parties have, therefore, for
their protection, the right to demand that all due diligence be made to charge the primary party and that upon his
default, they receive immediate notice thereof. To this end custom required, and the law now provides, that where the
holder of an instrument desires to charge the parties secondarily liable thereon he must go through a certain
procedure, otherwise such secondary parties are discharged. What steps are necessary to charge various parties will
now be considered.

Liability Of The Parties. A. Presentment For Payment At Maturity To Parties Primarily Liable

Sec. 93. Not Necessary To Charge Parties Primarily Liable

Presentment of a note to the maker thereof, or of an accepted bill to the acceptor thereof at its maturity, Is not
necessary to fix the liability of such maker or acceptor. But if a place of payment Is provided in the instrument, and the
party liable thereon has funds there at maturity to pay it, but no presentment is there and then made, that will bar
further interest and costs, and the right to have the Instrument paid at such place.
The neglect of a holder of negotiable paper to present it for payment at its maturity to the party primarily liable thereon
(maker of a note, or acceptor of a bill or check) will not operate to discharge such parties. Such a rule is highly
reasonable. For instance, if one has borrowed $5,000 for one year and given his note therefor, and the holder has not
on the maturity of such note presented it for payment, it would be most unconscionable to hold that the holder of the
note had thereby lost his cause of action. He does not even lose his right to interest, for the burden is on the maker of
such note to see that it is paid when it matures.
We must note, however, at this point, the effect of failure to present for payment to the maker or acceptor when there is
a place for payment stated. First, note that no peculiar results follow and the rule is the same as where no place of
payment is specified unless the party liable was at such place, that is, has funds there, for the payment of the
instrument. If he was at such place to make payment, but did not find the instrument there for delivery to him on
payment, he is excused from paying interest accruing after maturity, from paying costs incidental to further
presentment, and from any obligation to go to the place named to make payment. By failing to have the paper at such
place of payment at its maturity the holder has forfeited the right to have it there paid. When, however, he thereafter
makes actual presentment to the party liable, payment must be made, for tender must be kept good.
If an instrument is payable at a certain bank, and on the date of the maturity of the instrument the party liable thereon
has funds on deposit at such bank, is the bank authorized to pay out of such funds, there being no express direction?
Courts have held both ways. But the Negotiable Instruments Act settles it that a provision in an instrument that it is
payable at a bank, is equivalent to an order upon the bank to pay the instrument if there are funds sufficient for that
purpose.40a

Sec. 94. Presentment For Payment Necessary To Charge Parties Secondarily Liable
Presentment for payment at maturity to the party primarily liable, Is necessary to charge parties secondarily liable;
except where excused or waived.
To fix the liability of the drawer and the in-dorsers on a bill (which has not been previously
40a. Illinois and Nebraska have omitted this section.
dishonored by non-acceptance) it is necessary to present the bill for payment at the maturity to the drawee or acceptor.
To fix the liability of the in-dorsers on a promissory note, it is necessary to present the note for payment at its maturity
to the maker. If this step of presentment is not taken, the drawer or indorser might well enough claim that if the
presentment had been made to the party primarily liable thereon, he might have paid it. That being so, the party only
secondarily liable ought not to have to pay it. Accordingly he is discharged. There are certain exceptions. Presentment
may be waived by the drawer or indorser, or the circumstances may excuse presentment.

Sec. 95. What Presentment Sufficient

In order to charge parties secondarily liable, presentment for payment must be made (1) by the holder or his agent in
that behalf; (2) on the day of the maturity of the Instrument; (3) at a proper hour as by the law defined; (4) at a proper
place, as by the law defined; (5) to the person primarily liable, or in his absence or Inaccessibility, to any person found
at the place of presentment; (6) by exhibiting the paper and demanding payment thereof.
The law sets forth clearly and in detail what presentment shall be deemed sufficient and reference is made to section
70-78, Appendix A in connection herewith.
(1) Presentment by whom.
This must be the holder or his agent in that behalf. Possession of a negotiable instrument payable to bearer, or
properly indorsed shows prima facie authority to receive payment. One may hold paper merely as an agent to receive
payment, as shown by the form of the indorsement, or by any other evidence.
If the holder is dead, his personal representative should make presentment.
(2) Date of presentment.
This is the date of its maturity. If it is demand paper it must be presented within a reasonable time to charge the drawer
or indorsers. What time is reasonable depends on circumstances. Paper matures on the date specified for payment,
without grace, for grace, which was allowed at common law, has been abolished in most states. If, however, this day is
a holiday, or Saturday or Sunday, the following business day is the proper day on which to make presentment, though
demand paper may be presented before 12 o'clock noon on Saturday when not a holiday.
Time is computed by excluding the day on which it begins to run and including the day of payment. A month is a
calendar month.
Thus, a note payable 30 days after date, and which is dated May 30th would be due on the thirtieth day after May 30th.
That is, the first of the thirty days would be May 31st. The last of such thirty days would be June 29th, and this would
be the day of maturity on which presentment must be made to charge the indorsers, if any, though of course failure to
then present it would not discharge the maker. A note dated January 31st, due one month from date would be due
February 28th, or, if leap year, February 29th. A note dated
January 15th, due one month from date would be due February 15th.
(3) Hour of presentment.
This must be a reasonable hour or if payable at a bank, during banking hours, unless the party liable have no funds
there during banking hours, in which case presentment before the bank is closed is sufficient. What is a reasonable
hour depends on the particular customs of the community. What might be a reasonable hour in a rural district might not
be such in a large city.
(4) Place of presentment.
If there is a place of presentment specified, of course that governs. If there is no place specified, then the law provides
the place of presentment. We may say that the instrument must be presented (1) at the place specified, or if none, then
(2) at the address given, or, if none, then (3) at usual place of business or residence, or, (4) in any other case where
the party can be found, or at his last known place of residence.
(5) To whom presented.
This must be to the person himelf, or to his agent, or if he is absent or inaccessible, then to any person found at the
place where presentment is made. If the person liable is dead, his personal representative must be sought out, if with
reasonable diligence he can be found.
Where several parties are liable as co-makers or co-acceptors, whether presentment must be made to all, or may be
made to only one, depends on their relationship to each other. If they are partners presentment may be to any one,
unless a place of presentment is stated. If not partners, then presentment must be to all, unless a place of presentment
is stated, or unless one or more of them is agent of the others in that regard.
(6) Instrument exhibited.
The party called upon to pay an instrument is entitled to have it exhibited. Therefore due presentment has not been
made without such exhibition. It has been held however that if the instrument is lost or mislaid, presentment of a copy
with a promise of reasonable indemnity, is a good presentment to charge the drawer and indorsers.

Sec. 96. When Presentment For Payment Not Required

Presentment for payment is not required when the circumstances excuse it or it is waived. In these cases the party
secondarily liable is not discharged, notwithstanding such lack of presentment.
(1) Where drawer has no right to expect or require .the drawee or acceptor to pay, presentment Is not required.
If one draws on another without reasonable grounds for believing that the drawee will pay, he has not right to require
presentment for payment. This depends on the circumstances. Even if he has no funds with the drawee, he may
reasonably expect acceptance.
(2) Where an instrument is made or accepted to accommodate an indorser, he cannot require presentment for
payment.
We may thus illustrate the text: A for B's accommodation, that is, to loan B his credit, makes a note to B, which B
indorses to C. B is in this case the only real debtor, and A has indorsed on the theory that B will pay when the
instrument is due. B therefore has no right to complain because it was not presented to A, for payment.
(3) Presentment for payment is dispensed with, where after the exercise of reasonable diligence it cannot be made.
What constitutes reasonable diligence depends on the circumstances. Looking one up in a directory and not availing
one's self of other available means of information would not be reasonable diligence. But it is impossible to lay down
definite rules. One must simply do what an ordinarily prudent person would do under the circumstances where one has
made no presentation. The burden of showing that he exercised reasonable diligence is on him.
(4) Presentment for payment is dispensed with where the drawee is a fictitious person.
(5) Parties entitled to presentment may waive It by word or conduct.
A waiver of presentment for payment (as well as other steps to fix liability) is often embodied in the instrument itself. If
so, all parties are bound by it including all subsequent indorsers. Sometimes a waiver is embodied in the individual
indorsement. Any one could also waive right to presentment in any separate instrument or by his conduct.
B. Presentment Of Bill For Acceptance

Sec. 97. Presentment For Acceptance Necessary In Certain Cases To Charge Drawer And
Indorsers
In order to charge the drawer, presentment for acceptance to the drawee is necessary (except where excused by
circumstances) in the following cases:
"First: Where the bill is payable after sight, or in any other case where presentment for acceptance is necessary in
order to fix the maturity of the instrument; or
"Second: Where the bill expressly stipulates that it shall be presented for acceptance;
"Third: Where the bill is drawn elsewhere than at the residence or place of business of the drawee."
In these cases, the presentment of a bill of exchange for acceptance is necessary to charge the drawer and indorsers.
In other cases presentment for payment at maturity is sufficient.
Where presentment for acceptance is not required it may nevertheless be made, for two purposes:
First: To obtain as soon as possible the liability of the drawee, as an acceptor; and, second: To give, in case of non-
acceptance, a right of immediate recourse against the drawee and the in-dorsers.
41. Uniform Negotiable Instruments Law, Sees. 143-151.
SUFFICIENT. In order to charge parties secondarily liable presentment of a bill for acceptance must be made, (1) by or
on behalf of the holder; (2) within a reasonable time (or negotiated within a reasonable time) on a business day before
the instrument Is overdue; (3) at a reasonable hour; and (4) to the drawee, his agent In that behalf, or his personal
representative.
(1) Party who must make presentment for acceptance.
This must be the holder of some one who acts in his behalf. The holder might be the original payee or a transferee of
such payee.
(2) Date of presentment for acceptance.
There is no exact date on which presentment for acceptance must be made, but it must be made before the instrument
is overdue on a business day. It may be presented for acceptance on any day on which an instrument may be
presented for payment, as above stated. When Saturday is not a holiday it may be presented before 12 noon on such
day. This day must fall within a reasonable time from the time the instrument is delivered to the payee, or within a
reasonable time from the last transfer. For one who holds an instrument which requires acceptance, must present it for
acceptance or negotiate it within a reasonable time. So it might be negotiated a number of times before it was finally
presented for acceptance and if such succeeding negotiation was made within a reasonable time since the former
negotiation and the presentment for acceptance made within a reasonable time after the last negotiation and before
maturity, there would be no discharge of the drawer or prior indorsers.
(3) Hour of presentment for acceptance.
A bill of exchange may be presented at any hour at which a bill might be presented for payment, as above stated.
(4) To whom presented for acceptance.
It must be presented for acceptance to the drawee personally, or to an agent who has authority to accept or reject. If
several drawees, acceptance must be made to all, except where one or more are agent for the others in that behalf or
are partners. If the drawee is dead presentment may be made to his personal representative; if he is a bankrupt or has
made an assignment presentment may be made either to him, or his trustee or assignee.

Sec. 99. When Presentment For Acceptance Is Excused

In the cases in which ordinarily presentment for acceptance must be made, it is excused in certain cases, and in those
cases the bill may be treated as dishonored for non-acceptance.
(1) "Where drawee is dead, or has absconded, or is a fictitious person, or is a person not having capacity to contract by
bill.
(2) "Where after the exercise of reasonable diligence, presentment cannot be made;
(3) "Where though presentment has been irregular, presentment is refused on some other ground."

Sec. 100. Rights Of Holder Where Bill Not Accepted

If a bill is presented for acceptance within the time and in the manner stated, and is not accepted, or if presentment is
excused, the bill may be treated as dishonored by non-acceptance and an immediate right of recourse accrues against
the drawer and indorsers.
Where the bill is dishonored by non-acceptance, an immediate right of recourse accrues against prior parties. This is
true not only in cases where presentment for acceptance is required in order to fix the liability of the prior parties, but
also in any case where actual presentment has been made and acceptance refused. Thus suppose that on January 2,
1910, A draws a bill on B, to order of C, due in three months. On the same day the bill is delivered to C, and he
indorses to D. D on January 3rd applies to B for acceptance. B refuses to accept. D may proceed at once against A
and C if he has duly notified them, and need not wait until the three months have expired.

C. Notice Of Dishonor

Sec. 101. Notice Of Dishonor Necessary To Charge Drawer And Indorser

Notice to the drawer of a bill or check and to the indorser of a bill, check or note, that it has been dishonored by non-
payment, or non-acceptance, as the case may be, is necessary to charge such drawer and indorser; otherwise they
are discharged; except where owing to the circumstances of the particular case, notice is excused, or where it has
been waived.
42. Uniform Negotiable Instruments Law, Sees. 89-118.
A party secondarily liable on negotiable paper is entitled to immediate notice that the party who should have accepted
it, or paid it, has failed or refused to do so. Accordingly the law provides in detail as to the time, manner and sufficiency
of the notice. And unless notice is given according to the provisions of the law, any party entitled to such notice, who
did not receive it, is discharged. See sections 89 to 118 in Appendix A in connection with this text.

Sec. 102. What Notice Sufficient

In order to charge parties secondarily liable on a negotiable instrument notice of dishonor must be given to such party
(1) by the holder, or any one who might be compelled to pay it to the holder, or an agent duly authorized, (2) within the
times provided by the law, (3) at the place provided by law; unless owing to peculiar circumstances notice is excused,
or has been waived.
To set out in the text here all the detail concerning the requirements of notice would be unnecessary duplication. See
sections 91 to 104 in Appendix A.

Sec. 103. When Notice To Drawer Is Excused

Notice to drawer is excused when after the exercise of reasonable diligence it cannot be given to or does not reach
such drawer, where drawer is fictitious or lacks capacity contract, or where drawer is the person to whom the
Instrument is presented for payment, or where drawer has no right to expect or require the drawee or acceptor to honor
the instrument, or where the drawer has countermanded payment.
The law does not require notice to a drawer of an instrument where it would be superfluous, or where there is no right
to expect it, or where it cannot with reasonable diligence be given.

Sec. 104. Where Notice To Indorser Excused

Notice to indorser is excused where after the exercise of reasonable diligence it cannot be given or does not reach
such indorser, or where indorser at the time of the indorsement knew that the drawee was fictitious or had no capacity
to contract, or where Indorser is the person to whom the instrument is presented for payment, or where the instrument
was made or accepted for his accommodation.

Sec. 105. When Notice Of Dishonor Waived

The party entitled to notice may waive it by waiver embodied in the instrument or in his indorsement, or by word or
deed, before or after time for giving notice.
A party otherwise entitled to notice may waive it. This he may do either by his express language or by his conduct. The
waiver may be embodied in the instrument itself, and in that case it binds all who indorse the instrument or it may be in
the individual indorsement. Waiver may be made at any time, even after the right to have notice has gone by. Thus if
an indorser promises to pay the instrument when he would be discharged by lack of notice, that operates as a waiver
and he will be bound.
Where one "waives protest," he thereby also waives presentment and notice of dishonor.

D. Protest

Sec. 106. Protest Necessary To Charge Drawer And Indorser On Foreign Bill
Where a foreign bill is dishonored by non-acceptance or non-payment It must be protested; otherwise the drawer and
Indorser are discharged.
Any bill which on its face appears to be a foreign bill must be protested for non-acceptance or non-payment as the
case may be, else the drawer and in-dorsers will be discharged. Inland bills and promissory notes do not need to be
protested, yet often are, to furnish evidence of due presentment and giving notice of dishonor.
A form of protest is set out in Appendix B.
Protest is made when the officer or party entitled under the law to make protest, takes the instrument to the place
where it may be under the law presented for acceptance or payment and there presents the instrument, and demands
payment thereon. He then sets forth in writing the details of such presentment, and the demand and the refusal, giving
the time and place of presentment, the fact of presentment, and the manner thereof, the cause or reason for protesting
the bill, the demand made and the answer given, if any, or the fact that the party sought could not be found. Such
protest must be under the hand and seal of the notary making it, if it is made by a notary, as is usual.

Sec. 107. Who Authorized To Make Protest

Protest may be made by a notary public; or by any respectable resident of the place where the bill Is dishonored in the
presence of two or more credible witnesses.
43. Uniform Negotiable Instruments Act, Sees. 152-160.
Protest is almost universally made by a notary public. The other provision is made in case a notary is unavailable.
Such notary must make the protest in person.

Sec. 108. Time, Place And Manner Of Protest

The protest must be made at the time, in the place and in the manner set forth by the law.
The details of making protest are set out fully in Appendix A, in sections 153 to 156 and are so complete as to require
no comment.

Sec. 109. Protest Dispensed With Or Waived

Protest is dispensed with In any case which would dispense with notice of dishonor. So it may be waived in the same
way that notice of dishonor may be waived.

Part IV. Discharge Of Negotiable Instruments. Chapter 13. Manner And Effect Of
Discharge.44

Sec. 110. Meaning Of Term "Discharge."

A contract is discharged when it loses Its force and effect as a legal obligation.
A discharged contract is one which for some reason is no longer in force. It has lost its former legal effect. A paper may
express a promise to pay money, yet the promise may be without any life in it, and not be expressive of any legal
obligation. This may be true because the promise has been performed, or for other reasons that we will note.

Sec. 111. Causes Of Discharge Of Paper

Discharge may be (1) by payment in due course by or for the debtor; (2) by payment of accommodation paper by
accommodated party; (3) by intentional cancellation by holder; (4) by the acquisition of the paper at or after maturity by
the principal debtor.
(1) By payment in due course by or for the principal debtor. Payment by the maker or acceptor is the most usual
method of discharging a note or bill. Assuming that there are no accommodation parties, but that the party primarily
liable on the paper pays it when it becomes mature or after its maturity this discharges it and it thereafter becomes only
so much waste paper so far as any legal obligation is concerned. One who pays such paper ought, of course, as a
matter of ordinary precaution, to see that it is cancelled and given to him. And we have seen that one who pays
negotiable paper must take care that he is paying it to the holder.
44. Uniform Negotiable Instruments Act, Sees. 119-125.
If a party secondarily liable upon an instrument pays it, the instrument is not discharged.
(2) By payment in case of accommodation paper by the party accommodated. The real debtor may not be the maker or
acceptor. One may have become maker of a note or acceptor of a bill for the accommodation of another, that is, in
order to lend him credit. Such accommodator is liable just as a surety or guarantor is liable, although the creditor may
know it is not really his debt. In such a case it is the real debtor's duty to pay the debt and if the accommodating party
pays it, he may sue the party whom he has accommodated. If the real debtor pays the instrument, then it is
discharged.
(3) By intentional cancellation by holder. If a cancellation is by the holder with the intention of destroying the
instrument, as such, it destroys it, but if the cancellation is unintentional, or under a mistake or by anyone without
authority, the instrument is not destroyed.
(4) By acquisition of the instrument by the principal debtor, at or after maturity. If one makes a note and at or after its
maturity buys it from the holder that is the same thing as paying it so far as discharging the instrument is concerned.

Sec. 112. Discharge Of Party Secondarily Liable

A party secondarily liable is discharged (1) by an act that discharges the instrument; (2) by intentional cancellation of
his signature by the holder; (3) by a valid tender of payment by a prior party; (4) by release of the principal debtor
without express reservation of right against party secondarily liable; (5) by extension of time of payment without
reserving right against the party secondarily liable; (6) by failure of the holder to take the proper steps to hold him.
A party secondarily liable is discharged by a failure of a holder, as we have seen, to take the proper steps to fix his
liability. In such a case the instrument itself is not discharged; it still continues as a bill, note or check as the case may
be, and the parties primarily liable may be sued upon it.
So in other ways a party secondarily liable may be discharged though the instrument continues in force. One is a valid
tender of payment by a prior party. This does not discharge the instrument. One who owes money on a note is not
allowed to escape his liability if he may succeed in making a tender which is not accepted. Tender of money under a
debt due must be kept good. But such tender does discharge a party secondarily liable. This debt is not really his. He
is to be held only in case the party does not pay who ought to pay. Consequently his rights are strictly guarded and if a
tender is made to such holder which such holder ought to have accepted, such secondary party may say that he will
not be held for a failure of the party primarily liable to pay when the holder might once have had payment of his debt.
Such tender, however, must be a valid tender. A tender in something not "legal tender," or a tender of the wrong
amount or a tender before the instrument was due, would not be good tenders, and would not discharge.
If the holder releases the principal debtor this will discharge the party secondarily liable, unless at the time the release
is made there is an express reservation made by the holder of his rights against the party secondarily liable.
The same may be said of a contract to extend the time of payment. A mere failure to sue, or a mere unenforceable
agreement, which is too indefinite to amount to a contract or is without consideration, and which therefore could not be
enforced by the debtor, would not release the party secondarily liable, if his liability had been duly fixed by the taking of
the proper steps.

Sec. 113. Effect Of Payment By Party Secondarily Liable

A payment by a party secondarily liable does not discharge the Instrument, but such party Is put In his former position
and may assert his rights against prior parties, or again negotiate the paper.
A party secondarily liable may pay the paper without discharging it, because it yet has to be paid by the party primarily
liable. Thus suppose A makes a note to B, who indorses to C, who indorses to D. D being unable at maturity to secure
payment by A, or any other party, C, in order to avoid suit, pays it. He now stands in the same situation as though he
had not indorsed it, and may sue the prior parties as he could have done before indorsement. Or, striking out his
indorsement to D, he may negotiate it to E, and thus make himself again secondarily liable if the instrument cannot be
enforced by E.

Sec. 114. Material Alteration As Releasing Those Not Parties Thereto

If an Instrument Is altered In any material respect It releases all parties who did not authorize or assent thereto except
that an Innocent purchaser for value may enforce it as it was before the alteration.
If an instrument is materially altered, it releases those who do not authorize or assent to such alteration except as far
as innocent purchasers are concerned, and these may enforce the instrument as it was in its original form. We have
already noted what is a material alteration, and have considered how one by a negligent drawing of paper may estop
himself to say that it is altered as against innocent parties.

Sec. 115. Renunciation Of Rights

A holder may expressly renounce his rights against any party either by so stating In writing or delivering up the
Instrument.
One may renounce rights against any party or may renounce all rights upon the instrument. If he does so, the party or
the instrument, as the case may be, is discharged. The discharge must be in writing, or in case of renunciation of rights
against the principal debtor, it may be by delivery up of the instrument.

Appendix A. Uniform Negotiable Instruments Law

(For states in which this law is substantially enacted, see page 40, note.)
Secs.
1-23. Form and interpretation.
24-29. Consideration.
30-50. Negotiation.
51-59. Rights of the holder.
60-69. Liabilities of parties.
70-88. Presentation for payment.
89-118. Notice of dishonor. 119-125. Discharge of negotiable instruments.
Bills of Exchange.
126-131. Form and interpretation.
132-142. Acceptance.
143-151. Presentation for payment.
152-160. Protest.
161-170. Acceptance for honor.
171-177. Payment for honor.
178-183. Bills in a set.
Promissory Notes and Checks. 184-189. Form, interpretation, acceptance, etc.
General Provisions. 190-196. Definitions.

Title I. - Negotiable Instruments in General

Article I. - Form and Interpretation.

SEC. 1. An instrument to be negotiable must conform to the following requirements:
1. It must be in writing and signed by the maker or drawer.
2. Must contain an unconditional promise or order to pay a sum certain in money.
3. Must be payable on demand or at a fixed or determinable future time.
4. Must be payable to the order or to bearer; and,
5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty.
SEC. 2. The sum payable is a sum certain within the meaning of this Act, although it is to be paid:
1. With interest; or
2. By stated installments; or
3. By stated installments, with a provision that upon default in payment of any installment, or of interest the whole shall
become due; or
4. With exchange, whether at a fixed rate or at the current rate; or
6. With costs of collection or an attorney's fee, in case payment shall not be made at maturity.
SEC. 3. An unqualified order or promise to pay is unconditional within the meaning of this Act, though coupled with:
1. An indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited
with the amount; or
2. A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not unconditional.
SEC. 4. An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to
be payable:
1. At a fixed period after date or sight; or
2. On or before a fixed or determinable future time specified therein; or
3. On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of
happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the event' does not cure the defect.
SEC. 5. An instrument which contains an order or promise to do an act in addition to the payment of money is not
negotiable.
But the negotiable character of an instrument otherwise negotiable is not affected by a provision which:
1. Authorizes the sale of collateral securities in case the instrument be not paid at maturity; or
2. Authorizes a confession of judgment; or
3. Waives the benefit of any law intended for the advantage or protection of the obligator; or
4. Gives the holder an election to require something to be done in lieu of payment of money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.
SEC. 6. The validity and negotiable character of an instrument are not affected by the fact that:
1. It is not dated; or
2. Does not specify the value given, or that any value has been given therefor; or
3. Does not specify the place where it is drawn or the place where it is payable; or
4. Bears a seal; or
5. Designates a particular kind of current money in which payment is to be made.
But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to
be stated in the instrument.
SEC. 7. An instrument is payable on demand:
1. Where it is expressed to be payable on demand, or at sight, or on presentation; or
2. In which no time for payment is expressed.
Where an instrument is issued, accepted or indorsed when overdue, it is, as regards the person so issuing, accepting
or indorsing it, payable on demand.
SEC. 8. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his
order. It may be drawn payable to the order of:
1. A payee who is not maker, drawer or drawee; or
2. The drawer or maker; or
3. The drawee; or
4. Two or more payees jointly; or
5. One or more of several payees; or
6. The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable
certainty.
SEC. 9. The instrument is payable to bearer:
1. When it is expressed to be so payable; or
2. When it is payable to a person named therein or bearer; or
3. When it is payable to the order of a fictitious or nonexisting person and such fact was known to the person making it
so payable; or
4. When the name of the payee does not purport to be the name of any person; or
5. When the only or last indorsement is an indorsement in blank.
SEC. 10. The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an
intention to conform to the requirements hereof.
SEC. 11. When the instrument or an acceptance or any indorsement thereon is dated, such date is deemed prima
facie to be the true date of the making, drawing, acceptance or indorsement, as the case may be.
SEC. 12. The instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is not done
for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered acquires the title thereto
as of date of delivery.
SEC. 13. When an instrument expressed to be payable at a fixed period after date is issued undated, or where the
acceptance of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date
of issue or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not avoid
the instrument in the hands of a subsequent holder in due course, but as to him, the date so inserted is to be regarded
as the true date.
SEC. 14. Where the instrument is wanting in any material particular, the person in possession thereof has a prima facie
authority to complete it by filling up the blanks there-in. And a signature on a blank paper delivered by the person
making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie
authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be
enforced against any person who became a party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is
issued or negotiated to a holder in due course it is valid and effectual for all purposes in his hands, and he may enforce
it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.

Negotiable Instruments in General. Part 2

SEC. 15. Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without
authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon
before delivery.
SEC. 16. Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in
due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making,
drawing, accepting or indorsing, as the case may be; and in such case the delivery may be shown to have been
conditional or for a special purpose only, and not for the purpose of transferring the property in instrument. But where
the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make
them liable to him, is conclusively presumed. And where the instrument is no longer in the possession of party whose
signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.
SEC. 17. Where the language of the instrument is ambiguous, or there are omissions therein the following rules of
construction apply:
1. Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the
sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be bad to
the figures to fix the amount.
2. Where the instrument provides for the payment of interest, without specifying the date from which interest is to run,
the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof.
3. Where the instrument is not dated, it will be considered to be dated as of the time it was issued.
4. Where there is conflict between the written and printed provisions of the instrument, the written provisions prevail.
5. Where the instrument is so ambiguous that there is doubt whether it is a bill or a note, the holder may treat it as
either, at his election.
6. Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same
intended to sign, he is to be deemed an indorser.
7. Where an instrument containing the words "I promise to pay" is signed by two or more persons, they are deemed to
be jointly and severally liable thereon.
SEC. 18. No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise
expressly provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed
his own name.
SEC. 19. The signature of any party may be made by a duly authorized agent. No particular form of appointment is
necessary for this purpose; and the authority of the agent may be established as in other cases of agency.
SEC. 20. Where the instrument contains, or a person adds to his signature, words indicating that he signs for or on
behalf of the principal, or in a representative capacity, he is not liable on the instrument if he was duly authorized; but
the mere addition of words describing him as agent, or as filling a representative character, without disclosing his
principal, does not exempt him from personal liability.
SEC. 21. A signature by "procuration" operates as notice that the agent has but limited authority to sign, and the
principal is bound in case the agent in so signing acted within the actual limits of his authority.
SEC. 22. The indorsement or assignment of the instrument by a corporation or by an infant passes the property
therein, notwithstanding that from want of capacity the corporation or infant may incur no liability thereon.
SEC. 23. Where a signature is forged or made without authority it is wholly inoperative, and no right to retain the
instrument or to give a discharge therefor or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such right is precluded from
setting up the forgery or want of authority.

Article II. - Consideration.

SEC. 24. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration, and
every person whose signature appears thereon to have become a party thereto for value.
SEC. 25. Value is any consideration sufficient to support a simple contract.
2. An antecedent or pre-existing debt constitutes value and is deemed such, whether the instrument is payable on
demand or at a future time.
SEC. 26. Where value has at any time been given for the instrument, the holder is deemed a holder for value in
respect to all parties who became such prior to that time.
SEC. 27. Whether the holder has a lien on the instrument, arising either from contract or by implication of law, he is
deemed a holder for value to the extent of his lien.
SEC. 28. Absence or failure of consideration is a matter of defense as against any person not a holder in due course,
and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount
or otherwise.
SEC. 29. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, for
the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value,
notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.

Negotiable Instruments in General. Part 3. Negotiation

Article III. - Negotiation.

SEC. 30. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute
the transferee the holder thereof; if payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by
the indorsement of the holder, completed by delivery.
SEC. 31. The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of
the indorser, without additional words, is a sufficient indorsement.
SEC. 32. The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer
to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees
severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may
be indorsed as to the residue.
SEC. 33. An indorsement may be either in blank or special; and it may also be either restrictive or qualified, or
conditional.
SEC. 34. A special indorsement specifies the person to whom or to whose order the instrument is to be payable; and
the indorsement of such indorsee is necessary to the 2 B - 10 further negotiation of the instrument. An indorsement in
blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.
SEC. 35. The holder may convert a blank indorsement into a special indorsement by writing over the signature of the
indorser in blank any contract consistent with the character of the indorsement.
SEC. 36. An indorsement is restrictive which either:
1. Prohibits the further negotiation of the instrument; or
2. Constitutes the indorsee the agent of the indorser; or
3. Vests the title in the indorsee in trust for or to the use of some other person. But the mere absence of words implying
power to negotiate does not make an indorsement restrictive.
SEC. 37. A restrictive indorsement confers upon the indorsee the right:
1. To receive payment of the instrument.
2. To bring any action thereon that the indorser could bring.
3. To transfer his rights as such indorsee where the form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement.
SEC. 38. A qualified indorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made
by adding to the indorser's signature the words "without recourse" or any words of similar import. Such an indorsement
does not impair the negotiable character of the instrument.
SEC. 39. Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and
make a payment to the indorsee or his transferee, whether the condition has been fulfilled or not. But any person to
whom an instrument so indorsed is negotiated, will hold the same, or the proceeds thereof, subject to the rights of the
person indorsing conditionally.
SEC. 40. Where an instrument originally payable to or indorsed specifically to bearer is subsequently indorsed
specially it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as indorser to
only such holders as make title through his indorsement.
SEC. 41. Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all
must indorse unless the one indorsing has authority to indorse for the others.
SEC. 42. Where an instrument is drawn or indorsed to a person, as "Cashier" or other fiscal officer of a bank or
corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer; and may be
nego-tiated by either the indorsement of the bank or corporation, or the indorsement of the officer.
SEC. 43. Where the name of the payee or indorsee is wrongly designated or misspelled, he may indorse the
instrument as therein described, adding, if he think fit, his proper signature.
SEC. 44. Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms
as to negative personal liability.
SEC. 45. Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed
prima facie to have been effected before the instrument was overdue.
SEC. 46. Except where the contrary appears, every indorse-ment is presumed prima facie to have been made at the
place where the instrument is dated.
SEC. 47. An instrument negotiable in its origin continues to be negotiable until it has been respectively indorsed or
discharge by payment or otherwise.
Bee. 48. The owner may at any time strike out any indorsement which is not necessary to his title. The indorser whose
indorsement is struck out, and all indorsers .subsequent to him, are thereby relieved from liability on the instrument.
SEC. 49. Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transferer
vests in the transferee such title as the transferee had therein, and the transferee acquires, in addition, the right to
have the indorsement of the transferer. But for the purpose of determining whether the transferee is a holder in due
course, the negotiation takes effect as of the time when the indorsement is actually made.
SEC. 50. Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act,
reissue and further negotiate the same, but he is not entitled to enforce payment thereof against any intervening party
to whom he was personally liable.

Negotiable Instruments in General. Part 4. Rights of the Holder

Article IV. - Rights of the Holder.

SEC. 51. The holder of a negotiable instrument may sue thereon in his own name and payment to him in due course
discharges the instrument.
SEC. 52. A holder in due course is a holder who has taken the instrument under the following conditions:
1. That it is complete and regular upon its face.
2. That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if
such was the fact.
3. That he took it in good faith and for value.
4. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the
person negotiating it.
SEC. 53. Where an instrument payable on demand is negotiated an unreasonable length of time after its issue, the
holder is not deemed a holder in due course.
SEC. 54. Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person
negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due
course only to the extent of the amount theretofor paid by him.
SEC. 55. The title of a person who negotiates an instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for
an illegal consideration or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.
SEC. 56. To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same,
the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounted to bad faith.
SEC. 57. A holder in due course holds the instrument free from any defect of title or of prior parties, and free from
defenses available to prior parties among themselves and may enforce payment of the instrument for the full amount
thereof against all parties liable thereon.
SEC. 58. In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable. But the holder who derives his title through a holder in due course, and who is
not himself a party to any fraud or duress or illegality affecting the instrument, has all the rights of such former holder in
respect to all parties prior to the latter.
SEC. 59. Every holder is deemed prima facie to be a holder in due course; but when it is shown that the title of any
person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person
under whom he claims acquired the title as a holder in due course. But the last mentioned rule does not apply in favor
of a party who became bound on the instrument prior to the acquisition of such defective title.

Negotiable Instruments in General. Part 5. Liability of Parties

Article V. - Liability of Parties.

SEC. 60. The maker of a negotiable instrument by making it engages that he will pay it according to its tenor, and
admits the existence of the payee and his then capacity to indorse.
SEC. 61. The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse,
and engages that on due presentment the instrument will be accepted or paid, or both, according to its tenor, and that
if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the
holder, or to any indorser who may be compelled to pay it. But the drawer may insert in the instrument an express
stipulation negativing or limiting his own liability to the holder.
SEC. 62. The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance
and admits:
1. The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument;
and
2. The existence of the payee and his then capacity to indorse.
SEC. 63. A person placing his signature upon an instrument otherwise than as maker, drawer or acceptor is deemed to
be an indorser, unless he clearly indicated by appropriate words his intention to be bound in some other capacity.
SEC. 64. Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery,
he is liable as indorser in accordance with the following rules:
1. If the instrument is payable to the order of a third person he is liable to the payee and to all subsequent parties.
2. If the instrument is payable to the order of the maker or drawer, or is payable to dearer, he is liable to all parties
subsequent to the maker or drawer.
3. If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.
SEC. 65. Every person negotiating an instrument by delivery or by a qualified indorsement, warrants:
1. That the instrument is genuine and in all respects what it purports to be.
2. That he has a good title to it.
3. That all prior parties had capacity to contract.
4. That he has no knowledge of any fact which would impair the validity of the instrument, or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate
transferee.
The provisions of subdivision three of this section do not apply to persons negotiating public or corporate securities,
other than bills and notes.
SEC. 66. Every indorser not an accommodating party who indorses without qualification, warrants to all subsequent
holders in due course:
1. The matters and things mentioned in subdivision one, two, three and four of the next preceding section; and
2. That the instrument is at the time of his indorsement valid and subsisting.
And, in addition, every indorser engages that on due presentment, it shall be accepted or paid, or both, as the case
may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken
he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.
SEC. 67. Where a person places his indorsement on an instrument negotiable by delivery he incurs all the liabilities of
an indorser.
SEC. 68. As respects one another, indorsers are liable prima facie in the order in which they indorse, but evidence is
admissible to show that as between or among themselves they have agreed otherwise. Joint payees or joint indorsees
who indorse are deemed to indorse jointly and severally.
SEC. 69. Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities
prescribed by section sixty-five of this Act, unless he discloses the name of his principal, and the fact that he is acting
only as agent.

Negotiable Instruments in General. Part 6. Presentment For Payment

Article VI. - Presentment For Payment.
SEC. 70. Presentment for payment is not necessary in order to charge the person primarily liable on the instrument but
if the instrument is, by its terms, payable at a special place and he is able and willing to pay it there at maturity, such
ability and willingness are equivelent to a tender of payment upon his part. But except as herein otherwise provided,
presentment for payment is necessary in order to charge the drawer and indorsers.
SEC. 71. Where the instrument is not payable on demand, presentment must be made on the day it falls due. Where it
is payable on demand, presentment must be made within a reasonable time after its issue, except that in case of a bill
of exchange, presentment for payment will be sufficient if made within a reasonable time after the last negotiation
thereof.
SEC. 72. Presentment for payment, to be sufficient, must be made:
1. By the holder, or by some person authorized to receive payment on his behalf.
2. At a reasonable hour on a business day.
3. At a proper place as herein defined.
4. To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place
where the presentment is made.
Sec 73. Presentment for payment is made at the proper place:
1. Where a place of payment is specified in the instrument and it is there presented.
2. Where no place of payment is specified and the address of the person to make the payment is given in the
instrument and it is there presented.
3. Where no place of payment is specified and no address is given and the instrument is presented at the usual place
of business or residence of the person to make payment.
4. In any other case, if presented to the person to make payment wherever he can be found, or if presented at his last
known place of business or residence.
SEC. 74. The instrument must be exhibited to the person from whom payment is demanded, and when it is paid must
be delivered up to the party paying it.
SEC. 75. Where the instrument is payable at a bank, presentment for payment must be made during banking hours,
unless the person to make payment has no funds there to meet it at any time during the day, in which case
presentment at any hour before the bank is closed on that day is sufficient.
SEC. 76. Where the person primarily liable on the instrument is dead, and no place of payment is specified,
presentment for payment must be made to his personal representative if such there be, and if with exercise of
reasonable diligence, he can be found.
SEC. 77. Where the persons primarily liable on the instrument are liable as partners, and no place of payment is
specified, presentment for payment may be made to any one of them, even though there has been a dissolution of the
firm.
SEC. 78. Where there are several persons, not partners, primarily liable on the instrument, and no place of payment is
specified, presentment must be made to them all.
SEC. 79. Presentment for payment is not required in order to charge the drawer where he has no right to expect or
require that the drawee or acceptor will pay the instrument.
SEC. 80. Presentment for payment is not required to charge an indorser where the instrument was made or accepted
for his accomodation and he has no reason to expect the instrument will be paid if presented.
SEC. 81. Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the
control of the holder, and not imputable to his default, misconduct or negligence. When the cause of delay ceases to
operate, presentment must be made with reasonable diligence.
SEC. 82. Presentment for payment is dispensed with:
1. When after the exercise of reasonable diligence presentment as required by this Act can not be made.
2. Where the drawee is a fictitious person.
3. By waiver of presentment, express or implied.
SEC. 83. The instrument is dishonored by non-payment when:
1. It is duly presented for payment and payment is refused or can not be obtained; or
2. Presentment is excused and the instrument is overdue and unpaid.
SEC. 84. Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an immediate right
of recourse to all parties secondarily liable thereon accrues to the holder.
SEC. 85. Every negotiable instrument is payable at the time fixed therein without grace. When a day of maturity falls on
Sunday, or a holiday, the instrument is payable on the next succeeding business day. Instruments falling due on
Saturday are to be presented for payment on the next succeeding business day, except that instruments payable on
demand may, at the option of the holder, be presented for payment before 12:00 o'clock noon on Saturday, when that
entire day is not a holiday.
SEC. 86. Where the instrument is payable at a fixed period after date, after sight, or after the happening of a specified
event, the time of payment is determined by excluding the day from which the time is to begin to run, and by including
the date of payment.
SEC. 87. Where the instrument is made payable at a bank it is equivalent to an order to the bank to pay the same for
the account of the principal debtor thereon. (This section omitted in the Illinois law.)
SEC. 88. Payment is made in due course when it is made at or after maturity of the instrument to the holder thereof in
good faith and without notice that his title is defective.

Negotiable Instruments in General. Part 7. Notice of Dishonor

Article VII. - Notice of Dishonor.

SEC. 89. Except as herein otherwise provided, when a negotiable instrument has been dishonored by non-acceptance
or non-payment, notice of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to
whom such notice is not given is discharged.
SEC. 90. The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who
might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the
party to whom the notice is given.
SEC. 91. Notice of dishonor may be given by an agent, either in his own name or in the name of any party entitled to
give notice, whether that party be his principal or not.
SEC. 92. Where notice is given by or on behalf of the holder, it inures for the benefit of all subsequent holders and all
prior parties who have a right of recourse against the party to whom it is given.
SEC. 93. Where notice is given by or on behalf of a party entitled to give notice, it inures for the benefit of the holder
and all parties subsequent to the party to whom notice is given.
SEC. 94. Where the instrument has been dishonored in the hands of an agent, he may either himself give notice to the
parties liable thereon or he may give notice to his principal. If he gives notice to his principal, he must do so within the
same time as if he were the holder and the principal upon the receipt of such notice, has himself the same time for
giving notice as if the agent had been an independent holder.
SEC. 95. A written notice need not be signed, and an insufficient written notice may be supplemented and validated by
verbal communication. A misdescription of the instrument does not vitiate unless the party to whom the notice is given
is in fact misled thereby.
SEC. 96. The notice may be in writing or merely oral and may be given in any terms which sufficiently identify the
instrument and indicate that it has been dishonored by non-acceptance or non-payment. It may in all cases be given by
delivering it personally or through the mails.
SEC. 97. Notice of dishonor may be given either to the party himself or to his agent in that behalf.
SEC. 98. Where any party is dead, and his death is known to the party giving notice, the notice must be given to a
personal representative, if there be one, and if with reasonable diligence he can be found. If there be no personal
representative, notice may be sent to the last residence or last place of business of the deceased.
SEC. 99. Where the parties to be notified are partners, notice to any one partner is notice to the firm, even though
there has been a dissolution.

Sec. 100
Notice to joint parties who are not partners must be given to each of them, unless one of them has authority to receive
such notice for the others.

Sec. 101
Where a party has been adjudged a bankrupt or an insolvent, or has made an assignment for the benefit of his
creditors, notice may be given either to the party himself or to his trustee or assignee.

Sec. 102
Notice may be given as soon as the instrument is dishonored, and unless delay is excused as hereinafter provided,
must be given within the times fixed by this
Act.

Sec. 103
Where the person giving and the person to re-ceive notice reside in same place, notice must be given within the
following times:
1. If given at the place of business of the person to receive notice, it must be given before the close of business hours
on the day following.
2. If given at his residence, it must be given before the usual hours of rest on the day following.
3. If sent by mail, it must be deposited in the postoffice in time to reach him in the usual course on the day following.
Sec. 104
Where the person giving and the person to receive notice reside in different places, the notice must be given within the
following times:
1. If sent by mail, it must be deposited in the postoffice in time to go by mail the day following the day of dishonor, or if
there be no mail at a convenient hour on that day by the next mail thereafter.
2. If given otherwise than through the postoffice, then within the time that notice would have been received in due
course of mail, if it had been deposited in the postoffice within the time specified in the last subdivision.

Sec. 105
Where notice of dishonor is duly addressed and deposited in the postoffice, the sender is deemed to have given due
notice, notwithstanding any miscarriage in the mails.

Sec. 106
Notice is deemed to have been deposited in the postoffice when deposited in any branch postoffice or in any letter box
under the control of the postoffice department.

Sec. 107
Where a party receives notice of dishonor, he has, after the receipt of such notice, the same time for giving notice to
antecedent parties that the holder has after dishonor.

Sec. 108
Where a party has added an address to his signature, notice of dishonor must be sent to that address; but if he has not
given such address, then the notice must be sent as follows:
1. Either to the postoffice nearest to his place of residence, or to the postoffice where he is accustomed to receive his
letters; or,
2. If he lives in one place and has his place of business in another, notice may be sent to either place; or,
3. If he is sojourning in another place, notice may be sent to the place where he is sojourning.
But where the notice is actually received by the party within the time specified in this Act, it will be sufficient though not
sent in accordance with the requirements of this section.

Sec. 109
Notice of dishonor may be waived, either before the time of giving notice has arrived, or after the omission to give due
notice, and the waiver may be express or implied.

Sec. 110
Where the waiver is embodied in the instrument itself, it is binding upon all parties; but where it is written above the
signature of an indorser, it binds him only.

Sec. 111
A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a
waiver not only of a formal protest, but also of a presentment and notice of dishonor.
Sec. 112
Notice of dishonor is dispensed with when after the exercise of reasonable diligence, it cannot be given to or does not
reach the parties sought to be charged.

Sec. 113
Delay in giving notice of dishonor is excused when the delay is caused by circumstances beyond the control of the
holder and not imputable to his default, misconduct or negligence. When the cause of delay ceases to operate notice
must be given with reasonable diligence.

Sec. 114
Notice of dishonor is not required to be given to the drawer in either of the following cases:
1. Where the drawer and drawee are the same person.
2. Where the drawee is a fictitious person or a person not having capacity to contract.
3. Where the drawer is the person to whom the instrument is presented for payment.
4. Where the drawer has no right to expect or require that the drawee or acceptor will honor the instrument.
5. Where the drawer has countermanded payment.

Sec. 115
Notice of dishonor is not required to be given to an indorser in either of the following cases:
1. Where the drawee is a fictitious person or a person not having capacity to contract and the indorser was aware of
the fact at the time he indorsed the instrument.
2. Where the indorser is the person to whom the instrument is presented for payment.
3. Where the instrument was made or accepted for his accommodation.

Sec. 116
Where due notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by non-payment is
not necessary, unless in the meantime the instrument has been accepted.

Sec. 117
An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course
subsequent to the omission.

Sec. 118
Where any negotiable instrument has been dishonored it may be protested for non-acceptance or non-payment, as the
case may be, but protest is not required except in the case of foreign bills of exchange.

Negotiable Instruments in General. Part 8. Discharge of Negotiable Instruments

Sec. 119. A negotiable instrument is discharged:

1. By payment in due course by or on behalf of the principal debtor.
2. By payment in due course by the party accommodated, where the instrument is made or accepted for
accommodation.
3. By the intentional cancellation thereof by the holder.
4. By any other act which will discharge a simple contract for the payment of money.
6. When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

Sec. 120
A person secondarily liable on the instrument is discharged:
1. By an act which discharges the instrument.
2. By the intentional cancellation of his signature by the holder.
3. By the discharge of a prior party.
4. By a valid tender of payment made by a prior party.
5. By a release of the principal debtor, unless the holder's right of recourse against the party secondarily liable is
expressly reserved, or unless the principal debtor be an accommodating party.
6. By any agreement binding upon the holder to extend the time of payment, or to postpone the holder's right to
enforce the instrument, unless made with the assent of the party secondarily liable, or unless the right of recourse
against such party is expressly reserved.

Sec. 121
Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is
remitted to his former rights as regards all prior parties, and he may strike out his own and all subsequent
indorsements, and again negotiate the instrument, except:
1. Where it is payable to the order of a third person and has been paid by the drawer; and,
2. Where it was made or accepted for accommodation, and has been paid by the party accommodated.

Sec. 122
The holder may expressly renounce his right against any party to the instrument before, at, or after its maturity. An
absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the
instrument, discharges the instrument. But a renunciation does not affect the rights of a holder in due course without
notice. A renunciation must be in writing, unless the instrument is delivered up to the person primarily liable thereon.

Sec. 123
A cancellation made unintentionally, or under a mistake, or without the authority of the holder, is inoperative; but where
an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who
alleges that the cancellation was made unintentionally, or under a mistake or without authority.

Sec. 124
Where a negotiable instrument is- materially altered by the holder without the assent of all parties liable thereon, it is
avoided except as against a party who has himself made, authorized or assented to the alteration and subsequent
indorsers.
But when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the
alteration, he may enforce payment thereof according to its original tenor.

Sec. 125
Any alteration which changes:
1. The date.
2. The sum payable, either for principal or interest.
3. The time or place of payment.
4. The number and the relations of the parties.
5. The medium or currency in which payment is to be made.
Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters
the effect of the instrument in any respect, is a material alteration.

Title II. - Bills of Exchange

Article I. - Form and Interpretation.

Sec. 126
A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving
it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable further time, a sum
certain in money to order or to bearer.

Sec. 127
A bill itself does not operate as an assignment of the funds in the hands of the drawee available for the payment
thereof, and the drawee is not liable on the bill unless and until he accepts the same.

Sec. 128
A bill may be addressed to two or more drawees jointly, whether they are partners or not; but not to two or more
drawees in the alternative or in succession.

Sec. 129
An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within this State. Any
other bill is a foreign bill. Unless the contrary appears on the face of the bill the holder may treat it as an inland bill.

Sec. 130
Where in a bill drawer and drawee are the same person, or where the drawee is a fictitious person, or a person not
having capacity to contract, the holder may treat the instrument at his option, either as a bill of exchange or a
promissory note.
Sec. 131
The drawer of a bill and any indorser may insert thereon the name of a person to whom the holder may resort in case
of need; that is to say, in case the bill is dishonored by non-acceptance or non-payment. Such person is called the
referee in case of need. It is the option of the bolder to resort to the referee in case of need, or not, as he may see fit.

Article II. - Acceptance.

Sec. 132
The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The acceptance
must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other
means than the payment of money.

Sec. 133
The holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill, and if
such request is refused may treat the bill as dishonored.

Sec. 134
Where an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a
person who, on the faith thereof, receives the bill for value.

Sec. 135
An unconditional promise in writing to accept a bill before or after it is drawn is deemed an actual acceptance in favor
of every person who, upon the faith thereof, receives the bill for value.

Sec. 136
The drawee is allowed twenty-four hours after presentment in which to decide whether or not he will accept the bill; but
the acceptance, if given, dates as the day of presentation.
Sec 137. Where a drawee to whom a bill is delivered for acceptance destroys the same or refuses within twenty-four
hours after such delivery, or within such other period as the holder may allow, to return the bill accepted or non-
accepted to the holder, he will be deemed to have accepted the same.

Sec. 138
A bill may be accepted before it has been signed by the drawer, or while otherwise incomplete, or when it is overdue,
or after it has been dishonored by a previous refusal to accept, or by non-payment. But when a bill payable after sight
is dishonored by non-acceptance and the drawee subsequently accepts it, the holder, in the absence of any different
agreement, is entitled to have the bill payable accepted as of the date of the first presentment.

Sec. 139
An acceptance is either general or qualified. A general acceptance assents without qualification to the order of the
drawer. A qualified acceptance in express terms varies the effect of the bill as drawn.

Sec. 140
An acceptance to pay at a particular place is a general acceptance unless it expressly states that the bill it to be paid
there only, and not elsewhere.
Sec. 141
An acceptance is qualified which is:
1. Conditional; that is to say, which makes payment by the acceptor dependent on the fullfillment of a condition therein
stated.
2. Partial; that is to say, an acceptance to pay part only of the amount for which the bill is drawn.
3. Local; that is to say, an acceptance to pay only at a particular place.
4. Qualified as to time.
5. The acceptance of some one or more of the drawees but not of all.

Sec. 142
The holder may refuse to take a qualified acceptance, and if he does not obtain an unqualified acceptance, he may
treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the drawer and in-dorsers are
discharged from liability on the bill, unless they have expressly or impliedly authorized the holder to take a qualified
acceptance, or subsequently assent thereto. When the drawer or indorser receives notice of a qualified acceptance, he
must within a reasonable time express his dissent to the holder, or he will be deemed to have assented thereto.

Bills of Exchange. Continued. Presentment for Acceptance

Article III. - Presentment for Acceptance.

Sec. 143
Presentment for acceptance must be made.:
1. Where the bill is payable after sight, or any other case where presentment for acceptance is necessary in order to fix
the maturity of the instrument; or,
2. Where the bill expressly stipulates that it shall be presented for acceptance; or,
3. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill liable.

Sec. 144
Except as herein otherwise provided, the holder of a bill which is required by the next preceding section to be
presented for acceptance must either present it for acceptance or negotiate it within a reasonable time. If he fails to do
so, the drawer and all indorsers are discharged.

Sec. 145
Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day, and
before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and,
1. Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all,
unless one has authority to accept or refuse acceptance for all, in which case presentment may be made to him only.
2. Where the drawee is dead, presentment may be made to his personal representatives.
3. Where the drawee has been adjuged a bankrupt or an insolvent, or has made an assignment for the benefit of
creditors, presentment may be made to him or to his trustee or assignee.

Sec. 146
A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment
under the provisions of sections 72 and 85 of this Act. When Saturday is not otherwise a holiday, presentment for
acceptance may be made before 12:00 o'clock noon on that day.

Sec. 147
Where the holder of a bill drawn payable elsewhere than at the place of business or residence of the drawee has not
time, with the exercise of reasonable diligence to present the bill for acceptance before presenting it for payment on the
day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused
and does not discharge the drawers and indorsers.

Sec. 148
Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the
following cases:
1. Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to con-tiact by
bill.
2. Where, after the exercise of reasonable diligence presentment cannot be made.
3. Where, although presentment has been irregular, acceptance has been refused on some ground.

Sec. 149
A bill is dishonored by non-acceptance:
1. When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not
be obtained; or,
2. When a a presentment for acceptance is excused and the bill is not accepted.

Sec. 150
Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it
must treat the bill as dishonored by non-acceptance, or he loses the right of recourse against the drawer and indorsers.

Sec. 151
When a bill is dishonored by non-acceptance, an immediate right of recourse against the drawers and in-dorsers
accrues to the holders, and no presentment for payment is necessary.

Article IV. - Protest.

Sec. 152
Where a foreign bill appearing on its face to be such is dishonored by non-acceptance, it must be duly protested for
non-acceptance, and where such a bill which has not previously been dishonored by non-acceptance it dishonored by
non-payment, it must be duly protested for non-payment. If it is not so protested, the drawer and in-dorsers are
discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof, in case of dishonor, is
unnecessary.

Sec. 153
The protest must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal of the
notary making it and must specify:
1. The time and place of presentment.
2. The fact that presentment was made and the manner thereof.
3. The cause or reason for protesting the hill.
4. The demand made and the answer given, if any, of the fact, that the drawee or acceptor could not he found.

Sec. 154
Protest may be made by:
1. A notary public; or,
2. By any respectable resident of the place where the bill is dishonored, in the presence of two or more credible
witnesses.

Sec. 155
When a bill is protested, such protest must be made on the day of its dishonor, unless delay is excused as herein
provided. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting.

Sec. 156
A bill must be protested at the place where it is dishonored, except that when a bill drawn payable at the place of
business or residence of some person, other than the drawee, has been dishonored by non-acceptance, it must be
protested for non-payment at the place where it is expressed to be payable; and no other presentment for payment to,
or demand on, the drawee is necessary.

Sec. 157
A bill which has been protested for non-acceptance may be subsequently protested for non-payment.

Sec. 158
When the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of
creditors, before the bill matures, the holder may cause the bill to be protested for better security against the drawer
and indorsers.

Sec. 159
Protest is dispensed with by any circumstances which would dispense with notice of dishonor. Delay in noting or
protesting is excused when delay is caused by circumstances beyond the control of the holder and not imputable to his
default, misconduct or negligence. When the cause of delay ceases to operate, the bill must be noted or protested with
reasonable diligence.
Sec. 160
Where a bill is lost or destroyed, or is wrongly detained from the person entitled to hold it, protest may be made on a
copy or written particulars thereof.

Article V. - Acceptance for Honor.

Sec. 161
Where a bill of exchange has been protested for dishonor by non-acceptance, or protested for better security and is not
overdue, any person not being a party already liable thereon, may, with the consent of the holder, intervene and accept
the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is
drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn, and where there has been
an acceptance for honor for one party there may be a further acceptance by a different person for the honor of another
party.

Sec. 162
An acceptance for honor supra protest must be in writing and indicate that it is an acceptance for honor, and must be
signed by the acceptor for honor.

Sec. 163
Where an acceptance for honor does not expressly state for whose honor it was made, it is deemed to be an
acceptance for the honor of the drawer.

Sec. 164
The acceptor for honor is liable to the holder and to all parties to the bill subsequent to the party for whose honor he
has accepted.

Sec. 165
The acceptor for honor by such acceptance engages that he will, on due presentment, pay the bill according to the
terms of his acceptance: Provided, it shall not have been paid by the drawee: And provided, also, that it shall have
been duly presented for payment and protested for non-payment and notice of dishonor given to him.

Sec. 166
When a bill payable after sight is accepted for honor, its maturity is calculated from the date of the noting for non-
acceptance and not from the date of the acceptance for honor.

Sec. 167
Where a dishonored bill has been accepted for honor supra protest or contains a reference in case of need, it must be
protested for non-payment before it is presented for payment to the acceptor for honor or referee in case of need.

Sec. 168
Presentment for payment to the acceptor for honor must be made as follows:
1. If it is to be presented in the place where the protest for nonpayment was made, it must be presented not later than
the day following its maturity.
2. If it is to be presented in some other place than the place where it was protested, then it must be forwarded within
the time specified in section 104.

Sec. 169
The provisions of section 81 apply where there is delay in making presentment to the acceptor for honor or referee in
case of need.

Sec. 170
When the bill is dishonored by the acceptor for honor, it must be protested for non-payment by him.

Article VI. - Payment for Honor.

Sec. 171
Where a bill has been accepted for non-payment, any person may intervene and pay it supra protest for the honor of
any person liable thereon or for the honor of the person for whose account it was drawn.

Sec. 172
The payment for honor supra protest in order to operate as such, and not as a mere voluntary payment, must be
attested by a notarial act of honor, which may be appended to the protest or form an extension to it.

Sec. 173
The notarial act of honor must be founded on a declaration made by the payer for honor or by his agent in that behalf
declaring his intention to pay the bill for honor and for whose honor he pays.

Sec. 174
Where two or more persons offer to pay a bill for the honor of different parties, the person whose payment will
discharge most parties to the bill is to be given preference.

Sec. 175
Where a bill has been paid for honor, all parties subsequent to the party for whose honor it is paid, are discharged, but
the payer for honor is subrogated for, and succeeds to, both the rights and duties of the holder as regards the party for
whose honor he pays and all parties liable to the latter.

Sec. 176
Where the holder of a bill refuses to receive payment supra protest, he loses his right of recourse against any party
who would have been discharged by such payment.

Sec. 177
The payer for honor, on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonor,
is entitled to receive both the bill itself and the protest.

Title III. - Promissory Notes and Checks

Article VII. - Bills in a set.

Sec. 178
Where a bill is drawn in a set, each part of the Bet being numbered and containing a reference to other parts the whole
of the parts constitute one bill.

Sec. 179
Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues
is, as between such holders, the true owner of the bill. But nothing in this section affects the rights of a person who in
due course accepts or pays the part first presented to him.

Sec. 180
Where the holder of a set indorses two or more parts to different persons he is liable on every such part and every
indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills.

Sec. 181
The acceptance may be written on any part and it must be written on one part only. If the drawee accepts more than
one part, and such accepted parts are negotiated to different holders in due course, he is liable on every such part as if
it were a separate bill.

Sec. 182
When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up
to him, and that part at maturity is out standing in the hands of a holder in due course, he is liable to the holder thereon.

Sec. 183
Except as herein otherwise provided, where any one part of a bill drawn in a set is discharged by payment or
otherwise, the whole bill is discharged.

Title IV. - General Provisions

Article I.

Sec. 184
A negotiable promissory note within the meaning of this Act is an unconditional promise in writing made by one person
to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain in
money to order or to bearer. Where a note is drawn to the maker's own order, it is not complete until indorsed by him.

Sec. 185
A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the
provisions of this Act are applicable to a bill of exchange payable on demand apply to a check.
Sec. 186
A check must be presented for payment within a reasonable time after its issue, and notice of dishonor given to the
drawer as provided for in the case of bills of exchange, or the drawer will be discharged from liability thereon to the
extent of the loss caused by the delay.
Sec 187. Where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance.

Sec. 188
Where the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from
liability thereon.

Sec. 189
A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank,
and the bank is not liable to the holder, unless and until it accepts or certifies the check.

Article I.

Sec. 190
This Act shall be known as the Negotiable Instrument Law.

Sec. 191
In this Act, unless the context otherwise requires:
"Acceptance" means an acceptance completed by delivery or notification.
"Action" includes counter-claim and set-off.
"Bank" includes any person or association of persons carrying on the business of banking, whether incorporated or not.
"Bearer" means the person in possession of a bill or note which is payable to bearer.
"Bill" means bill of exchange, and "note" means negotiable promissory note.
"Delivery" means transfer of possession, actual or constructive, from one person to another.
"Holder" means the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
"Indorsement" means an indorsement completed by de-livery.
"Instrument" means negotiable instrument.
"Issue" means the first delivery of the instrument, complete in form, to a person who takes it as holder.
"Person" includes a body of persons, whether incorporated or not.
"Value" means valuable consideration.
"Written" includes print, and "writing" includes print.

Sec. 192
The person "primarily" liable on an instrument is the person who, by the terms of the instrument, is absolutely required
to pay the same. All other parties are "secondarily" liable.
Sec. 193
In determining what is a "reasonable time" or an "unreasonable time," regard is to be had to the nature of the
instrument, the usage of trade or business (if any) with respect to such instruments, and the facts of the particular
case.

Sec. 194
Where the day, or the last day, for doing an act herein required or permitted to be done falls on Sunday or on a holiday,
the act may be done on the next succeeding secular or business day.

Sec. 195
The provisions of this Act do not apply to negotiable instruments made and delivered prior to the passage hereof.

Sec. 196
In any case not provided for in this act the rules of the law merchant shall govern.

Appendix B. Various Forms

1. Promissory Note.
$100.00 Chicago, 111., July 1st, 1911.
August first, 1911, after date, for value received, I promise to pay to the order of William Smith, the sum of One
Hundred (100) Dollars, at 1011 Blank Street, Chicago, Illinois, with interest at 6% per cent, per annum.
(sd.) Walter W. Johnson.
2. Judgment Note.
Add to the above note above the place for the signature the following:
And to secure the payment of said amount I hereby authorize, irrevocably, any attorney of any Court of Record to
appear for me in such Court, in term time or vacation, at any time hereafter, and confess a judgment, without process,
in favor of the holder of this Note, for such amount as may appear to be unpaid thereon, together with costs and ten
dollars attorney's fees, and to waive and release all errors which may intervene in any such proceedings, and consent
to immediate execution upon such judgment, hereby ratifying and confirming all that my said attorney may do by virtue
hereof.
(Note: It is better to purchase forms of judgment notes from local stationers, as such forms embody peculiar provisions
applicable to the condition of the law in the state involved. The above is a form used in Illinois. Judgment notes
however, are not widely used. They are used in Illinois, Ohio, Pennsylvania, New Mexico and Wisconsin.)
3. Bill of Exchange.
Cincinnati, Ohio, June 1, 1911. One month after date, pay to the order of William H. White, One Hundred Dollars.
Value received, and charge to the account of
(sd) Walter W. Johnson. To Oliver Smith,
Chicago, Illinois.
An acceptance of the above bill would read as follows: "Accepted, Chicago, June 3rd, 1911," and would be written
across the face of the bill. Oliver Smith might also in such acceptance name the place of payment above his signature,
thus, "Payable at 16th National Bank, Chicago." This qualification is permitted; but if he should say "Payable at 16th
National Bank and not elsewhere," that would be a qualified acceptance and constitute dishonor, unless the holder
assented.
4. Checks.
No. 1490. Chicago, July 1st, 1911.
The Blank Trust And Savings Bank.
Pay to the order of---------------John Smith---------------$1000
One Thousand-------------------------------------------Dollars.
(sd) Wm. Jones.
5. Certificate of Deposit.
No. 1008. Chicago, July 1, 1911.
James A. Jones has deposited in the 16th National Bank of Chicago, Hlinois, Five Hundred Dollars, payable to the
order of himself upon the return of this Certificate properly endorsed. Interest 3 per cent, per annum. Not subject to
check.
William Randolph,
Cashier.
6. Forms of Indorsement.
(1) Blank indorsement.
William Jones.
(2) Special indorsement.
Pay to the order of John Smith. William Jones.
or, Pay to John Smith.
William Jones.
(3) Qualified indorsement.
without recourse.
William Jones.
(4) Restrictive indorsement.
Pay to John Smith, for collection. William Jones.
7. Notice of Dishonor of Note Where Note Not
Protested.
July 1, 1911. You are hereby notified that a promissory note made by John Smith, dated June 1, 1911, payable one
month after date to the order of William H. White, and indorsed by said William H. White, was this day presented by the
undersigned for payment which was refused and the under-signed as holder looks to you as indorser for payment,
damages, interest and costs.
(sd) Joseph Black,
1820 Blank Street, Chicago, Illinois. To William H. White, 190 Blank Street, Chicago, Illinois.
8. Certificate of Protest.
(Here attach original instrument or copy thereof.)
State of ILLINOIS, Cook County.
88
Be it Known, That on this first day of July in the year of our Lord One Thousand Nine Hundred and Eleven, I, Henry N.
Green, a Notary Public, duly commissioned and sworn, and residing in the City of Chicago in said County and State, at
the request of Henry W. Jones, the holder of the above bill of exchange, went with the original bill of exchange which is
above attached, to the Office of The First National Bank, where such bill is payable, during the usual business hours
and demanded payment thereon, which was refused for the following assigned reason - not sufficient funds and no
instructions to pay.
Whereupon I, the said Notary, at the request aforesaid, did PROTEST, and, by these Presents, do Solemnly Protest,
as well against the drawer of said bill and the indorsers thereof, as all others whom it may or doth concern, for
exchange, re-exchange and all costs, charges, damages and interest already incurred by reason of the non-payment
of the said bill of exchange.
And I, the said Notary, do hereby certify, that, on the same day and year above written, due notice of the foregoing
Protest was put in the Post-Office at Chicago, Illinois, as follows:
Notice for Whiter W. Johnson, 12 Blank Street, Cincinnati, Ohio. Notice for William H. White, Blankville, Illinois.
Each of the above-named places being the reputed place of residence of the person to whom this notice was directed.
In testimony whereof, I have hereunto set my hand and affixed my Official Seal, the day and year first above written.
Notary Public.
Fees - Noting for Protest,.............25 cents; Protest,... .75 cents;
Noting Protest,... .25 cents; Notices,... .50. Certificate and Seal,.... 25 cents; Postage,.... 4 cents; Vol. 1; page 272;
$2.04.
(Note: If the protest is for non-acceptance this same form may be used by writing in "non-acceptance" for
"nonpayment.")
9. Notice of Protest of Note.
State of Illinois, Cook County.
88
July 1st, 1911. A promissory note for $100.00 payable to the order of William Jones, dated July 1st, 1910, payable July
1st, 1911, signed by John Smith, indorsed by William Jones, being this day due and unpaid, and by me PROTESTED
for non-payment, I hereby notify you that the payment thereof has been duly demanded, and that the holder looks to
you for payment, damages, interest and costs.
Done at the request of Henry W. Jones, 1711 Blank Street, Chicago, Illinois.
Henry N. Gbeen, Notary Public. To William Jones,
1512 Blank Street, Chicago, Illinois. (Note: It is not necessary, but usual, to protest a note or inland bill, but a foreign
bill must be protested.)
10. Notice of Protest of Bill.
State of Illinois, Cook County.
88
Chicago, July 1, 1911. Take notice that a bill of exchange for $100.00, dated June 1, 1911, drawn by Walter W.
Johnson, 12 Blank Street,
Cincinnati, Ohio, in favor of William H. White, on Oliver Smith, Chicago, Illinois, indorsed by said William H. White,
accepted by said Oliver Smith, payable at 16th National Bank, Chicago, was this day presented for payment, which
was refused, and therefore was this day protested by the undersigned notary public for non-payment.
The holder therefore looks to you for payment thereof together with interest, costs, damages, etc., you being the
drawer thereof.
Henry N. Green,
Notary Public. To Walter W. Johnson, 12 Blank Street, Cincinnati, Ohio.

Appendix C. Table Of Interest Laws

Table Showing What Interest May Be Charged in the Different States and the Effect of Charging Usury.

State Interest Chargeable By Contract Penalty for Usury

Alabama ............. 8% Forfeiture of all Interest.

Alaska ................. 10%

Arizona .................. No limit None.

Arkansas .............. 10% Forfeiture of debt.

California .............. No limit None.

Colorado ............... No limit None.

Connecticut ............ 15% Forfeiture of debt and interest.

Delaware .............. 6% Forfeiture of debt and interest.

District of Columbia.. 10% Forfeiture of all interest.

Florida .................. 10% Forfeiture of all interest.

Georgia .............. 8% Forfeiture of excess interest.

Idaho ................. 12% Forfeiture of interest and 10% annually of principal.

Illinois ................. 7% Forfeiture of all interest.

Indiana ............... 8% Forfeiture of all interest over 6%.

Iowa .................... 8% Forfeiture of all interest, 8% of principal and costs of suit.

Kansas .................... 10% Forfeiture of double the usury.

Kentucky ................. 8% Forfeiture of excess interest.

Interest
State Chargeable Penalty for Usury
By Contract

Louisiana......................... 8% Forfeiture of all interest.

Maine......................... No limit None except for loans less than $200 secured by chattel mortgage.

Maryland......................... 6% Forfeiture of all interest.

Massachusetts................... No limit On less than $1,000 only 18% recoverable.

Michigan......................... 7% Forfeiture of all interest.

Minnesota......................... 10% Forfeiture of debt and interest.

Mississippi......................... 10% Forfeiture of all interest.

Missouri......................... 8% Forfeiture of excess interest.

Montana......................... No limit None.

Nebraska......................... 10% Forfeiture of all interest.

Nevada No limit None.

New Hampshire................. 6% Forfeiture 3 times excess interest.

New Jersey......................... 6% Forfeiture of all interest.

New Mexico....................... 12% Forfeiture double the usury.

New York......................... 6% Forfeiture of debt and interest.

North Carolina................. 6% Forfeiture of all interest.

North Dakota.................... 12% Forfeiture of all interest.

Ohio......................... 8% Forfeiture of excess over 6%.

State Interest Chargeable By Contract Penalty of Usury

Oklahoma......................... 10% Forfeiture of all interest-

Oregon......................... 10% Forfeiture of debt and interest.

Pennsylvania..................... 6% Forfeiture of excess interest.

Rhode Island..................... No limit None.

South Carolina................... 8% Forfeiture of all interest.

South Dakota..................... 12% Forfeiture of all interest.

Tennessee......................... 6% Forfeiture of excess interest.

Texas......................... 10% Forfeiture of all interest.

Utah......................... 12% Forfeiture of debt and interest.

Vermont......................... 6% Forfeiture of excess interest.

Virginia........................ 6% Forfeiture of all interest.

Washington..................... 12% Forfeiture of all interest.

West Virginia..................... 6% Forfeiture of excess interest.

Wisconsin.................... 10% Forfeiture of all interest.

Wyoming.................... 12% Forfeiture of all interest.

Appendix D. Questions And Problems

Chapter One

1. State three ways in which a negotiable instrument differs from an instrument not negotiable. How does "assignment"
differ from "negotiation"?
2. Define a negotiable promissory note. Who are the parties thereto?
3. Define a bill of exchange. What two sorts are there? Define them. Name the parties to a bill of exchange.
4. Define a check. In what respect does it differ from a bill of exchange?
5. Is a certificate of deposit negotiable? Why?
6. When are bonds negotiable?
7. What is a "straight" bill of lading? an "order" bill? Is a warehouse receipt negotiable?
8. Is a mortgage negotiable? Is a certificate of ownership of corporate stock negotiable?
9. What are the instruments properly falling within the negotiable instruments law?

Chapter Two

10. What was the origin of negotiable paper?

11. What was the first kind of negotiable Instrument?
12. State the history in brief of the Uniform Negotiable Instruments Law?

Chapter Three

13. What are the essential elements of a negotiable instrument?

14. May a note which is signed by the maker's initial be negotiable?
15. Can one whose name, assumed or real, is not by one's self or one's agent signed to a note, be liable thereon?
16. The following note was given:
"New York, Jan. 5, 1906. "Six months after date I promise to pay to the order of C. D. $3166. Subject to terms of
contract between maker and payee of October 25, 1905. (Signed) A. B."
E. P. purchased his note for value before maturity and in good faith. When he presented it at maturity to A. B. for
payment, payment was refused on account of the fact that the contract referred to had not been performed. E. F. sues
A. B. A. B. sets up his defense. Can he avail of it against E. P.? Why? (Klots Co. v. M'n'f'rs Co., 179 Fed. 813.)
17. A wrote an order upon B to pay C or order $200 "out of money due me for labor." Is this a bill of exchange or an
assignment? Why? Why Is there any importance In the distinction? (Stebbins v. Union Pacific R. Co., 2 Wyo. 71.)
18. A made a note to the order of B which was secured by a mortgage from A to B, and one of whose provisions was
that A should pay taxes, special assessments, etc., upon the mortgaged property and various other conditions and
stipulations. B sold the note and assigned the mortgage to C. Is this note rendered non-negotiable by the fact that It
states upon Its face that it is secured by a mortgage between the parties? (Zollman v. Bank, 238 111. 290.)
19. Is a note which falls due in installments negotiable If otherwise correctly drawn? If it is to bear "current rate of
exchange"? Suppose it provides for payment of a certain sum "with an attorney's fee and costs of collection if not paid
at maturity"?
20. What la demand paper?
2I. If a note It payable a certain time after as treat whose happening la uncertain to ever occur, and the treat hap-aena,
does the note thereupon become negotiable?
22. What are words of negotiability? Give them.
23. A made oat his check payable to "cash." It this nege-tlablaf

Chapter Four

24. What is a "Judgment note"? It It negotiable?

25. If the date is omitted. is an Instrument rendered thereby non-negotiable? What it tat rule with reference to
antedating and post-dating?
26. If a check states the ram payable In writing In the body and in figures in the margin, and there is a discrepancy
between the two, which governs?

Chapter Five

27. A made a note payable to the order of B, but told B not to make use of it under any circumstances except upon a
certain condition. B, in violation of this stipulation Indorsed the note to C who paid value for It and took before maturity
and In good faith. is A responsible to C? Why?
28. B has a note payable to his order by A with tern la blank. He Informs C that he authorized to fill In any amount up to
$1000. His real authority la to fill up for not over $500. C pays B $1000 for the note which sum is thereupon filled la by
B, and the note la Indorsed and delivered to C Can C hold A for $1000 on the note?
29. Give the proper form of signature tar as agent to use la binding hit principal.

Chapter Six

3O. A. ancle of B, as a gift to B, gave B a promissory note reading to B's order payable on July 1, 1911, which was B's
twenty-first birthday. When that date occurred, A Informed B he would not honor the note. B brought suit. Hat A any
good defense? Way ?
31. It it necessary to refer to the consideration is i ne-gotlablt instrument? Arc the words "value received" or their
equivalent necessary?
32. A bought a lot of second hand furniture from B at an agreed price of $500 and gave B his promissory note for that
■am payable in three months. This was an exorbitant price as A could hare purchased its equivalent for not over $100
at any second hand furniture dealer's. A discovers that the price is excessive. Can he set up this inadequacy to defeat
the nots in whole or part?
33. A desired to borrow $500 from B. B was willing to loan the money to A if C would sign the note with A. C did so
purely as an act of friendship, which B knew. No benefit was derived by C, nor was it expected by the parties that he
should receive any of the consideration or any benefit Can C when sued by B, sat up lack of consideration? Why?
What la C called?

Chapter Seven

34. Define acceptance. May an acceptance be orally made? Must it be on the face of the bill Itself?
35. A draws on B in favor of C, and C sends the bill to B for acceptance. B retains the paper and makes no reply to C.
C claims that this retention amounted to an acceptance. What is the rale?
36. What is a qualified acceptance? Must the holder be content with a qualified acceptance? What is its effect upon the
drawer and prior indorsers? If the acceptance names a place of payment, is this a qualified acceptance?
37. A drew a check upon the Ocean National Bank, and delivered It to the payee who procured its certification. The
drawer had sufficient funds to pay the check and the amount of the check was charged off against him. Within an hour
the bank suspended payment. Can the payee hold A upon this check?

Appendix D. Questions And Problems. Continued

Chapter Eight
38. A, for the purpose of securing credit with C, drew a bill of exchange on B, requesting B to accept It, and Informing
B that he, A, would be able to pay it when It became toe. whereupon B wrote his acceptance upon the bill. What la B
called? If C knew before he extended credit to A that B accepted or would accept without any benefit to him, la B liable
toC?
39. In the foregoing case, if A does not pay the bill or furnish B with fundi wherewith to pay it, what are B's rights?
40. What la acceptance for honor? What Is essential before there can be acceptance for honor? In what manner is the
acceptance for honor made?
41. What steps most be taken by a holder la order to hold his rights against an acceptor for honor?
42. Define payment for honor. State the method of making payment for honor.

Chapter Nine

43. Name two sorts of negotiation

44. Define an allonge and state its purpose,
45. Hay an Indorsement be made on a separate instrument?
46. Is it necessary to use words of negotiability in an Indorsement la order to continue its negotiable character.
47. What is the rale as to partial indorsement of an in-atrumeat?
48. What Is a special Indorsement? Give an example.
49. What is a blank indorsement? Give an example. How may a blank indorsement be converted into a special
indorse-ment by the indorsee or holder?
50. What is a qualified indorsement?
51. What la a reatrictlre indorsemeat? What la its purpose!

Chapter Ten

52. Who la a holder in due coarse? Why is it important that one should be a holder in due course?
53. A makes a negotiable note to B for $100. B transfers it to C for $50. What are C's rights?
54. What constitutes one a holder in good faith? Suppose one purchases negotiable paper for a very much smaller
sum than its face value. Does the fact that it is procurable at this large discount prevent the purchaser from being a
holder in due course?
55. Does the fact that an instrument is overdue thereby deprive it of its negotiable character? Why is it important in
buying paper to purchase it before it is overdue? When is demand paper overdue in the sense that it prevents a
purchaser from being a holder in due course?
56. How can one purchase with notice of a defense good against the original party and still be a holder in due course?
57. Name the defenses which the party liable on an instrument could have made against a prior party but cannot be
made against a holder in due course.
58. A made out his check to B and delivered it to B, B Intending to bank it, indorsed it in blank and put it in his pocket
from which it was stolen by C. C sold it to D for value. D did not know how C came by it Assume that the check is
negotiable as drawn. Can the lack of delivery to C and his theft of it be used against D by any party?
59. Name the defenses which can be set up against a holder in due course.

Chapter Eleven

60. What la the contract of the maker of a note?

61. What is the contract of a drawer of a bill or check?
62. What is the contract of the acceptor of a bill?
63. What is the contract of an unqualified indorser? Of one who transfers without indorsement? Of one who indorses
"without recourse"? A was a minor. Hit made a note to B who Indorsed it without recourse to C. A plead his minority.
Can C hold B? Why?
64. Who la an anomalous lndorser? What la his contract?

Chapter Twelve

65. Why does the law require certain formal steps to he taken to charge parties secondarily liable on a negotiable
Instru-ment?
66. If one seeks to hold the maker of a note, must he show that on the date of Its maturity ha presented It to the maker
and demanded its payment?
67. Suppose a note Is payable at a certain street address in a certain city, but the holder does not bare it there for
payment on that day. What effect. If any, does this hare on the maker's liability?
68. At what date and hoar must negotiable paper he presented to the party liable thereon in order that rights against
parties secondarily liable may be saved? What la the rule where paper is payable on demand? What are days of
grace? Are such days allowed in most states?
69. Where paper falls due on Sunday or a legal holiday when must It be presented? What la the rule where it falls due
on Saturday?
70. How la time computed where am Instrument la payable as many days or a month after sight?
7l. At what place most such paper be presented 1 To wham?
72. When may one hold an indorser or drawer notwithstanding he makes no presentment for payment to the maker or
acceptor?
73. When is presentment for acceptance necessary to hold parties secondarily liable? May presentment for
acceptance ha made la other cases? Why?
74. A is holder of a bill drawnupon B payable ninety days after date. A presents it for acceptance which la refused.
Unit A present the bill for payment to such drawee when due in order to hold C, the drawer?
75. At what date and hour must presentment for acceptance be made? To whom most presentment be made?
76. Name the cases la which presentment for acceptance is excused or waived?
77. What is notice of dishonor? When and to whom mast It he given? May It he given by mall?
78. What Is protest? When most it be given? Who in authorised to make protest?
79. What must the protest contain? At What place most the protest he made?
8O. What is meant by protest for hotter security?
81. Suppose yon have a note with an inderser thereon. State all the steps necessary to hold such indorser. Suppose
you have an inland bill. Name the steps necessary to hold the drawer and indorser. Suppose it is a foreign bill. Name
the steps necessary to be taken.

Chapter Thirteen

82. What la meant by discharge of negotiable paper? State the causes which will operate as discharge.
83. Does tender of payment operate as discharge of the instrument or any party thereto.
84. What is the effect of material alteration? What constitutes material alteration?
Subdivision I. Bailments And Carriers. Chapter 1. Definitions

Sec. 1. Bailment Defined

A bailment is a holding of personal property by one person which belongs to another under a contract or legal duty to
redeliver to that other either in the same or altered form or disposed of for that other according to the purposes of the
bailment.
The term "bailment" signifies a situation in which one person holds personal property, the ownership of which is in
another. Ownership and possession are separated. And the person who has the possession is under obligation to
return the same goods, either in the same or altered form to the owner, or dispose of them for his benefit, when the
purpose of the bailment shall have been accomplished.1
The party who is entitled to the goods is called the bailor; the party who holds them is called the bailee.
Whenever a person holds personal property that he does not own, there is a bailment. It is very frequently said that a
bailment signifies a delivery and that delivery is an essential element of a bailment, but this is certainly
I. Wentworth v. Riggs, 143 N. Y. S. 955.
error, for it ignores cases of finding, theft, etc., in which the holder is a bailee, and there cannot be said to be a delivery
except by a fiction, although ordinarily in any commercial bailment there is delivery.
The idea underlying bailment is that the person who holds does not own, but that he holds for another goods which he
is under obligation to restore to that other because that other is the owner thereof. It follows that if he must restore the
same goods received by him, although in an altered form, there is a bailment.
Example 1. K delivered to C timber to be made into lumber for K. Held, a bailment. K was the owner of the lumber as
well as of the logs.la (If it had been C's undertaking to return the same lumber, or lumber equally as good, or to pay for
the lumber, C would not have been bailee, but owner. See further in this chapter.)
The idea of bailment implies a full and complete possession by the bailee, so that he is responsible for the safety of the
thing. Thus it has been held that a restaurant keeper is not a bailee of an overcoat hung by the guest upon a hook
within a few feet of where he was sitting.2

Sec. 2. Kinds Of Bailments. A. Ordinary Bailments

1. Bailments for sole benefit of bailor (A asks B as a favor to keep property for him).
2. Bailments for sole benefit of bailee (B borrows from A).
3. Bailments for benefit of both:
(a) Bailments of mere keeping (warehousemen, agents, etc.).
1a. Chaffin v. State, 5 Ga. Ap. 368, 63 S. E. 230. 2. Wentworth v. Riggs, supra.
(b) Bailments of carriage (private carriers).
(c) Bailments of goods delivered to another to do work upon.
(d) Bailments of goods delivered to another to do work with.
(e) Bailments for security (pledges).
(f) Bailments of vendor in possession after sale. 4. Fortuitous bailments, etc. (bailments arising out of finding, salvage,
theft, etc.).

B. Extraordinary Bailments
1. Inn Keepers.
2. Common Carriers.

Sec. 3. How Bailment Differs From Sale

There is a sale whenever ownership passes. In a bailment ownership does not pass. A bailment may be involved in a
sale, as where ownership having passed, the seller has not yet delivered the goods to the buyer.
In transactions in which one delivers property to another it becomes a question whether the property continues to
belong to him or becomes the property of the other. This question is important from a great variety of reasons, as
follows:
(1) From the standpoint of the parties to determine upon whom is the risk of loss.
(2) From the standpoint of the parties to determine which party is entitled to the specific goods.
(3) From the standpoint of creditors of either party to determine whether the assets involved in the transaction are
subject to seizure for debts.
(4) From the standpoint of purchasers of the goods from either party as to whether such party has any title or right to
convey.
(5) From standpoint of the state for purposes of taxation, etc.2a
The distinction between bailment and sale, and incidentally the nature of each is shown in the following examples:
Example 2. W delivers to F 6 sheep, F to return to W at the end of the year, an equal number of sheep of equal value.
F did not return 6 sheep, and being sued by W replies that W's creditors took the sheep delivered by W for W's debts.
This defense is not good. The sheep when delivered by W became F's sheep for he had no duty to return the same
sheep. Therefore W's creditors took F's property to pay W's debt; and F should sue them for damages. The transaction
was a sale and not a bailment.3
Example 5. A delivers to B jeweler's sweepings to be refined by B, who is then either to return the refined product or
account for its value. This is not a bailment, but a sale, the sweepings necessarily becoming B's, although he has a
right (not an obligation) to return the identical property.4
In cases of alleged consignment for sale, great difficulties arise, and the courts have not always been in harmony.
Where one, as, for instance, a manufacturer
2a. See D. M. Ferry & Co. v. Hall, 188 Ala. 178, 66 So. 104. (Question whether the Ferry Company should be taxed on
seeds supplied its retailers alleged to still belong to the Ferry Company as being merely on consignment, but held, that
title had passed to the retailers.) or jobber, sends goods to another, as a dealer, he sometimes desires on the one
hand to make the dealer absolutely his debtor, with no right to return unsold goods, and on the other hand he desires
to be able to say in the event of the dealer's insolvency, that the goods were sent on mere consignment and that
therefore all unsold goods on hand at the dealer's insolvency belong to him. This has resulted in drawing contracts of
exceedingly ingenious nature, and upon the construction of which the courts have differed. The question would seem
to be whether when the goods were delivered, the recipient became a debtor for the goods delivered to him. If so it is a
sale, no matter what stipulations may have been made merely to avoid that consequence in the event of disaster.
3. Wilson v. Finney, 13 Johns. N. Y. 368.
4. Austin v. Seligman, 18 Fed. 519.
The following case will illustrate the nature of a simple consignment:
Example 4. A sends to B for goods on consignment which B is to sell, accounting to A for the proceeds, unsold goods
to be returned to A. This is a bailment and not a sale and in the event of bankruptcy, A can recover the goods from the
bankrupt or his trustee, and is not confined to mere proof of his debt against the insolvent estate.5
The fact that the consignee must pay freight and storage, that he must guarantee the payment of the purchase price on
all goods sold by him, that he may make his own price to purchasers, do not prevent the transaction being one merely
of bailment if the contract in its essential meaning shows no sale to the consignee, conditional or otherwise.6
5. In re Columbus Buggy Co., 143 Fed. 861.
6. Ludvigh v. Amer. Woolen Co., 231 U. S. 522; Lentz v. Harrison, 148 111. 508.
But if the party to whom the goods are sent cannot return them in the event of not disposing of them, but becomes in
effect a debtor, the transaction is a sale and not a bailment, and the alleged consignor is a general creditor and in
event of bankruptcy must prove up as such.
Example 5. A sent goods to K under an arrangement whereby K was to pay for all goods received within 60 days,
whether sold by K or not. This arrangement was set forth in a contract by which K was called a "special selling factor"
and in which it was recited that the title remained in A. But the court held that by the substance of the agreement K was
a debtor with a single obligation to pay money, and that therefore the transaction was a sale and not a bailment.7
An entire book might be devoted to a consideration of the various cases in which the facts present the question
whether the transaction constitutes a consignment or a sale. As has been said in an exhaustive note on this subject7a
"much ingenuity has been employed by consignors in framing contracts to secure all the benefits and at the same time,
avoid the disadvantages of contracts of sale, and also to secure the benefits, and avoid the detriments of agency
contracts. The result is a hybrid contract, frequently involving essential elements both of sale and consignment
contracts. * * * A contract cannot be both."

Sec. 4. Same Subject In Case Of Fungible Goods

If goods are fungible, and are mixed with like
7. Arbuckle Bros. v. Kirkpatrick, 98 Tenn. 221; see also Taylor v. Fram, 252 Fed. 465.
7a. L. R. A. 1917B, 626ff. And see a form of consignment contract upon pianos set out in full in same volume on page
615.
goods of similar quality under an obligation to return an equivalent amount, the transaction is a bailment.
Fungible goods are those made up of particles necessarily for all practical purposes alike, so that it can make no
possible difference whether one gets the same goods or some others.
Example 6. A deposits grain in a public warehouse, to be stored in a bin with other grain, and a like quantity to be
returned on demand. This is a bailment and not a sale. The depositors are tenants in common.8
Fungible goods are such as grain, flour, oil, wine, the units of which are necessarily alike; but not such as bricks, logs,
chairs, etc., the units of which may be alike, but not necessarily so, and therefore the importance of choice may be
present.
8. Yorkey v. Smith, 181 111. 564.

Chapter 2. Rights And Obligations Of Ordinary Bailees

Sec. 5. Bailee's Duty Of Care

An ordinary bailee is not an insurer, and is only bound to use such care in keeping the goods as under the
circumstances of the case amounts to reasonable care.
In some cases it has been said that the bailee's duty of care depended upon whether the bailment was for his benefit
(in which case he must use great care), for the benefit of the bailor (in which case he need use but slight care), or for
the benefit of both (in which case he must use ordinary care). But the better rule seems to be that in any case his duty
of care arises out of the circumstances, and he must use the care that the circumstances demand in the exercise of
good faith. Thus if being a banker he receives bonds for safe keeping, although he gets no reward, he must take all
proper precaution to keep them safely.9
But the ordinary bailee is not an insurer. He is only responsible for the use of care ordinarily exercised under the same
circumstances. He is, however, absolutely responsible for loss if
(1) He has omitted to obtain insurance if he has impliedly or expressly promised to insure;
9. Gray v. Merriam, 148 111. 179. In this case the court says that the test of the care demanded is decided by the
dictate of good faith.
(2) He wrongfully uses the property and the loss results from such use (see next section).

Sec. 6. Use Of Property By Bailee

The bailee must not use the property except in the manner contemplated by the bailment. If he does so, and loss
results, the bailee is absolutely liable regardless of his use of care.
What use the bailee may put the property to, depends entirely upon the purpose of the bailment.
A bailment for mere safe keeping would not warrant any use by the bailee.
Example 7. A hired a horse to drive to a certain place. He loaned it to B to drive to another place. The horse is injured
in a street car collision for which the driver is not to blame. A is responsible for the loss to the owner.10

Sec. 7. Bailee's Lien

An ordinary bailee has a lien upon the property bailed when, as in the case of a pledge, it is so understood, or where
he rightfully spends money or puts services upon the property and thereby enhances its value, and where he is a
warehouseman. An extraordinary bailee has a lien for his proper charges.
The charges that a bailee may make for his services or expenditures depends entirely on his contract. Assuming his
charges are correctly made, does he have a lien?
The common law rule was that a bailee had a lien in the following cases:
(1) Where he enhanced the value of the thing bailed by putting expense or services upon it;
10. Palmer v. Mayo, 80 Conn. 353.
(2) Where he was given such lien by contract, as is case of a pledge;
(3) Warehousemen;
(4) Extraordinary bailees (carriers and innkeepers). One who merely kept, or who performed services that did not
enhance value, had no lien; but statutes have extended the lien quite generally to bailees who perform services and
spend money on the thing bailed (if the bailee upon becoming such agreed to give credit, of course he would have no
lien).
The bailee's lien is lost by his voluntarily parting with possession.
The common law lien of the bailee gave him no right to sell the article, but only to hold it against the claim of the bailor.
Statutes have recognized right of sale to various extents and under varying circumstances.
A bailee's lien is not a general lien, that is, it extends only to the property bailed. By voluntarily parting with that specific
property, he waives his lien, and in case he afterwards comes into possession of other property, his lien under the prior
bailment will not attach to that property.

Sec. 8. The Pledge

The pledge is a bailment in which the property is delivered to the bailee for the purposes of securing the payment of a
debt.
In the bailment known as a pledge, the subject matter thereof is delivered to the pledgee for the purposes of
security.11 The property delivered may be the goods themselves, or the tokens of the goods, as warehouse receipts,
bills of lading, or may be choses in action, as negotiable paper.
11. The pledge is considered more fully in the volume on Debtor and Creditor in this Series.
Upon the non payment of the debt, the property may be sold, but the creditor need not make use of his security but
may sue upon his debt.
If upon the sale, the security does not bring a sufficient amount to satisfy the debt, the balance is still owing by the
debtor.
The sale must be made in the exercise of good faith to bring as much as possible. It should be at public sale, unless
the contract permits private sale. The pledgee cannot buy at his own sale.12
The contract of pledge is generally contained in the promissory note given in connection therewith and generally
referred to as a "collateral note." The provisions of that contract should be scrupulously observed in the enforcement of
the pledge.
12. Wetherell v. Johnson, 208 111. 247. ("A pledge is trust property and the character of a pledge is that of trustee.
The law does not permit a pledgee to purchase the pledge at his own sale, except upon an agreement with the
pledgor, because he has a duty to perform in relation to the property inconsistent with the character of a purchaser.")

Chapter 3. Extraordinary Bailees

Sec. 9. Public Service Businesses
A business which peculiarly serves the public is subject to the peculiar regulation of the state and is known as a public
utility or public service business. Historically foremost among such businesses is that of the common carrier. An
innkeeper has also from early times been subject to an onerous liability as bailee with a duty to serve all who come.12a
In the consideration of the subject of extraordinary bailments, we note that the subject is, apart from the law of
bailments, one phase of the larger law of public service businesses, now frequently described as the law of public
service corporations. The ordinary business man - the merchant or the manufacturer - serves whom he pleases, when
and as he pleases. He asks for no public franchise; he uses no public domain; his business is not monopolistic. But the
public service company must (1) serve all who come; (2) indiscriminately and (3) at reasonable rates.
Historically the carrier of passengers and goods, occupies the foremost, as it will always occupy a prominent, place.
The innkeeper, also, was a bailee, upon whom was placed an extraordinary liability as bailee, and also a legal
command to serve all who come. These
12a. See Wyrnan, Public Service Corporations for extended treatment of this subject; also, Corporations, in this series.
two types of business we note here because they are bailees. The other public service businesses - the telegraph, the
telephone, are not bailees, and belong to a subject treated elsewhere. The warehouseman has become largely subject
to modern public utility laws, but as a bailee he is "ordinary" and subject to the rules heretofore discussed.

Sec. 10. Innkeepers

Innkeepers are those who make it their business to entertain travellers with board and lodging for hire.
An inn is a house which is held out to the public as a place where all transient persons who come will be received and
entertained as guests for compensation.13 A lodging house is not an inn; nor is a restaurant.
The innkeeper must receive all who come, and who are willing to pay his reasonable charges, so long as his
accommodations remain.
The innkeeper is held to an extraordinary responsibility ; but the cases differ as to the extent. Under some he is an
insurer of the goods of the guest,14 except for loss by Act of God and the public enemy; but other views do not hold
him to so onerous an undertaking; although in all cases he must use extreme care. Modern statutes permit him by
notice given in a specified way to require the deposit of valuables with him for safe keeping in order to render him
responsible. Under these statutes the guest may retain possession of the usual paraphernalia of a traveller.
13. Fay v. Pacific Improvement Co., 93 Cal. 253, 16 L. R. A. 188.
14. De Wolf v. Ford, 193 N. Y. 396, 86 N. E. 527, 21 L. R. A. N. S. 860; Gile v. Libby, 36 Barb. (N. Y.) 70.
The innkeeper has a lien upon the goods of his guest for his reasonable charges.15

Sec. 11. Common Carrier Defined

A common carrier may be defined as a person who holds himself out to transport goods or persons or both, for hire,
from one place to another.16
Carriers are of either private or public. A private carrier is a bailee whose rights and obligations are those of an ordinary
bailee heretofore considered. If a carrier undertakes to serve those who come to hire him he is a public carrier, and the
law imposes upon him the character of a public servant. Carriers as we know them today are generally incorporated
companies; and besides being a public calling, which in itself imposes on them duties to deal indiscriminately with all
who come, at reasonable prices, may have also important public franchises, as the right to lay tracks in the street and
to exercise the power of eminent domain.
Carriers may undertake to carry goods or passengers, and may limit themselves to the carriage of classes of goods
such as small packages.16a

Sec. 12. Common Carrier's Duty Of Indiscriminate Service

The common carrier must serve all who come for the kind of service that it purports to give.
A common carrier may limit itself to a certain territory, and a common carrier of goods may confine itself
15. Robins & Co. v. Gray, L. R. (1895) 2 Q. B. D. 501.
16. Dwight v. Brewster, 1 Pick. (Mass.) 50, 11 Amer. Dec. 133; Liverpool Steam Co. v. Phenix Co., 129 U. S. 397 at p.
440.
16a. This would not be true of a railroad or any carrier operating under a franchise requiring a general carriage
business.
to certain classes of goods. But all customers are entitled to equal service so long as the facilities are not exhausted.17
Neither can it discriminate in rates. The Interstate Commerce Act with its amendments from time to time has been
largely concerned with this question of enforcing indiscriminate service at reasonable rates.

Extraordinary Bailees. Continued

Sec. 13. Common Carrier's Duty To Transport Goods Safely

The rule of the common law was that the carrier of goods undertook an absolute duty to carry and deliver safely,
unless harm befell by Act of God or the Public Enemy. The courts permitted a modification by special contract, but
Federal legislation has restored the common law rule.
(1) The carrier liable as an insurer. It has been the law from early times that a carrier is an insurer of the safety of the
goods entrusted to its care (with the exceptions hereinafter noted) ; that is to say that it has no defense that the loss
was one not attributable to its negligence, or one which it could not have prevented by the exercise of every
precaution.18 The reason for the rule was stated in the case cited as follows: "And this is a politic establishment,
contrived by the policy of the law, for the safety of all persons, that they may be safe in their ways of dealing; for else
these carriers might have an opportunity of undoing all persons that had any dealings with them, by combining with
thieves, etc., and yet doing it in such a clandestine manner as would not be possible to be discovered." This rule has
been maintained to the present day and re-affirmed in recent federal legislation.
17. Missouri Pac. R. Co. v. Larrabee Flour Mills Co., 211 U. S. 612.
18. Coggs v. Bernard, 2 Ld. Raymond, 909, 1 Smith's Leading Cases, 369.
(2) The exceptions to the liability. The carrier is excused if the loss is caused by the following causes, each of which is
defined and briefly commented upon:
(a) Act of God. An act of God is a violent eruption of nature, not caused by man's intervention and which could not be
foreseen or guarded against. Hurricanes, unusual floods, earthquakes, lightning, landslides, have in them the elements
of violence, surprise, lack of man's intervention, which make them "Acts of God." 19 The carrier is not liable for loss so
caused.
(b) Act of the public enemy. A public enemy was a force of sufficient organization and dignity to lay claim to political
power, or pirates upon the high seas. A mob was not a public enemy,20 although authorities have excused loss
caused by mobs when the carrier has taken every precaution.
(c) Loss caused by shipper's own act. This includes loss caused by improper crating, etc., and being attributable to the
shipper, the carrier is not liable.
(d) Inherent defect or vice, of thing shipped. The carrier must take such proper precautions to preserve goods which
their nature demands, as refrigeration, watering of live stock, etc. But for loss not thus preventable arising out of the
inherent defect or vice of the article itself, the carrier is not responsible.
(e) Loss by authority of law. If the goods are seized under legal process, or other authority of law, the carrier is
excused.
(3) Limitation of liability. The carrier naturally attempted a limitation of this liability, and the courts allowed this to be
done by special contract. In England they were permitted to do so merely by posting notice of limitation, until legislation
in 1854 required special contract. In this country, limitation by merely giving notice has generally been held insufficient,
unless brought home to the shipper and assented to by him. In that event liability could be reduced to that caused by
the carrier's own negligence which the carrier could not contract away.21
19. New Brunswick Steamboat Co. v. Thiers, 4 Zabr. (N. J.) 697, 64 Am. Dec. 394.
20. Coggs v. Bernard, supra.
By federal legislation (Carmack Amendment, first and second Cummins Amendment) the common law liability of the
carrier has been practically restored; and it has also been provided that the initial carrier shall be liable for loss or
damage whether arising upon its own line or upon the lines of connecting carriers over which it has accepted shipment.
A much mooted point in regard to this question of liability arose in connection with a stipulation as to value. For
instance, suppose a loss of automobiles shipped under an express receipt limiting liability to $50.00 unless a greater
valuation was stipulated in the receipt. In some states it was denied that such a limitation was effective; but the United
States courts upheld such a limitation even against the carrier's own negligence;22 and the Croninger case decided
that the federal rule must prevail in all interstate shipments. By the first and second Cummins Amendments, the rule
now is that the law prohibits all limitations upon the carrier's liability for full loss, damage or injury caused by it except
when rates dependent upon the value declared in writing by the shipper, or agreed to in writing by the shipper as the
released value, are authorized by the Interstate Commerce Commission.23
21. Games v. Union Transportation Co., 28 Ohio St. 118.
22. Adams Express Co. v. Croninger, 226 U. S. 491; Pierce Co. v. Wells Fargo Co., 236 U. S. 278.
(4) Beginning and termination of liability as insurer. The liability of the carrier as such begins upon the receipt of the
goods for shipment without further order of the shipper. Upon the question when the liability of the carrier as a carrier
(that is, as an insurer) ceased, and its liability as a warehouseman (that is, liable only in case of negligence) began
there were three rules. The Massachusetts rule was that the carrier's liability as such ends when the goods arrive at
their destination and there safely deposited in the warehouse or upon the platform, no notice to consignee necessary.
The New Hampshire rule was that the carrier's liability ends when the goods have arrived at destination and a
reasonable time elapsed during which they might have been removed, no notice to consignee being necessary. The
New York rule was that the carrier must give the consignee notice, and then he must have a reasonable time in which
to remove them. The New York rule is also the rule applied everywhere as to water carriers. By order of the Interstate
Commerce Commission, the bill of lading now reads to the effect that the carrier's liability shall become that of
warehouseman for loss by fire occurring after the expiration of free time allowed by the tariffs lawfully on file, after
notice of the arrival of the property, duly sent or given, and after the property has been placed for delivery, or tendered
to consignee's order.
Sec. 14. Common Carrier's Duty To Transport Without Delay
The common carrier undertakes to use diligence to transport without delay. But any cause not arising out of his
negligence excuses him.
23. Interstate Commerce Commission Reports, Vol. 54, p. 66.
The common carrier is not an insurer of undelayed transportation; he undertakes only to use due care. Causes beyond
his control excuse him; they need not be "Acts of God."

Sec. 15. Freight And Demurrage

Freight is the charge which a carrier of goods is entitled to make for its services as carrier. Demurrage is the charge for
delay by the shipper or consignee in not unloading the cargo after a reasonable length of time has elapsed for its
unloading.
The compensation of the carrier for carrying1 the shipment is called freight. Freight rates must be reasonable and
equal upon all. What maximum rates may be charged is now governed by the federal law, so far as interstate
commerce is concerned, under the supervision of the Interstate Commerce Commission.
The carrier may also charge demurrage, that is, a charge for delay in unloading cars whereby they are held on the
track more than a reasonable length of time. This would not apply of course to small shipments in which it is the
carrier's duty to unload upon the platform or in its warehouse, but refers to the charge made upon cars which are set
upon sidetracks for the consignee to unload.25
25. Schumacher v. R. Co. 207 111. 199.

Chapter 4. Bills Of Lading And Warehouse Receipts

Sec. 16. Documents Of Title Defined

A document of title is a document issued by a carrier or warehouseman reciting the receipt of goods for carriage or
keeping and the terms and conditions thereof. It sets forth the contract between the bailee and bailor; and also is a
symbol of the goods themselves whereby they may be transferred.
A document of title is a document issued by a bailee setting forth the fact and terms of the bailment. The term is not
used to describe a document which in itself effects or evidences transfer of title. Thus a bill of sale while in one sense a
document of title, inasmuch as it is a document whereby the transfer of title is witnessed, is not a document of title as
that phrase is used in commercial law. The idea in the phrase document of title is that one has possession of goods to
which another is entitled, and to show such possession issues an instrument which instrument thereupon stands to the
owner in the place of the goods and is the evidence of his ownership thereof.26
Documents of title in use in commercial life are bills of lading and warehouse receipts.
A document of title is a contract between the parties, and is a symbol of the goods themselves whereby they may be
transferred. It also in its form is very important in determining whether title has passed between buyer and seller.27
26. "All documents of title have this in common, that they are receipts of a bailee or orders upon a bailee." Williston on
Sales, SEC. 405.

Sec. 17. Assignability At Common Law

Documents of title were assignable at common law.
By the common law (meaning thereby the non-statutory law and ignoring the distinction between equity and law), bills
of lading were assignable; they were not negotiable. A transferee took such right to the goods as his transferor had,
and could protect that right by notice to the bailee. Today documents of title are both assignable and negotiable as
drawn, as hereafter shown.

Sec. 18. Legislation Upon Documents Of Title

There have been recently enacted: (1) The Uniform Bills of Lading Act; (2) The Uniform Warehouse Receipt Act; (3)
The Federal Bills of Lading Act; (4) The Uniform Sales Act, containing provisions as to documents of title.
The need of an up-to-date and authentic statement of the law concerning documents of title as felt in the commercial
practices of the day has been met by state and federal enactments, as follows:
(1) The Uniform Bills of Lading Act.28
(2) The Uniform Warehouse Receipt Act.29
27. See Subject Transfer of Title, post.
28. In force in Alaska, California, Connecticut, Idaho, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, North Carolina, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode
Island, Vermont, Washington, and Wisconsin.
29. In force in Alabama, Alaska, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida,
Idaho, Illinois, Iowa, Kansas, Louisiana, Maine, Maryland, Massa(3) The Federal Bills of Lading Act.30
(4) The Sales Act, which recognizes and incorporates the provisions of the other acts so far as they affect sales and
pledges.31

Sec. 19. Bills And Receipts Negotiable And Non-Negotiable

Under the legislation above noted bills of lading and warehouse receipts are divided into those that are non-negotiable
and those that are negotiable, according to their form.
By the legislation noted in the previous section, bills of lading and warehouse receipts are of two forms, those that are
negotiable, or "order" bills of lading and warehouse receipts, and those that are "straight" bills of lading and warehouse
receipts. The order document is to the consignor or consignee's order;32 the straight document is direct to consignor or
consignee. The order document is the more suitable one to use when a sale of goods is contemplated while they are in
transit or in the warehouse, and especially where the document is to be used for purposes of security.

Sec. 20 Legal Meaning Of Negotiability As Here Applied

If a document of title is negotiable it passes with greater freedom from hand to hand chiefly by reason of the fact that
the transferee thereof does not need chusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New
Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Porto Rico,
Rhode Island, and South Dakota.
to notify the bailee (railroad or warehouseman) of his acquisition of title, while a transferee of an assignable document
of title acquires no rights against the bailee except by giving notice. Other distinctions noted below.
30. United States Statutes at Large, Vol. 39, p. 538; see Uniform Bill of Lading, set out in the back of this book.
31. See Section 31, post.
32. Uniform Sales Act, SEC. 27.
The law of negotiable paper (bills of exchange, promissory notes and checks), became incorporated into the common
law by judicial decision recognizing the customs of merchants. Such instruments, being drawn with certain requisites of
form, were characterized by freedom of transferability that the non-negotiable promise or order or contract of any form
did not have, and out of that central characteristic arose others, and the negotiable instrument thus became an
instrument of credit and a means of payment that we can hardly imagine the commercial world doing without. Such
instruments are called negotiable instruments, or negotiable paper or commercial paper; and are governed by the
Uniform Negotiable Instruments Act. The law as to documents of title (bills of lading and warehouse receipts) has
borrowed this feature of negotiability from the law of Negotiable Instruments; but it must always be remembered that
the two classes of instruments, negotiable instruments on the one hand, and documents of title on the other, must in
certain respects ever be different and be governed as they are today, by entirely different bodies of law. The negotiable
instrument is a promise to pay, or an order to pay, money, generally (not any particular money), while a document of
title calls for the delivery by a bailee of goods - certain, particular goods. It is well to keep this thought in mind that a bill
of exchange or warehouse receipt is a document of title, not a negotiable instrument, and that there is a separate body
of law governing each.
Documents of title are negotiable or non-negotiable, as explained in the previous section. But both kinds are
transferable. If the negotiable bill of lading is transferred, no notice of its transfer need be given the carrier, as the
carrier must assume that being negotiable, it may therefore have been negotiated and must call for its production
before surrendering the goods, while the transferee of a negotiable bill of lading must in order to protect his acquisition
give notice to the carrier. The carrier must take up the negotiable bill of lading and will be liable to any one who may
purchase it in case of its failure so to do; while it would not be so liable in case of a non-negotiable bill.

Sec. 21. How Negotiation Of Documents Accomplished

A negotiable document is transferable by delivery when it runs to bearer, and by indorsement when it runs to the order
of a certain person. If indorsed in blank it then becomes payable to bearer.
If the document runs to bearer it may pass from hand to hand without indorsement; if to a person's order, then it must
be indorsed by him to transfer title. He may indorse it in blank, that is, by simply writing his name; or specially, that is,
to a certain person over his signature. If he indorses in blank, this permits its further negotiation by mere delivery; if he
indorses it specially it can only be negotiated by indorsement.

Sec. 22. Results Of Transfer Of Document To Transfer Title To Goods

When a negotiable or non-negotiable document of title is transferred in due form, it accomplishes the transfer of title to
the goods. It is a symbolical delivery and title thereupon vests in the transferee.
A document of title is a symbol of the goods. When it is transferred in proper form, the title passes. The goods then
become the goods of the transferee. We have seen that notice to the carrier, warehouseman or other bailee must be
given in order to protect the transferee's rights and protect him against the future acts of the transferor. But in
negotiable documents this is unnecessary, and in non-negotiable documents, it is unnecessary as between transferror
and transferee.

Sec. 23. Warranties Of Transferror

The transferror warrants to the transferee the genuineness of the bill, his title thereto, and may also by the transfer
warrant the goods, as shown below.
A transferror of a bill of lading or warehouse receipt warrants:
(a) That the bill or receipt is genuine;
(b) That he has a legal right to transfer it;
(c) That he has knowledge of no fact that would impair the validity or worth of the document;
(d) That he has a right to transfer the title to the goods, that the goods represented by the document are merchantable
or fit for a particular purpose wherever those warranties would be made if the sale were directly to the goods
themselves without use of such document. But the transferror does not guarantee that the carrier or warehouseman or
previous indorsers will perform their obligations. In that event the holder must sue the carrier or warehouseman. In this
respect a transfer of a document of title is notably different from an indorsement of negotiable paper which (unless
qualified) renders the indorser liable if the party primarily liable fails to make payment.

Sec. 24. The Use Of Documents Of Title As Security

Documents of title are very widely used as security to obtain credit from banks and other lenders.
In case of credit being extended with a document of title as security it has been pointed out that the negotiable or order
form is the more convenient and safer one to use. If offered by the consignor it should be to consignor's order; if by
consignee, should be to his order or endorsed to him or in blank.

Sec. 25. Right Of Transferee Of Negotiable Document Against The Issuer Thereof
The negotiation of a negotiable document of title gives the transferee as against the issuer such rights as such
transferee would have had against the issuer had the contract been directly with him according to the terms of the
document.
The holder of a negotiable document becomes by his acquisition and without notice to the carrier or warehouseman a
party to the document as though he had originally contracted with the issuer.
The carrier (or warehouseman) cannot interpose the defense that he has not received the goods where the bill of
lading is issued by an official or agent having power to issue bills of lading. Neither can the carrier defend that the
contents of the goods are not as described, unless it is stated that "contents unknown," or "said to contain" or "shippers
load and count," etc. If the goods are visible, such phrases cannot be used to qualify the liability, unless the shipper did
his own loading, and even there such provisions do not qualify if the goods were actually known to the carrier by use of
its own scales, etc.33
33. See Article in 16 Mich. L. R. 402.

Subdivision II. Sales Of Personal Property. Part I. Formation Of Contract Of Sale. A.

Definitions And Distinctions. Chapter 5. Definition And General Nature

Sec. 26. Definitions

"A sale of goods is an agreement whereby the seller transfers the property in goods to the buyer for a consideration
called the price." "A contract to sell goods is a contract whereby the seller agrees to transfer the property in goods to
the buyer for a consideration called the price." "A contract to sell, or a sale may be absolute or conditional."1
The law which governs contracts to transfer the ownership of goods, and the actual transfer of such ownership, from
one person to another for a consideration is called the law of "Sales of Goods," or more briefly, "Sales." The law of
sales thus concerns itself in the first place with the contract thereafter to pass a title, in the second place with the actual
passing of title itself, and in the third place with the results of the sale, or the obligations which endure after ownership
has been transferred. In any particular transaction one or more of these situations may be wanting, or they may all
exist. (I) Thus A may engage with B that A will secure for and sell to B certain wagons which B agrees to buy. Now in
such case no transition of ownership has as yet been effected. If A refuses to carry out his contract B has no
ownership in or claim against the wagons themselves but is left to his remedy in a suit for damages occasioned by the
breach. (2) Or, pursuant to the contract, A may make an actual transfer of ownership to B. He may do this, as we shall
find, even though he may perhaps still retain the possession of the wagons for the time being. In such a case title - that
is to say, the ownership of property in the goods - has been transferred; B may claim the wagons as his own, and if A
wrongfully refuses to deliver them or, having delivered, wrongfully retakes them, B may have the aid of the courts to
secure his property. This transaction constitutes the sale as distinguished from the contract to sell. A sale need not,
however, be preceded by any distinct, preliminary contract such as mentioned, but all the proceedings may consist in
one transaction wherein the ownership is transferred and the price paid. Yet even in such case there would usually
really be a contract to sell, followed by the sale, though the interval between the two might be almost or quite
inappreciable. (3) After B has secured his title there may still be existing contractual obligations. A may have
undertaken to do something further to the goods, or in reference to them; or B may have undertaken that A may have
the goods again if he, B, does not pay the price within a certain time. Our treatment of the law of Sales will take us into
all this subject matter. The term "sales," it will thus be seen, is used in two ways: first, in a general way, to cover both
the executory transaction wherein title does not yet pass and the executed transaction wherein it does, and also in a
more limited way, to distinguish the latter transaction from the former. It will hereafter be used in both senses, as the
context will indicate.
1. Uniform Sales Act, SEC. 1. For complete text of this Act. and note as to states adopting it, see Appendix A.

Sec. 27. Consideration Called The Price

The consideration for which personal property is sold is called the price. It need not be money. It may be expressly
fixed by the contract, or left to implication to pay a reasonable price.
"Price" is the term indicating the consideration for the sale. It may be money or not. "Barters or exchanges" are
governed by the law of Sales and the Uniform Sales Act.
(a) Price implied.
The price need not be expressly arrived at but may be determined by the course of dealing between the parties.1a
If the price is not expressly stated, it may mean either that there is an omission of an essential element, or that no
contract exists, or it may mean that the price is left to implication. This depends on what a person would be entitled
reasonably to infer from the circumstances. Thus if one orders goods having a market price or a catalogue price, it is to
be inferred that he intends to pay such market price 2 or catalogue price.3 But nego1a. Phifer v. Erwin, 100 N. C. 59.
tiations concerning the purchase of a specific horse, or second hand automobile, or any article upon which a
settlement as to price would have to be made before it could be said there was any contract, would not result in
contract until such price was arrived at.
2. McEwen v. Morey, 60 111. 32.
3. Paine Lumber Co. v. Betcher, 34 Minn. 480.
(b) Sale for a price to be afterwards agreed upon.
In this case the contract is incomplete as the price may never be agreed upon. If, however, the buyer keeps the goods
and no price is agreed upon, the Sales Act provides a remedy of a quasi-contractual nature 4 that the buyer shall pay a
reasonable price.
(c) Sale for a price to be fixed by a third party.
In this case there is a good contract, based upon a condition that may never be performed and which may therefore
defeat the sale.5
If the valuation by the third party is fraudulent, neither party is bound by it and it may be set aside.
In case the valuation is not made and the buyer receives and retains the goods he is liable for a reasonable price.
(d) Price to be ascertained by future event.
The price may be ascertained by a future event, as, the future market price. In such case, the contract is a valid one.

Sec. 28. Conditional Sales Defined

A conditional sale is a sale in which the transfer of ownership depends upon a condition the breach of which will defeat
the title if it has passed, or prevent it from passing if it has not passed.
4. Williston on Sales, p. 203.
5. Sales Act, SEC. 10.
The term "conditional sale" is correctly used to describe two situations. The first is that situation in which one transfers
the ownership of goods to another upon a provision that the ownership shall come back and revest in him if he, the
seller, does something within a certain time, or providing the buyer does something or fails to do something within a
certain time.
The usual transaction, however, which this term is used to describe, is the familiar one in which one transfers the
possession of goods to another but provides that title shall not vest in the other until the purchase price is paid or some
other act done. The title is retained for purposes of security. Selling goods on the installment plan and providing that
the title shall remain in the seller until the last installment is paid is a familiar example.6

Sec. 29. Sales Distinguished From Gifts

A gift is a transaction wherein one person for no consideration, that is, gratuitously, transfers to another ownership in
property.
There is a fundamental distinction between a gift and a sale. One is a purely gratuitous act, whereas the other is
contractual in nature, imposing obligations enforceable in the courts. A promise to make a gift is unenforceable; if
broken there is no remedy. If the gift is made, the giver parts with whatever title he had and no more. In fact, if he have
creditors hindered or delayed from the collection of their claims by such gift, such creditors may have it set aside as a
transfer which is fraudulent as to them. But a sale may in many cases give a better title than the seller himself had.
That subject is discussed more at length hereafter. And even an insolvent debtor may sell his goods to a purchaser in
good faith (subject, of course, to the lien of such mortgages, judgments, etc., as may be of record and in force). (Sales
have been distinguished from Bailments in Chapter 1 of Subdivision I, supra.)
6. For remedies in conditional sales, see post, SEC. 95.
In a gift there can be no warranty. That one "must not look a gift horse in the mouth" is as good law as it is good
sentiment.

B. Form Of Contract
Sec. 30. Sale In Writing; Oral; Or Implied
"Subject to the provisions of this act and of any statute in that behalf, a contract to sell or a sale may be made in writing
(either with or without seal) or by word of mouth, or may be inferred from the conduct of the parties." 7
7. Uniform Sales Act, SEC. 3.
Innumerable sales of personal property are made upon the market day by day. The chief end of any mercantile
business is to sell its product. Any law requiring sales to be put in any particular form would be senseless and
impracticable. Sales may be in writing; may be oral; may be implied; may be any combination of these.
The "statute of frauds," 17th section, requires a written proof if the sale is above a certain amount, and if there has not
been performance in whole or part. This subject is discussed in Volume I, but will also be covered briefly here.

Sec. 31. Formalities Required In Certain Cases. Provisions Of The "Statute Of Frauds" And
Uniform Sales Act
By the 17th section of the English Statutes of Frauds, substantially copied by enactment in many of the states, and by
section 4 of the Uniform Sales Act, a contract to sell or a sale of goods at a price amounting to or above a certain sum
is not enforceable in the courts unless a payment has been made upon the bargain or unless part of the goods have
been accepted and actually received by the buyer or unless some memorandum in writing of the contract or sale has
been signed by the party sought to be charged or by his duly authorized agent.
Statutes substantially to this effect are in force in the following states and territories: Alaska ($50) ; Arizona ($500) ;
Arkansas ($30) ; California ($200) ; Colorado ($50) ; Connecticut ($100) ; District of Columbia ($50) ; Florida (of any
amount) ; Georgia ($50) ; Idaho ($200) ; Illinois ($500) ; Indiana ($50) ; Indian Territory ($30) ; Iowa (of any amount) ;
Maine ($30) ; Maryland ($50) ; Massachusetts ($500) ; Michigan ($50) ; Minnesota ($50) ; Mississippi ($50) ; Missouri
($30) ; Montana ($200) ; Nebraska ($50); Nevada ($200) ; New Jersey ($500) ; New Hampshire ($33) ; New York
($50) ; North Dakota ($50) ; Ohio ($2500) ; Oklahoma ($50) ; Oregon ($50); Pennsylvania ($500) ; Rhode Island
($500) ; South Carolina ($50) ; South Dakota ($50) ; Tennessee ($500) ; Utah ($200); Vermont ($40) ; Washington
($50); Wisconsin ($50); Wyoming ($50).
The English "Statute of Frauds" was passed to prevent "frauds and perjuries," that is, false testimony in respect to
alleged transactions.8 Clearly, if the law requires a plaintiff who alleges a breach of contract of sale to produce written
evidence of the contract, signed by the other party, there can be no perjury on his part in that respect, and neither can
the other party swear contrary to such written evidence, except to prove it a forgery or fraudulently obtained. The
statute also allows, however, the enforcement of a contract of sale when there is no writing, if it has been partly
performed by some payment or by delivery and acceptance of some part; for, these things furnish corroborative
evidence of the sale alleged.
8. See Volume on Contracts in this series for general discussion of Statute of Frauds.
The following should be observed in reference to this statute:
First: The provision concerns the enforcement and in no sense the validity of the transaction. Therefore, if the contract
of sale has been executed, or if the defense is not relied upon by the party sought to be charged, the provision has no
application.
Second: The statute does not apply at all if the goods are sold for a less sum than a certain value, this value, differing
in different states, as shown above.
Third: That a sale is enforceable notwithstanding there is no writing;
(a) If below the amount named;
(b) If a part payment has been made;
(c) If a part delivery has been made and received;
(d) If a sale is of goods to be specially made up for the buyer.
Fourth: The practical observation should be made that out of the great multitude of cases to which the statute would be
a defense, because no compliance therewith, the deal nevertheless goes through as planned, as the parties intend it
shall.
This seventeenth section of the statute of frauds has been incorporated in the Sales Act. An important addition has
been made respecting sales of goods to be made up to the special order of the buyer, as explained hereafter.

Sec. 32. Statute Of Frauds Not Applicable If Price Is Less Than A Certain Amount
The statutes of frauds of the various states name a certain price at and beyond which sales are to be unenforceable
unless the other provisions of the statute are satisfied. To bargains below that price the statute has no application. This
price varies in the different jurisdictions.
If a bargain is for less than the price named in the statute, it is enforceable though there is no written memorandum and
though there has been nothing paid and no part of the goods delivered. For in sales of small amounts it would be a
matter of too great inconvenience to require the formalities required in sales of greater moment, and the law considers
that a party will not for the smaller sums be so strongly tempted to commit perjury, or if he does so, the hardship is not
enough to overcome other considerations. Accordingly the statute does not include sales which are below a certain
amount.
If several articles are purchased at one time and under one contract the statute applies if the aggregate price is of or
above the amount named in the statute, although each article was separately priced at an amount below the amount
named in the statute. The test would be whether or not the contract was all one contract and not several contracts.9
Example 1. A comes to B's residence and offers B $10 for a chair, $5 for a lamp, $3 for a stool, and $35 for a
bookcase. B accepts this offer. He afterwards refuses
9. Mechem on Sales, SEC. 349, 350 to deliver the articles. Nothing has been paid and there has been no
memorandum. A statute is in force in reference to sales in sums of $50 and upwards. B can plead this statute in
defense, for the contract of sale is all one, having been made at one time and as one transaction.10

B. Form Of Contract. Continued

Sec. 33. Statute Of Frauds No Defense If Payment Has Been Made In Whole Or In Part
If there has been a payment by the buyer the contract is enforceable by or against him though it is otherwise
unexecuted and though it is entirely oral.
Example 2. A sells B an automobile for $1200. There is no writing and the automobile has not been delivered, but B
gave and A accepted $10 in part payment. Neither party, on being sued, can plead the statute of frauds in defense.
Payment may be in any thing agreed upon as such.11 Payment by one's own note has been held not to be payment;
or a mere agreement to apply an indebtedness in part payment.12
Sec. 34. Statute Of Frauds No Defense Where There Has Been Delivery And Acceptance Of
All Or Part Of The Goods
A delivery and actual acceptance of the goods or any part of them at the time of making the bargain or before suit is
brought is sufficient to enable the party suing to prove the contract though it is entirely oral and no part of the price has
been paid.
10. Baldy v. Parker, 2 B. & C. 37.
11. Wier v. Hudnut, 115 Ind. 525.
12. Krohn v. Bantz, 68 Ind. 277; Walker v. Nussey, 16 M. & W. 302.
Note that there must be both delivery by the seller and actual acceptance by the buyer. If the seller attempts to make
delivery, but the buyer refuses to accept, the contract cannot be proved unless there has been a part payment or a
written memorandum. It is sufficient if the delivery and acceptance is in part only. If articles of a miscellaneous sort
were all bought under one contract of sale, the delivery and acceptance of any one of these articles would be a
sufficient delivery and acceptance to satisfy the statute and permit the enforcement of the entire contract. But if articles
are bought under separate contracts, the performance or part performance of one of these could not be relied on in aid
of another.
Delivery and acceptance does not necessarily involve removal of the goods, although that would be the usual case, but
in the event of delivery and acceptance without removal there would have to be some act showing clearly that one
party meant to deliver, and the other to take control of the property.13

Sec. 35. Statute Of Frauds No Defense Where There Is A Sufficient Signed Memorandum
If there has been no payment and no delivery and acceptance of the goods or any part of them then the statute
requires a memorandum signed by the party sought to be charged.
There being no sufficient performance to take away the defense of the statute of frauds, there must be a memorandum
signed by the party sought to be charged. Of this it should be noted:
13. Shindler v. Houston, 1 N. Y. 261.
First. The memorandum need not be of a formal character; it may be in the form of a note, letter, receipt, entries in
book, telegrams, etc., provided these contain a sufficient memorandum and be signed. It may also consist in a series
of papers, if, all together, they go to make up or express one contract.14
Second. That, in most states, the memorandum need not be made at the time the contract of sale is made, but it is
sufficient if it be made any time thereafter but before suit is begun. This accomplishes the purpose of the statute, as
that is merely for the prevention of frauds and perjuries. It is therefore immaterial when the memorandum was made
and signed by the party sought to be charged or his duly authorized agent.
Third. The memorandum must state all the material terms of the contract and leave no material term to be orally
proved. All of the contract must be proved by the memoranda. It must state the names of or describe the parties
though the name in the signature would be sufficient. It must state the price agreed upon; provided there was a price
agreed upon; but if the parties had left the price to inference, then, as the law will under such circumstances imply an
agreement to pay a reasonable price, the contract is enforceable. It must describe the subject matter, or refer to it in
such a way as to plainly identify it. So all the other substantial terms of the contract must be stated.
Fourth. The memorandum must be signed by the party sought to be charged and need not be signed by the other
party. By the party sought to be charged is ordinarily meant the defendant. Unless the statute uses the term
"subscribed" instead of "signed" the signature need not be at the bottom of the memorandum but may be any place in
the writing, provided it was intended as a signature. Any mark or writing intended as a signature and which can be so
proved would be sufficient.15 Thus signature by initial would be sufficient. If the contract consists in several
memoranda, they must all be signed, or else those that are signed must make a sufficient reference to the others to
identify them.
14. Louisville, etc., Co., v. Lorick, 29 S. C. 533.
Fifth. The memorandum and signature may be made by agent duly authorized for that purpose. Any agent having a
special authority to make the bargain, or a large general authority where from the authority to make the particular
bargain could be inferred, would also have authority impliedly given therewith to make the memorandum and sign his
principal's name thereto. Thus suppose that A orally appoints B general manager of his store, to buy and sell the stock
in trade, etc. B would have implied authority to comply with the statute of frauds in purchases and sales.

Sec. 36. What Is A Contract Of Sale Within The Statute

By the Uniform Sales Act, and by the prevailing view adopted by such act, the requirements of the statute are
inapplicable where the goods are to be made up by the seller especially for the buyer, and are not suitable for sale to
others in the ordinary course of the seller's business.
The original statute of frauds required a signed memorandum, part payment or part delivery in every case of sale of the
prescribed amount. It made no distinction as to goods to be made up by the seller specially for the buyer. For instance,
suppose a person orders a dentist to make up a set of teeth for him,16 and there being no memorandum, payment or
delivery, pleads the statute of frauds. Here is a hard case, for the dentist will have left on hand an article of
comparatively little value to him, and none to any one else. The courts in the construction of the law, developed three
rules. Some courts said that if the goods were to be made up for the buyer, whether stock goods or not, the contract
was one of work and labor and the statute of frauds did not apply; other courts said that if it were to be made up, and in
addition, was of a peculiar nature, not readily resellable, as stock ware, then the statute did not apply; and others said
that it applied in any event, for it was a sale and therefore within the act; but the matter has now been settled by the
Sales Act, which has adopted the second rule. Under that rule, the dentist's customer would have no defense.
15. A printed bill head is a sufficient signature, Goldiwitz v. Kupfer, 141 N. Y. Suppl. 531.
Example 3. A orders dishes to be made up with his monogram thereon. There is no writing, no part delivery and no
part payment. The contract is enforceable, being within the exception made by the sales act.16a
16. Lee v. Griffin, 1 B. & S. (Eng.) 272.
16a. Bauscher Bros. v. Gies Estate, 160 Mich. 502, 125 N. W. 420.

Chapter 6. Parties And Subject Matter

Sec. 37. Parties To Sales

The capacity of parties to sales is governed entirely by the general law of contract.
Reference is made to the general law of contract as to capacity of parties to sales.17
17. Such reference is also made by the Uniform Sales Act.

Sec. 38. Sale Of "Future Goods."

Goods to be acquired to arise in the future, or being now in existence, but to be acquired in the future, may be the
subject of a contract to sell but not of a sale.
A sale, in its narrower sense is a transfer of ownership in property from one to another. Logically, one can not confer
ownership to another of a thing he doesn't own himself. Therefore there may be no sale of goods to be acquired in the
future, although there may be a contract to sell such goods and if there has been an attempted sale it will operate as a
contract to sell,18 but, as was explained, in that event the buyer gets thereby no title. Something further must be done
in order to transfer title; that is, the contract to sell must be executed after the goods come into existence. Until that
time the purchaser has only his action for damages. Thus A "sells" to B fish yet to be caught by him. This does not put
the title in B as the fish are caught. A must confer the title by some unequivocable act after the fish are caught. If he
sells the fish to C, C gets a good title and B has only his action for damages.19
18. Low v. Pew, 108 Mass. 347.
19. Id.

Sec. 39. Destruction Or Deterioration Of The Goods Before The Making Of The Contract
If one attempts to sell specific goods which without his or the buyer's knowledge have been destroyed in whole or in
part, or have materially deteriorated in whole or in part, there is a mistake which prevents a contract from arising and
neither party can aver breach; yet the law permits the buyer in case of part destruction or deterioration to take the part
remaining or the deteriorated goods.
It is well settled in the law of contracts that if there is a mutual mistake in the minds of the parties to an agreement as to
the existence of the subject matter thereof there is really no meeting of minds and therefore there is no formation of
contract. This principle is applicable to the law of sales. If a contract is made to sell goods, whether title is to pass now
or later, and before the time of making the contract, but unknown to the parties, the goods had been destroyed, then
neither party may be charged with breach. There was really no contract to be broken. We shall note hereafter that
where one orders goods by description or by sample he thereby undertakes that he will supply goods of a certain
quality, and it is immaterial that his stock or the material from which he expected to supply them has been destroyed,
where it is not the stipulation of both parties that they shall be supplied out of certain ascertained stock or material. But
if the seller and buyer are negotiating concerning certain known and ascertained goods, then their agreement cannot
attach to any other goods whatsoever; and in such case the prior destruction of such subject matter, unknown to either,
creates in their minds a mutual mistake preventing the formation of contract.
Example 4. Thus A owns a certain wagon which B desires to buy. Pending the negotiations the wagon is destroyed by
fire. Neither party knowing of this, a bargain is struck. The destruction of the wagon while still belonging to A puts the
loss upon him, and it prevents B from alleging breach of contract. But had A contracted to deliver to B "ten Imperial
wagons, No. 3," no particular wagons or lot of wagons being specified, the destruction of certain wagons A had in mind
would be no excuse.
What has been said of total destruction is true also of partial destruction or material depreciation.
The law provides, however, that if the buyer elects, notwithstanding, to take the deteriorated goods or the part that
remains, he may do so by paying the price that he would have paid had there been no such mistake as to quality or
existence; or in case the contract is divisable, that is, made up of parts, so that the price of the whole is plainly
referable to the number of unit parts in the whole, then he may have the contract price proportioned to the part
taken.20
20. Uniform Sales Act, SEC. 7 (2).
Sec. 40. Destruction Or Deterioration After Contract To Sell Of The Subject-Matter Thereof
If there is a contract to sell specific goods and thereafter before tide or risk passes to the buyer the goods in whole or in
part perish or substantially deteriorate without seller's fault, the seller's obligation is discharged; but the buyer may
elect to take the part remaining or the deteriorated goods.
The destruction of the subject matter before title passes excuses performance. This must be distinguished from the
cases in which material is destroyed out of which a seller expected to deliver, where he has no obligation in respect to
that very material, but has the right to supply from such other source. In that case the destruction would be the seller's
misfortune, but would not excuse him, for the seller may still perform by selecting out of other stock or material, or by
going upon the market to buy.
Example 5. A and B contract for the sale by A to B of A's horse "Ely." After the contract to sell, but before the actual
sale has taken place, the horse dies without A's fault. This occurrence terminates the contract between the parties. If
the horse had died after title passed, the loss would be B's, even though A still had possession.
Example 6. A contracts with B to sell 1000 bushels of May wheat. No particular lot of wheat is specified as the subject
matter of the sale. A has 1000 bushels on hand. Before the sale takes place this 1000 bushels is destroyed. A is still
bound to deliver 1000 bushels of wheat.
What has been said of total destruction is true also in case of part destruction or material deterioration.
Yet the law allows the buyer in such case to take the goods remaining or the deteriorated goods, paying the price
therefor he would have paid had the contract been performed, or if the contract is divisible, that is, made up of parts so
that the price of the whole is plainly referable to the number of unit parts, then he may have the contract price
proportioned to the part taken.21
21. Uniform Sales Act, SEC. 8 (2).

Chapter 7. The Contract's Obligations As Affected By Warranties

Sec. 41. Definition Of Warranty

A warranty is a part of the contract of sale. It consists in the assertion of some fact concerning the goods put forth to
induce the contract and which did induce it and whose truth is regarded by the buyer as essential to the seller's
performance of his contract. But if an assertion made by the seller does not so enter into his contract as to become a
part thereof it is not a warranty, and its truth is immaterial. Warranties are express or implied.
When there is a contract of sale, the buyer may make assertions in respect to the goods. He is indeed very prone to do
this, for it may be by such assertions that he is able to close the transaction. It is a matter of common knowledge that a
seller will "puff his wares." Indeed he may make affirmations without any words spoken. Thus by his very possession of
the goods and by the fact that he offers to sell them, he affirms he is the owner of them.
Has the buyer any remedy if these assertions are false? Or does he act entirely at his own risk? Suppose the seller
states that the stone he offers to sell is a diamond, and it turns out paste, will the court say that he can return the stone,
or have his money back, or his damages ? Or, what if the seller thought it was a diamond - is this material ?
The law is that some assertions in respect to goods sold cannot be broken without penalty because they become a
part of the contract, and they become so irrespective of the seller's belief whether they were true or false.
We have then to inquire, what assertions in respect to quality, title, fitness, value, etc., become a part of the contract,
and which ones do not.
Generally speaking, we may say that whatever assertion is made for the purpose of being relied upon, and in its nature
is worthy of belief, and is relied upon, becomes an essential term in the contract of sale, and if false, there is then a
breach of contract, for which the buyer has his remedy.
We have already indicated that warranties are express and implied. First, let us consider express warranties, and then
those that are implied from the circumstances.

A. Express Warranties

Sec. 42. What Constitutes Express Warranty

"Any affirmation of fact or any promise by the seller relating to the goods is an express warranty if the natural tendency
of such affirmation or promise is to induce the buyer to purchase the goods and if the buyer purchases the goods
relying thereon. No affirmation of the value of the goods nor any statement purporting to be a statement of the seller's
opinion only shall be construed a warranty." 22
(a) Affirmation of fact is warranty.
We see from the above language that it is largely a question whether a statement was given and taken as a matter of
fact or a matter of opinion which is decisive whether the assertion is or is not a warranty. It is well settled law that a
mere opinion or prediction on the part of the seller is not a warranty, for the plain reason that the buyer ought simply to
receive it as such. He may indeed be influenced by it, but, after all, he should know that it may or may not be true. An
opinion is but an opinion; it is a matter resting alone in judgment. It may be based upon facts but it does not purport to
state a fact. If I say that a horse is sound I state a fact which may be true or false and this therefore constitutes a
warranty if relied upon.23 But if I say that a horse is considered sound, or that I believe him to be sound, that is a
different matter.24 So if I predict a future event, it is a mere opinion. No one can foretell the future. I may say stocks will
rise, oil wells will yield, gold mines will pay, and though I be the best judge on earth of those events, still every one
must know that I am only giving my opinion. An express warranty, then, must be the statement of a fact concerning the
goods meant to be relied upon, and which is relied upon. It does not matter that the seller speaks as he believes. He
takes it upon himself that the fact is true. If he says a stone is a diamond, his contract is that it is a diamond, and the
buyer is entitled to rely on his statement. And it is not necessary that the parties use the word "warrant" or similar word.
22. Uniform Sales Act, SEC. 12.
(b) Express warranty in description.
It was said in an early case that if one sells a stone calling it a "bezoar stone," that is no warranty that it is a bezoar
stone, but the buyer must beware what he gets. But the law has progressed until now the exact contrary is true and a
description by a seller is an express warranty that the goods are as described. Thus a sale of a
"sound horse" is a warranty that he is sound. It is not necessary that the word warranty be used. The use of any words
in which an affirmation of fact is contained is a warranty.25
(c) Buyer's reliance on warranty.
The buyer must rely upon the affirmation in order to constitute it a warranty. For this reason a general affirmation is
considered not to cover a known defect.
Example 7. A warrants a horse to be sound. B, the buyer knows him to have a blind eye. The warranty does not extend
to this defect.26
But a buyer need not search for defects, if the seller is willing to expressly warrant against them. So if there is a doubt
in the mind of the buyer, the seller may cover it by warranty.

Sec. 43. Whether Alleged Oral Warranties Provable If Contract In Writing

If a contract to sell or a sale is completely reduced to writing alleged oral warranties cannot be introduced for the
purpose of changing or adding to the contract as it appears in the writing.
23. Hobart v. Young, 63 Vt. 363.
24. Id.
If the contract of sale has been reduced to writing complete upon its face, statements made orally cannot be regarded
as constituting warranties and therefore will not be received in evidence, for it is to be considered that the parties
meant the writing to be the expression and evidence of their act.27 But if the writing shows on its face that it was but an
incomplete memorandum and was not regarded by the parties as expressing the entire act, then such oral warranties
as were really a part of the contract could be proved as though the entire transaction had been oral, unless the statute
of frauds was applicable to the particular case (there being no part delivery or payment). Of course this reasoning has
no application to implied warranties which exist regardless of the form of contract, except that if the writing covers the
point, there cannot be an implied warranty upon the same point.
25. Id.
26. McCormick v. Kelly, 28 Minn. 135.
3. Implied Warranties.

Sec. 44. Doctrine Of Caveat Emptor

Where there is a sale of specific articles which may be inspected by the buyer, and there is no fraud on the part of the
seller, and the seller is neither manufacturer or dealer, there is no implied warranty. The buyer must "beware."
The simplest case of sale is that of a specific article before the parties at the time of the bargain which the buyer may
inspect. In such a case the doctrine is "caveat emptor" ("let the buyer beware").28
Example 8. A has a horse to sell which he offers to B. The horse is present before the parties, or is where the buyer
may inspect him. B buys. Whether B inspects the horse or not, there is no implied warranty of the soundness of the
horse, as to any fact discoverable or not by such inspection. If the horse has a hidden disease, A is not blameworthy
and cannot be sued. (If the hidden disease were known to A, and could not be discovered on reasonable inspection
the duty would be on A to disclose it. See Contracts, title "Fraud.")
27. Seitz v. Brewer's Refng. Co., 141 U. S. 510. See also, generally, the Volume on Contracts in this series.
28. Jones v. Just, L. R. 3 Q. B. 197.
If the seller is a manufacturer, or even a dealer (though all authorities are not agreed on this) and it is apparent that the
buyer relies on the seller's superior knowledge or judgment there is an implied warranty that the article is
merchantable.29

Express Warranties. Part 2

Sec. 45. Generally Of The Implied Warranties
Under the law of sales, warranties of an implied nature arise, from different classes of fact, unless negatived by the
agreement of the parties.
Under the law of sales as it has developed from the decision of cases, and now, by statute, under the Uniform Sales
Act, sales of personal property carry affirmations of fact of an implied nature arising out of different classes of facts.
That is to say, when one sells personal property, he thereby by that very act, makes representations in respect to such
property upon which the buyer can rely, and for the breach of which he may refuse the goods or sue for damages. The
seller may of course negative the fact of the warranty by providing against it; or may replace it by an express warranty
covering the same point. The various implied warranties are discussed severally in following sections.

Sec. 46. Implied Warranties In Express Sales

Warranties of an implied nature attach to express contracts, whether oral or in writing, unless stipulated
29. Williston on Sales, SEC. 233.
against, or unless the same point is covered by an express warranty.
As few contracts are implied, except in part, the law of implied warranties would have comparatively small importance if
implied warranties arose only in the case of implied contracts. If a contract is totally in writing, so that any attempt to
incorporate anything further therein by way of extrinsic agreement would violate the parol evidence rule, nevertheless
the contract will carry with it the proper warranties by implication, unless they have been stipulated against, or unless
there is an express warranty on the same point.
The expression is frequently met with in the cases that an express warranty will prevent an implied warranty; but this is
a loose statement. An express warranty will not prevent a warranty from being implied except upon the same point.
This is provided in the sales act under this language:
"An express warranty or condition does not negative a warranty or condition implied under this act, unless inconsistent
therewith." 30

Sec. 47. The Implied Warranties Of Title

In every sale or contract to sell there are the implied warranties of title that the seller has, or will have when the title is
to pass, an unencumbered ownership in the goods or right to sell them.
It will be seen hereafter, that under certain conditions a buyer of personal property may ignore the true state of the title,
and take a better title than his vendor had. But that is not the rule (in case of negotiable paper it is the
30. Uniform Sales Act, SEC. 15 (6).
rule), but the exception, based upon estoppel, non-compliance with recording laws, etc. The rule is that an owner of
personal property can follow it and retake it from any one who has purchased it from another who had no right or
authority to sell it. Or, to be more specific, if A has property which is in B's hands without any right or authority on B's
part to sell it, and C purchases it from B supposing him to be the owner, A may retake from C. Now C has sustained a
damage and ought to have a remedy against B, and that remedy is given him under the theory of a warranty by B in
making the sale that he was the owner, or had power to sell. The rule that one who sells impliedly warrants the title is
thus complementary to the rule that he who buys personal property buys it at the peril of an unknown owner taking it
fom him. And this warranty does not depend at all on B's state of mind. He may think he is the owner, or he may know
he is not the owner. Impliedly in either case, he warrants that he is the owner or has the power of sale. This warranty
may be rebutted by evidence that he negatived the warranty in making the sale.31 The implied warranties of title are:
(1) In sales, that he has a right to sell; in contracts to sell, that he will have a right to sell.
(2) That the buyer will have and enjoy quiet possession against lawful claims existing at the time of the sale.
(3) That the goods are free from any incumbrance not known to buyer.32 These implied warranties do not exist as
against sheriffs, auctioneers, mortgagees, or any person professing to sell under authority of law or fact.
31. George v. Smith, 122 N. E. (Ind.) 351.
32. Uniform Sales Act, SEC. 13.

Express Warranties. Part 3

Sec. 48. The Implied Warranties In A Sale By Description

In a sale by description there is (1) an implied warranty that the goods shall correspond with the description; (2) that
the goods are merchantable when the seller deals in goods of that kind.
(1) What is sale by description.
A sale by description is a sale where the identification of the goods which are the subject matter of the bargain
depends upon the description.33 It was seen heretofore that describing identified goods by a description is an express
warranty that they are of that description. It has also been seen that the better rule is that in the sale of a specific article
by a manufacturer or grower (or even a dealer in goods of that kind) there is a warranty of merchantability.
(2) Warranty that goods shall correspond with the description.
If one orders goods by description and they do not correspond with that description, he may treat the description as a
condition with which the buyer has not complied or refuse to take them, or may receive them and sue upon his
warranty.
Example p. A sale of "prime quality winter oil" is a warranty that the article sold is of that description.34
(3) Warranty in sales by description that the goods are merchantable.
If there is a sale by description and the seller is a manufacturer, there is a warranty that the goods are merchant 33.
Williston on Sales, SEC. 224.
34. Hastings v. Levering, 2 Pick. (Mass.) 214; see also Gould v. Stern, 149 Mass. 570.
able. This has been denied to be the case where the seller is a mere dealer in goods of that kind, but it seems the
better doctrine and is the doctrine of the sales act, that such a warranty extends not only to a manufacturer or grower
but to a mere dealer who deals in goods of that kind.
Example 10. A, a dealer in coal, sold B coal. B defends that the coal is not merchantable. By the court: "This [the Sales
Act] does away with the old distinction between sales by a manufacturer, on the one hand, and sales by a jobber or
dealer, on the other hand, and affixes to every sale, as defendant contends, an implied warranty of merchantability." 35
On account of the fact that the doctrine that a warranty of merchantability does not apply as against a mere dealer has
been applied so long and so strictly in some states, there will undoubtedly be an adherence to that doctrine where not
changed by statute and possible even a narrow construction of the statute. But every consideration of justice points to
a doctrine holding one though he be only a dealer to a warranty of merchantability of the goods he sells for the
following reasons:
First: The dealer's customer may not know whether the dealer is manufacturer or not. Second: The dealer has chosen
the manufacturer, and may have his remedy against him; Third: The consumer is remediless, unless he can make out
a case of fraud or negligence against the manufacturer, for warranties do not extend to sub-purchasers; and if he can
make cut a case in tort, he may have to sue one in a foreign state under such circumstances as to deny him even that
remedy. For instance, there are cases holding that if an automobile wheel breaks down, the manufacturer of the car
cannot be sued, if as to the wheel, he is a mere dealer.36 Such a doctrine would also permit evasion of liability by a
manufacturer by organizing an incorporated selling company. There are other cases, however, which take the contrary
view.37 By "merchantability" is meant freedom from unusual defects - the usual degree of soundness and
serviceability.
35. Majestic Coal Co. v. W. J. Bush & Co., 171 N. Y. Suppl. 662.

Sec. 49. Implied Warranties In A Sale By Sample

In a sale by sample there is an implied warranty that the goods will correspond with the sample; if also by description
as well as sample the goods must correspond also with the description; and also if the seller is a dealer in goods of
that kind that such goods are merchantable.
If a sale is by sample, the goods must correspond with the sample; if a description is added they must measure up to
the description, though the sample fall short thereof; and if the seller is also a manufacturer or dealer, the same
comment is to be made here as in the foregoing section.
Every case in which a part of the bulk is shown, or something is supposed to be a representative of the bulk
36. Cadillac Motor Car Co. v. Johnson, 221 Fed. 801. (In this case the wheel was made of dead and "dozy" wood, and
broke down while the car was going at moderate speed a short time after the car was purchased. The court held the
Cadillac Co. not responsible because it was not a manufacturer of the wheel. Clearly such a doctrine is a denial of
justice and shocks the lay, if not the legal, conscience.)
37. McPherson v. Buick Motor Co., 145 N. Y. Suppl. 462. (In this case and many similar cases, however, the right was
not supported as arising out of warranty, but upon the question whether the manufacturer had exercised due care in
selecting and testing the wheel. If the theory of warranty is adopted the amount of care exercised becomes immaterial.)
is not a sale by sample. It must be the mutual understanding of the parties that the seller is in effect saying: the goods
are like this. But if the circumstances are such that it can only be said that the seller was simply giving assistance to
the buyer that he might form his own judgment, and there was no representation that the bulk would equal the part
shown, as where the bulk was present and might conveniently be examined it is usually held there was no sale by
sample.
The following cases illustrate this section.
Example II. B bought of D a quantity of blankets, which were wrapped up in bales, the sale being made in a
warehouse. Several pairs were pulled out and exhibited, and found to be sound. B therefore purchased 27 bales. They
were found to be largely moth eaten. Held, a question for the jury, whether the exhibition of the samples was intended
as a representation of the condition of the others.38
Example 12. A bought a quantity of beans of B, upon B's exhibition of some of them. The sample was 3 per cent
"buggy." The bulk was 51 per cent buggy and had to be destroyed. Held, a sale by sample.39

A. Express Warranties. Part 4

Sec. 50. The Implied Warranty Of Fitness For Purpose Bought

Where goods are purchased for a particular purpose which is expressly or by implication made known to the seller
there is an implied warranty that the goods shall be fit for that purpose; unless the buyer preclude in that regard the
exercise of the seller's judgment by ordering a known, described and definite article, or purchases by patent or trade
name or unless he has opportunity for inspection which should have disclosed the defect.
38. Bierne v. Dord, 5 N. Y. 95.
39. Glazier v. Armsby, 170 N. Y. Suppl. 1055.
"Fitness for particular purpose" may mean same as "merchantability" discussed in the foregoing section. But it may
mean more. If one buys goods they must, in the cases stated, be merchantable - which means usually that they must
be reasonably fit for the purpose for which they were intended as goods of that kind. But the warranty may go further -
that they are fit for the special purpose for which this buyer intends them. To make this the case, the seller must be
acquainted with the use to which the buyer intends to put them and the contract must show that he undertook to furnish
goods fit for that use. This warranty applies as against a manufacturer or dealer or any one else, if the circumstances
show an undertaking by a seller to supply something that will be suitable for a particular purpose.
Knowledge of the use to which the goods are to be put may be obtained in either of two ways; (I) from the knowledge
which the vendor has concerning the usual purpose to which such goods are put by purchasers thereof; (2) from the
particular knowledge which the vendor has concerning the special purpose to which such goods are to be put by this
particular purchaser. The warranty covering the first case might be called either a warranty of merchantability or of
fitness for particular purpose; the warranty covering the second case is the true warranty of fitness for particular
purpose.
Example 13. A Lumber Company desired a locomotive engine to do its work. It sent an order to a manufacturer of
engines, setting forth with great particularity for what purpose the engine was wanted and the work it must do. The
manufacturer provided an engine which was totally inadequate, as its use proved. The Court held that as an engine
had been ordered from the seller which would do this particular work, the seller by filling the order had undertaken that
it should do such work.40
40. Marbury Lumber Co. v. Stearns Mfg. Co., 32 Ky. L. R. 739
As the basis of warranty is reliance upon the representations by the seller, there can be no warranty where the buyer
exercises in that respect his own judgment. Thus if the article is seen and inspected by the buyer and the seller is not
in a position to know more of the goods than the buyer has opportunity to know, then there cannot be an implied
warranty of merchantability or fitness. The rule of caveat emptor applies. So, if the buyer in ordering goods describes a
known and definite article, he cannot complain if he gets just what he ordered, for the seller has no choice but to
furnish the particular thing that was ordered. By such known and definite description of the article, rather than
description of the purpose for which he intends it, he precludes any judgment on the part of the seller and shows that
he does not rely upon the seller's knowledge or skill to furnish him goods for a particular purpose, and in such a case
there can be no further warranty of fitness than that it is fit for the purpose to which such goods are usually put by
buyers thereof - not the particular purpose to which this buyer intends to put them.41 The same reasoning applies if
goods are purchased in patent or trade name.42
Example 14. A orders of B a ventilating fan to ventilate a certain room and B agrees to furnish him such a fan. He must
provide a fan fit for that purpose. But if A had simply ordered a "No. 17 X-Fan" that being a patent name, or a name by
which a known definite article was described B's only liability would be to furnish a good merchantable fan of that
description, even though he should know A's purpose in buying the fan, for he would have no right under the contract
to furnish anything else.
41. Grand Ave. Hotel Co. v. Wharton, 79 Fed. 43.
42. Peoria v. Turney, 175 111. 631.
There may, in such cases, be a warranty of merchantability, that is, that they have no unusual defect, but not of fitness
for special purpose, for if goods by such description are ordered, it cannot be a breach to furnish that which
corresponds with the description.
If goods are ordered from a dealer of provisions for purposes of immediate consumption, there is an implied warranty
that they are fit for such consumption: Thus, if one orders meat from a butcher, to use for his own and family's
consumption, there is an implied warranty that it is not unwholesome and unfit for use. "It may be said that the rule is a
harsh one; but, as a general rule, in the sale of provisions, the vendor has so many more facilities for sale than are
possessed by the purchaser, that it is much safer to hold the vendor liable than it would to compel the purchaser to
assume the risk."43 In some states there is no such warranty.

Sec. 51. Warranties Do Not Run With Personal Property

A warranty by a seller to a buyer is a contract between the two which does not accrue to the benefit of a buyer from the
buyer. A seller may, however, warrant to the consumer though the consumer buys through an intermediary.
In real estate law, warranties may "run with the land" so that a remote purchaser may sue. But sales of personal
property are not (ordinarily) a matter of record, and each seller and buyer make their own contract. A "subpurchaser"
cannot sue upon a warranty.
43. Wedeman v. Keller, 171 111. 93.
Example 15. A, a manufacturer, sells to B, a dealer, warranting (either expressly or impliedly) that the goods are
merchantable and that he has good title. B resells to C, a customer. C cannot sue A upon A's warranties to B. If, in
such a case B were A's agent to sell and therefore A, through his agent B, sold to C, C could of course sue.
A manufacturer may contract direct with the consumer even though the goods are sold through an intermediary. That is
the case where he addresses his offer of warranty to the consumer. Thus it is customary in the automobile trade for the
manufacturer of parts (batteries, tires, etc.) to warrant the article to the consumer. This may be done by general trade
announcements, or by propositions accompanied with the article at the time of sale.
A manufacturer may be responsible to a remote buyer on the ground of tort. See next section.

Express Warranties. Part 4

Sec. 52. Right Of Remote Purchaser To Sue In Tort

A remote purchaser of an article may sue the manufacturer or producer thereof for injuries sustained by him in cases in
which such manufacturer or producer is guilty of fraud or has knowledge of the defect; in cases in which the article
manufactured is inherently dangerous to life or limb and the manufacturer or producer is guilty of negligence in
preparing the same; in cases in which the article manufactured is intended for human consumption and there is like
negligence; but by the weight of authority the producer is not liable to a remote consumer with whom he has no
contract in any other case than those above given even if he be guilty of negligence in the preparation or manufacture.
The situation we now consider is as follows: A, a manufacturer, sells to B, a dealer, who sells to C, a consumer. We
have already considered C's rights against B (a mere dealer) in warranty; we have also seen that warranties do not
extend to subpurchasers and therefore C cannot sue A in contract. The question now is may he sue him in tort ? This
question is of rather late development, but considerable litigation has lately arisen upon it. The law is not altogether
settled, but we may attempt a summary as follows:
(a) Article manufactured not inherently dangerous, not meant for food, drink or medicine, manufacturer or producer
guilty of mere negligence - manufacturer or producer not liable to remote purchaser in tort.
Example 16. S, a manufacturer of carriages, sold a carriage to R, a dealer, who resold to B. B while driving the
carriage was injured by the breaking of a defective wheel. It was not shown that S had any knowledge of the defect.
Held, manufacturer not liable unless such guilty knowledge were shown, a carriage not being a dangerous article.44
(b) Article manufactured not inherently dangerous, not meant for food, drink or medicine, manufacturer guilty of deceit -
manufacturer liable to remote purchaser in tort.
44. Burkett v. Studebaker Bros. Mfg. Co., 126 Tenn. 467. See also a leading case in Caffrey v. Mossberg Mfg. Co., 23
R. I. 381, 55 L. R. A. 822.
Example 17. M manufactured a buggy which .he sold to a city and it was used by W, a waterworks superintendent,
who was injured by reason of a defect which the manufacturer had concealed by the use of paint and grease.
Manufacturer held liable to W.45
45. Woodward v. Miller, 119 Ga. 618, 64 L. R. A. 932.
(c) Article inherently dangerous - manufacturer liable to any one hurt in the use thereof unless he uses care in its
preparation. What is reasonable care depends on the facts. Thus the preparer of drugs, poisons, explosives, etc., must
take every precaution to safeguard the user.
Example 18. A manufactured fur coats containing a dye injurious to some persons, although not to all. Held liable for
not giving notice of the hidden danger.46
46. Gerkin v. Brown, 143 N. W. (Mich.) 48.
In the case of Johnson v. Cadillac Motor Car Company, 261 Fed. 878, Johnson bought a car from a dealer who bought
it from the defendant, and while driving it was injured by the breakage of a defective wheel. Johnson sued in tort for
damages and the court held that he could recover upon showing merely negligence on the part of the Cadillac
Company, on the ground that an automobile is inherently dangerous if not carefully manufactured, and should be in the
same class as drugs or food.
(d) Articles intended for food, drink, medicine, etc. Manufacturer liable to any consumer, unless he uses utmost
precaution in preparation.
The above doctrine is qualified by many cases by the statement that the goods must be contained in original packages.
Example 19. M purchased a carton of cold tongue from Seattle Grocery Co. who had purchased it from the producers,
A & Co. Alleged that it was unwholesome owing to negligence of producers. A & Co. demurred to the case. Held, that a
manufacturer of food who sells it in original packages and is negligent in preparing it is liable to any one who is
damaged by its intended use.47
47. Mazetti v. Armour & Co., 135 Pac. (Wash.) 633. 48 L. R. A. N. S. 213.

Part II. The Contract's Effect As Transferring Title. Chapter 8. Transfer Of Title Between
Buyer And Seller, When Rights Of Third Parties Not Involved

Sec. 53. Meaning Of Phrase "Transfer Of Title

In every complete sale there is a certain moment of time wherein the ownership of the goods by the seller ceases and
that of the buyer begins; therein is the transfer of title. When this shall occur depends upon the intention of the parties
as determined by rules of construction. But where the rights of third parties as creditors or purchasers are affected by
such sale, the positive law may override and defeat such intention.
Goods which are the subject matter of a sale, must belong at each moment of time to buyer or to seller. There must
occur a certain definite moment or occasion wherein it can be said that then the title or property passed, defeasibily or
absolutely. The goods must be at any given moment either buyer's or seller's (assuming, of course, that no third party
has title). Whether this transition takes place and at what moment, is the subject matter of this present chapter. There
is, however, another viewpoint made necessary in cases which concern the rights of third persons. A person other than
the seller, may, unknown to the buyer, really own the goods or he may have rights which may be so prejudiced by such
sale or attempted sale, that the law permits him to defeat or ignore it in the proper proceedings. The subject of the
transition or title as between the buyer and seller is discussed in the present chapter. In the following chapter the rights
of third parties in respect to such transition are considered.

Sec. 54. Goods Unascertained

Title to unascertained goods cannot be transferred.
There may be a contract to sell goods which are at the time wholly unascertained, but the transfer of title cannot take
place until the ascertainment.48 Thus if A undertakes to sell B a certain kind of threshing machine out of A's stock of
such machines, B does not thereby own any machine until one party has, with the express or implied consent of the
other party, selected or appropriated a machine to the contract. Whether title would pass at such appropriation
depends on other rules. It is true, of course, that before title passes there will be a right to sue for breach of contract.
But after title passes there is a right to the property in the buyer.
It is a mooted question whether title can pass, even when that is the intention, to a part of a mass of fungible goods like
wheat, oil, or wine, where there has been no separation of the part from the whole. One argument is that title cannot
pass, because it could not be said what part was owned by the buyer, and in case of a destruction of a part of the
mass, whether it was his part or another's that had been destroyed. But it is really not necessary to determine this. For
the buyer may be considered as an owner in common with the seller and in case of loss each would sustain his
proportionate share and this is the better rule.49
48. McLaughlin v. Piatti, 27 Cal. 451; Ellis & Myers Lumber Co. v. Hubbard, 06 S. E. (Va.) 754.
It is every where admitted that if the goods contracted for are not fungible goods, that is, the units are not
indistinguishable, title cannot pass until ascertained. Thus if 50 out of 100 logs are sold, it is important both to buyer
and seller what particular logs shall be selected as each may differ from the others even though as a matter of fact they
may be substantially alike and no title passes unless the sale was intended to be an undivided interest in the whole
mass. But where the sale is of wheat in a warehouse, oil in a tank, etc., it ought to be possible to transfer ownership
without separation if the parties so intend and that title may be so transferred is now considered the better rule and in
accordance with mercantile demands, but the contrary doctrine prevails in some jurisdictions.50

Sec. 55. Goods Ascertained

Title to ascertained goods passes according to the intention of the parties.
So long as the goods are unascertained, title cannot pass. If ascertained, the time at which property in the goods shall
pass depends on the question of the parties' intention. The law will not declare the buyer to be owner of the goods
sooner or later than the parties intended he should become such owner. The difficulty is in discovering such mutual
intention. For this purpose the law resorts to certain rules of construction. These rules are not arbitrary or final in
nature, but indicate primarily, and unless it otherwise appear, the intention of the parties.
49. Kimberly v. Patchin, 19 N. Y. 330.
50. Scudder v. Worster, 11 Cush. (Mass.) 573.
These rules are framed according to circumstances as they may be, for it is from such circumstances that the intention
must be inferred when the parties do not in words express their intention. In usual cases these rules would constitute
the true indicia of intention; for that reason they are established as rules. But the intention of the parties to the contrary
will overcome the rules.50a

Sec. 56. Rules For Ascertaining Intention Of The Parties: The First Rule
Unless a different intention appears, "where there is an unconditional contract to sell specific goods, in a deliverable
state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of
payment, or the time of delivery, or both, be postponed." 51
If at the time of contract, the goods are ascertained and are then in a deliverable shape, the presumption is that the title
is then to pass, though perhaps credit is given and the goods are not yet delivered. This presumption may be
overcome by contrary evidence.
Example 20. A says "I will sell you this horse for $50." B says "I will take him" and it is arranged that B shall come the
next day and pay for and get the horse, the presumption is that the horse immediately becomes B's.52

Transfer Of Title Between Buyer And Seller, When Rights Of Third Parties Not Involved. Part
2

Sec. 57. Rules For Ascertaining Intention Of The Parties

SECOND RULE. Unless a different intention appears "where there is a contract to sell specific goods, and the seller is
bound to do something to the goods,
50a. Ellis & Myers Lumber Co. v. Hubbard, 06 S. E. (Va.) 754.
for the purpose of putting them into a deliverable shape, the property does not pass until such thing be done." 53
51. Uniform Sales Act. SEC. 19, Rule 1.
52. See Case v. Little Falls Lumber Co,, 47 Minn. 422.
As long as the seller must do something to the property for the purpose of putting it in a deliverable state, the
presumption is that title has not passed.
Example 21. A contracted for sale of corn in cribs to B. A to shell it, haul it to elevator and there weigh it. Corn is not B's
until these things have been done, unless facts show a contrary intention.54
There is a difference of opinion whether if weighing and measuring is to be done for the purpose of ascertaining the
price, title will pass, these being otherwise in deliverable shape. The better rule seems to be, and it is the view
permitted, though perhaps not made mandatory by the sales act, that the mere fact that the seller must measure or
weigh will not prevent passing of title where the goods are otherwise in deliverable shape, so that title would pass,
were there no question of weighing or measuring merely to ascertain the price. This rule that title does not pass so long
as anything remains to be done to put into deliverable state is a rule of presumption only and title may pass before that
time if the parties so intend.55
Sec. 58. Rules For Ascertaining Intention Of The Parties
THIRD RULE. Unless a different intention appear "(1) When goods are delivered to the buyer 'on sale or return,' or on
other terms indicating an intention to make a present sale, but to give the buyer an option to return the present goods
instead of paying the price, the property passes to the buyer on delivery, but he may re-vest the property in the seller
by returning or tendering the goods within the time fixed in the contract, or if no time has been fixed, within a
reasonable time. (2) When goods are delivered to the buyer on approval or on trial or on satisfaction, or other similar
terms, the property therein passes to the buyer (a) when he signifies his approval or acceptance to the seller or does
any other act adopting the transaction, (b) if he does not signify his approval or acceptance to the seller, but retains the
goods without giving notice of rejection, then, if a time has been fixed for a return of the goods, on the expiration of
such time, and, if no time has been fixed, on the expiration of a reasonable time. What is a reasonable time is a
question of fact."56
53. Uniform Sales Act, SEC. 19. Rule 2.
54. Orient Ins. Co. v. McKnight, 96 111. Ap. 525.
55. Ellis & Meyers Lumber Co. v. Hubbard, 95 S. E. (Va.) 754.
The above rule covers those sales wherein title is not finally to pass until the buyer is satisfied by trial with the goods.
The first paragraph of the rule relates to transactions in which there is an executed contract of sale, but the buyer may
cause the title to revest; the second paragraph of the rule relates to transactions in which the buyer has the goods
simply "on trial" that he may thereafter accept and purchase them if he so desires. It will be noted that the mere failure
to make the return operates to pass the title, or if it has already vested, to make it absolute. The importance of
distinguishing between the two transactions lies chiefly in the fact that risk of loss (where there is no negligence
involved) follows the title in such cases, and in the fact that the creditors of the owner may seize his goods. These
transactions must not be confused with that form of conditional sale in which the title is retained by the seller merely for
purposes of security. Thus, if A sells goods to B under an agreement that B may return the goods any time within 30
days if he finds them unsatisfactory, the goods belong to B but he has a right to re-vest the title in A any time within the
30 days by returning them. When the 30 days have elapsed, B owns the goods absolutely with no right of return so far
as this particular agreement is concerned. Until such return within 30 days, the goods are subject to seizure by the
creditors of B. Risk of loss is upon B at all times from the time he gets the goods until he makes the return or makes a
good tender of return. Or, suppose that B agrees with A that A may send him a washing machine "on trial" for 30 days.
Under such circumstances B has not purchased the machine, and title will not pass to B until 30 days have elapsed,
unless before the expiration of the 30 days he signifies his intention to take the machine. If B does not return the goods
within 30 days, title will pass to him and he cannot thereafter return such machine. During the 30 days (unless B has
before the end of the period signified his acceptance) the risk of loss is on A unless the loss occurs by B's
negligence.57 The creditors of A also could seize the machine - B has no right in the machine against A's creditors
because he is under no contract to purchase it.
56. Uniform Sales Act, SEC. 19. Rule 3.
There is a real distinction in cases of this kind. As one court has said: "An option to purchase if he likes is essentially
different from an option to return if he should not like."58
Example 22. A decides to buy a shock absorber for his car. The shock absorber is sold with a privilege of return. In this
case A regards himself as purchaser of and owner of the shock absorber, even if he does have a right to return it.
57. Pence v. Carney, 78 Ark. 123.
58. Pence v. Carney, 78 Ark. 123.
Example 23. An agent wishing to sell B a typewriter asks leave to put in B's office for a while that B may try it. No title
passes here and the parties do not so regard it.

Title Transfer Between Buyer And Seller, When Rights Of Third Parties Not Involved. Part 3

Sec. 59. Rules For Ascertaining The Intention Of The Parties

FOURTH RULE. Unless a different intention appears "(1) where there is a contract to sell unascertained or future
goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the
contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller the property in the
goods thereupon passes to the buyer. Such assent may be expressed or implied and may be given either before or
after the appropriation is made. (2) Where in pursuance of a contract to sell, the seller delivers the goods to the buyer
or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to or holding for the
buyer, he is presumed to have unconditionally appropriated the goods to the contract, except in the cases provided for
in the next rule and in section 20. This presumption is applicable although by the terms of the contract, the buyer is to
pay the price before receiving delivery of the goods, and the goods are marked with the words collect on delivery or
their equivalents." 59
(a) Title passes upon appropriation of contract.
Where the goods are unascertained, the title, as has been already noted, cannot pass. Upon ascertainment title
passes according to the intention of the parties. Where pursuant to this contract to sell goods at present unascertained,
certain goods in a deliverable state are set aside or designated or in any way appropriated to the contract, it is
presumed, rebuttally, that the intention of the parties is to pass title upon such appropriation, subject to the other rules
as to deliverable shape, goods to be put on cars by seller, etc.
59. Uniform Sales Act, SEC. 19. Rule 4. "Section 20" relates to reservation of title. See herein SEC. 60.
(b) Delivery to carrier or other bailee by seller.
If the seller pursuant to the contract delivers goods to a carrier for transportation to the buyer, the delivery is presumed
to be an appropriation and title passes then, if it has not passed before. The goods are while in transit the property of
the buyer and not of the seller. We shall hereafter notice that if the seller undertakes, as a part of his contract, to make
the delivery, title remains in him until such delivery is complete. That, however, means that the seller undertakes to pay
the expense of the delivery and assumes the burden of its success. In the ordinary cases where the goods are at the
seller's place of business, the seller assumes the task of putting the goods in the possession of a carrier, and such
carrier is the agent of the buyer, and the risk of loss is upon the buyer and title has passed.61
Even though goods are appropriated to the contract, still so long as there remains something to be done by the seller
to put them in a deliverable shape, title has not passed. In cases of shipment made by the seller, title is usually held
not to pass until delivery to the carrier though necessarily before that time the goods had to be segregated; this is
because where a number of things were to be done by the seller in the process of appropriating unascertained goods,
it is presumed the intention of the parties was to defer transition of title until the last act.
61. Belz v. McMorrow, 173 Mass. 8.
Example 24. A at Philadelphia sells ale to B in Boston, A to ship the goods to B at B's expense. A sues B for the price
of the goods. B defends that a sale of ale in Boston without a license was illegal. Held, that the defense is not good, as
title passed at Philadelphia62
(c) Goods shipped "C. O. D."
Where goods are shipped "Collect on Delivery," this has no effect upon the passing of title. If by the rules discussed
where goods are not so shipped title would pass, it will still pass notwithstanding such provision that the carrier must
collect before delivery.63 Thus the carrier might be the buyer's agent to transport the goods and the seller's agent to
maintain the lien for the price and collect the charges.
Example 25. S, in Carthage, Illinois, ordered liquor from D, a dealer at Burlington, Iowa, to be shipped to
S, "C. O. D." Held, a sale in Iowa, and not in Carthage.64

Sec. 60. Rules For Ascertaining The Intention Of The Parties

FIFTH RULE. Unless a different intention appears "if a contract to sell requires the seller to deliver the goods to the
buyer, or at a particular place, or to pay the freight or cost of transportation to the buyer, or to a particular place, the
property does not pass
62. Belz v. McMorrow, 173 Mass. 8.
63. Carthage v. Duvall, 202 111. 234.
64. Carthage v. Duvall, 202 111. 234. until the goods have been delivered to the buyer or reached the place agreed
upon."65
Delivery to carrier is ordinarily delivery to buyer and if it was understood from the express terms of the contract or from
the circumstances that the seller was to deliver to the carrier, the seller would be under the obligation so to do and
having done so, title would thereupon pass. But if the seller takes upon himself the more onerous contract of seeing
that the goods reach a certain place, as where he undertakes to pay the freight, title does not pass in such case until
the carriage to such place is complete.
In this connection the initials "f. o. b." standing for the words "free on board," are often used, and are of importance in
determining the intention. Thus if M. at A., agrees to ship goods to N. at C, " f. o. b." at B, a point intermediate between
A and C, title will presumably pass at B.66 If terms are "f. o. b." at A, or "f. o. b." at C, title will pass in the first case at A,
the point of shipment, or in the second case at C, the point of destination. This is but a rule of construction and not
final. Evidence may show that the parties meant the title to pass otherwise. Thus, if on final settlement the buyer is to
add the cost of shipment to re-imburse the seller, that would seem to indicate that title was to pass on delivery of goods
to the carrier.

Sec. 61. Reservation, Upon Shipment, Of Title In Seller

The seller by the form of his contract with the carrier may reserve title in himself notwithstanding delivery to such
carrier.
If the shipper has the bill of lading made out to himself or his agent, this effects a retention of title in himself. A bill of
lading is the evidence of title and by its form may indicate that though the seller made delivery to the carrier, yet he did
not by that act finally appropriate the goods to the contract, but intended until a future time to reserve title in himself.
This is sometimes referred to as the retention of the jus disponendi. One mode of retaining title by means of the bill of
lading is to send the bill to some third person, usually a banker, with draft attached, which must be accepted, or, if a
sight draft, paid, before the bill of lading can be secured. This reserves title even though the bill of lading names the
buyer as consignee.67
65. Uniform Sales Act, Rule 19, SEC. 15.
66. Deutzel v. Island Park Ass'n, 229 Pa. 403.
Bills of lading are made out in two forms: the "straight" bill and the "order" bill. The first form is a bill made to some
certain person. The second form is one made to the order of a certain person, or to a certain person or his order. As
has been seen in the discussion of Documents of Title, straight bills of lading are made non-negotiable; order bills are
made negotiable, and where such distinction prevails the carrier is not protected in delivering the goods where an
"order" form was used except upon presentment of the bill of lading properly endorsed; otherwise it is. To insure a valid
retention of title, the shipper should therefore use the order form of bill of lading, unless he makes himself the
consignee. See the subject of Documents of Title, supra, in this volume.

Sec. 62. Risk Of Loss

Unless there is an agreement to the contrary risk of loss attends the title.68
The risk of loss is usually upon the owner. The parties might indeed agree otherwise, but that is seldom
67. Greenwood Groc. Co. v. Canadian, etc. Co., 72 S. C. 450. See also subject of Documents of Title, supra in this
Volume.
68. Uniform Sales Act, SEC. 22.
done. This statement of risk does not include cases of loss on account of negligence of a seller or buyer having
possession and not title. If title has passed while goods are in possession of the seller or his agent in that behalf, the
seller would then be a bailee of the goods and liable as such to use due care for their safety. Assuming there is no
question of negligence, it is almost always true that risk follows the title. Indeed the important reason in many cases for
raising the question of transition of title is to decide upon whom the loss must fall.
If, then, a specific article has been bought and title has really passed, the loss is on the buyer regardless of the fact
that he may never have had possession. Thus, if pursuant to a contract of sale goods are shipped to A under such
circumstances that title passed upon delivery to the carrier, the loss as between buyer and seller, is upon the buyer,
but if by shipment "f. o. b." destination, or by retention of title by bill of lading, title is still in the shipper, then loss is
upon him as between him and the buyer. In these cases, whether there is any recourse against the carrier is a different
question and would depend on the nature of the cause of loss and the contract with the carrier.
Cases have made exceptions to this rule in the cases in which title is reserved solely for purposes of security,
possession and ownership for all other purposes being vested in the buyer. There are two classes of cases within this
exception. There is also an exception where delivery has been delayed by the fault of either part. Risk is upon the party
in fault.
(1) Cases of conditional sales in which buyer is given possession but seller retains contract for purposes of security.
In this case the risk of loss is on the buyer.
Example 26. A sells books to B, delivering B the books under a contract whereby A is to have title until the last
installment is paid. The risk is on B. He must pay although the goods are destroyed before the last installment.69
(2) Cases in which title is reserved during transit for purposes of security where except for such reservation title would
have passed.
The law is not as clear as desirable on this point. Supporting this view see Farmers & Mechanics Bank v. Logan;70
and against it Willman Mercantile Co. v. Fussy.71 The Sales Act adopts the former view.
69. Tufts v. Griffin, 107 N. C. 47.
70. 4 N. Y. 568
71. 15 Mont. 511. See Williston on Sales, SEC. 305.
Chapter 9. Title And Third Persons

Sec. 63. Attempted Sale By One Not Owner: In General

If goods are sold by one not the owner thereof, no title is acquired by the purchaser unless the real owner is estopped
to assert his own title.
One cannot sell goods that he does not own unless he is aided therein by some act of the real owner which estops the
owner to assert his ownership or deny the seller's authority or title. It is true that one who acquires negotiable paper in
due course may often take a better title than his transferor had. So one who gives value for money may acquire good
title thereto even from a thief but goods are not subject to these considerations. Except for the estoppel of the owner,
the buyer can take no better title than his vendor had, and the true owner may retake the goods as his own. In which
case the purchaser must be content with the warranties of title implied in the sale. For breach of these he may have his
damages.
A buyer who has a title, although voidable by the seller, may give a good title to an innocent purchaser so long as such
title has not been voided.

A. When True Owner Not Estopped To Assert Title

Sec. 64. In General

Against third persons an owner of goods by merely investing another with their possession for a lawful purpose is not
thereby estopped to assert his title against any one claiming under the possessor's title.
The owner loses no rights to assert his title by merely clothing another with possession. There must be some additional
element. It is true that by reason of such possession, the possessor may be enabled to deceive his creditors or
purchasers as to his ownership. He may seem to have more assets than he really has. Yet the exigencies and
conveniences of commercial life override this consideration and it is well settled everywhere that the true owner may
still assert his rights. As illustrating this principle the following particular instances are cited.

Sec. 65. In Case Of Consignment For Sale

A mere consignment of goods to be sold by consignee for the benefit of the consignor gives the creditors of such
consignee no rights against such goods.
It is a usual practice among merchants for a wholesaler to consign goods to a retailer, that is, to send the goods to the
consignee as agent to sell them. This must be strictly distinguished from a sale on credit. In a sale on credit the buyer
owns the goods and the seller has parted with his title in return for the buyer's promise. One who purchases from a
consignee gets of course a good title, for that is the purpose of and the authority conferred by the consignment, but a
creditor gets no rights even though he may have allowed the credit in reliance upon the apparent value of the assets
conferred by the possession of such consigned goods. Therefore, such goods cannot be seized for the debts of the
consignee, and may be reclaimed from the trustee in bankruptcy.72
72. See Example 4 in Bailments and Carriers; supra.

Sec. 66. In Case Of Bailment Other Than For Sale

Conferring mere possession upon an agent or bailee for purposes other than those of sale gives neither creditors of
such consignee nor purchasers from him any rights against such goods.
Whether an agent is entirely within one's employ upon salary or commission or is specially employed for a particular
purpose it may be necessary or desirable to supply him with goods whereby he may accomplish his agency or perform
the terms of the contract. In such a case the owner may assert his title against any one claiming under or against such
agent or bailee. In such a case it is to be remembered, there must be a true case of bailment. The possessor must be
obliged to return the same goods in their present or an altered form, for otherwise the possessor as purchaser has a
title he may convey.
Even though the party with whom possession was placed is a dealer in such goods, still if no authority were given him
to sell he could give no valid title.
Example 27. A jeweler has a watch left with him for repair. He sells it to B, an innocent customer who pays value for it.
M, the owner, can take it from B. B must rely on his rights against A.73
73. Biggs v. Evans, (1894) 1 Q. B. 88; Fawcett v. Osborne, 32 111. 411

B. When True Owner Estopped To Assert Title Against Third Persons

Sec. 67. In General

Where other than by mere possession the owner authorizes or permits another to deal with the goods as his own, he
may be estopped to assert his ownership as to one who has dealt with the possessor as the owner.
Having now considered the cases in which the true owner may assert his title against creditors and purchasers of
another, let us consider the cases in which a true owner will not be permitted to set up his title, as against those who
have dealt with another as the owner of the property. There are two well defined classes of cases.

Sec. 68. Allowing Another To Assert That He Is Owner

Where the true owner of goods allows another to make statements and representations of ownership the true owner
cannot assert title against third persons acting on the faith of such representations and statements.
In this case there might or might not be actual fraud. But in either event, the true owner could not assert his title. It
would have to be apparent of course that the true owner permitted the representations - stood by and did not deny
them or aided the agent in making them.
Example 28. T was in possession of a wagon owned by O, on which T had been permitted to paint his name. T sold to
C. O claims the wagon and sues C for its recovery. Held, O, although the true owner, is estopped to assert his
ownership against an innocent purchaser. Between the two the loss should fall on O who made the loss possible.74

Sec. 69. Clothing Another With Documentary Indicia Of Title

When the true owner of goods allows another to hold documents of title made out in his own name, registration in his
own name, etc., this is clothing the other with such indicia of title that the true owner cannot assert his title against third
persons acting on the faith of the apparent ownership.
74. O'Connor v. Clarke, 170 Pa. Rep. 318.
Let us now suppose the case in which the owner, besides conferring possession, also permits the possessor to hold
documents of title in his own name, that is, bills of lading, warehouse receipts, etc. In such a case, the true owner is
estopped to set up his title against those who deal with the holder of such documents as the apparent owner, and
creditors can seize such goods to satisfy their claims.75
C. When True Owner Prevented By Statute From Asserting Title

Sec. 70. In General

The law may prevent an owner from asserting his title; and statutes are in force in respect to (1) sales in which the
seller retains possession; (2) conditional sales; (3) bulk sales of entire stock in trade; (4) mortgages and pledges by
factors; (5) chattel mortgages.
The different states have passed various laws for the protection of creditors and purchasers, providing that such
parties may ignore the real ownership in various cases, or may ignore it in such cases unless the rights of the true
owner are put on record where they may be known by all men. The chief of these are below briefly considered.

Sec. 71. Effect Of Retention By Seller After Sale

If after a sale of goods, absolute in form, the seller continues in their possession, this is treated, in some states as in
itself constructive fraud, rendering the sale void as to creditors or purchasers from the seller and in others as evidence
of fraud, subject to rebuttal.
75. Calais Steamboat Co. v. Scudder, 2 Black (U. S.) 372.
It has long been settled law that the retention by the vendor of goods sold in an absolute sale is at least evidence of
fraud,76 and in some jurisdictions it is held to constitute fraud, per se, no matter how innocent might have been the
intention of the parties; this, of course, not as between the parties themselves, but as to creditors of the vendor, and
purchasers from him of the goods formerly sold.77 The buyer who allowed such retention could not assert title as
against the creditors of the seller or anyone to whom he had resold such goods. A qualification has been made that if
the contract in terms provides for such retention and there is no actual fraud, the case is taken out of the rule. But in
such a case the' clause must be for some honest purpose and not merely to avoid the rule, and if for purposes of
security, would usually have to be recorded, being in effect a chattel mortgage.
Delivery need not consist in removal. If, for example, one buys a stock of goods, he may take possession by merely
assuming control. It is a sufficient change of possession if the acts of control are of an outward, exclusive character,
sufficient to notify observers that a change has taken place. There may still be a change of possession though the
seller's employees are retained by the buyer. What amounts to change of possession is a question of fact. If the article
purchased is of a cumbersome character, not subject to immediate and easy
76. Twyne's Case, 3 Coke, 80b.
77. Wilson v. Walrath, 103 Minn. 412; Ticknor v. McClelland, 84 111. 47L removal, and constructive delivery is made,
as by delivery of keys, that will for a reasonable time be sufficient.78

Sec. 72. Conditional Sales

A conditional sale of goods wherein the seller retains title for purposes of security in most jurisdictions must be
recorded or the condition is void as to innocent purchasers and creditors. Otherwise in most, but not all of the states,
the owner of the goods may assert his title against such purchasers and creditors.
In most states prior to the passage of recording laws covering that subject a conditional sale of goods deprived the
seller of no rights to assert his title against purchasers and creditors of the purchaser until by the performance of the
condition the buyer acquired his title. This law has become modified in most states by the recording laws requiring
such transactions to be recorded just as chattel mortgages must be recorded. But in some states
78. In the following states retention is considered as prima facie evidence of fraud, rebuttable by evidence that the sale
was actually for value and in good faith. Alabama, Arizona Arkansas, Delaware, Florida, Georgia, Indiana, Kansas,
Louisiana, Michigan, Minnesota, Mississippi, Nebraska, New Jersey New York, North Carolina, North Dakota, Ohio,
Oregon, Rhodi Island, South Carolina, Tennessee, Texas, Virginia, West Virginia, Wisconsin.
In the following states retention of possession is conclusively presumed to be fraud. California, Colorado, Connecticut.
Idaho, Illinois, Iowa (unless recorded) Kentucky, Maine, Maryland (unless recorded), Massachusetts, Missouri,
Montana, Nevada, Oklahoma, Pennsylvania, South Dakota, Utah, Vermont, Washington (unless recorded). In Mexico
and Wyoming not clearly established.
By the Sales Act (Sections 25 and 26) a seller who is allowed to continue in the possession of the goods sold may give
a good title to a vendee as though having express authority to sell them and creditors have much the same rights in
such states, as heresuch transactions though good between the parties, estop the seller to assert his title against the
creditors or purchasers of the purchaser. Unless the recording laws in such states comprehend within their terms a
conditional sale, even recording will not help and the only safe device is a chattel mortgage.79
If a contract of conditional sale is called a "lease" or by any other name, the courts will regard its true intent rather than
its mere form.

Sec. 73. Bulk Sales Of Entire Stock In Trade

Bulk sales by a dealer of his stock in trade are forbidden by statute in some states unless there is a certain notice given
to creditors, or recordation, or both.
Frauds upon creditors are often perpetrated by means of a sale of the entire stock in trade of a tradesman to one who
has actual or constructive notice of the fraud or who may even be in connivance and not actually a purchaser, and
statutes in some states have been passed providing that bulk sales shall not be good except upon notice to creditors,
or upon recording the transaction, or both.80
79. In the following states, one who sells by conditional sale may protect himself by recording the contract: Alabama,
Arizona, Colorado, Connecticut, Florida, Georgia, Iowa, Kansas, Maine, Michgan, Minnesota, Missouri, Montana,
Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina,
Texas, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming. If recording laws do not cover
conditional sales, recording them is a nullity. Gilbert v. National Cash Register Co., 176 111. 288.
80. Bulk sales laws are in force in Alabama, Arizona, California, Colorado, Connecticut, Delaware, District of Columbia,
Florida, Georgia, Illinois, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New

Sec. 74. Transfers And Pledges By Factors

Factors' acts have been passed in a number of states to protect those who deal with factors and consignees to the
amount of their advances.
A factor is one to whom is given the possession of goods to sell them for the owner. He is more popularly referred to as
a commission merchant. His authority is very large and he often deals with respect to such goods in his own name. But
he has no authority to pledge such goods for his own debts, even though such pledgee deal with him under the
assumption that he is the owner. Statutes in a number of states have been passed to protect pledgees, lienors and
purchasers to the extent of their advances. These factor's acts differ in their provisions to some extent, but they are all
for the purpose of protecting parties dealing with a factor to whom goods have been entrusted.81
Sec. 75. Chattel Mortgages
One who buys chattels or acquires any lien upon them is protected against a prior mortgagee of such chattels unless
such mortgage has been duly recorded or possession has been taken by the mortgagee.
In all the states a chattel mortgagee is not protected against subsequent parties dealing with the owner of the goods
unless he either takes possession or records the mortgage.
Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island,
South Carolina, Tennessee, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
81. Factors acts are in force in Maine, Maryland, Massachusetts, New York, Ohio, Pennsylvania, Rhode Island and
Wisconsin.

Part III. The Performance Of The Contract. Chapter 10. Obligations Of The Parties

Sec. 76. In General

The obligations of the parties, being contractual in nature, are governed by the general law of contracts. Each in
accordance with his contract is bound to perform, unless by some act or failure to act on the part of the other his
obligation is discharged and his performance excused.
The obligation of the seller is to furnish the goods, as agreed upon, the buyer to pay therefor. Yet the performance of
each will be conditioned upon the performance of the other according to the terms of the contract. The seller may be
bound to deliver the goods on credit, or if it is a cash sale, he need not deliver at all, but only make tender, unless he
receives the price. So, if the seller is to deliver at a place, he cannot perform by making delivery or tender elsewhere
unless the buyer waives that obligation. Certain particular obligations are briefly noted.

Sec. 77. Obligations In Respect To Time

A contract of sale must be performed within the time stated, unless strict compliance is waived by the other party.
Under the general law of contracts we note that time is of the essence of a mercantile contract; or in other words, that a
contract must be performed or performance tendered, within the time stated, or, if none is stated, then within a
reasonable time. The other party may accept a belated performance, or may refuse to accept it. If he accepts a tardy
performance the question arises whether he may reserve his right to such damages as are occasioned by the breach.
If goods arrive late the buyer may usually accept them and still claim damages for the delay. His acceptance will not in
itself amount to a waiver of his right to his damages if by such delay he has sustained any. Yet the evidence in a
particular case might show a waiver; as where, knowing all the facts he had voluntarily paid the full price; or, where he
had made no protest or objection.

Sec. 78. Obligation In Respect To Place

Stipulations as to place are material in a contract of sale, and performance must be tendered at such place, unless
strict compliance is waived.
Each party must perform at the place agreed upon. If goods are at a distance from the buyer, and are to be furnished
later or upon order, it is usually implied that the seller is to deliver them to a carrier. The carrier is thus made the agent
of the buyer rather than the agent of the seller and, as has been seen, title then passes and the risk during
transportation is upon the buyer. It requires a special undertaking on the part of the seller to make him liable to deliver
to the buyer's place of business in the sense that the carrier is his agent. Where the buyer is at the place where the
goods are located and there is no agreement to the contrary expressed or implied from custom or otherwise, the seller
is under no obligation to deliver.

Sec. 79. Obligation In Respect To Quantity

The seller is bound to deliver the amount purchased and the buyer must accept that amount. The buyer need not
accept either a larger or smaller amount. If a smaller amount is received he is bound to pay for it at the contract rate,
subject, however, to his damages, if any.
(a) Seller must deliver proper quantity.
It is not requisite in contracts to sell that any certain amount be ordered. It need only be capable of reduction to
certainty. But there must be in a contract to sell that mutuality required in all contracts. One cannot be bound unless
the other is bound. Therefore an agreement by one to sell at a certain price all such goods as another may desire, is
not a contract at all. It may be an offer which the other may accept until withdrawn; but it may be withdrawn at any time.
On the other hand a promise by one to sell and another to buy all that the buyer may require during a certain period is
good, even though it cannot be absolutely stated that the buyer will require any such goods during that season; for the
buyer has foregone his right to purchase elsewhere and this constitutes the consideration for the seller's promise.82
The quantity that is tendered must be the quantity that was agreed upon; the seller is not obliged to take less; and he
cannot be obliged to take more unless given by way of good measure.
(b) Use of words "about," "more or less," etc.
Where a contract is made to sell a certain quantity of goods as for instance, 40,000 tons of coal; and the quantity is
recited with the qualifying words "more or less" or "about" or of equivalent meaning the recital of quantity is material
and such qualifying words provide for merely slight variations.83
82. See Subject Contracts in this Series.
Where a contract is made to sell certain specific identified goods and the quantity is recited with qualifying words
"about" or "more or less" or of equivalent meaning, the recital of quantity is by way of identification or description and
not material in the absence of bad faith. Thus if one should sell all the corn then standing unhar-vested in a certain field
"being about 10,000 bushels" and there were actually only 7,500 bushels, both parties would be bound, the recited
quantity being a mere estimate.84
(c) Quantity to be delivered in installments.
Where the quantity is to be delivered in installments, very difficult questions in respect to performance often arise. If the
first installment is not delivered at all or in an insufficient amount, has the buyer a right to regard the contract as broken
and himself discharged from further performance? Where goods are to be shipped in installments, this may amount to
several contracts, or it may be one contract whose performance is divisible. This depends on the facts of each case.
Concerning this subject, the text of the Uniform Sales Act is as follows:
"Section 45 (1) Unless otherwise agreed the buyer of goods is not bound to accept delivery thereof by installments.
(2) When there is a contract to sell goods to be delivered by stated installments which are to be separately paid for,
and the seller makes defective deliveries in respect of one or more installments, it depends in each case on the terms
of the contract and the circumstances of the case, whether the breach of contract is so material as to justify the injured
party in refusing to proceed further and sue for damages for breach of the entire contract, or whether the breach is
severable, giving rise to a claim for compensation, but not to a right to treat the whole contract as broken."
83. Moore v. U. S., 190 U. S. 157.
84. Robinson v. Noble's Adm'rs, 33 U. S. 181.
This is one of the difficult questions in the law of sales. It may be said that the fact that goods are deliverable in
installments does not make the contract a severable one, and therefore a breach in respect to one installment may
amount to a breach of the entire contract; and further it may be said that in any sale for deliveries by installment, a
deliberate refusal to deliver the first installments justifies a belief on the part of the buyer that there is to be a breach in
respect to later installments, and he may act accordingly. But beyond this, we can only say, in the words of the Sales
Act, "it depends in each case on the terms of the contract and the circumstances of the case." 85

Sec. 80. Delivery To Carrier As Delivery To Buyer

Delivery to the carrier is delivery to the buyer in all cases in which the seller is authorized or notified to deliver to a
carrier, unless the seller is bound as a part of his undertaking to get the goods to a certain place.
We have seen that title passes upon delivery to carrier except in certain instances. In those cases in which title will
pass upon delivery to a carrier, such delivery amounts to performance by the seller. Therefore, the loss of the goods by
the carrier, their delay in transportation, their depreciation after shipment are matters which the buyer must have out
with the carrier, assuming the seller is not in default in any manner.
85. See Norrington v. Wright, 115 U. S. 188, as a leading case on this subject.
Example 29. A sold coffee to B to be loaded by A on cars at Canton, Ohio, for shipment to B, at Pittsburg. The coffee
was lost in transportation. A sues B for the price. Conceding the title passed at Canton, B must pay the price, and look
to the carrier for his remedy if any.86

Sec. 81. Buyer's Right To Examine The Goods

The buyer who has not examined the goods before delivery, has after delivery a right to a reasonable opportunity to
examine them to determine whether they conform to the contract.
As a buyer has a right to reject goods which do not conform to the terms of the bargain, he has a right to know whether
they are in accordance with the contract. The law therefore gives him the right to examine the goods, or, if a test is
necessary, to make a reasonable test before it can be said that he has accepted them. If he will not exercise his right,
then he must be deemed to have accepted the goods. What constitutes a reasonable time in which to examine
depends on the circumstances.
Example 30. P sold vanilla to Z, a candy manufacturer. Z used a considerable portion, when a fair test could have been
made by use of a few ounces. Z then sought to return the balance as of poor quality. Held, that Z had a right to test,
but his use in this case was unreasonable and amounted to an acceptance, precluding his right to reject.87
86. Dannemiller v. Kirkpatrick, 201 Pa. 218, 50 Atl. 928; see also Pittsburgh Co. v. Cudahy Co., 260 Pa. 135, 103 Atl.
548.

Sec. 82. What Constitutes Acceptance By Buyer

The buyer accepts the goods, and therefore cannot thereafter reject them (although he may still sue for damages as
hereafter shown) when he so states, or deals with them inconsistently with the seller's title, or does not reject them
within a reasonable time.
If the buyer accepts he cannot reject even if the goods are not in compliance with the contract. He shows acceptance
in any of three ways: (1) By so intimating to the seller; (2) by dealing with the goods in any manner that is inconsistent
with the seller's ownership; and (3) by failing to reject them within a reasonable time.
Acceptance does not bar an action for damages as hereafter shown.
87. Zipp Mfg. Co. v. Pa.storino, 120 Wis. 176.

Chapter 11. Rights Of Seller Upon Non-Performance

Sec. 83. Enumeration Of Rights And Remedies Of Unpaid Seller

A. Where Goods Have Not Been Delivered to Buyer.
(a) If title has not passed:
(1) A right to withhold delivery;
(2) A right to rescind the contract;
(3) A right to sue for the price if price payable on a day certain;
(4) A right to sue for the price if goods not readily resellable for reasonable price, an offer of delivery having been
made.
(5) A right to sue for damages for non-acceptance.
(b) If title has passed (goods being still undelivered) :
(1) A lien on the goods;
(2) A right of resale (with suit for damages) ; I. Where goods of perishable nature; II. Where seller reserves right of
resale; III. Where buyer has been in default unreasonable length of time; no Sales of Personal Property.
(3) A right of rescission (with suit for damages) ; I. Where he has reserved right to rescind; II. Where buyer in default
unreasonable length of time;
(4) A right to sue for the purchase price;
(5) A right to sue for damages for non-acceptance.
B. Where Goods Have Been Delivered to Buyer or His Agent.
(a) Where title has not passed:
(1) Right to sue for price or damages;
(2) Right to reclaim goods.
(b) Where title has passed:
(1) Right to stop in transit, if buyer insolvent ;
(2) Right to sue for price.
The rights and remedies above enumerated are those provided by the Uniform Sales Act, but the arrangement and
tabulation is that of the author of this series. These rights and remedies are commented on in the following sections.

Sec. 84. In General Of These Rights And Remedies

It will be noticed by the above tabulation that the rights and remedies of the seller in case of a non-delivery of the
goods by him (rightfully of course), are broad enough to protect him against loss, and may consist in his appeal to the
court for his damages or the purchase price; or may consist in his own act in rescinding the contract, or reselling the
goods with no appeal to the court. If he has parted with the goods or if he has sold on credit, his remedy in the absence
of settlement by the buyer is necessarily an appeal to the court for judgment upon the debt. Of course in such a case, if
title has not passed, which is unusual (except in case of conditional sales), he may recover the goods themselves,
peaceably if he can, by law if he must. Let us consider his various rights under the different circumstances.

Sec. 85. Whether Sale Is On Credit

In determining the rights of an unpaid seller, where there has been no delivery by him, we must consider whether the
sale is for cash or on credit. If on credit the seller is in default unless he delivers the goods as agreed upon. A sale may
be on credit by implication, as by a prior course of dealing.
In considering the rights of an unpaid seller before delivery, it is essential to ask the question Whether the sale is for
cash or on credit. For obviously if the sale is on credit, there is no right to call for payment before delivery. After the
seller has made his contract, he cannot change his mind and insist on cash, unless in the meantime the buyer has
become insolvent; in that event he may withdraw the credit.
A sale may be upon credit through inference from an established course of action, that is, if credit has been previously
given in former instances, the seller cannot insist on payment after he has made the sale, but would have to
incorporate the new term in his contract when made.

A. Where Goods Have Not Been Delivered To Buyer (Title Passed)

(a) If title has not passed.

Sec. 86. Goods Not Delivered, Title Not Passed, Right To Withhold Delivery Or Rescind
Contract
If the title has not passed and the goods have been sold without credit, the seller may withhold delivery and may
rescind the contract.
What the seller may do if title has passed where price is not paid is considered hereafter. If no title has passed
(according to the rules above considered) the seller may of course withhold the possession and refuse to pass the title
if the price is not paid as agreed upon; assuming of course, that the sale was not to be on credit. And he may treat the
contract as broken by the buyer and therefore rescind; or he may hold the buyer to damages, as will be considered,
post.

Sec. 87. Goods Not Delivered, Title Not Passed, Right To Sue For Price
Under the sales act, the seller may sue for the price agreed upon even though the title has not passed (1) if the price
irrespective of delivery is payable on a day certain; (2) if the goods are not readily resellable at a reasonable price,
providing an offer of delivery has been made to the purchaser.
Text of Sales Act. "Where under a contract to sell or a sale, the price is payable on a day certain, irrespective of
delivery or of transfer of title, and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an
action for the price, although the property in the goods has not passed and the goods have not been appropriated to
the contract. But it shall be a defense to such an action that the seller at any time before judgment in such action has
manifested an inability to perform the contract or the sale on his part or an intention not to perform it." 89
89. Uniform Sales Act, SEC. 63 (2).
"Although the property in the goods has not passed, if they cannot readily be resold for a reasonable price, and if the
provisions of Section 64 (4) are inapplicable, the seller may offer to deliver the goods to the buyer, and, if the buyer
refuses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee for the buyer.
Thereafter the seller may treat the goods as the buyer's and may maintain an action for the price." 90
The Sales Act gives the seller a right to sue for the price even if title has not passed where the payment is to be made
on a day certain. This is evidently to be construed to refer to those cases in which the buyer is to make payment or
payments on a certain day or days irrespective of the transfer of title, as where advance payments on certain days are
provided for. These cases would be comparatively unusual.
Another case in which a right to sue for the price is given although ownership has not passed is that in which the goods
cannot readily be resold for a reasonable price. There has been a difference of opinion as to this right under the
decisions, for it is said that if the seller can sue for the price, this amounts to compelling the buyer to take title, and is
specific performance by the seller where the buyer, if the case were turned around, could not get specific performance
- certainly not in law courts. But the weight of authority, now affirmed by the Sales Act, allows the recovery of the price
91 - that is, does not put the seller to a proof of his damages. In fact, many cases do not include the provision that it
shall be necessary to this right that the goods be not readily resalable.92
90. Uniform Sales Act, SEC. 63 (3).
91. Dustan v. McAndrew, 44 N. Y. 72.
92. Habeler v. Rogers, 131 Fed. 43.

Sec. 88. Goods Undelivered, Title Not Passed, Seller's Right To Sue For Damages
If title has not passed and the buyer refuses to perform, the seller may sue for his damages.
Still considering that title has not passed, and that the goods are undelivered, the buyer may sue for the damages by
him sustained, that is, need not accept the election to sue for the price in cases in which we have considered, but may
treat the contract as a broken contract and have his damages for the non-acceptance.
Rule of Damages. The rule of damages in such cases is variously stated, but is substantially as follows: that the buyer
(if he does not sue for the price, as in the last section), may recover the difference between the contract price and the
market value of the goods at the time and place of delivery. That is, if he was to get 6 cents a pound by the contract
and the market price is 4 cents, he may recover 2 cents per pound as his damages.93 If there is no market price then
the rule is that he may recover his actual loss, taking into consideration the value of the property on hand to the
seller.94
If the buyer repudiates the sale, while the goods are yet in preparation, the seller cannot go ahead in the performance
of the contract and sue for the price or his additional damages. The seller must stop at the time of repudiation, and his
damages will be ascertained as of that time.
Example 30. Cameron made a contract of sale with White for sale of lumber to be manufactured by Cameron. After
Cameron purchased the logs, but before the lumber was sawed, White repudiated the contract. Held, that the rights of
the parties were fixed at that time. Cameron could not go on and perform an entirely useless act and charge the
expense thereto to the defendant. His damages were the profit that he would have made had the contract been
performed.95
93. Habeler v. Rogers, 131 Fed. 43.
94. Habeler v. Rogers, 131 Fed. 43; Uniform Sales Act, SEC. 93.
(b) If title has passed (goods being still undelivered).
Sec. 89. Goods Undelivered, Title Passed, Seller's Lien
Where title has passed and the goods are still undelivered the seller has a lien on the goods for their price and his
incidental expenses caused by the buyer's default.
Assuming (1) that title has passed; (2) that the goods are still undelivered; and (3) that the sale is not on credit; the
unpaid seller has a lien, frequently called a vendor's lien - that is, a right to hold the goods awaiting the payment.
This lien assumes that the seller has possession. With such assumption, the seller has a lien:
(a) Where the goods have been sold without any stipulation as to credit;
(b) Where the goods have been sold on credit, but the term of credit has expired;
(c) Where the buyer becomes insolvent. An unpaid seller loses his lien:
(a) By delivery of goods to carrier for transmission to buyer if he does not reserve title or right to possession (but see
right to stop in transit, post);
(b) Where the buyer lawfully obtains possession;
(c) By a waiver of his lien.
95. Cameron v. White, 74 Wis. 425.
A seller who has a lien may (1) rescind the contract; (2) resell the goods; or (3) may sue for the price. If he gets
judgment, this does not destroy his lien. See these rights considered in following sections.

Sec. 90. Goods Undelivered, Title Passed, Right Of Resale

Although title has passed to the buyer, an unpaid seller, still having possession of the goods, the sale not being on
credit, and the buyer being in default, may resell the goods (1) where they are of perishable nature; (2) where seller
reserves right of resale, or (3) where buyer has been in default an unreasonable length of time.
In the three cases stated, the buyer, being in default, a seller still being in possession of the goods, notwithstanding
they have become the property of the buyer, may execute his lien upon them by a resale, and can give a good title to
the second buyer.
Notice of his intention to resell is not essential, but where goods are not perishable, and where the right to resell has
not been reserved in the contract, the lack of notice is proper in consideration whether the buyer has been in default an
unreasonable length of time. Such being the case, it would be safer in any event for the seller to give notice.
The sale may be either public or private but should be made in the exercise of reasonable care and judgment.
If the resale brings more than the contract price, the seller may retain the surplus; if it brings less the seller may sue the
buyer for the loss.

Sec. 91. Goods Undelivered, Title Passed, Seller's Right Of Rescission Upon Breach By Buyer
A seller may rescind, that is, re-vest the title in himself, keep the goods, and sue for damages, where (1) he has
reserved the right to do so; (2) the buyer is in default an unreasonable length of time.
A seller being rightfully in the possession of the goods, may, if he chooses, instead of reselling or instead of bringing
suit, take back the title in himself in the cases mentioned, and that means in every case where the buyer persists in his
non-performance.
Sec. 92. Goods Undelivered, Title Passed, Seller's Right To Sue For Purchase Price
The seller may under the circumstances stated sue for the purchase price.
The goods being the buyer's even though the seller still is retaining the possession by virtue of his vendor's lien, the
vendor may sue for the purchase price. His judgment will not destroy his lien. The buyer is of course in that event
entitled to the goods upon payment of such price or judgment.

B. Where Goods Have Been Delivered To Buyer Or His Agent

(a) Where title has not passed.

Sec. 93. Right To Sue For Price Or Damages

If the goods have been delivered to the buyer or his agent, and title has not yet passed, and the buyer is in default, the
seller may sue for the purchase price or for damages.
Here is a situation that would occur comparatively seldom, except in conditional sales. It is unusual for delivery to be
made to the buyer before title has passed.
Almost always title has passed at least at the delivery. If a seller who has not delivered may sue where the title has not
passed, it would follow logically that a seller who has made delivery would be in no worse position.

Sec. 94. Goods Delivered, Title Not Passed, Buyer In Default, Right Of Seller To Re-Claim
Goods
A seller may reclaim goods if title has not passed where the buyer is in default.
Assuming the unusual situation of the buyer having the goods and the title not having passed, and the buyer being in
default, the seller can obviously recover the property unless there has been an agreement to the contrary. Let us
consider the case of a seller of goods who has made delivery but has reserved title for purposes of security.

Sec. 95. Same Subject (Conditional Sales)

In a conditional sale, the buyer may retake the same without court action if he may do so peaceably, or by an action of
replevin; some courts holding that he may retain what has been paid; some that he must repay what has been paid,
unless it has been agreed to the contrary. Or he may sue for the price, letting the buyer retain the goods.
The law of conditional sale is not in a satisfactory and uniform state as shown by the decisions. In all courts the seller
may enforce the sale by a suit for the price; but if he attempts to reclaim the goods, which is his right conceded
everywhere, there is a difference of opinion whether he must account for what he has received. Some courts hold he
need not.96 If the contract provides for retention of payments as liquidated damages, as is generally the case, and
such a provision is a fair one, it would seem enforceable anywhere.97
96. Fleck v. Warner, 25 Kan. 492; Latham v. Sumner, 89 111. 233.
(b) Where title has passed.

Sec. 96. Goods Delivered, Title Passed, Buyer In Default

In this case the seller's remedy is to sue for the price; he has no right to reclaim the goods.
One who has sold goods and delivered them to the buyer, thereby extending credit, either pursuant to the original
contract or by waiving his rights to cash payment, has the remedy simply of suing for the price if the buyer will not pay
it. He cannot reclaim the goods. He has been contented to take the credit of the buyer and has passed the title to him
in return therefor. His ownership is gone and he has no lien. He must sue for the price.

Sec. 97. Right To Stop In Transit

A seller notwithstanding he has delivered the goods to a carrier for transmission to the buyer under circumstances that
pass the title to the buyer and amount to a delivery to the buyer, so that the seller's lien is gone, may nevertheless in
case of insolvency of the buyer re-attach that lien if he does so while the goods are still in transit and before any third
party has purchased them or acquired a lien upon them.
Though it has been noted, the carrier is the agent of the buyer except where specially agreed otherwise, and therefore
delivery to such carrier is delivery to the buyer, and property passes, yet the common law has extended, the lien of a
seller to the goods during transit in case the buyer becomes insolvent; not otherwise.
97. See Williston on Sales, SEC. 579.
The right ceases when the transit is ended and the carrier has made delivery to the buyer.98
The right is exercised by notifying the carrier of the insolvency and requesting it to hold the goods. The carrier then will
deliver the goods to the buyer at its peril.
If before the exercise of the right the buyer has sold the goods by a transfer of the bill of lading, the right of stoppage
cannot be asserted against the innocent purchaser.
98. Re W. A. Patterson Co., 186 Fed. 629.

Chapter 12. Rights Of Buyer Upon Non-Performance

Sec. 98. Enumeration Of Rights And Remedies Of Buyer

A. Where Goods Have Not Been Delivered to Buyer.
(a) Where title has not passed:
(1) Right to damages; (2) Right to specific performance in certain cases.
(b) Where title has passed:
(1) Right to obtain goods themselves;
(2) Right to sue for damages.
B. Where Goods Are Delivered or Tendered to Buyer.
(a) Right to refuse acceptance for breach of warranty, late delivery or other breach of contract;
(b) Right to reject after trial;
(c) Right to accept and sue for breach of warranty;
(d) Right to accept and sue for tardy delivery.
In this enumeration of rights and remedies of the buyer it is of course assumed that the seller is in default.

A. Where Goods Have Not Been Delivered To Buyer

(a) Where title has not passed.

Sec. 99. Goods Not Delivered, Title Not Passed, Buyer's Right To Sue For Damages
The buyer in such a situation must always sue for damages, except as noted in the next section. He is entitled to such
damages as he actually sustains provided they are such as must have been contemplated by the parties as the
probable result of breach.
If the seller has not passed title to the buyer, and refuses to perform his contract and make delivery the buyer's usual
remedy is that of suit for damages. This would be the case whether the goods were ascertained goods at the time the
contract was made, or had thereafter become ascertained provided in either case title had not passed, or whether the
goods were never ascertained, perhaps not even acquired or manufactured. For in any such case, the goods never
having become the buyer's (which is our hypothesis), the buyer cannot claim them (for his right to specific performance
in unusual cases, see next section).
The rule of damages in such cases is the usual rule of damages for breach of any contract - that the buyer may have
such damages as he has actually sustained and which the seller from what he knew at the time of the making of the
contract must have foreseen might result from breach by him.
The usual rule of damages in such a case is the difference between the contract price and the market price at the time
and place of delivery; if there is a market price.99
If there is no market price the rule of damages is the difference between the contract price and the reasonable value of
the goods.
99. Capen v. De Steyer Glass Co., 105 111. 185. (Holding also that if the goods cannot be bought in the market where
they were to have been delivered, cost of getting them from next nearest market may be added.)
This rule of damages may be totally inadequate to protect and compensate the buyer if he bought for a special purpose
known to the seller, in which case his damages, according to the general rule of damages in contract cases consist in
the loss to which the seller from what he knew at the time of entering into the contract must have contemplated would
likely result from breach.
Example 31. Seller agreed to deliver machinery for harvesting. Buyer's damages or default is determined from amount
of yield and contemplated yield, although to some extent speculative.100
A buyer, however, must do what he reasonably can to keep down damages.

Sec. 100. Goods Not Delivered, Title Not Passed, Buyer's Right To Specific Performance
If the goods have not been delivered, and the title has not passed and the seller refuses to pass title, the buyer, not
being in default, may have a decree of a court of equity that the seller specifically perform where damages are not
adequate compensation to the buyer, that is, where the goods have a peculiar value to the buyer which cannot be
estimated in money damages.
The right to have specific performance of a contract of sale of personal property is not usual. It is an extraordinary
remedy which a court of equity will grant if the judgment for damages cannot adequately compensate the buyer, on
account of the fact that the thing sold is an article in which he has some peculiar and especial interest.101
100. Cushman Motor Works Co. v. Kelley, 173 Pac. (Okla.) 1042.
101. See Volume on Contracts.
Sec. 101. Goods Not Delivered, Title Passed, Buyer's Right To Obtain Goods Themselves
If the goods are undelivered, but title has passed to the buyer, the buyer not being in default, that is, having paid or
tendered the price, may obtain the goods themselves in an action of replevin.
We saw in the previous section that if the title has not passed, the buyer cannot, except under unusual circumstances,
obtain the goods themselves, but must content himself with damages, but if the title has clearly passed, the goods then
are the buyer's and he may obtain them from the seller as he may obtain his property from any other person who
wrongfully withholds it. This assumes that the buyer is himself not in default in the performance or tender of
performance required of him by the contract.

B. Where Goods Are Delivered Or Tendered To Buyer

(a) Right to refuse acceptance for breach of warranty.

Sec. 102. Goods Tendered To Buyer, Right To Refuse Acceptance For Breach Of Warranty
If the goods which are tendered to the buyer do not comply with the seller's warranties, either express or implied, the
seller may treat the warranty as a condition to his obligation to accept, and may therefore reject the goods.
Provision of the Sales Act. "Where the property in the goods has not passed, the buyer may treat the fulfilment by the
seller of his obligation to furnish goods as described and as warranted, expressly or by implication, in the contract to
sell as a condition of the obli gation of the buyer to perform his promise to accept and pay for the goods." 102
The Sales Act states the law as it has developed by the weight of authority, although by artificial reasoning some
courts had developed the view that if the warranty was express, the buyer must accept and sue upon his warranty. The
general law of contract is that a party to a contract need not accept a defective performance. One is entitled to what he
has bought and ought not to be compelled to receive anything inferior thereto. Whether he may receive it, and still
reserve his right upon the warranty is considered elsewhere.

Sec. 103. Goods Delivered To Buyer, Right To Reject After Trial

This subject has been developed in another section, and is noted here for purposes of completeness. If a buyer must
make a trial or test in order to determine whether the goods are those which he has ordered, the buyer may make such
trial or test in order to avail himself of his rights described in the preceding section.

Sec. 104. Goods Delivered To Buyer, Buyer's Right To Accept And Sue For Breach Of
Warranty
If goods are tendered the buyer which do not comply with the warranty, he may reject, as above shown, or accept and
sue for breach of warranty, express or implied.
Provision of the Sales Act. "In the absence of express or implied agreement by the parties, acceptance of the goods by
the buyer shall not discharge the seller from liability in damages or other legal remedy for breach of any promise or
warranty in the contract to sell or sale. But if, after acceptance of the goods, the buyer fail to give notice to the seller of
the breach of any promise or warranty within a reasonable time after the buyer knows, or ought to know of such
breach, the seller shall not be liable therefor." 103
102. Uniform Sales Act, SEC. II, par. 2.
In some states the doctrine was developed that in case of an implied warranty, the warranty would not survive
acceptance, that is, an acceptance was a waiver of the warranty, although in other states the right to accept the goods
and sue on the warranty was recognized. The Sales Act adopts the majority view that one may accept goods whether
the warranty is express or implied and still sue on the warranty provided he gives notice at the time or within a
reasonable time thereafter that he intends to hold the seller on the warranty. This is the more sensible rule. To held
that a buyer must reject in order to preserve his rights under an implied warranty was not only a hardship frequently
upon him, but in many cases, as for instance, where the goods came from a distance, burdensome upon the seller
himself.
The damages sustained for the breach of the warranty are those which reasonably result therefrom, and may include
damages for personal injuries if such injuries can be said to be the natural and probable result of the breach.104
103. Uniform Sales Act, SEC. 49.
104. Bruce v. Fiss, D. & C. Horse Co., 62 N. Y. Suppl. 96.

Appendix A. Uniform Sales Act

(Note: The following Act was recently drafted by the Commissioners on Uniform State Laws, and recommended for
passage by the different states. It does not seek in any substantial way to change existing law, but purports to gather
into one code the Law of Sales, changing the law in some states in some respects where such states had adopted a
view rejected by the commissioners in their choice between opposing doctrines. It has been adopted so far in Alaska,
Arizona, Connecticut, Illinois, Iowa, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York,
North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, Utah, Wisconsin, Wyoming, Tennessee.)
(For states in which this law is substantially enacted, see page 127, note.)
Formation of the Contract.
Secs.
1. Contracts to sell and sales.
2. Capacity - liabilities for necessaries. 3-4. Formalities of the contract.
5-8. Subject-matter of the contract.
9-10. The price. 11-15. Warranties. 16. Sale by sample.
Transfer of Property and Title.
17-22. Transfer of property as between seller and buyer. 23-40. Transfer of title.
Performance of the Contract. 41-51. Performance of the contract.
Rights of Unpaid Seller Against the Goods.
52. Definition of unpaid seller.
53. Remedies of an unpaid seller. 54-56. Unpaid seller's lien.
Secs.
57-59. Stoppage in transitu.
60. Resale by seller.
61-62. Rescission by the seller.
Actions for Breach of Contract.
63-65. Remedies of the seller. 66-70. Remedies of the buyer.
Interpretation. 71-79. Interpretation, definition, etc

Part I. Formation Of The Contract

Section I. (Contracts to Sell and Sales.) (1) A contract to sell goods is a contract whereby the seller agrees to transfer
the property in goods to the buyer for a consideration called the price.
(2) A sale of goods is an agreement whereby the seller transfers the property in goods to the buyer for a consideration
called the price.
(3) A contract to sell or a sale may be absolute or conditional.
(4) There may be a contract to sell or a sale between one part owner and another.
Section 2. (Capacity - Liabilities for Necessaries.) Capacity to buy and sell is regulated by the general law concerning
capacity to contract, and to transfer and acquire property.
Where necessaries are sold and delivered to an infant, or to a person who by reason of mental incapacity or
drunkenness is incompetent to contract, he must pay a reasonable price therefor.
Necessaries in this section means goods suitable to the condition in life of such infant or other person, and to his actual
requirements at the time of delivery.

Formalities of the Contract.

Section 3. (Form of Contract or Sale.) Subject to the provisions of this act and of any statute in that behalf, a contract to
sell or a sale may be made in writing (either with or without seal), or by word of mouth, or partly in writing and partly by
word of mouth, or may be inferred from the conduct of the parties.
Section 4. (Statute of Frauds.) (1) A contract to sell or a sale of any goods or choses in action of the value of five
hundred dollars or upward105 shall not be enforceable by action unless the buyer shall accept part of the goods or
choses in action so contracted to be sold or sold, and actually receive the same, or give something in earnest to bind
the contract, or in part payment, or unless some note or memorandum in writing of the contract or sale be signed by
the party to be charged or his agent in that behalf.
(2) The provisions of this section apply to every such contract or sale, notwithstanding that the goods may be intended
to be delivered at some future time or may not at the time of such contract or sale be actually made, procured, or
provided, or fit or ready for delivery, or some act may be requisite for the making or completing thereof, or rendering
the same fit for delivery; but if the goods are to be manufactured by the seller especially for the buyer and are not
suitable for sale to others in the ordinary course of the seller's business, the provisions of this section shall not apply.
(3) There is an acceptance of goods within the meaning of this section when the buyer, either before or after delivery of
the goods, expresses by words or conduct his assent to becoming the owner of those specific goods.

Subject-Matter of Contract.
Section 5. (Existing and Future Goods.) (1) The goods which form the subject of a contract to sell may be either
existing goods, owned or possessed by the seller, or goods to be manufactured or acquired by the seller after the
making of the contract to sell, in this act called "future goods."
105. States adopting this Act may change this amount.
(2) There may be a contract to sell goods, the acquisition of which by the seller depends upon a contingency which
may or may not happen.
(3) Where the parties purport to effect a present sale of future goods, the agreement operates as a contract to sell the
goods.
Section 6. (Undivided Shares.) (1) There may be a contract to sell or a sale of an undivided share of goods. If the
parties intend to effect a present sale, the buyer, by force of the agreement, becomes an owner in common with the
owner or owners of the remaining shares.
(2) In the case of fungible goods, there may be a sale of an undivided share of specific mass, though the seller
purports to sell and the buyer to buy a definite number, weight or measure of the goods in the mass, and though the
number, weight or measure of the goods in the mass is undetermined. By such a sale the buyer becomes owner in
common of such a share or the mass as the number, weight or measure bought bears to the number, weight or
measure of the mass. If the mass contains less than the number, weight or measure bought, the buyer becomes the
owner of the whole mass and the seller is bound to make good the deficiency from similar goods unless a contrary
intent appears.
Section 7. (Destruction of Goods Sold.) (1) Where the parties purport to sell specific goods, and the goods without the
knowledge of the seller have wholly perished at the time when the agreement is made, the agreement is void.
(2) Where the parties purport to sell specific goods, and the goods without the knowledge of the seller have perished in
part or have wholly or in a material part so deteriorated, in quality as to be substantially changed in character, the
buyer may at his option treat the sale (a) As avoided, or
(b) As transferring the property in all of the existing goods or in so much thereof as have not deteriorated, and as
binding the buyer to pay the full agreed price if the sale was indivisible or to pay the agreed price for the goods in which
the property passes if the sale was divisible.
Section 8. (Destruction of Goods Contracted to be Sold.) (1) Where there is a contract to sell specific goods, and
subsequently but before the risk passes to the buyer, without any fault on the part of the seller or the buyer, the goods
wholly perish, the contract is thereby avoided.
(2) Where there is a contract to sell specific goods, and subsequently but before the risk passes to the buyer, without
any fault of the seller or the buyer, part of the goods perish or the whole or a material part of the goods so deteriorate
in quality as to be substantially changed in character, the buyer may at his option treat the contract (a) As avoided, or
(b) As binding the seller to transfer the property in all of the existing goods or in so much thereof as have not
deteriorated, and as binding the buyer to pay the full agreed price if the contract was indivisible, or to pay the agreed
price for so much of the goods as the seller, by the buyer's option, is bound to transfer if the contract was divisible.

Part I. Formation Of The Contract. Continued

The Price.
Section 9. (Definition and Ascertainment of Price.) (1) The price may be fixed by the contract, or may be left to be fixed
in such manner as may be agreed, or it may be determined by the course of dealing between the parties.
(2) The price may be made payable in any personal property.
(3) Where transferring or promising to transfer any interest in real estate constitutes the whole or part of the
consideration for transferring or for promising to transfer the property in goods, this act shall not apply.
(4) Where the price is not determined in accordance with the foregoing provisions the buyer must pay a reasonable
price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case.
Section 10. (Sale at a Valuation.) (1) Where there is a contract to sell or a sale of goods at a price or on terms to be
fixed by a third person, and such third person without fault of the seller or the buyer, cannot or does not fix the price or
terms, the contract or the sale is thereby avoided; but if the goods or any part thereof have been delivered to and
appropriated by the buyer he must pay a reasonable price therefor.
(2) Where such third person is prevented from fixing the price or terms by fault of the seller or the buyer, the party not
in fault may have such remedies against the party in fault as are allowed by Parts IV and V of this act

Conditions and Warranties.

Section II. (Effect of Conditions.) (1) Where the obligation of either party to a contract to sell or a sale is subject to any
condition which is not performed, such party may refuse to proceed with the contract or sale or he may waive
performance of the condition. If the other party has promised that the condition should happen or be performed, such
first-mentioned party may also treat the non-performance of the condition as a breach of warranty.
(2) Where the property in the goods has not passed, the buyer may treat the fulfillment by the seller of his obligation to
furnish goods as described and as warranted expressly or by implication in the contract to sell as a condition of the
obligation of the buyer to perform his promise to accept and pay for the goods.
Section 12. (Definition of Express Warranty.) Any affirmation of fact or any promise by the seller relating to the goods is
an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the
goods, and if the buyer purchases the goods relying thereon. No affirmation of the value of the goods nor any
statement purporting to be a statement of the seller's opinion only shall be construed as a warranty.
Section 13. (Implied Warranties of Title.) In a contract to sell or a sale, unless a contrary intention appears, there is (1)
An implied warranty on the part of the seller that in case of a sale he has a right to sell the goods, and that in case of a
contract to sell he will have a right to sell the goods at the time when the property is to pass.
(2) An implied warranty that the buyer shall have and enjoy quiet possession of the goods as against any lawful claims
existing at the time of the sale.
(3) An implied warranty that the goods shall be free at the time of the sale from any charge or incumbrance in favor of
any third person, not declared or known to the buyer before or at the time when the contract or sale is made.
(4) This section shall not, however, be held to render liable a sheriff, auctioneer, mortgagee, or other persons
professing to sell by virtue of authority in fact ar law goods in which a third person has a legal or equitable interest.
Section 14. (Implied Warranty in Sale by Description.) Where there is a contract to sell or a sale of goods by
description, there is an implied warranty that the goods shall correspond with the description and if the contract or sale
be by sample, as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the
goods do not also correspond with the description.
Section 15. (Implied Warranties of Quality.) Subject to the provisions of this act and of any statute in that behalf, there
is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a
contract to sell or a sale, except as follows:
(1) Where the buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods
are required, and it appears that the buyer relies on the seller's skill or judgment (whether he be the grower or
manufacturer or not), there is an implied warranty that the goods shall be reasonably fit for such purpose.
(2) Where the goods are bought by description from a seller who deals in goods of that description (whether he be the
grower or manufacturer or not), there is an implied warranty that the goods shall be of merchantable quality.
(3) If the buyer has examined the goods, there is no implied warranty as regards defects which such examination ought
to have revealed.
(4) In the case of a contract to sell or a sale of a specified article under its patent or other trade name, there is no
implied warranty as to its fitness for any particular purpose.
(5) An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of
trade.
(6) An express warranty or condition does not negative a warranty or condition implied under this act unless
inconsistent therewith.

Sale by Sample.
Section 16. (Implied Warranties in Sale by Sample.) In the case of a contract to sell or a sale by sample:
(a) There is an implied warranty that the bulk shall correspond with the sample in quality.
(b) There is an implied warranty that the buyer shall have a reasonable opportunity of comparing the bulk with the
sample, except so far as otherwise provided in section 47 (3).
(c) If the seller is a dealer in goods of that kind, there is an implied warranty that the goods shall be free from any
defect rendering them unmerchantable which would not be apparent on reasonable examination of the sample.

Part II. Transfer Of Property And Title. Transfer Of Property As Between Seller And Buyer
Section 17. (No Property Passes until Goods are Ascertained.) Where there is a contract to sell unascertained goods
no property in the goods is transferred to the buyer unless and until the goods are ascertained, but property in an
undivided share of ascertained goods may be transferred as provided in section 6.
Section 18. (Property in Specific Goods Passes When Parties So Intend.) (1) Where there is a contract to sell specific
or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend
it to be transferred.
(2) For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the
conduct of the parties, usages of trade and the circumstances of the case.
Section 19. (Rules for Ascertaining Intention.) Unless a different intention appears, the following are rules for
ascertaining the intention of the parties, as to the time at which the property in the goods is to pass to the buyer.
Rule 1. Where there is an unconditional contract to sell specific goods, in a deliverable state, the property in the goods
passes to the buyer when the contract is made, and it is immaterial whether the time of payment, or the time of
delivery, or both, be postponed.
Rule 2. Where there is a contract to sell specific goods and the seller is bound to do something to the goods, for the
purpose of putting them into a deliverable state, the property does not pass until such thing be done.
Rule 3. (1) When the goods are delivered to the buyer "on sale or return," or on other terms indicating an intention to
make a present sale, but to give the buyer an option to return the goods instead of paying the price, the property
passes to the buyer on delivery, but he may revest the property in the seller by returning or tendering the goods within
the time fixed in the contract, or, if no time has been fixed, within a reasonable time.
(2) When goods are delivered to the buyer on approval or on trial or on satisfaction, or other similar terms, the property
therein passes to the buyer (a) When he signifies his approval or acceptance to the seller or does any other act
adopting the transaction.
(b) If he does not signify his approval or acceptance to the seller but retains the goods without giving notice of
rejection, then if a time has been fixed for the return of the goods, on the expiration of such time, and, if no time has
been fixed, on the expiration of a reasonable time. What is a reasonable time is a question of fact
Rule 4. (1) Where there is a contract to sell unascertained or future goods by description, and goods of that description
and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the
buyer, or by the buyer with the assent of the seller, the property in the goods thereupon passes to the buyer. Such
assent may be expressed or implied, and may be given either before or after the appropriation is made.
(2) Where, in pursuance of a contract to sell, the seller delivers the goods to the buyer, or to a carrier or other bailee
(whether named by the buyer or not) for the purpose of transmission to or holding for the buyer, he is presumed to
have unconditionally appropriated the goods to the contract, except in cases provided for in the next rule and in section
20. This presumption is applicable, although by the terms of the contract, the buyer is to pay the price before receiving
delivery of the goods, and the goods are marked with the words "collect on delivery" or their equivalents.
Rule 5. If the contract to sell requires the seller to deliver the goods to the buyer, or at a particular place, or to pay the
freight or cost of transportation to the buyer, or to a particular place, the property does not pass until the goods have
been delivered to the buyer or reached the place agreed upon.
Section 20. (Reservation of Right of Possession or Property When Goods Are Shipped.) (1) Where there is a contract
to sell specific goods, or where goods are subsequently appropriated to the contract, the seller may, by the terms of
the contract or appropriation, reserve the right of possession or property in the goods until certain conditions have been
fulfilled. The right of possession or property may be thus reserved notwithstanding the delivery of the goods to the
buyer or to a carrier or other bailee for the purpose of transmission to the buyer.
(2) Where goods are shipped, and by the bill of lading the goods are deliverable to the seller or his agent, or to the
order of the seller or his agent, the seller thereby reserves the property in the goods. But if, except for the form of the
bill of lading, the property would have passed to the buyer on shipment of the goods, the seller's property in the goods
shall be deemed to be only for the purpose of securing performance by the buyer of his obligations under the contract
(3) Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the buyer or of his
agent, but possession of the bill of lading is retained by the seller or his agent, the seller thereby reserves a right to the
possession of the goods as against the buyer.
(4) Where the seller of goods draws on the buyer for the price and transmits the bill of exchange and bill of lading
together to the buyer to secure acceptance or payment of the bill of exchange, the buyer is bound to return the bill of
lading if he does not honor the bill of exchange, and if he wrongfully retains the bill of lading he acquires no added right
thereby. If, however, the bill of lading provides that the goods are deliverable to the buyer or to the order of the buyer,
or is indorsed in blank, or to the buyer by the consignees named therein, one who purchases in good faith, for value,
the bill of lading, or goods from the buyer will obtain the property in the goods, although the bill of exchange has not
been honored, provided that such purchaser has received delivery of the bill of lading indorsed by the consignee
named therein, or of the goods, without notice of the facts making the transfer wrongful.
Section 21. (Sale by Auction.) In the case of sale by auction (1) Where goods are put up for sale by auction in lots,
each lot is the subject of a separate contract of sale.
(2) A sale by auction is complete when the auctioneer announces its completion by the fall of the hammer, or in other
customary manner. Until such announcement is made, any bidder may retract his bid; and the auctioneer may
withdraw the goods from sale unless the auction has been announced to be without reserve.
(3) A right to bid may be reserved expressly by or on behalf of the seller.
(4) Where notice has not been given that a sale by auction is subject to a right to bid on behalf of the seller, it shall not
be lawful for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf, or for the
auctioneer to employ or induce any person to bid at such sale on behalf of the seller or knowingly take any bid from the
seller or any person employed by him. Any sale contravening this rule may be treated as fraudulent by the buyer.
Section 22. (Risk of Loss.) Unless otherwise agreed, the goods remain at the seller's risk until the property therein is
transferred to the buyer, but when the property therein is transferred to the buyer the goods are at the buyer's risk
whether delivery has been made or not, except that (a) Where the delivery of the goods has been made to the buyer,
or to a bailee for the buyer, in pursuance of the contract and the property in the goods has been retained by the seller
merely to secure performance by the buyer of his obligation under the contract, the goods are at the buyer's risk from
the time of such delivery.
(b) Where delivery has been delayed through the fault of either buyer or seller the goods are at the risk of the party in
fault as regards any loss which might not have occurred but for such fault.

Transfer Of Title
Section 23. (Sale by a Person Not the Owner.) (1) Subject to the provisions of this act, where goods are sold by a
person who is not the owner thereof, and who does not sell them under the authority or with the consent of the owner,
the buyer acquires no better title to the goods than the seller had, unless the owner of the goods is by his conduct
precluded from denying the seller's authority to sell.
(2) Nothing in this act, however, shall affect (a) The provisions of any factors' acts, recording acts, or any enactment
enabling the apparent owner of goods to dispose of them as if he were the true owner thereof.
(b) The validity of any contract to sell or sale under any special common law or statutory power of sale or under the
order of a court of competent jurisdiction.
Section 24. (Sale by One Having a Voidable Title.) Where the seller of goods has a voidable title thereto, but his title
has not been avoided at the time of the sale, the buyer acquires a good title to the goods, provided he buys them in
good faith, for value, and without notice of the seller's defect of title.
Section 25. (Sale by Seller in Possession of Goods Already Sold.) Where a person having sold goods continues in
possession of the goods, or of negotiable documents of title to the goods, the delivery or transfer by that person, or by
an agent acting for him, of the goods or documents of title under any sale, pledge, or other disposition thereof, to any
person receiving and paying value for the same in good faith and without notice of the previous sale, shall have the
same effect as if the person making the delivery or transfer were expressly authorized by the owner of the goods to
make the same.
Section 26. (Creditors' Rights Against Sold Goods in Seller's Possession.) Where a person having sold goods
continues in possession of the goods, or of negotiable documents of title to the goods, and such retention of
possession is fraudulent in fact or is deemed fraudulent under any rule of law, a creditor or creditors of the seller may
treat the sale as void.
Section 27. (Definition of Negotiable Document of Title.) A document of title in which it is stated that the goods referred
to therein will be delivered to the bearer, or to the order of any person named in such document is a negotiable
document of title.
Section 28. (Negotiation of Negotiable Documents by Delivery.) A negotiable document of title may be negotiated by
delivery:
(a) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to
deliver the goods to the bearer, or
(b) Where by the terms of the document the carrier, warehouseman or other bailee issuing the same undertakes to
deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the document has
indorsed it in blank or to bearer.
Where by the terms of a negotiable document of title the goods are deliverable to bearer or where a negotiable
document of title has been indorsed in blank or to bearer, any holder may indorse the same to himself or to any other
person, and in such case the document shall thereafter be negotiated only by the indorsement of such indorsee.
Section 29. (Negotiation of Negotiable Documents by Indorsement.) A negotiable document of title may be negotiated
by the indorsement of the person to whose order the goods are by the terms of the document deliverable. Such
indorsement may be in blank, to bearer or to a specified person. If indorsed to a specified person, it may be again
negotiated by the indorsement of such person in blank, to bearer or to another specified person. Subsequent
negotiation may be made in like manner.
Section 30. (Negotiable Documents of Title Marked "Not Negotiable.") If a document of title which contains an
undertaking by a carrier, warehouseman or other bailee to deliver the goods to the bearer, to a specified person or
order, or to the order of a specified person, or which contains words of like import, has placed upon it the words "Not
negotiable," "non-negotiable" or the like, such a document may nevertheless be negotiated by the holder and is a
negotiable document of title within the meaning of this act. But nothing in this act contained shall be construed as
limiting or defining the effect upon the obligation of the carrier, warehouseman, or other bailee issuing a document of
title of placing thereon the words "non-negotiable," or the like.
Section 31. (Transfer of Non-Negotiable Documents.) A document of title which is not in such form that it can be
negotiated by delivery may be transferred by the holder by delivery to a purchaser or donee. A non-negotiable
document cannot be negotiated and the indorsement of such a document gives the transferee no additional right.
Section 32. (Who May Negotiate a Document.) A negotiable document of title may be negotiated:
(a) By the owner thereof, or
(b) By any person to whom the possession or custody of the document has been entrusted by the owner, if, by the
terms of the document the bailee issuing the document undertakes to deliver the goods to the order of the person in
whom the possession or custody of the document has been entrusted, or if at the time of such entrusting the document
is in such form that it may be negotiated by delivery.
Section 33. (Rights of Person to Whom Document Has Been Negotiated.) A person to whom a negotiable document of
title has been duly negotiated acquires thereby (a) Such title to the goods as the person negotiating the document to
him had or had ability to convey to a purchaser in good faith for value and also such title to the goods as the person to
whose order the goods were to be delivered by the terms of the document had or had ability to convey to a purchaser
in good faith for value, and
(b) The direct obligation of the bailee issuing the document to hold possession of the goods for him according to the
terms of the document as fully as if such bailee had contracted directly with him.
Section 34. (Rights of Person to Whom Document Has Been Transferred.) A person to whom a document of title has
been transferred, but not negotiated, acquires thereby, as against the transferor, the title to the goods, subject to the
terms of any agreement with the transferor.
If the document is non-negotiable, such person also acquires the right to notify the bailee who issued the document of
the transfer thereof, and thereby acquire the direct obligation of such bailee to hold possession of the goods for him
according to the terms of the document.
Prior to the notification of such bailee by the transferor or transferee of a non-negotiable document of title the title of the
transferee to the goods and the right to acquire the obligation of such bailee may be defeated by the levy of an
attachment or execution upon the goods by a creditor of the transferor, or by a notification to such bailee by the
transferor or a subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor.
Section 35. (Transfer of Negotiable Document Without Indorsement.) Where a negotiable document of title is
transferred for value by delivery, and the indorsement of the transferor is essential for negotiation, the transferee
acquires a right against the transferor to compel him to indorse the document unless a contrary intention appears. The
negotiation shall take effect as of the time when the indorsement is actually made.
Section 36. (Warranties on Sale of Document.) A person who for value negotiates or transfers a document of title by
indorsement or delivery, including one who assigns for value a claim secured by a document of title unless a contrary
intention appears, warrants:
(a) That the document is genuine.
(b) That he has a legal right to negotiate or transfer it.
(c) That he has knowledge of no fact which would impair the validity or worth of the document, and
(d) That he has a right to transfer the title to the goods, and that the goods are merchantable or fit for a particular
purpose, whenever such warranties would have been implied if the contract of the parties had been to transfer without
a document of title the goods represented thereby.
Section 37. (Indorser not a Guarantor.) The indorsement or a document of title shall not make the indorser liable for
any failure on the part of the bailee who issued the document or previous indorsers thereof to fulfill their respective
obligation.
Section 38. (When Negotiation Not Impaired by Fraud, Mistake or Duress.) The validity of the negotiation of a
negotiable document of title is not impaired by the fact that the negotiation was a breach of duty on the part of the
person making the negotiation, or by the fact that the owner of the document was induced by fraud, mistake or duress
to entrust the possession or custody thereof to such person, if the person to whom the document was negotiated or a
person to whom the document was subsequently negotiated paid value therefor, without notice of the breach of duty,
or fraud, mistake or duress.
Section 39. (Attachment or Levy Upon Goods for Which a Negotiable Document Has Been Issued.) If goods are
delivered to a bailee by the owner or by a person whose act in conveying the title to them to a purchaser in good faith
for value would bind the owner and a negotiable document of title is issued for them they cannot thereafter, while in the
possession of such bailee, be attached by garnishment or otherwise or be levied upon under an execution unless the
document be first surrendered to the bailee or its negotiation enjoined. The bailee shall in no case be compelled to
deliver up the actual possession of the goods until the document is surrendered to him or impounded by the court.
Section 40. (Creditors' Remedies to Reach Negotiable Documents.) A creditor whose debtor is the owner of a
negotiable document of title shall be entitled to such aid from courts of appropriate jurisdiction by injunction and
otherwise in attaching such documents or in satisfying the claim by means thereof as is allowed at law or in equity in
regard to property which cannot readily be attached or levied upon by ordinary process.

Part III. Performance Of The Contract

Section 41. (Seller Must Deliver and Buyer Accept Goods.) It is the duty of the seller to deliver the goods, and of the
buyer to accept and pay for them, in accordance with the terms of the contract to sell or sale.
Section 42. (Delivery and Payment Are Concurrent Conditions.) Unless otherwise agreed, delivery of the goods and
payment of the price are concurrent conditions; that is to say, the seller must be ready and willing to give possession of
the goods to the buyer in exchange for the price and the buyer must be ready and willing to pay the price in exchange
for the possession of the goods.
Section 43. (Place, Time and Manner of Delivery.) (1) Whether it is for the buyer to take possession of the goods or for
the seller to send them to the buyer is a question depending in each case on the contract, express or implied, between
the parties. Apart from any such contract, express or implied, or usage of trade to the contrary, the place of delivery is
the seller's place of business if he have one, and if not his residence, but in case of a contract to sell or a sale of
specific goods, which to the knowledge of the parties when the contract or the sale was made were in some other
place, then that place is the place of delivery.
(2) Where by a contract to sell or a sale the seller is bound to send the goods to the buyer, but no time for sending
them is fixed, the seller is bound to send them within a reasonable time.
(3) Where the goods at the time of sale are in the possession of a third person, the seller has not fulfilled his obligation
to deliver to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on the
buyer's behalf; but as against all others than the seller the buyer shall be regarded as having received delivery from the
time when such third person first has notice of the sale. Nothing in this section, however, shall affect the operation of
the issue or transfer of any document of title to goods.
(4) Demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is a
reasonable hour is a question of fact.
(5) Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state must be borne
by the seller.
Section 44. (Delivery of Wrong Quantity.) (1) Where the seller delivers to the buyer a quantity of goods less than he
contracted to sell, the buyer may reject them, but if the buyer accepts or retains the goods so delivered, knowing that
the seller is not going to perform the contract in full, he must pay for them at the contract rate. If, however, the buyer
has used or disposed of the goods delivered before he knows that the seller is going to perform his contract in full, the
buyer shall not be liable for more than the fair value to him of the goods so received.
(2) Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may accept
the goods included in the contract and reject the rest, or he may reject the whole. If the buyer accepts the whole of the
goods so delivered he must pay for them at the contract rate.
(3) Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not
included in the contract, the buyer may accept the goods which are in accordance with the contract and reject the rest,
or he may reject the whole.
(4) The provisions of this section are subject to any usage of trade, special agreement, or course of dealing between
the parties.
Section 45. (Delivery in Installments.) (1) Unless otherwise agreed, the buyer of the goods is not bound to accept
delivery thereof by installments.
(2) Where there is a contract to sell goods to be delivered by stated installments, which are to be separately paid for,
and the seller makes defective deliveries in respect of one or more installments, or the buyer neglects or refuses to
take delivery of or pay for one or more installments, it depends in each case on the terms of the contract and the
circumstances of the case whether the breach of contract is so material as to justify the injured party in refusing to
proceed further and suing for damages for breach of the entire contract, or whether the breach is severable, giving rise
to a claim for compensation, but not to a right to treat the whole contract as broken.
Section 46. (Delivery to a Carrier on Behalf of the Buyer.) (1) Where, in pursuance of a contract to sell or a sale, the
seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the
buyer or not, for the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, except
in cases provided for in section 19, Rule 5, or unless a contrary intent appears.
(2) Unless otherwise authorized by the buyer, the seller must make such contract with the carrier on behalf of the buyer
as may be reasonable, having regard to the nature of the goods and the other circumstances of the case. If the seller
omit so to do, and the goods are lost or damaged in course of transit, the buyer may decline to treat the delivery to the
carrier as a delivery to himself, or may hold the seller responsible in damages.
(3) Unless otherwise agreed, where goods are sent by the seller to the buyer under circumstances in which the seller
knows or ought to know that it is usual to insure, the seller must give such notice to the buyer as may enable him to
insure them during their transit, and, if the seller fails to do so, the goods shall be deemed to be at his risk during such
transit.
Section 47. (Right to Examine the Goods.) (1) Where goods are delivered to the buyer, which foe has not previously
examined, he is not deemed to accept them unless and until he has had a reasonable opportunity of examining them
for the purpose of ascertaining whether they are in conformity with the contract.
(2) Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford
the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in
conformity with the contract.
(3) Where goods are delivered to a carrier by the seller, in accordance with an order from or agreement with the buyer,
upon the terms that the goods shall not be delivered by the carrier to the buyer until he has paid the price, whether
such terms are indicated by marking the goods with the words "collect on delivery," or otherwise, the buyer is not
entitled to examine the goods before payment of the price in the absence of agreement permitting such examination.
Section 48. (What Constitutes Acceptance.) The buyer is deemed to have accepted the goods when he intimates to
the seller that he has accepted them, or when the goods have been delivered to him, and he does any act in relation to
them which is inconsistent with the ownership of the seller, or when, after the lapse of a reasonable time, he retains the
goods intimating to the seller that he has rejected them.
Section 49. (Acceptance Does Not Bar Action for Damages.) In the absence of express or implied agreement of the
parties, acceptance of the goods by the buyer shall not discharge the seller from liability in damages or other legal
remedy for breach of any promise or warranty in the contract to sell or the sale. But, if, after acceptance of the goods,
the buyer fail to give notice to the seller of the breach of any promise or warranty within a reasonable time after the
buyer knows, or ought to know of such breach, the seller shall not be liable therefor.
Section 50. (Buyer Is Not Bound to Return Goods Wrongly Delivered.) Unless otherwise agreed, when goods are
delivered to the buyer, and he refuses to accept them, having the right so to do, he is not bound to return them to the
seller, but it is sufficient if he notifies the seller that he refuses to accept them.
Section 51. (Buyer's Liability for Failing to Accept Delivery.) When the seller is ready and willing to deliver the goods,
and requests the buyer to take delivery, and the buyer does not within a reasonable time after such request take
delivery of the goods, he is liable to the seller for any loss occasioned by his neglect or refusal to take delivery, and
also for a reasonable charge for the care and custody of the goods. If the neglect or refusal of the buyer to take
delivery amounts to a repudiation or breach of the entire contract, the seller shall have the rights against the goods and
on the contract hereinafter provided in favor of the seller when the buyer is in default.

Part IV. Rights Of Unpaid Seller Against The Goods

Section 52. (Definition of Unpaid Seller.) (1) The seller of goods is deemed to be an unpaid seller within the meaning of
the act (a) When the whole of the price has not been paid or tendered.
(b) When a bill of exchange or other negotiable instrument has been received as conditional payment, and the
condition on which it was received has been broken by reason of the dishonor of the instrument, the insolvency of the
buyer, or otherwise.
(2) In this part of this act the term "seller" includes an agent of the seller to whom the bill of lading has been indorsed,
or a consigner or agent who has himself paid, or is directly responsible for, the price, or any other person who is in the
position of a seller.
Section 53. (Remedies of an Unpaid Seller.) (1) Subject to the provisions of this act, notwithstanding that the property
in the goods may have passed to the buyer, the unpaid seller of the goods, as such, has (a) A lien on the goods or
right to retain them for the price while he is in possession of them;
(b) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has parted with the
possession of them;
(c) A right of resale as limited by this act;
(d) A right to rescind the sale as limited by this act.
(2) Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a
right of withholding delivery similar to and coextensive with his rights of lien and stoppage "in transitu" where the
property has passed to the buyer.

Unpaid Seller's Lien

Section 54. (When Right of Lien May Be Exercised.) (1) Subject to the provisions of this act, the unpaid seller of goods
who is in possession of them is entitled to retain possession of them until payment or tender of the price in the
following cases, namely:
(a) Where the goods have been sold without any stipulation as to credit;
(b) Where the goods have been sold on credit, but the term of credit has expired;
(c) Where the buyer becomes insolvent.
(2) The seller may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for
the buyer.
Section 55. (Lien After Part Delivery.) Where an unpaid seller has made part delivery of the goods, he may exercise his
right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an intent
to waive the lien or right of retention.
Section 56. (When Lien Is Lost.) (1) The unpaid seller of goods loses his lien thereon (a) When he delivers the goods
to a carrier or other bailee for the purpose of transmission to the buyer without reserving the property in the goods or
the right to the possession thereof;
(b) When the buyer or his agent lawfully obtains possession of the goods;
(c) By waiver thereof.
(2) The unpaid seller of goods, having a lien thereon, does not lose his Hen by reason only that he has obtained
judgment or decree for the price of the goods.

Stoppage In Transitu
Section 57. (Seller May Stop Goods on Buyer's Insolvency.) Subject to the provisions of this act, when the buyer of
goods is or becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right of
stopping them in transitu, that is to say, he may resume possession of the goods at any time while they are in transit,
and he will then become entitled to the same rights in regard to the goods as he would have had if he had never parted
with the possession.
Section 58. (When Goods Are in Transit.) (1) Goods are in transit within the meaning of section 57 (a) From the time
when they are delivered to a carrier by land or water, or other bailee for the purpose of transmission to the buyer, until
the buyer, or his agent in that behalf, takes delivery of them from such carrier or other bailee;
(b) If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them, even if the
seller has refused to receive them back.
(2) Goods are no longer in transit within the meaning of section 57 (a) If the buyer, or his agent in that behalf, obtains
delivery of the goods before their arrival at the appointed destination;
(b) If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer
or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his
agent; and it is immaterial that a further destination for the goods may have been indicated by the buyer;
(c) If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf.
(3) If the goods are delivered to a ship chartered by the buyer, it is a question depending on the circumstances of the
particular case, whether they are in the possession of the master as a carrier or as agent of the buyer.
(4) If part delivery of the goods has been made to the buyer, or his agent in that behalf, the remainder of the goods
may be stopped in transitu, unless such part delivery has been made under such circumstances as to show an
agreement with the buyer to give up possession of the whole of the goods.
Section 59. (Ways of Exercising the Right to Stop.) (1) The unpaid seller may exercise his right of stoppage in transitu
either by obtaining actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose
possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his
principal. In the latter case the notice to be effectual, must be given at such time and under such circumstances that
the principal, by the exercise of reasonable diligence, may prevent a delivery to the buyer.
(2) When notice of stoppage in transitu is given by the seller to the carrier, or other bailee in possession of the goods,
he must redeliver the goods to, or according to the directions of, the seller. The expenses of such redelivery must be
borne by the seller. If, however, a negotiable document of title representing the goods has been issued by the carrier or
other bailee, he shall not be obliged to deliver or be justified in delivering the goods to the seller unless such document
is first surrendered for cancellation.

Resale By The Seller

Section 60. (When and How Resale May Be Made.) (1) Where the goods are of a perishable nature, or where the
seller expressly reserves the right of resale in case the buyer should make default, or where the buyer has been in
default in the payment of the price an unreasonable time, an unpaid seller having a right of lien or having stopped the
goods in transitu may resell the goods. He shall not thereafter be liable to the original buyer upon the contract to sell or
the sale or for any profit made by such resale, but may recover from the buyer damages for any loss occasioned by the
breach of the contract or the sale.
(2) Where a resale is made, as authorized in this section, the buyer acquires a good title as against the original buyer.
(3) It is not essential to the validity of a resale that notice of an intention to resell the goods be given by the seller to the
original buyer. But where the right to resell is not based on the perishable nature of the goods or upon an express
provision of the contract or the sale, the giving or failure to give such notice shall be relevant in any issue involving the
question whether the buyer had been in default an unreasonable time before the resale was made.
(4) It is not essential to the validity of a resale that notice of the time and place of such resale should be given by the
seller to the original buyer.
(5) The seller is bound to exercise reasonable care and judgment in making a resale, and subject to this requirement
may make a resale either by public or private sale.

Rescission By The Seller

Section 61. (When and How the Seller May Rescind the Sale.) (1) An unpaid seller having a right of lien or having
stopped the goods in transitu, may rescind the transfer of title and resume the property in the goods, where he
expressly reserved the right to do so in case the buyer should make default, or where the buyer has been in default in
the payment of the price an unreasonable time. The seller shall not thereafter be liable to the buyer upon the contract
to sell or the sale, but may recover from the buyer damages for any loss occasioned by the breach of the contract or
the sale.
(2) The transfer of title shall not be held to have been rescinded by an unpaid seller until he has manifested by notice
to the buyer or by some other overt act an intention to rescind. It is not necessary that such overt act should be
communicated to the buyer, but the giving or failing to give notice to the buyer of the intention to rescind shall be
relevant in any issue involving the question whether the buyer has been in default an unreasonable time before the
right of rescission was asserted.
Section 62. (Effect of Sale of Goods Subject to Lien or Stoppage in Transitu.) Subject to the provisions of this act, the
unpaid seller's right of lien or stoppage in transitu is not affected by any sale, or other disposition of the goods which
the buyer may have made, unless the seller has assented thereto.
If, however, a negotiable document of title has been issued for goods, no seller's lien or right of stoppage in transitu
shall defeat the right of any purchaser for value in good faith to whom such document has been negotiated, whether
such negotiation be prior or subsequent to the notification to the. carrier or other bailee who issued such document, of
the seller's claim to a lien or right of stoppage in transitu:

Part V. Actions For Breach Of The Contract. Remedies Of The Seller

Section 63. (Action for the Price.) (1) Where, under a contract to sell or a sale, the property of the goods has passed to
the buyer, and the buyer neglects or refuses to pay for the goods according to the terms of the contract or the sale, the
seller may maintain an action against him for the price of the goods.
(2) Where, under a contract to sell or a sale, the price is payable on a day certain, irrespective of delivery or of transfer
of title and the buyer wrongfully neglects or refuses to pay such price, the seller may maintain an action for the price,
although the properly in the goods has not passed, and the goods have not been appropriated to the contract But it
shall be a defense to such an action that the seller at any time before judgment in such action has manifested an
inability to perform the contract or the sale on his part or an intention not to perform it.
(3) Although the property in the goods has not passed, if they cannot readily be resold for a reasonable price, and if the
provisions of section 64 (4) are not applicable, the seller may offer to deliver the goods to the buyer, and, if the buyer
refuses to receive them, may notify the buyer that the goods are thereafter held by the seller as bailee for the buyer.
Thereafter the seller may treat the goods as the buyer's and may maintain an action for the price.
Section 64. (Action for Damages for Non-Acceptance of the Goods.) (1) Where the buyer wrongfully neglects or
refuses to accept and pay for the goods, the seller may maintain an action against him for damages for non-
acceptance.
(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events,
from the buyer's breach of contract.
(3) Where there is an available market for the goods in question, the measure of damages is, in the absence of special
circumstances, showing proximate damage of a greater amount, the difference between the contract price and the
market or current price at the time or times when the goods ought to have been accepted, or, if no time was fixed for
acceptance, then at the time of the refusal to accept.
(4) If, while labor or expense of material amount are necessary on the part of the seller to enable him to fulfill his
obligations under the contract to sell or the sale, the buyer repudiates the contract or the sale, or notifies the seller to
proceed no further therewith, the buyer shall be liable to the seller for no greater damages than the seller would have
suffered if he did nothing towards carrying out the contract or the sale after receiving notice of the buyer's repudiation
or countermand. The profit the seller would have made if the contract or the sale had been fully performed shall be
considered in estimating such damages.
Section 65. (When Seller May Rescind Contract or Sale.) Where the goods have not been delivered to the buyer, and
the buyer has repudiated the contract to sell or sale, or has manifested his inability to perform his obligations
thereunder, or has committed a material breach thereof, the seller may totally rescind the contract or the sale by giving
notice of his election so to do to the buyer.

Remedies Of The Buyer

Section 66. (Action for Converting or Detaining Goods.) Where the property in the goods has passed to the buyer and
the seller wrongfully neglects or refuses to deliver the goods, the buyer may maintain any action allowed by law to the
owner of goods of similar kind when wrongfully converted or withheld.
Section 67. (Action for Failing to Deliver Goods.) (1) Where the property in the goods has not passed to the buyer, and
the seller wrongfully neglects or refuses to deliver the goods, the buyer may maintain an action against the seller for
damages for non-delivery.
(2) The measure of damages is the loss directly and naturally resulting in the ordinary course of events, from the
seller's breach of contract.
(3) Where there is an available market for the goods in question, the measure of damages, in the absence of special
circumstances showing proximate damages of a greater amount, is the difference between the contract price and the
market or current price of the goods at the time or times when they ought to have been delivered, or, if no time was
fixed, then at the time of the refusal to deliver.
Section 68. (Specific Performance.) Where the seller has broken a contract to deliver specific or ascertained goods, a
court having the powers of a court of equity may, if it thinks fit, on the application of the buyer, by its judgment or
decree direct that the contract shall be performed specifically, without giving the seller the option of retaining the goods
on payment of damages. The judgment or decree may be unconditional, or upon such terms and conditions as to
damages, payment of the price and otherwise, as to the court may seem just.
Section 69. (Remedies for Breach of Warranty.) (1) Where there is a breach of warranty by the seller, the buyer may,
at his election (a) Accept or keep the goods and set up against the seller, the breach of warranty by way of recoupment
in diminution or extinction of the price;
(b) Accept or keep the goods and maintain an action against the seller for damages for the breach of warranty;
(c) Refuse to accept the goods, if the property therein has not passed, and maintain an action against the seller for
damages for the breach of warranty;
(d) Rescind the contract to sell or the sale and refuse to receive the goods, or if the goods have already been received,
return them or offer to return them to the seller and recover the price or any part thereof which has been paid.
(2) When the buyer has claimed and been granted a remedy in any one of these ways, no other remedy can thereafter
be granted.
(3) Where the goods have been delivered to the buyer, he cannot rescind the sale if he knew of the breach of warranty
when he accepted the goods, or if he fails to notify the seller within a reasonable time of the election to rescind, or if he
fails to return or to offer to return the goods to the seller in substantially as good condition as they were in at the time
the property was transferred to the buyer. But if deterioration or injury of the goods is due to the breach of warranty,
such deterioration or injury shall not prevent the buyer from returning and offering to return the goods to the seller and
rescinding the sale.
(4) Where the buyer is entitled to rescind the sale and elects to do so, the buyer shall cease to be liable for the price
upon returning or offering to return the goods. If the price or any part thereof has already been paid, the seller shall be
liable to repay so much thereof as has been paid, concurrently with the return of the goods, or immediately after an
offer to return the goods in exchange for repayment of the price.
(5) Where the buyer is entitled to rescind the sale and elects to do so, if the seller refuses to accept an offer of the
buyer to return the goods, the buyer shall thereafter be deemed to hold the goods as bailee for the seller, but subject to
a lien to secure the repayment of any portion of the price which has been paid, and with the remedies for the
enforcement of such lien allowed to an unpaid seller by section 53.
(6) The measure of damages for breach of warranty is the loss directly and naturally resulting, in the ordinary course of
events, from the breach of warranty.
(7) In the case of breach of warranty of quality, such loss, in the absence of special circumstances showing proximate
damage of a greater amount, is the difference between the value of the goods at the time of delivery to the buyer and
the value they would have had if they had answered to the warranty.
Section 70. (Interest and Special Damages.) Nothing in this act shall affect the right of the buyer or the seller to recover
interest or special damages in any case where by law interest or special damages may be recoverable, or to recover
money paid where the consideration for the payment of it has failed.

Part VI. Interpretation

Section 71. (Variation of Implied Obligations.) Where any right, duty or liability would arise under a contract to sell or a
sale by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the
parties, or by custom, if the custom be such as to bind both parties to the contract or the sale.
Section 72. (Rights May Be Enforced by Action.) Where any right, duty or liability is declared by this act, unless
otherwise by this act provided, it may be enforced by action.
Section 73. (Rule for Cases Not Provided for by this Act.) In any case not provided for in this act, the rules of law and
equity, including the law merchant, and in particular the rules relating to the law of principal and agent and to the effect
of fraud, misrepresentation, duress or coercion, mistake, bankruptcy, or other invalidating cause, shall continue to
apply to contracts to sell and to sales of goods.
Section 74. (Interpretation Shall Give Effect to Purpose of Uniformity.) This act shall be so interpreted and construed, if
possible, as to effectuate its general purpose to make uniform the laws of those states which enact it.
Section 75. (Provisions not Applicable to Mortgages.) The provisions of this act relating to contracts to sell and to sales
do not apply, unless so stated, to any transaction in the form of a contract to sell or a sale which is intended to operate
by way of mortgage, pledge, charge, or other security.
Section 76. (Definitions.) (1) In this act, unless the context or subject-matter requires "Action" includes counterclaim,
set-off and suit in equity.
"Buyer" means a person who buys or agrees to buy goods or any legal successor in interest of such person.
"Defendant" includes a plaintiff against whom a right of set-off or counterclaim is asserted.
"Delivery" means voluntary transfer of possession from one person to another.
"Divisible contract to sell or sale" means a contract to sell or a sale in which by its terms the price for a portion or
portions of the goods less than the whole is fixed or ascertainable by computation.
"Document of title to goods" includes any bill of lading, dock warrant, warehouse receipt or order for the delivery of
goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the
possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer
or receive, either by indorsement or by delivery, goods represented by such document.
"Fault" means wrongful act or default
"Fungible goods" means goods of which any unit is from its nature or by mercantile usage treated as the equivalent of
any other unit
"Future goods" means goods to be manufactured or acquired by the seller after the making of the contract of sale.
"Goods" include all chattels personal other than things in action and money. The term includes emblements, industrial
growing crops, and things attached to or forming part of the land which are agreed to be severed before sale or under
the contract of sale.
"Order" in sections of this act relating to documents of title means an order by indorsement on the document
"Person" includes a corporation or partnership or two or more persons having a joint or common interest.
"Plaintiff" includes defendant asserting a right of set-off or counterclaim.
"Property" means the general property in goods, and not merely a special property.
"Purchaser" includes mortgagee and pledgee.
"Purchases" includes taking as a mortgage or as a pledgee.
"Quality of Goods" includes their state or condition.
"Sale" includes a bargain and sale as well as a sale and delivery.
"Seller" means a person who sells or agrees to sell goods, or any legal successor in interest of such person.
"Specific Goods" means goods identified and agreed upon at the time a contract to sell or a sale is made.
"Value" is any consideration sufficient to support a simple contract. An antecedent or pre-existing claim, whether for
money or not, constitutes value where goods or documents of titles are taken either in satisfaction thereof or as
security therefor.
(2) A thing is done "in good faith" within the meaning of this act when it is in act done honestly, whether it be done
negligently or not.
(3) A person is insolvent within the meaning of this act who either has ceased to pay his debts in the ordinary course of
business or cannot pay his debts as they become due, whether he has committed an act of bankruptcy or not, and
whether he is solvent within the meaning of the federal bankruptcy law or not.
(4) Goods are in a "deliverable state" within the meaning of this act when they are in such a state that the buyer would,
under the contract, be bound to take delivery of them.
Section 77. (Inconsistent Legislation Repealed.) All acts or parts of acts inconsistent with this act are hereby repealed.
Section 78. (Time When the Act Takes Effect.) This act shall take effect on the-------- day of--------, one thousand nine
hundred and--------.
Section 79. (Name of Act.) This act may be cited as the Sales Act.

Appendix B. Uniform Bills Of Lading Act

(Adopted in Alaska, Connecticut, Idaho, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Missouri, North Carolina, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island,
Vermont, Washington, Wisconsin, United States.)
Secs.
1-10. Issue of bills of lading. 11-27. Obligations and rights of carriers upon their bills of lading. 28-43. Negotiation and
transfer of bills. 44-50. Criminal offenses. 51-56. Interpretation.
Section 1. Bills of lading issued by any common carrier shall be governed by this Act.
SEC. 2. Every bill must embody within its written or printed terms:
(a) The date of its issue,
(b) The name of the person from whom the goods have been received,
(c) The place where the goods have been received.
(d) The place to which the goods are to be transported,
(e) A statement whether the goods received will be delivered to a specified person, or to the order of a specified
person,
(f) A description of the goods or of the packages containing them which may, however, be in such general terms as are
referred to in section 23, and
(g) The signature of the carrier.
A negotiable bill shall have the words "order of" printed thereon immediately before the name of the person upon
whose order the goods received are deliverable.
A carrier shall be liable to any person injured thereby for the damage caused by the omission from a negotiable bill of
any of the provisions required in this section.
SEC. 3. A carrier may insert in a bill, issued by him, any other terms and conditions, provided that such terms and
conditions shall not (a) Be contrary to law or public policy, or
(b) In any wise impair his obligation to exercise at least that degree of care in the transportation and safe-keeping of
the goods entrusted to him which a reasonably careful man would exercise in regard to similar goods of his own.
SEC. 4. A bill in which it is stated that the goods are consigned or destined to a specified person, is a non-negotiable or
straight bill.
SEC. 5. A bill in which it is stated that the goods are consigned or destined to the order of any person named in such
bill, is a negotiable or order bill.
Any provision in such a bill that it is non-negotiable shall not affect its negotiability within the meaning of this Act.
SEC. 6. Negotiable bills issued in this State for the transportation of goods to any place in the United States on the
continent of North America, except Alaska, shall not be issued in parts or sets.
If so issued the carrier issuing them shall be liable for failure to deliver the goods described therein to any one who
purchases a part for value in good faith, even though the purchase be after the delivery of the goods by the carrier to a
holder of one of the other parts.
SEC. 7. When more than one negotiable bill is issued in this State for the same goods to be transported to any place in
the United States on the continent of North America, except Alaska, the word "duplicate" or some other word or words
indicating that the document is not an original bill shall be placed plainly upon the face of every such bill, except the
one first issued. A carrier shall be liable for the damage caused by his failure so to do to any one who has purchased
the bill for value in good faith as an original, even though the purchase be after the delivery of the goods by the carrier
to the holder of the original bill.
SEC. 8. A non-negotiable bill shall have placed plainly upon its face by the carrier issuing it "non-negotiable" or "not
negotiable."
This section shall not apply, however, to memoranda or acknowledgments of an informal character.
SEC. 9. The insertion in a negotiable bill of the name of the person to be notified of the arrival of the goods shall not
limit the negotiability of the bill, or constitute notice to a purchaser thereof of any rights or equities of such person in the
goods.
SEC. 10. Except as otherwise provided in this Act, where a consignor receives a bill and makes no objection as
hereinafter provided to its terms or conditions, neither the consignor or any person who accepts delivery of the goods,
or any person who seeks to enforce any provision of the bill, shall be allowed to deny that he is bound by such terms
and conditions, so far as they are not contrary to law or public policy.
SEC. 11. A carrier, in the absence of some lawful excuse, is bound to deliver goods upon the demand made either by
the consignee named in the bill for the goods, or if the bill is negotiable, by the holder thereof, if such demand is
accompanied by(a) An offer in good faith to satisfy the carrier's lawful lien upon the goods,
(b) An offer in good faith to surrender, properly indorsed, the bill which was issued for the goods, if the bill is negotiable
and
(c) A readiness and willingness to sign, when the goods are delivered, an acknowledgment that they have been
delivered, if such signature is requested by the carrier.
In case the carrier refuses or fails to deliver the goods in compliance with a demand by the consignee or holder so
accompanied, the burden shall be upon the carrier to establish the existence of a lawful excuse for such refusal or
failure.
SEC. 12. A carrier is justified, subject to the provisions of the three following sections, in delivering goods to one who is
(a) A person lawfully entitled to the possession of the goods, or
(b) The consignee named in a non-negotiable bill for the goods, or
(c) A person in possession of a negotiable bill for the goods by the terms of which the goods are deliverable to his
order, or which has been endorsed to him or in blank by the consignee or by the mediate or immediate indorsee of the
consignee.
SEC. 13. Where a carrier delivers goods to one who is not lawfully entitled to the possession of them, the carrier shall
be liable to any one having a right of property or possession in the goods if he delivered the goods otherwise than as
authorized by subdivisions (b) and (c) of the preceding section; and, though he delivered the goods as authorized by
either of said subdivisions, he shall be so liable if prior to such delivery he (a) Had been requested, by or on behalf of a
person having a right of property or possession in the goods, not to make such delivery, or

Appendix B. Uniform Bills Of Lading Act. Part 2

(b) Had information at the time of the delivery that it was to a person not lawfully entitled to the possession of the
goods.
A request or information to be effective within the meaning of this section must be given to an officer or agent of the
carrier, the actual or apparent scope of whose duties includes action upon such a request or information, and must be
given in time to enable the officer or agent to whom it is given, acting with rea-• sonable diligence, to stop delivery of
the goods.
SEC. 14. Except as provided in section 27, and except when compelled by legal process, if a carrier delivers goods for
which a negotiable bill had been issued, the negotiation of which would transfer the right to the possession of the
goods, and fails to take up and cancel the bill, such carrier shall be liable for failure to deliver the goods to any one who
for value and in good faith purchases such bill, whether such purchaser acquired title to the bill before or after the
delivery of the goods by the carrier, and notwithstanding delivery was made to the person entitled thereto.
SEC. 15. Except as provided in section 27, and except when compelled by legal process, if a carrier delivers part of the
goods for which a negotiable bill had been issued and fails either (a) To take up and cancel the bill, or
(b) To place plainly upon it a statement that a portion of the goods has been delivered, with a description, which may
be in general terms, either of the goods or packages that have been so delivered or of the goods or packages which
still remain in the carrier's possession, he shall be liable for failure to deliver all the goods specified in the bill, to any
one who for value and in good faith purchases it, whether such purchaser acquired title to it before or after the delivery
of any portion of the goods by the carrier, and notwithstanding such delivery was made to the person entitled thereto.
SEC. 16. Any alteration, addition or erasure in a bill after its issue without authority from the carrier issuing the same,
either in writing or noted on the bill, shall be void, whatever be the nature and purpose of the change, and the bill shall
be enforceable according to its original tenor.
SEC. 17. Where a negotiable bill has been lost or destroyed, a court of competent jurisdiction may order the delivery of
the goods upon satisfactory proof of such loss or destruction and upon the giving of a bond with sufficient surety to be
approved by the court to protect the carrier or any person injured by such delivery from any liability or loss, incurred by
reason of the original bill remaining outstanding. The court may also in its discretion order the payment of the carrier's
reasonable costs and counsel fees.
The delivery of the goods under an order of the court as provided in this section, shall not relieve the carrier from
liability to a person to whom the negotiable bill has been or shall be negotiated for value without notice of the
proceedings or of the delivery of the goods.
SEC. 18. A bill upon the face of which the word "duplicate" or some other word or words indicating that the document is
not an original bill is placed plainly shall impose upon the carrier issuing the same the liability of one who represents
and warrants that such bill is an accurate copy of an original bill properly issued, but no other liability.
SEC. 19. No title to goods or right to their possession, asserted by a carrier for his own benefit, shall excuse him from
liability for refusing to deliver the goods according to the terms of a bill issued for them, unless such title or right is
derived directly or indirectly from a transfer made by the consignor or consignee after the shipment, or from the
carrier's lien.
SEC. 20. If more than one person claims the title or possession of goods, the carrier may require all known claimants
to interplead, either as a defense to an action brought against him for non-delivery of the goods, or as an original suit,
whichever is appropriate.
SEC. 21. If some one other than the consignee or person in possession of the bill, has a claim to the title or possession
of the goods, and the carrier has information of such claim, the carrier shall be excused from liability for refusing to
deliver the goods either to the consignee or person in possession of the bill, or to the adverse claimant, until the carrier
has had a reasonable time to ascertain the validity of the adverse claim or to bring legal proceedings to compel all
claimants to interplead.
SEC. 22. Except as provided in the two preceding sections and in section 12, no right or title of a third person unless
enforced by legal process shall be a defense to an action brought by the consignee of a non-negotiable bill or by the
holder of a negotiable bill against the carrier for failure to deliver the goods on demand.
SEC. 23. If a bill of lading has been issued by a carrier or on his behalf by an agent or employee the scope of whose
actual or apparent authority includes the issuing of bills of lading, the carrier shall be liable to (a) The consignee named
in a non-negotiable, or
(b) The holder of a negotiable bill,
Who has given value in good faith relying upon the description therein of the goods, for damages caused by the non-
receipt by the carrier or a connecting carrier of all or part of the goods or their failure to correspond with the description
thereof in the bill at the time of its issue.
If, however, the goods are described in a bill merely by a statement of marks or labels upon them or upon packages
containing them, or by a statement that the goods are said to be goods of a certain kind or quantity, or in a certain
condition, or it is stated in the bill that packages are said to contain goods of a certain kind or quantity or in a certain
condition, or that the contents or condition of the contents of packages are unknown, or words of like purport are
contained in the bill, such statements, if true, shall not make liable the carrier issuing the bill, although the goods are
not of the kind or quantity or in the condition which the marks or labels upon them indicate, or of the kind or quantity or
in the condition they were said to be by the consignor. The carrier may, also, by inserting in the bill the words "shipper's
load and count" or other words of like purport, indicate that the goods were loaded by the shipper and the description of
them made by him; and if such statement be true, the carrier shall not be liable for damages caused by the improper
loading or by the non-receipt or by the misdescription of the goods described in the bill.

Appendix B. Uniform Bills Of Lading Act. Part 3

SEC. 24. If goods are delivered to a carrier by the owner or by a person whose act in conveying the title to them to a
purchaser for value in good faith would bind the owner and a negotiable bill is issued for them, they cannot thereafter,
while in the possession of the carrier, be attached by garnishment or otherwise, or be levied upon under an execution,
unless the bill be first surrendered to the carrier or its negotiation enjoined. The carrier shall in no such case be
compelled to deliver the actual possession of the goods until the bill is surrendered to him or impounded by the court.
SEC. 25. A creditor whose debtor is the owner of a negotiable bill shall be entitled to such aid from courts of
appropriate jurisdiction by injunction and otherwise in attaching such bill, or in satisfying the claim by means thereof as
is allowed at law or in equity in regard to property which can not readily be attached or levied upon by ordinary legal
process.
SEC. 26. If a negotiable bill is issued the carrier shall have no lien on the goods therein mentioned, except for charges
on those goods for freight, storage, demurrage and terminal charges, and expenses necessary for the preservation of
the goods or incident to their transportation subsequent to the date of the bill, unless the bill expressly enumerates
other charges for which a lien is claimed. In such case there shall also be a lien for the charges enumerated so far as
they are allowed by law and the contract between the consignor and the carrier.
SEC. 27. After goods have been lawfully sold to satisfy a carrier's lien, or because they have not been claimed, or
because they are perishable or hazardous, the carrier shall not thereafter be liable for failure to deliver the goods to the
consignee or owner of the goods, or to a holder of the bill given for the goods when they were shipped, even if such bill
be negotiable.
SEC. 28. A negotiable bill may be negotiated by delivery where, by the terms of the bill, the carrier undertakes to
deliver the goods to the order of a specified person, and such person or a subsequent indorsee of the bill has indorsed
it in blank.
SEC. 29. A negotiable bill may be negotiated by the indorsement of the person to whose order the goods are
deliverable by the tenor of the bill. Such indorsement may be in blank or to a specified person. If indorsed to a specified
person, it may be negotiated again by the indorsement of such person in blank or to another specified person.
Subsequent negotiations may be made in like manner.
SEC. 30. A bill may be transferred by the holder by delivery, accompanied with an agreement, express or implied, to
transfer the title to the bill or to the goods represented thereby.
A non-negotiable bill can not be negotiated, and the indorsement of such a bill gives the transferee no additional right.
SEC. 31. A negotiable bill may be negotiated by any person in possession of the same, however such possession may
have been acquired if, by the terms of the bill, the carrier undertakes to deliver the goods to the order of such person,
or if at the time of negotiation the bill is in such form that it may be negotiated by delivery.
SEC. 32. A person to whom a negotiable bill has been duly negotiated acquires thereby (a) Such title to the goods as
the person negotiating the bill to him had or had ability to convey to a purchaser in good faith for value, and also such
title to the goods as the consignee and consignor had or had power to convey to a purchaser in good faith for value,
and
(b) The direct obligation of the carrier to hold possession of the goods for him according to the terms of the bill as fully
as if the carrier had contracted directly with him.
Sec 33. A person to whom a bill has been transferred but not negotiated acquires thereby as against the transferor, the
title to the goods, subject to the terms of any agreement with the transferor. If the bill is non-negotiable, such person
also acquires the right to notify the carrier of the transfer to him of such bill, and thereby to become the direct obligee of
whatever obligations the carrier owed to the transferor of the bill immediately before the notification.
Prior to the notification of the carrier by the transferor or transferee of a non-negotiable bill, the title of the transferee to
the goods and the right to acquire the obligation of the carrier may be defeated by garnishment or by attachment or
execution upon the goods by a creditor of the transferor, or by a notification to the carrier by the transferor or a
subsequent purchaser from the transferor of a subsequent sale of the goods by the transferor.
A carrier has not received notification within the meaning of this section unless an officer or agent of the carrier, the
actual or apparent scope of whose duties includes action upon such a notification, has been notified; and no
notification shall be effective until the officer or agent to whom it is given has had time with the exercise of reasonable
diligence to communicate with the agent or agents having actual possession or control of the goods.
SEC. 34. Where a negotiable bill is transferred for value by delivery, and the indorsement of the transfer or is essential
for negotiation, the transferee acquires a right against the transferor to compel him to indorse the bill, unless a contrary
intention appears. The negotiations shall take effect as of the time when the indorsement is actually made. This
obligation may be specifically enforced.
SEC. 35. A person who negotiates or transfers for value a bill by indorsement or delivery, including one who assigns
for value a claim secured by a bill, unless a contrary intention appears, warrants (a) That the bill is genuine,
(b) That he has a legal right to transfer it,
(c) That he has knowledge of no fact which would impair the validity or worth of the bill, and
(d) That he has a right to transfer the title to the goods, and that the goods are merchantable or fit for a particular
purpose whenever such warranties would have been implied, if the contract of the parties had been to transfer without
a bill the goods represented thereby.

Appendix B. Uniform Bills Of Lading Act. Part 4

In the case of an assignment of a claim secured by a bill, the liability of the assignor shall not exceed the amount of the
claim.
SEC. 36. The indorsement of a bill shall not make the indorser liable for any failure on the part of the carrier or previous
in-dorsers of the bill to fulfill their respective obligations.
SEC. 37. A mortgagee or pledgee, or other holder of a bill for security who in good faith demands or receives payment
of the debt for which such bill is security, whether from a party to a draft drawn for such debt or from any other person,
shall not be deemed by so doing to represent or to warrant the genuineness of such bill or the quantity or quality of the
goods therein described.
SEC. 38. The validity of the negotiation of a bill is not impaired by the fact that such negotiation was a breach of duty
on the part of the person making the negotiation, or by the fact that the owner of the bill was deprived of the
possession of the same by fraud, accident, mistake, duress or conversion, if the person to whom the bill was
negotiated, or a person to whom the bill was subsequently negotiated, gave value therefor, in good faith, without notice
of the breach of duty or fraud, accident, mistake, duress or conversion.
SEC. 39. Where a person having sold, mortgaged, or pledged goods which are in a carrier's possession and for which
a negotiable bill has been issued, or having sold, mortgaged, or pledged the negotiable bill representing such goods,
continues in possession of the negotiable bill, the subsequent negotiation thereof by that person under any sale,
pledge, or other disposition thereof to any person receiving the same in good faith, for value and without notice of the
previous sale, shall have the same effect as if the first purchaser of the goods or bill had expressly authorized the
subsequent negotiation.
SEC. 40. Where goods are shipped by the consignor in accordance with a contract or order for their purchase, the form
in which the bill is taken by the consignor shall indicate the transfer or retention of the property or right to the
possession of the goods as follows:
(a) Where by the bill the goods are deliverable to the buyer or to his agent, or to the order of the buyer or of his agent,
the consignor thereby transfers the property in the goods to the buyer.
(b) Where by the bill the goods are deliverable to the seller or to his agent, or to the order of the seller or of his agent,
the seller thereby reserves the property in the goods. But if, except for the form of the bill, the property would have
passed to the buyer on shipment of the goods, the seller's property in the goods shall be deemed to be only for the
purpose of securing performance by the buyer of his obligations under the contract.
(c) Where by the bill the goods are deliverable to the order of the buyer or his agent, but possession of the bill is
retained by the seller or his agent, the seller thereby reserves a right to the possession of the goods, as against the
buyer.
(d) Where the seller draws on the buyer for the price and transmits the draft and bill together to the buyer to secure
acceptance or payment of the draft, the buyer is bound to return the bill if he does not honor the draft, and if he
wrongfully retains the bill he acquires no added right thereby. If, however, the bill provides that the goods are
deliverable to the buyer, or to the order of the buyer, or is endorsed in blank or to the buyer by the consignee named
therein, one who purchases in good faith, for value, the bill or goods from the buyer, shall obtain the title to the goods,
although the draft has not been honored, if such purchaser has received delivery of the bill indorsed by the consignee
named therein, or of the goods, without notice of the facts making the transfer wrongful.
SEC. 41. Where the seller of goods draws on the buyer for the price of the goods and transmits the draft and a bill of
lading for the goods either directly to the buyer or through a bank or other agency, unless a different intention on the
part of the seller appears, the buyer and all other parties interested shall be justified in assuming:
(a) If the draft is by its terms or legal effect payable on demand or presentation or at sight, or not more than three days
thereafter (whether such three days be termed days of grace or not), that the seller intended to require payment of the
draft before the buyer should be entitled to receive or retain the bill.
(b) If the draft is by its terms payable on time, extending beyond three days after demand, presentation or sight
(whether such three days be termed days of grace or not), that the seller intended to require acceptance, but not
payment of the draft before the buyer should be entitled to receive or retain the bill.
The provisions of this section are applicable whether by the terms of the bill the goods are consigned to the seller, or to
his order, or to the buyer, or to his order, or to a third person, or to his order.
SEC. 42. Where a negotiable bill has been issued for goods, no seller's lien or right of stoppage in transitu shall defeat
the rights of any purchaser for value in good faith to whom such bill has been negotiated, whether such negotiations be
prior or subsequent to the notification to the carrier who issued such bill of the seller's claim to a lien or right of
stoppage in transitu. Nor shall the carrier be obliged to deliver or justified in delivering the goods to an unpaid seller
unless such bill is first surrendered for cancellation.
SEC. 43. Except as provided in section 42, nothing in this Act shall limit the rights and remedies of a mortgagee or
lienholder whose mortgage or lien on goods would be valid, apart from this Act, as against one who for value and in
good faith purchased from the owner, immediately prior to the time of their delivery to the carrier, the goods which are
subject to the mortgage or lien and obtained possession of them.

Appendix B. Uniform Bills Of Lading Act. Part 5

SEC. 44. Any officer, agent, or servant of a carrier, who with intent to defraud issues or aids in issuing a bill knowing
that all or any part of the goods for which such bill is issued have not been received by such carrier, or by an agent of
such carrier or by a connecting carrier, or are not under the carrier's control at the time of issuing such bill, shall be
guilty of a crime, and upon conviction shall be punished for each offense by imprisonment in the State penitentiary not
exceeding five years, or by a fine not exceeding five thousand dollars, or by both.
SEC. 45. Any officer, agent, or servant of a carrier, who with intent to defraud issues or aids in issuing a bill for goods
knowing that it contains any false statement, shall be guilty of a crime, and upon conviction shall be punished for each
offense by imprisonment in the State penitentiary not exceeding one year, or by a fine not exceeding one thousand
dollars, or by both.
SEC. 46. Any officer, agent, or servant of a carrier, who with intent to defraud issues or aids in issuing a duplicate or
additional negotiable bill for goods in violation of the provisions of section 7, knowing that a former negotiable bill for
the same goods or any part of them is outstanding and uncancelled, shall be guilty of a crime, and upon conviction
shall be punished for each offense by imprisonment in the State penitentiary not exceeding five years, or by a fine not
exceeding five thousand dollars, or by both.
SEC. 47. Any person who ships goods to which he has not title, or upon which there is a lien or mortgage, and who
takes for such goods a negotiable bill which he afterwards negotiates for value with intent to deceive and without
disclosing his want of title or the existence of the lien or mortgage, shall be guilty of a crime, and upon conviction shall
be punished for each offense by imprisonment in the State penitentiary not exceeding one year, or by a fine not
exceeding one thousand dollars, or by both.
SEC. 48. Any person who with intent to deceive negotiates or transfers for value a bill knowing that any or all of the
goods which by the terms of such bill appears to have been received for transportation by the carrier which issued the
bill, are not in the possession or control of such carrier, or of a connecting carrier, without disclosing this fact, by
causing said fact to be endorsed shall be guilty of a crime, and upon conviction shall be punished for each offense by
imprisonment in the State penitentiary not exceeding five years, or by a fine not exceeding five thousand dollars or by
both.
SEC. 49. Any person who with intent to defraud secures the issue by a carrier of a bill knowing that at the time of such
issue, any or all of the goods described in such bill as received for transportation have not been received by such
carrier, or an agent of such carrier or a connecting carrier, or are not under the carrier's control, by inducing an officer,
agent, or servant of such carrier falsely to believe that such goods have been received by such carrier, or are under its
control, shall be guilty of a crime, and upon conviction shall be punished for each offense by imprisonment in the State
penitentiary not exceeding five years, or by a fine not exceeding five thousand dollars, or by both.
SEC. 50. Any person who with intent to defraud issues or aids in issuing a non-negotiable bill without the words "not
negotiable" placed plainly upon the face thereof, shall be guilty of a crime, and upon conviction shall be punished for
each offense by imprisonment in the State penitentiary not exceeding five years or by a fine not exceeding five
thousand dollars, or by both.
SEC. 51. In any case not provided for in this Act the rules of law and equity, including the law merchant, and in
particular the rules relating to the law of principal and agent, executors, administrators and trustees, and to effect of
fraud, misrepresentation, duress or coercion, accident, mistake, bankruptcy, or other invalidating cause, shall govern.
SEC. 52. This Act shall be so interpreted and construed as to effectuate its general purpose to make uniform the law of
those states which enact it
SEC. 53. (1) In this Act, unless the context or subject matter otherwise requires "Action" includes counter claim, set-off,
and suit in equity.
"Bill" means bill of lading.
"Consignee" means the person named in the bill as the person to whom delivery of the goods is to be made.
"Consignor" means the person named in the bill as the person from whom the goods have been received for shipment.
"Goods" means merchandise or chattels in course of transportation, or which have been or are about to be
transported.
"Holder" or a bill means a person who has both actual possession of such bill and a right of property therein.
"Order" means an order by indorsement on the bill.
"Owner" does not include mortgagee or pledgee.
"Person" includes a corporation or partnership or two or more persons having a joint or common interest.
To "purchase" includes to take as mortgagee and to take as pledgee.
"Purchaser" includes mortgagee and pledgee.
"Value" is any consideration sufficient to support a simple contract. An antecedent or pre-existing obligation, whether
for money or not, constitutes value where a bill is taken either in satisfaction thereof or as security therefor.
(2) A thing is done "in good faith," within the meaning of this Act, when it is in fact done honestly, whether it be done
negligently or not.
SEC. 54. The provisions of this Act do not apply to bills made and delivered prior to the taking effect thereof.
SEC. 55. All Acts or parts of Acts inconsistent with this Act are hereby repealed.
SEC. 56. This Act may be cited as the Uniform Bills of Lading Act.

Appendix C. Forms
Page 1. Bill of Sale............................................ 187
2. Memorandum of Sale.................................. 188
3. Chattel Mortgage....................................... 189
4. Chattel Mortgage Note................................. 192
5. Order Bill of Lading................................... 193

1. Bill Of Sale
KNOW ALL MEN BY THESE PRESENTS, that Henry Sampson of the City of Chicago in the County of Cook and State
of Illinois, party of the first part, for and in consideration of the sum of Four Hundred and Fifty ($450) Dollars, lawful
money of the United States of America, to him in hand paid, at or before the ensealing and delivery of these Presents,
by Lester McAuley, of the same place, party of the second part, the receipt whereof is hereby acknowledged, has
granted, bargained, sold and delivered, and, by these Presents, does grant, bargain, sell and deliver, unto the said
party of the second part, all the following GOODS, CHATTELS, and PROPERTY, to-wit:
I roll top, black walnut office desk, one desk chair, 4 sections Empire book cases, with top and bottom, and I set of
Illinois Reports, volumes 1 to 240 inclusive.
To have and to hold the said Goods, Chattels and Property unto the said party of the second part, his heirs, executors,
administrators and assigns, to and for his own proper use and behoof, forever.
And the said party of the first part does vouch himself to be the true and lawful owner of the said Goods, Chattels and
Property, and have in himself full power, good right and lawful authority, to dispose of the said Goods, Chattels and
Property, in manner as aforesaid: And he does, for himself, his heirs, executors and administrators, covenant and
agree to and with the said party of the second part, to Warrant and Defend the said Goods, Chattels and Property to
the said party of the second part, his executors, administrators, and assigns, against the lawful claims and demands of
all and every person and persons whomsoever.
In Witness Whereof, I have hereunto set my hand and seal the first day of August in the year One Thousand Nine
Hundred and Eleven.
Sealed and delivered in presence of
William Jones. (sd.) Henry Sampson. [seal]
..............................[seal]
State of Illinois, Cook County, ss.
I, James H. Zabel, a notary public, in and for said County, do hereby certify, that this Instrument was duly
acknowledged before me, by the above named Henry Sampson, the first day of August, A. D. 1911.
James H. Zabel, [notarial seal] Notary Public.

2. Memorandum Of Sale
(Note: As stated in the text, it is not necessary to put contracts of sale in writing except as required by the statute of
frauds. If there is delivery of all or part, or payment of all or part of the purchase price, writing becomes unnecessary. It
may be desirable, however, to give a formal bill of sale, but in mercantile contracts such formal instruments are seldom
made use of. Personal chattels, unlike real estate, seldom stand in any one's name as a matter of record, and although
formal deeds are always used and must be used in transfers of real estate, formal bills of sale are comparatively rare.
One has only to think of what transpires when he purchases merchandise at a retail store to have this impressed upon
him. A brief memorandum is here given that will fulfill the requirements of the statute of frauds, or may be used for
other reasons to preserve the evidence of the transaction.)
Chicago, August I, 1911. John Smith has this day sold to James Hicks, his black horse, named Tom, weight about
1400 pounds, white spot on forehead, for the sum of Two Hundred Dollars, One Hundred Dollars of which has been
paid, the receipt of which is hereby acknowledged, and the other hundred dollars of which is to be paid in six months,
as evidenced by the promissory note of the purchaser of same date as this memorandum. The said John Smith
warrants the said horse to be sound in all respects and a good buggy horse. It is agreed that the said Hicks may keep
the horse in said Smith's pasture during the month of August, 1911, without charge if he so desires.
John Smith.
James Hicks.
The following is a memorandum made by an agent which was held sufficient to satisfy the statute of frauds:
"February 29 bought of Isaac Clason, of Bailey & Voorhees, 3,000 bushels of good merchantable rye, deliverable from
the 5th to the 15th of April next, at $1.00 per bushel, and payable on delivery" (Clason v. Bailey, 14 Johns. Reports, (N.
Y.) 484).

3. Chattel Mortgage
(As a chattel mortgage is so often given in sale transactions, to secure a portion or all of the purchase price, a form is
here given. It is better to use the printed blanks to be secured of the stationers, for these are drawn in compliance with
local statutes and customs.)
Know all Men by these Presents, That A. B. of the city of ........in the County of........and State of........in consideration of
the sum of........Dollars, to him paid by C. D., of the
County of........and State of........the receipt whereof is hereby acknowledged, does hereby grant, sell, convey and
confirm, unto the said C. D. and to his heirs and assigns, the following goods and chattels, to-wit: (here describe goods
mortgaged so that they may be identified from the description, stating the place where the goods are
located).........................
To Have and to Hold, All and singular the said Goods and Chattels, unto the said Mortgagee. .herein, and his heirs,
executors, administrators and assigns, to his and their sole use, forever. And the Mortgagor, .herein, for himself and for
his heirs, executors and administrators, does hereby covenant to and with the said Mortgagee.., his heirs, executors,
administrators and assigns, that said Mortgagor is lawfully possessed of the said Goods and Chattels, as of his own
property; that the same are free from all incumbrances, and that he will, and his executors and administrators shall
warrant and defend the same to him, the said Mortgagee, his heirs, executors, administrators and assigns, against the
lawful claims and demands of all persons.
Provided, Nevertheless, That if the said Mortgagor.., his executors or administrators, shall well and truly pay unto the
said Mortgagee.., his executors, administrators or assigns..........
then said Mortgage is to be void, otherwise to remain in full force and effect.
And, Provided, also, That it shall be lawful for the said Mortgagor.., his executors, administrators and assigns, to retain
possession of the said goods and chattels, and at his own expense, to keep and to use the same, until he or his
executors, administrators or assigns, shall make default in the payment of the said sum of money above specified,
either in principal or interest, at the time or times and in the manner hereinbefore stated. And the said
Mortgagor..hereby covenant, .and agree..
that in case default shall be made in the payment of the Note., aforesaid, or, any part thereof, or the interest thereon,
on the day or days respectively, on which the same shall become due and payable; or if the Mortgagee.., his
executors, administrators or assigns, shall feel himself insecure or unsafe or shall fear diminution, removal or waste of
said property; or if the Mortgagor., shall sell or assign, or attempt to sell or assign, the said Goods and Chattels or any
interest therein; or if any Writ, or any Distress Warrant, shall be levied on said Goods and Chattels, or any part thereof;
then, and in any or either of the aforesaid cases, all of said Note..and sum of money, both principal and interest, shall,
at the option of the said Mortgagee.., his executors, administrators or assigns, without notice of said option to anyone,
become at once due and payable, and the said Mortgagee, his executors, administrators or assigns, or any of them
shall thereupon have the right to take immediate possession of said property, and for that purpose may pursue the
same wherever it may be found, and may enter any of the premises of the Mortgagor with or without force or process
of law, wherever the said Goods and Chattels may be, or be supposed to be, and search for the same, and if found,
take possession of, and remove, and sell, and dispose of the said property, or any part thereof, at public auction, to the
highest bidder, after giving
........days' notice of the time, place and terms of sale, together with a description of the property to be sold, by notices
posted up in three public places in the vicinity of such sale, or at private sale, with or without notice, for cash or on
credit, as the said Mortgagee.., his heirs, executors, administrators or assigns, agents or attorneys, or any of them,
may elect; and out of the money arising from such sale, to retain all costs and charges for pursuing, searching for,
taking, removing, keeping, storing, advertising and selling such Goods and Chattels, and all prior liens thereon,
together with the amount due and unpaid upon the said Note.., rendering the surplus, if any remain, unto said
Mortgagor.., or his legal representatives.
Witness The hand and seal of the said Mortgagor, this........
day of........in the year of our Lord One Thousand Nine Hundred........
....................................[seal]
....................................[seal]
Sealed and Delivered in the Presence of
State of Illinois, County of Cook, City of Chicago, ss.
I,........Clerk of the Municipal Court of Chicago, do hereby certify that this mortgage was duly acknowledged before me
by the above named........the Mortgagor therein named, and entered by me this........day of........A. D. 191..
Witness my hand and the seal of said court.
[seal] Clerk of the Municipal Court of Chicago.

4. Chattel Mortgage Note

$........ ............................191..
........after date for Value Received,........promise to pay to the Order of........the sum of........Dollars, at........
with interest thereon at the rate of........per cent per annum, payable........annually.
This Note is secured by a Chattel Mortgage to........of even date herewith, on personal property in........and is to bear
interest at the rate of........per cent per annum after........
No........ ...................................

5. Order Bill Of Lading

Original
These Railroads do not accept for transportation Money, Gold, Silverware, Shipper's No........
Valuable Papers or Painting's nor any articles of extraordinary value unless special arrangements are made. Agent's
No..........
RECEIVED, subject to the classifications and tariffs in effect on the date of issue of this Original Bill of Lading.
At....................................................................................... 19.....
FROM.....................................................the property described below, in apparent good order, except as noted
(contents and condition of contents of packages unknown), marked, consigned and destined as indicated below, which
the..........................................................
agrees to carry to its usual place of delivery at said destination, if on these roads, otherwise to deliver to another carrier
on the route to said destination. It is mutually agreed, as to each carrier of all or any of said property over all or any
portion of said route to destination, and as to each party at any time interested in all or any of said property, that every
service to be performed hereunder shall be subject to all the conditions, whether printed or writ-ten, herein contained
(including conditions on back hereof) and which are agreed to by the shipper and accepted for himself and his assigns.
Freight transported under this bill of lading, in addition to rates named from point of origin to point of destination will be
subject to such charges and entitled to such privileges as are set forth in tariffs published by the..............................or
by connecting lines and lawfully on file with the
Interstate Commerce Commission, relating to car service, inspection, mileage on private cars, reconsigning, storage,
switching, weighing or other transit or terminal privileges or requirements, which in any way increase or decrease the
value of the service to the shipper.
The surrender of this Original ORDER Bill of Lading properly endorsed shall be required before the delivery of the
property. Inspection of property covered by this bill of lading will not be permitted unless provided by law or unless
permission is endorsed on this original bill of lading or given in writing by the shipper.

The Rate of Freight from .................. to ................. is in Costs per 100 lbs.
IF IF IF IF IF IF IF IF IF IF IF Special IF Special
IF...Times lst
1st 2nd 3rd 4th 5th Class Class Class Class Class Per..................... Per.....................
Class
Class Class Class Class Class A B C D E

(Mail Address - Not for purposes of Delivery.)

Consigned to ORDER OF..........................................................................
Destination.....................................State of..................County of..................
Notify .............................................................................................
At ............................................State of..................County of..................
Route.............................................Car Initial................Car No.................

No. Description of Articles WEIGHT (Subject CLASS OR CHECK

If charges are to be prepaid, write or
Packages and Special Marks to Correction) RATE COLUMN
stamp here, "To be Prepaid."

Received $..............
to apply in prepayment of the charges
on the property described hereon.

Agent or Cashier.

Per......................
(The signature here acknowledges
only the amount prepaid.)

Charges Advanced: $................

..........................................Shipper ...........................................Agent
Per...................................... Per......................................
(This Bill of Lading is to be signed by the Shipper and Agent of the Railroad)

Conditions

Section 1. The carrier or party in possession of any of the property herein described shall be liable for any loss thereof
or damages thereto, except as hereinafter provided.
No carrier or party in possession of any of the property herein described shall he liable for any loss thereof or damage
thereto or delay caused by the act of God, the public enemy, quarantine, the authority of the law, or the act or default of
the shipper or owner, or for differences in the weights of grain, seed, or other commodities caused by natural shrinkage
or discrepancies in elevator weights. For loss, damage, or delay caused by fire occurring after forty-eight hours
(exclusive of legal holidays) after notice of arrival of the property at destination or at port of export (if intended for
export) has been duly sent or given, the carriers liability shall be that of warehouseman only. Except in case of
negligence of the carrier or party in possession (and the burden to prove freedom from such negligence shall be on the
carrier or party in possession), the carrier or party in possession shall not be liable for loss, damage, or delay occurring
while the property is stopped and held in transit upon request of the shipper, owner, or party entitled to make such
request; or resulting from a defect or vice in the property or from riots or strikes. When in accordance with general
custom, on account of the nature of the property, or when at the request of the shipper the property is transported in
open cars, the carrier or party in possession (except in case of loss or damage by fire, in which case the liability shall
be the same as though the property had been carried in closed cars) shall be liable only for negligence, and the burden
to prove freedom from such negligence shall be on the carrier or party in possession.
SEC. 2. In issuing this bill of lading, this company agrees to transport only over its own line, and except as otherwise
provided by law acts only as agent with respect to the portion of the route beyond its own line;
No carrier shall be liable for loss, damage, or injury not occurring on its own road or its portion of the through route nor
after said property has been delivered to the next carrier, except as such liability is or may be imposed by law, but
nothing contained in this bill of lading shall be deemed to exempt the initial carrier from any such liability so imposed.

Order Bill Of Lading. Continued

SEC. 3. No carrier is bound to transport said property by any particular train or vessel, or in time for any particular
market, or otherwise than with reasonable despatch, unless by specific agreement indorsed hereon. Every carrier shall
have the right in case of physical necessity to forward said property via any railroad or route between the point of
shipment and the point of destination; but if such diversion shall be from a rail to a water route the liability of the carrier
shall be the same as though the entire, carriage were by rail.
The amount of any loss or damage for which any carrier is liable shall be computed on the basis of the value of the
property at the place and time of shipment under this bill of lading, including the freight charges, if paid.
Except where the loss, damage, or injury complained of is due to delay or damage while being loaded or unloaded, or
damaged in transit by carelessness or negligence, as conditions precedent to recovery, claims must be made in writing
to the originating or delivering carrier within six months after delivery of the property (or, in case of export traffic, within
nine months after delivery at port of export), or, in case of failure to make delivery, then within six months (or nine
months in case of export traffic) after a reasonable time for delivery has elapsed; and suits for loss, damage, or delay
shall be instituted only within two years and one day after delivery of the property, or, in case of failure to make
delivery, then within two years and one day after a reasonable time for delivery has elapsed.
Any carrier or party liable on account of loss of or damage to any of said property shall have the full benefit of any
insurance that may have been effected upon or on account of said property, so far as this shall not avoid the policies or
contracts of insurance.
SEC. 4. All property shall be subject to necessary cooperage and baling at owner's cost. Each carrier over whose route
cotton is to be transported hereunder shall have the privilege, at its own cost and risk, of compressing the same for
greater convenience in handling or forwarding, and shall not be held responsible for deviation or unavoidable delays in
procuring such compression. Grain in bulk consigned to a point where there is a railroad, public, or licensed elevator,
may (unless otherwise expressly noted herein, and then if it is not promptly unloaded) be there delivered and placed
with other grain of the same kind and grade without respect to ownership, and if so delivered shall be subject to a lien
for elevator charges in addition to all other charges hereunder.
SEC. 5. Property not removed by the party entitled to receive it within forty-eight hours (exclusive of legal holidays)
after notice of its arrival has been duly sent or given may be kept in car, depot, or place of delivery of the carrier, or
warehouse, subject to a reasonable charge for storage and to carrier's responsibility as warehouseman only, or may be
at the option of the carrier, removed to and stored in a public or licensed warehouse at the cost of the owner and there,
held at the owner's risk and without liability on the part of the carrier, and subject to a lien for all freight and other lawful
charges, including a reasonable charge for storage.
The carrier may make a reasonable charge for the detention of any vessel or car, or for the use of tracks after the car
has been held for forty-eight hours (exclusive of legal holidays), for loading or unloading, and may add such charge to
all other charges hereunder and hold such property subject to a lien therefor. Nothing in this section shall be construed
as lessening the time allowed by law or as setting aside any local rule affecting car service or storage.
Property destined to or taken from a station, wharf, or landing at which there is no regularly appointed agent shall be
entirely at risk of owner after unloaded from cars or vessels or until loaded into cars or vessels, and when received
from or delivered on private or other sidings, wharves, or landings shall be at owner's risk until the cars are attached to
and after they are detached from trains.
SEC. 6. No carrier will carry or be liable in any way for any documents, specie, or for any articles of extraordinary value
not specifically rated in the published classification or tariff, unless a special agreement to do so and a stipulated value
of the articles are endorsed hereon.
SEC. 7. Every party, whether principal or agent, shipping explosive or dangerous goods, without previous full written
disclosure to the carrier of their nature, shall be liable for all loss or damage caused thereby, and such goods may be
warehoused at owner's risk and expense or destroyed without compensation.
SEC. 8. The owner or consignee shall pay the freight and all other lawful charges accruing on said property, and, if
required, shall pay the same before delivery. If upon inspection it is ascertained that the articles shipped are not those
described in this bill of lading, the freight charges must be paid upon the articles actually shipped.
SEC. 9. Except in case of diversion from rail to water route, which is provided for in Section 3 hereof, if all or any part
of said property is carried by water over any part of said route, such water carriage shall be performed subject to the
liability, limitation, and exemption provided by statute and to the conditions contained in this bill of lading not
inconsistent with such statutes or this section, and subject also to the condition that no carrier or party in possession
shall be liable for any loss or damage resulting from the perils of the lakes, sea, or other waters, or from explosion,
bursting of boilers, breakage of shafts, or any latent defect in hull, machinery, or appurtenances, or from collision,
stranding, or other accidents of navigation, or from prolongation of the voyage. And any vessel carrying any or all of the
property herein described shall have the liberty to call at intermediate ports, to tow and be towed, and assist vessels in
distress, and to deviate for the purpose of saving life or property.
The term "water carriage" in this section shall not be construed as including lighterage across rivers or in lake or other
harbors, and the liability for such lighterage shall be governed by the other sections) of this instrument.
SEC. 10. Any alteration, addition, or erasure in this bill of lading which shall be made without an endorsement thereof
hereon, signed by the agent of the carrier issuing this bill of lading, shall be without effect, and this bill of lading shall be
enforceable according to its original tenor.

Appendix D3. Questions And Problems

Chapter 1

1. Define "bailment."
2. Classify bailments.
3. State Examples 2 and 3.
4. Various farmers delivered wheat to a mill and received in return a certificate reading as follows: "Cedar Hill,
Texas,........,
191..... Received of .......... bushels of wheat for which he is to receive in exchange..........pounds of flour,..........pounds
of bran, and .......... pounds of shorts." The miller went into bankruptcy and the farmers claimed title as tenants in
common to all the wheat in his bins received under these certificates, but the trustee claims they are only general
creditors. How should the court decide? (Matter v. Ballard, 44 Amer. Bankr. Rep. 651.)
5. What are fungible goods? What is the rule as to such goods?
Chapter 2
6. A sent 20 pianos to B for safekeeping in B's warehouse. The waters of the Ohio River rose by an unprecedented
flood and ruined the pianos. The evidence showed that the rise was gradual and steady and defendant had time and
opportunity to guard against the calamity. A sues B. B claims he did not know the river would rise so high. Is B
responsible? Would it be for the court or Jury to decide and what facts should determine? (See H. C. Powell Music Co.
v. Park-ersburg Transfer Co., 75 W. Va. 659, 84 S. E. 653.)
7. In what two cases is an ordinary bailee absolutely liable for loss or injury, even if not negligent
8. K left goods with P to be stored at a certain place. P without K's knowledge stored them in another place in which
they were destroyed by fire without P's fault K sues P. For whom should judgment be? (Kennedy v. Portman, 97 Mo. At
253, 70 S. W. 1099.)
9. Does a bailee in all cases have a lien? How is a lien lost? is it a general or special lien?
10. Must a pledgee sell at public sale? Can he purchase at his own sale ?

Chapter 3

11. What are the chief "public service companies?"

12. What is the duty of an innkeeper (1) in respect to providing facilities for those who come; (2) in respect to safety of
goods?
13. Define a common carrier. What is the rule of liability for the safe carriage of goods by a common carrier?
14. Define an Act of God. Give an example.
15. Is a mob a "public enemy"?
16. Could a common carrier limit its liability in case of loss by negligence.
17. What is the rule where there is an agreed valuation?
18. When does the carrier's liability as a carrier begin? When end? What is its liability after the liability as carrier ends?

Chapter 4

19. Define a document of title.

20. Is a document of title negotiable? Distinguish in legal effect between a document of title and a negotiable
instrument.
21. How are documents of title negotiable?
22. State the warranties of a transferror of negotiable paper.

Chapter 5
23. Define a sale. How does it differ from a contract to sell? If there is a contract to sell and the seller refuses to
perform, has the buyer any ownership of the goods? Can he compel performance? What is his remedy?
24. (1) A agrees to deliver and B agrees to accept and pay for a horse at a price to be later agreed on. Is there a sale?
(2) Suppose the horse was actually delivered under the agreement and kept by B, but no price was ever agreed on;
what rights has A?
(3) A sale at a price to be determined by the market price on a future day. Is there a sale?
(4) A sale between A and B at a price to be determined by C. Is there a contract?
(5) A sale with no price expressly agreed upon and no way stated by which it can be fixed. Is there a contract?
25. Define a conditional sale.
26. A, being insolvent, gives his house to his sister, and sells his automobile to B at less than it is worth. A's trustee in
bankruptcy attempts to set aside both transactions. Will he prevail?
27. A ordered of B a number of automobile trucks of the kind sold by B as a part of his regular stock, and also a
number of taxi cabs to be made up especially for A with a monogram on each car, the cars to be built only upon A's
special order and not otherwise a regular part of the stock carried by B. They were to be painted in certain colors and
to have special designs. Both contracts are oral and there has been no payment or delivery. The cars are shipped to A.
He refuses to accept them and pleads the statute of frauds. Is his defense good?
28. A wrote a memorandum of sale upon his letterhead and handed it to B who accepted it. B afterwards sues A. A
relies on the statute of frauds and claims that there is no memorandum signed as required by the statute of frauds,
because, first, neither party has signed it; second because under any construction B did not sign it when the contract
was made. Is either defense good?
29. Under what circumstances can an agent of one party sign his name to comply with the statute of frauds?
30. A orders an automobile from B and pays $10.00 down. A afterwards sues B for failure to deliver the car. Can B
plead the statute of frauds?

Chapter 6

31. What is the rule as to the power to sell future goods? To contract for the sale of future goods?
32. If goods are destroyed unknown to either party before the contract is made, what is the rule? What right does the
Sales Act give the purchaser in case of partial destruction or partial deterioration?
33. Same questions where deterioration or destruction occurs after the contract is made but before the title passes.
34. A contracts to sell to B 500 reaping machines. A has on hand 1,000 machines out of which he expects to fulfill his
contract with B, but B has no right to demand any specific machines. The entire 1,000 machines are destroyed by fire.
Is the contract avoided? Why?

Chapter 7

35. Define a warranty.

36. A bought from B a horse, B stating that the horse was "sound and all right." The horse was afllicted with "moon
eyes," which is incurable and finally results in total blindness. Plaintiff sues for breach of warranty alleging that he did
not see or know of the defect when he bought the horse. Defendant contends (1) that the language does not constitute
a warranty; (2) that at any rate plaintiff must show fraud; (3) that defendant had an opportunity to inspect the horse
when he bought it. (McCarty v. Williams, Ind. Ap. 108 N. E. 370.)

Appendix D3. Questions And Problems. Continued

37. A sells B a car stating that it is a 1912 model. It is not a 1912, but an earlier model. Is A's statement a warranty?
(Morris v. Flat Motor Sales Co. of Calif., 162 Pac. 663. [Cal.]).
38. A sold B "cheese" stating that it was "excellent." B claims it is not excellent and sues for breach of warranty. Is
there a warranty in the use of this word? (Maggroros v. Edson Bros., 164 N. Y. S. 377.)
39. A sold to B a specific mule for a sound price. The mule had a bone spavin but it was not discoverable upon
reasonable inspection. A knew the mule had the defect and said nothing. B sues A for damages. A relies on caveat
emptor. Has B a case? (Glover v. Phillips, 174 S. W. (Tex.) 657.)
40. A was a manufacturer of farm machinery and he also dealt In windmills, which he did not manufacture. B knowing
this to be true, bought some farm machinery, ordered from A's catalogue, and also a windmill ordered in the same way.
Both were defective from a weakness not apparent on reasonable inspection and not known to either A or B at the time
of sale or delivery. Can B recover in either case?
41. A had a contract with B whereby it was to erect for B a building according to certain specifications. A submitted the
contract to C. Lumber Company and asked for a contract for lumber as required in said contract. C. Lumber Company
agreed to sell A the lumber needed in said contract. What warranties were implied? (Berger v. E. Berger & Co., 80 So.
(Fla.) 296.)
42. A orders "2 Harrison Safety Boilers of 150 Horse Power each." B, the manufacturer, knows the purpose for which
they are wanted. Name all the implied warranties in this sale.
43. Describe the warranties in a sale by sample.
44. W, owner of a retail store, sold S a sealed can of herring, canned by other parties from whom W purchased at
wholesale. The herring was spoiled, and S upon eating it became sick from the effect thererof. S sues W. Can S
recover damages? (Sloan v. F. W. Woolworth Co., 193 111. Ap. 620.)
45. A, a maker of cars, sold an automobile to B, a dealer who resold to C, and C while using the car was injured on
account of a defective wheel. C sues A. Must C show guilty knowledge, or can he recover on merely showing
negligence on A's part?

Chapter 8

46. What is meaning of phrase "transfer of title"?

47. A orders a wagon from B, to be made up especially for A from materials furnished by B. A sees the wagon from
time to time in the progress of being built and expresses satisfaction. Before the wagon is finished and while still at B's
place, B goes into bankruptcy. As between B's trustee and A, who is entitled to the wagon?
48. A miller sold a grocer 100 bbls. of flour, same was paid for. Later after the grocer left, the miller rolled on the
sidewalk 100 bbls. of flour that the grocer was to call for. Later the miller changed his mind and rolled the flour back
into the mill, and the sheriff levied on the flour for a credit of the miller who was insolvent. What right has the grocer?
49. Plaintiff made a contract of sale of grapes growing on certain vines, such grapes to be picked, packed and
delivered to a railroad station, and there received by defendant for prices stated. Before the grapes were picked, they
were destroyed by a heavy rain storm. Plaintiff sues defendant for the price. On whom will loss fall? Why? Pfoh v.
Porter, 137 Pac. 44 ( - Cal. - ). See also Hartley v. Lapidus & Holub Co., 216 Fed. 92. (Sale of apples then on trees to
be picked and delivered by seller.)
50. A at New York consigned goods to himself at Chicago and forwarded a bill of lading indorsed in blank and with
draft attached, to a bank, with directions that the bill be delivered only on payment of the draft. During transit and
before delivery of the bill of lading to the purchaser, the goods were damaged by the great flood of 1913 in Ohio, and
rendered practically worthless, and would not be received by the connecting carrier there. The shipper claimed that the
buyer was liable for the price. Who wins? (Brandenstein v. Geo. Ras-mussen Co., 192 111. Ap. 545.)
51. What is meant by reservation of "jus disponendi"? In what ways may it be accomplished?
52. Boxes were sold by A to B "f. o. b. scow at Seattle" (point of shipment). A made delivery on the scow. A part of the
boxes were lost on the scow. A sues for the purchase price of all the boxes. B contends title has not passed as he had
a right to examine the goods before acceptance. Result? Why? (Skinner v. James Griffith & Sons, 141 Pac. 693, -
Wash. - .)
53. A bought a horse from B. Agreed that B was to turn horse over to A's father C in a day or two, from whom A could
get the horse when he desired. Horse turned over to C, while in C's possession horse injured by coming in contact with
a wire. Suit by B for purchase price. Defense, title not passed. How should court decide? (Kepple v. Stoddard, 193
111. Ap. 301.)
54. A, living in one county in the state, orderd whisky from B, living in another county of the state, to be shipped by B
over a railroad traveling between such counties. B shipped the whisky. A law forbade the selling of whisky within one
mile of a schoolhouse. B, though living more than one mile of a schoolhouse, shipped the whisky at a railroad station
within one mile of a schoolhouse. B is indicted. Is he guilty? (State v. J. Kelly & Co., 123 Tenn. 556, 36 L. R. A. N. S.
171.

Chapter 9

55. A sold to B for cash, B giving a worthless check. B then resold to C an innocent purchaser for value. A, finding the
check worthless, sues C for conversion of his property. Can A recover? (B. & O. S. W. v. Good, 82 Ohio 51, 92 N. E.
435, 29 L. R. A. N. S. 713.) Notes 13 L. R. A. N. S. 809 ; 49 L. R. A. N. S. 173.
56. A is employed by B as a salesman to take orders from samples. Orders to be filled by shipments from B. A is given
certain costly samples from which to make his sales. He sells the samples to a tradesman upon whom he calls and
collects the price. State whether B has any remedy against the purchaser, and if so, what kind of remedy he should
pursue.
57. A buys an automobile from his neighbor Brown. He then tells Brown that he will not want to use it for a month and
Brown can keep and use it in the meantime. A week later Brown sells to Smith. A claims the machine from Smith. Who
prevails?
58. A sells his business to B, including the stock in trade. There is a bulk sale's act in force. It is not complied with. M is
one of A's creditors. What remedy has he?
59. The Singer Sewing Machine Company made a contract with one Carver under which they delivered him a sewing
machine, calling the contract a lease and the payments made thereunder rent, under which by the last payment lessee
was to acquire title. The statute of the state required a conditional sales contract to be recorded to be good against
innocent purchaser. Carver while still indebted sold the machine to the defendant. The contract in question was not
recorded. The Sewing Machine Company sues the defendant for possession, asserting that it had title. Can plaintiff
prevail?

Chapter 10
60. A made a contract with B for sale by B to A of 20 carloads of sauer kraut, specifying "kraut of good quality, 1913
pack, equal to that furnished by seller during season of 1911." Both parties, when the contract was signed, believed
that the kraut was to be manufactured at B's factory. B tenders kraut not made at B's factory and that is A's only
objection to it. Is the objection good? (Adapted from A. G. Behman Co. v. Island City Pickle Co., 208 Fed. 1014..)
61. If goods arrive late, must defendant accept them? Can he accept and sue for damages?
62. Where a quantity is stated and the words "more or less" or their equivalent are stated, what is their import?
63. A sold goods to B to be put on cars at New York for shipment to B in Chicago. Goods lost enroute. Has A
performed his contract ?
64. Plaintiff sold defendant a refrigerating plant under an express warranty, providing for a test, and providing that an
acceptance after the test would be in full discharge of all obligations under the contract, and further providing that use
after the time for rejection would be an acceptance. Defendant kept the machine after such period, but now claims in
defense to a suit for the purchase price that the warranty was broken. Is the defense good? (Fred W. Wolf Co. v.
Monarch Refining Co., 252 111. 491.)

Chapteb 11

65. If goods have not been delivered to buyer and title has not passed, and buyer breaks the contract, what are the
seller's remedies?
66. In such a case, state specifically whether seller can sue for the price.
67. What is a seller's lien? How is it lost?
68. If title was passed to buyer and goods are still in seller's possession, can seller take back the title for buyer's
default?
69. In such a case can the seller sue for purchase price?
70. If seller has delivered the goods to buyer and title has not passed, can seller reclaim the goods if purchase price
not paid? What is the rule in conditional sales?
71. What is right of stoppage in transitu?

Chapter 12

72. What is the measure of a buyer's damages for refusal of seller to pass title and deliver goods?
73. If title has not passed, can the buyers get the goods themselves?
74. If the seller has broken a warranty, may the buyer reject the goods? May he accept and sue on a broken warranty?

Negotiable Paper. Part I. General Nature And History. Chapter 1. General Description Of
Negotiable Paper

Sec. 1. Meaning Of The Word "Negotiable

By the term "negotiable" as applied to obligations to pay money is denoted a quality by virtue of which the obligation so
described is assignable at law by the payee (and his assignees), in some cases by mere delivery and in others by
indorsement, to vest in each succeeding transferee not only the legal title thereto and the direct obligation to him of the
original debtor without notice to such original debtor, but when acquired under certain circumstances, such title is
unaffected by the equities or defenses, if any, of such debtor against his original promisee.
A negotiable instrument is an evidence of a money indebtedness. Claims against debtors in any form are now in all
jurisdictions assignable by the claimant. But such claims although assignable are not negotiable unless having certain
"formal requisites" hereinafter described.
The general character of an instrument assumed to be negotiable may be indicated by the following process of
reasoning.
In the first place, the fundamental idea of contract in
English and American law is that of an agreement entered into by persons who have chosen to deal with each other
upon terms they have both been willing to make with full freedom to mutually regulate the manner of performance,
mutually change the provisions thereof, and to oppose each to the other mutual defenses, equities and set-offs. In
other words, a contract sets up an entirely personal relationship which neither party without the consent of the other
can change or disturb by transferring his rights thereunder to any third person.
However, it is also recognized that a contractual right and especially a right to money cannot be of its utmost value to
the claimant unless he can dispose of it to another and thereby accelerate for himself its realization. And if such
transfer to another can be accomplished without overthrowing or materially impairing the fundamental idea of contract
as a personal arrangement, the law ought to permit the claimant so to transfer it even without the consent of the debtor
- leaving to such debtor all the rights, equities and defenses that he would have had had there been no such transfer. If
a man must pay a debt arising out of contract, it cannot be material to him to whom he pays except to know that the
recipient is truly entitled to it. But it is material to him that he shall not pay more than he really owes. The law therefore
developed that notwithstanding the personal theory of contractual relationship, assignment of mere rights would be
allowed even without the consent of the other party to the contract, but that such assignment could not carry with it any
greater right than the assignor had to convey. The assignee would merely stand in the shoes of the assignor.
Defenses, if any, of prior payment, non-performance of contract, fraud, duress, set-off, could be as effectually urged
against the assignee as against the assignor. Furthermore such assignee must give notice that he had acquired the
claim in order to make it effective against the debtor, and it became effective at the time of such notice only. Such is
the law of assignment of contractual indebtedness, a law resulting as a sort of a compromise between the strict
personal theory of contract and the policy of the law that what one has in the nature of an asset should be a vendible
commodity; a law representing more or less of an inroad into the law of contracts, and at first reluctantly recognized.
Example 1. A, a merchant, sells his book accounts to B. One of them is an item against X for the purchase price of a
machine. X must pay B under this assignment, but if he has any defense against A whether of fraud, breach of
warranty, failure to get the machine, payment already, or whatever it may be, he may interpose such defense against B
although B was entirely ignorant of the defense and gave full face value for the claim. Furthermore X may pay A the
claim and thereby cancel the indebtedness even after the assignment unless he knows from A or B that B has acquired
the claim.
But there was early felt a need in the commercial world that one's obligation to pay money, might, when the parties so
desire, be made instruments of credit to bear upon their face the obligation of the debtor according to the tenor thereof,
or, to state it another way, that obligations to pay money, should, so far as possible, have the characteristics of money;
and this need requires that the obligation shall be separable from the transaction in which it arose and circulable as an
independent and absolute obligation in itself; so that when suit is finally brought thereon by one who has acquired it,
the equities, if any, between the original parties cannot be raised for adjustment against the present plaintiff. He has
acquired the direct obligation of the debtor to pay to him the obligation according to the written terms, whatever may be
the hidden defenses. This is contrary to the general concept of contract, and it is so because in the particular case the
parties have desired it to be so, and have indicated their desire by the adoption of a form of obligation, and the law has
recognized the desire and given it effect.
It is for this reason that form is so important in the law of negotiable paper, and the reason that the law says that "an
instrument to be negotiable must conform to the following requirements" (which are hereinafter enumerated and
considered).
Example 2. If in Example 1, X's obligation had been set forth in the form of a negotiable promissory note, B's
acquisition of it (under the rules prescribed to make him a holder in due course as indicated hereafter) would make X
liable to B upon the note according to its tenor, without respect to secret equities or defenses, and furthermore B would
not have to give notice to X that he had acquired it in order to prevent further dealings between A and X in respect to
the note. X must constantly assume that the note may have been negotiated, and therefore should not pay it except
upon its presentation.
Negotiable paper in addition to being so negotiable may serve the purpose of adjusting accounts between parties
without the actual transfer of funds, and, historically, that was the main reason that led to its invention upon the
continent of Europe.1
I. "From these different places they [Italian bankers] corresponded with one another, and doubtless before the
beginning of the thirteenth century commenced the custom of receiving money in one place to be paid out by an order
upon their correspondents in another. The merchants who traveled from country to country to trade and attend the
various marts and fairs were thus saved the expense and risk of transporting money in specie." - Street, Foundations
of Legal Liability, Vol. 2, Ch. 31.
For instance, suppose that merchant A in the city of X has business with parties in the city of Y, and merchant B in the
city of Y has business with parties in the city of X. If A and B arrange for each to accept the other's drafts upon him,
funds need not pass between X and Y except upon periodical adjustment of accounts. Variations of this situation could
be suggested, but the example shows the convenience of the draft or bill of exchange to perform the function
mentioned.

Sec. 2. Peculiarities Of Negotiable Paper As Distinguished From Instruments Not Negotiable

Negotiable paper is distinguishable from other forms of simple contracts (1) in the quality of its transferability as above
described, (2) in the fact that a consideration will be presumed, and (3) in the allowance of days of grace after maturity
(now generally abolished).
Negotiable paper has three qualities distinguishing it from other forms of indebtedness.
(1) Transferability, as above described. This led to the following incidents:
(a) Manner of transfer, being, in certain cases, by mere delivery, and, at most, by mere indorsement of the name of the
payee or other holder.
(b) Acquisition of title by transferee without necessity of notice to debtor that he has acquired it; for, being negotiable,
the debtor must always bear in mind that it may have been negotiated.
(c) Title of transferee unaffected by equities, as explained above.
(d) The establishment of rules governing the transfer for the protection of all parties concerned.
(e) The additional contingent obligation of successive transferors.
(2) Consideration presumed. Even as between the original parties a consideration is presumed in the case of
negotiable paper, until denied. A case is not made on other simple promises until the promisee proves the
consideration. But a prima facie case is made on negotiable paper by the instrument itself.
(3) Days of Grace were allowed on negotiable paper. That is, until three days had elapsed after the paper was by its
terms mature, it was not due, and suit was premature if begun before that time. But days of grace have generally been
abolished and are not recognized in the Uniform Act.
Chapter 2. Negotiability Of Various Instruments. A. General Types Of Instruments Governed
By Negotiable Instruments Law

Sec. 3. Promissory Notes

Promissory notes are promises to pay money and are negotiable when drawn as required by the negotiable
instruments law.
Promissory notes are defined in the Uniform Negotiable Instruments Law as follows:
"A negotiable promissory note within the meaning of this act is an unconditional promise in writing, made by one
person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum
certain in money, to order or to bearer. When a note is drawn to the maker's own order, it is not complete until indorsed
by him."la
Example 3. Form of Promissory note.
$100.00 Chicago, 111., July 1st, 1920.
August first, 1920, after date, for value received, I promise to pay to the order of William Smith, the sum of One
Hundred (100) Dollars, at 1011 Blank Street, Chicago, Illinois, with interest at 6 per cent. per annum, after the date
hereof.
(sd.) Walter W. Johnson.
1a. Uniform Negotiable Instruments Law, SEC. 184.
A promissory note, as the name indicates, is the expression of a promise. To be valid as a contract between the
parties, there must be all the essential elements necessary to the formation of a contract. To be a negotiable
instrument, it must contain other elements. What those elements are is indicated in the definition above, but as they
are hereafter more particularly discussed, they will not be further noticed here.
The parties to a negotiable promissory note are: the maker, who is the promisor, and the payee, or the one to whom
the promise to pay is made. But the payee may be described as "the bearer," in which event the instrument may be
transferred with or without indorsement. If the payee is named he must indorse, and he is then called an indorser, as
are all other subsequent transferors who place their names on the back of the instrument.
The power to evidence a debt in the form of a negotiable promissory note secures to one a better credit than perhaps
he could otherwise obtain. For it may in any particular instance enable his creditor to immediately realize on the debt
by a sale to another, who purchasing before maturity and with no knowledge of any defense against the note, knows
that he can enforce it according to its tenor, restrained only by the insolvency of both the maker and the payee, who is
now indorser, and even this restraint would be removed were the note adequately secured. And in a suit upon a
promissory note it is not necessary to prove the consideration, that is, the transaction out of which it arose, unless a
defense is made denying consideration.

Sec. 4. Bills Of Exchange

Bills of exchange are orders for the payment of money and are negotiable if drawn as required by the negotiable
instruments law.
"A bill of exchange is an unconditional order in writing addressed by one person to another signed by the person giving
it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer."2
Example 4. Form of bill of exchange.
Cincinnati, Ohio, June 1, 1920.
One month after date, pay to the order of William H. White, One Hundred Dollars. Value received, and charge to the
account of
(sd.) Walter W. Johnson. To Oliver Smith,
Chicago, Illinois.
An acceptance of the above bill would read as follows:
"Accepted, Chicago, June 3rd, 1920," and would be written across the face of the bill.
A bill of exchange is an order drawn by one person, in favor of another upon a third. To be negotiable it must contain
the elements indicated in the definition, but as these are discussed hereafter, they need not be further noticed here.
Bills of exchange are either "foreign" or "inland." "An inland bill of exchange is a bill which is, or on its face purports to
be, both drawn and payable within this state. Any other bill is a foreign bill. Unless the contrary appears on the face of
the bill, the holder may treat it as an inland bill."3 The importance of distinguishing between foreign and inland bills will
appear later herein.
2. Uniform Nego. Instru. Law, Sec 126.
3. Uniform Nego. Instru. Law, SEC. 129.
Bills of exchange are sometimes drawn in "sets," usually consisting of similar papers called "parts," usually three, each
one referring to the others, and all constituting one bill. Care should be taken in dealing with bills so drawn as double
liability may ensue. Acceptance by the drawee should be on one part only. See Sections 178 to 183 in Appendix A.

Sec. 5. Checks
Checks are orders to pay money upon banks by depositors and are negotiable if drawn as required by the negotiable
instruments law. "A check is a bill of exchange drawn on a bank payable on demand." 4
Example 5. Form of check.
No. 1490. Chicago, July 1st, 1920
The Blank Trust And Savings Bank
Pay to the order of................John Smith................$1000
One Thousand................................................Dollars.
(sd.) Wm. Jones.
A check is a kind of a bill of exchange and is governed as far as may be by the same rules that govern bills of
exchange. But there are these distinctions.
(1) A check is drawn on a bank or banker;
(2) By one who thereby asserts that he is a depositor and has funds in a checking account sufficient to cover the
check.
(3) The check is always payable on demand, whereas a bill of exchange may or may not be.
(4) A check is not intended to remain out unpre-sented for payment except for a brief period.
4. Uniform Nego. Instru. Law, Sec 185.
B. Special Forms Of Bills, Notes And Checks

Sec. 6. In Explanation
The above described instruments - bills of exchange, promissory notes and checks - are in commercial life for all
practical purposes all of the kinds of negotiable paper. There are, however, types of each kind serving special
purposes, and going by special names, but being nevertheless essentially either bills of exchange, promissory notes or
checks, and not being negotiable unless complying with the rules governing the requirements of those instruments.
Below are described some of these special forms.

Sec. 7. Certificates Of Deposit

A certificate of deposit is an instrument issued by a bank reciting a deposit of a certain sum of money, payable to order
on demand or at a fixed time. It is negotiable, if drawn properly, being a form of promissory note.5
Example 6. Certificate of deposit.
No. 1008. Chicago, July 1, 1920.
James A. Jones has deposited in the 16th National Bank of Chicago, Illinois, Five Hundred Dollars, payable to the
order of himself upon the return of this Certificate properly indorsed. Interest 3 per cent. per annum.
Not subject to check.
William Randolph,
Cashier.
5. Kushner v. Abbott, 156 la. 598.

Sec. 8. Corporate And Municipal Bonds

Bonds issued by private corporations and by municipalities are, as customarily drawn, negotiable promissory notes.
Bonds of municipalities and of corporations are in form and effect promissory notes, secured in the case of
municipalities by the taxing power, and secured in the case of corporations by a mortgage or trust deed upon specified
assets of the debtor.
Bonds are in form "registered" or "coupon" bonds. A registered bond is one transferable only upon the books of the
company, interest being payable to the registered holder.
Coupon bonds are payable to bearer and the interest payments are evidenced by coupons which are themselves
payable to bearer and negotiable.

Sec. 9. Trade Acceptances

A trade acceptance is a time bill of exchange drawn by a seller of merchandise on the buyer for the purchase price of
the goods, accepted by the buyer with the time and place of payment.
Example 7. Form of Trade Acceptance.6
A trade acceptance is a form of bill of exchange, and complies with the definition of an accepted bill of exchange, but it
is drawn upon and accepted by a buyer of goods for the purchase price thereof and so states upon its face. Its object is
to provide the buyer immediately with an instrument of credit which he may use if he wishes funds at once by
discounting the same at his bank or by using it as he may use any other negotiable paper. The trade acceptance
practice is designed to replace the discount system which has been generally prevalent throughout the country.

In case the trade acceptance is used the procedure is about as follows: The seller of merchandise sends with the
invoice a draft upon the buyer, payable in thirty, sixty or ninety days. The buyer writes his acceptance thereupon and
returns it to the seller, who may hold it and put it through his bank for collection when due, or may discount it at his
bank for cash, or may sell it in the open market, or may use it instead of currency. A buyer of the acceptance or a
lender thereupon would be in the same superior position of any holder in due course of commercial paper in that he
would be subject to no defense the buyer might later raise about the goods, and would be subject to no set-offs
between buyer and seller. The trade acceptance is known as "two name" paper, that is, when used by the seller of
goods for credit or discount, it bears the buyer's liability as drawer and the seller's liability as acceptor.

Sec. 10. Bank Drafts

A bank draft is a bill of ex-change payable on demand drawn by one bank upon another to the order of a person
named therein, or to bearer. It is negotiable.
A bank draft is a form of a bill of exchange, and is negotiable.

C. Documents Of Title Made Negotiable By Statute But Not Governed By The Negotiable
Instruments Law

Sec. 11. Bills Of Lading And Warehouse Receipts

Bills of Lading and Warehouse Receipts may be drawn to order or to bearer in which event they have a quality of
negotiability, but they are not instruments governed by the Negotiable Instruments Law.
By the common law bills of lading and warehouse receipts are assignable. Statutes in most jurisdictions have given
them (when drawn to order or to bearer) a negotiable quality. But they are not negotiable in the same sense that bills,
notes and checks are negotiable. They cannot be, inasmuch as they are in the nature of receipts by bailees for specific
goods, while negotiable instruments are general obligations to pay money. The law of negotiable paper does not cover
bills of lading or warehouse receipts notwithstanding they may be negotiable for they are in their nature different forms
of obligations, and are and must be governed by a law peculiar to themselves. The Uniform Bills of Lading Act, and the
Uniform Warehouse Receipt Act have been drafted by the Commissioners on Uniformity of Legislation to govern these
documents, under which such instruments are negotiable if drawn "to order" or "to bearer" and non-negotiable if drawn
"straight" to consignee. But neither under these acts nor any other law are "documents of title" to be assimilated with
the "negotiable paper."

D. Sundry Instruments Assignable But Not Negotiable

Sec. 12. Certificates Of Corporate Stock

A stock certificate is an instrument issued by a corporation reciting that the bearer or person named therein is the
owner of the number of shares in the corporation as therein stated. It is freely transferable, but not negotiable.
One of the objects of incorporation is to secure a free transfer of shares without affecting in any way the existing order
of affairs in the corporation. This transfer is accomplished by means of the certificate of stock which is issued to every
stockholder. Yet it cannot be said that a stock certificate is negotiable; it is simply assignable. It is not subject to the
rules governing commercial paper. A further consideration of such instruments should be sought in the law of
corporations.

Sec. 13. Mortgages And Trust Deeds

A mortgage or trust deed is a conveyance or lien given on real or personal property as a security for a debt. It is not
negotiable, but in some states statutes confer a quasi-negotiability.
Mortgages are assignable by the mortgagee, but not negotiable, being securities for debts, and not the evidences
thereof. But the notes which accompany mortgages are negotiable if correctly drawn, and indorsement of such notes
operates to transfer the mortgage. In some states, statutes have been passed to the effect that if a mortgage secures
and refers to a negotiable promissory note, it shall also be negotiable in the sense that the defenses shall not be set up
to defeat foreclosure proceedings which could not be set up in a suit on the note on account of the note's negotiable
character.

E. The Instruments Within The Scope Of This Text

Sec. 14. The Negotiable Instruments Herein Considered

The negotiable instruments hereinafter discussed are only those properly falling under the uniform negotiable
instruments law, that is, bills, notes, and checks, and special varieties thereof. These are the instruments which
constitute the proper subject-matter of "The Law of Negotiable Paper."
While various statutes in different states have attempted to confer upon various instruments a negotiable or quasi-
negotiable character, the discussion of them does not fall properly under a treatment of the law of commercial paper.
"Commercial paper" or "negotiable paper" or "negotiable instruments" as they are commonly understood mean paper
evidencing a debt ultimately reducible to money, and not calling for the delivery of other property. They are bills, notes,
and checks. We shall hereafter consider only those three forms of instruments. What is said shall refer to bonds,
certificates of deposit, bank drafts or any instrument payable in money, simply for the reason that such instruments are
bills, notes or checks. The discussion will have nothing to do with and will not apply to warehouse receipts, bills of
lading, or any instrument which does not contain a promise or order to pay money. The Uniform Negotiable Instrument
Act does not refer to such documents and it is serious error to think of them as negotiable instruments. For purposes of
distinction those instruments should be called "Documents of Title" - not "Negotiable Instruments."
Chapter 3. History And Origin Of Negotiable Paper

Sec. 15. Continental Origin And Adoption In England

Bills of exchange originated among the Florentine and Venetian merchants. They came into use in England and with
promissory notes became negotiable by the custom of merchants.7
Foreign bills of exchange are thought to have been invented by the Florentine and Venetian merchants in the 12th or
13th century as a means of transmitting credit from one country to another without the need of actually transferring
money. The time of their first use in England is uncertain. Bills of exchange were not at first negotiable, and did not
pass from hand to hand as they now do, but became so in the 16th or in the early part of the 17th century.
Inland bills and promissory notes came into use in England about the middle of the 17th century. One of the Judges of
England, Lord Holt, in the early part of the 18th century, doubted the negotiability of promissory notes,8 and the Statute
of 3 and 4 Anne, c. 9, was passed to declare them negotiable.
Bills and notes were first negotiable by the custom of merchants and then by reason of the universality of such
7. Street, Foundations of Legal Liability, Vol. 2, Ch. 31.
8. Clerke v. Martin, 2 Ld. Raym. 757.
custom, by the common law. Many statutes have since been passed in respect to such instruments, but are in
declaration of or addition or amendment to the common law whereby they were first negotiable. Lord Holt's opinion in
respect to promissory notes is believed to have been error.
In 1878 Judge M. D. Chalmers published a Digest of the English Law of Bills, Notes and Checks. His work attracted
much attention and praise, and his services were procured to draft a bill which should put the law of England in the
form of a Code, and in 1882 the English Bills of Exchange Act was enacted by Parliament.

Sec. 16. Negotiable Paper In The United States

By the adoption of the common law the American states adopted the law of negotiable paper. And the law has
developed therein according to the needs of the commercial world.
The American commonwealths adopted the English common law. They thereby adopted the law of negotiable
instruments as it was at the date which governs the adoption. Statutes have been passed from time to time which
amend the common law, but this legislation up to very recently has been of a detached sort. After Judge Chalmers' Act
was passed in England, the need of a similar codification was felt in this country. It was really much more needed on
account of the arbitrary division of our country into various legislative jurisdictions. In 1890 the legislature of New York
had authorized the appointment of commissioners to confer with commissioners from other states in respect to
uniformity in legislation. Shortly afterwards commissioners were appointed by other states and the Commissioners on
Uniformity of Legislation came to be widely representative. These commissioners procured in 1895 the services of Mr.
J. J. Crawford to draw up a Code; and the results of his labors were adopted in 1896 and recommended to the various
states for passage. New York was the first state to act upon such recommendation but the Uniform Negotiable
Instruments Law, with some minor changes in various instances, has been adopted as noted in Appendix A in which
the text of said Act is set out verbatim.
Part II. The Formation Of The Contract. Chapter 4. Expression - Negotiable Form. 1. Formal
Requisites

Sec. 17. In General

Certain elements are required by law to be present in any instrument, as essential to negotiability. While it cannot be
said that there are any particular words, exclusively necessary to express these elements, adherence to forms
approved by usage is highly desirable.
The law provides that an instrument to be negotiable (1) Must be in writing and signed by the maker or drawer;
(2) Must obtain an unconditional promise or order to pay a sum certain in money;
(3) Must be payable on demand, or at a fixed or determinable future time;
(4) Must be payable to order or to bearer;
(5) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable
certainty." 9
The negotiability of an instrument is indicated by the inclusion of the elements above prescribed. They are elements
whose existence is shown by the form of the language used. That language must be definite and unconditional. It is by
the form that the intention of the issuer to issue paper that shall be negotiable is made manifest. Therefore while it is
true that "the instrument need not follow the language of this act, but any terms are sufficient which clearly indicate an
intention to conform to the requirements hereof"10 still inasmuch as such instruments are intended to circulate much
as money does, their negotiable quality ought to be indicated in a manner beyond doubt; therefore, the simpler the
form, and the closer it corresponds to approved usage, the better. As it has been said: "By the law merchant and the
statutes of the state in aid thereof, negotiable instruments occupy a highly useful and valuable place in the commerce
and business of our people. There is no other form of contract known that in so few words may contain so many well
understood and thoroughly established legal rights and liabilities."11
9. Nego. Instru. Act, SEC. 1.
The various requisites may now be discussed.

Requisite A. "It Must Be In Writing And Signed By The Maker Or Drawer."

Sec. 18. Writing And Signature

Writing and signature of maker or drawer are essential to negotiability.
Our natural conception of a negotiable instrument is that of a written paper.
"Writing" includes print.12 The substance of the impression may be ink or lead.13 The former is of course preferable
from the standpoint of sound and safe business practice.
10. Id. Sec 10.
11. Smith v. Myers, 207 111. 126.
12. Nego. Instru. Act, SEC. 191.
13. Geary v. Physic, 5 B. & C (Eng.) 234.
Signature. An instrument to be negotiable must be signed.
"No person is liable on the instrument whose signature does not appear thereon, except as herein otherwise expressly
provided. But one who signs in a trade or assumed name will be liable to the same extent as if he had signed in his
own name."14
Example 8. A note signed "Western Novelty Co., Unincorporated" binds all who go under that trade name, assuming
that the note is given under the authority of those sought to be held.
Printed or lithographed signature is a legal signature,15 but not good practice except on bond coupons, or the bonds
themselves, in which case it ought to be so provided in the bond, and if used on a bond, authentication of each
delivered bond ought to be requisite to its validity.
Signature by agent. " The signature of any party may be made by duly authorized agent. No particular form of
appointment is necessary for this purpose, and the authority of the agent may be established as in other cases of
agency. "16
Location of signature. The signature is by custom at the bottom upon right hand side, but is legally sufficient if in the
body of the instrument if intended as a signature, although precaution suggests the use of the customary manner.
14. Nego. Instru. Act, SEC. 18; Jones v. Home Furn. Co., 41 N. Y. Suppl. 71.
15. Brown v. Bank, 6 Hill (N. Y.) 443.
16. Nego. Instru. Act, Sec 19.

B. "Must Contain An Unconditional Promise Or Order."

Sec. 19. Unconditional Promise Or Order

An instrument to be negotiable "must contain an unconditional promise or order."
(1) In general.
A promissory note must contain an absolute promise, a bill or check an absolute order, to make them negotiable. And
the absoluteness of the promise or order must appear from the language of the instrument, not from extrinsic
circumstance.
(2) Reference to transaction or consideration as affecting absolute character of promise or order.
Bills, notes and checks sometimes refer more or less extensively to the transaction to which they relate, and the
question presents itself whether such references are to be construed as making the promise or order conditional. In
this connection it should be first noted that the absolute character of the obligation as drawn does not prevent defenses
from being set up as between the parties where the contract for which the instrument was given is violated or the
consideration in any manner fails. For instance, if one gives his promissory note to another for services to be rendered
by that other, the note is not negotiable unless drawn as an absolute promise to pay, yet nevertheless if the payee
sues, the defense of non-performance can be successfully interposed as a defense. But as against a purchaser from
the payee the defense cannot be made as explained in another part of this book.
But the negotiable instruments law proceeds upon the theory that it is the making of the promise or order absolute in
form "which (with the other requirements) indicates the intention of the maker or drawer that the obligation shall have
negotiability. For if he makes it conditional, there is a tying up of the obligation with the conditions of the transaction
which negatives the idea of negotiability.
Is a reference to the consideration or transaction a qualification of the promise or order? Does such reference impair
the requirement that the promise or order must be unconditional? If the maker writes upon the note that it is "given for a
horse this day purchased from the payee" does this in itself destroy absoluteness of the promise?
If the reference to the consideration or transaction is a mere recital by way of identification, it does not impair
negotiability 17
It will be clearly seen upon reflection that a reference to the consideration or transaction in connection with which the
instrument arose cannot hinder negotiability, provided, it is by way of mere recital and does not impose conditions of
performance or otherwise. The reason is that when any person purchases negotiable paper, he must assume that
there was a transaction in connection with which it was given, and a consideration for which it was given. If he knows in
fact that there was no consideration he should not purchase. If he goes upon the general presumption that there is a
consideration, it cannot detract from the situation that he be informed definitely what the consideration was. This
should strengthen rather than weaken the case. If he buys a note, suppose he is told upon the face of the note that it
was given for goods purchased. Here the general presumption of consideration to which he is entitled, is intensified
into a particular item of information.18 But he is no more informed by this fact that there is anything wrong with the note
than he would be, were such notation not made. Therefore a mere recital of the actual consideration should have no
effect upon the negotiability of the instrument.
17. Id. SEC. 3.
Example 9. Siegel, Cooper & Co., merchants of Chicago, contracted with one D. Dalziel, for street car advertising to be
placed by him, and gave in consideration for his undertaking the following note:
"Chicago, Mar. 5, 1887. "300
| On July 1, 1887, we promise to pay to D. Dalziel, or order, the sum of three hundred dollars, for the privilege of one
framed advertising sign, size ............x............
inches, one end of each of 159 street cars of North Chicago City Railway Co., for a term of three months from May 15,
1887.
Siegel, Cooper & Co."
Dalziel sold the note for value on the day he received it to the bank. The work was never done. In a suit by the bank
against Siegel, Cooper & Co.,19 defendant claimed that the note was nonnegotiable by reason of the recital of the
consideration, but the court held that it was a mere recital in no way qualifying the absoluteness of the promise to pay,
and the note was therefore negotiable. If the note had said "subject to performance by payee," it would have been
nonnegotiable.
It appears by the above case that though the reference to the transaction shows that it is executory, the note is still
negotiable. It follows that it is negotiable if the recital shows a completed transaction.
18. Hereth et al. v. Meyer, 33 Ind. 511.
19. Siegel v. Bank, 131 111. 569.
In case of recitals showing a retention of title by the payee of the goods for which the instrument is given, the rule is the
same, although there is some variance of authority on this point. But the provision must not qualify the promise or
make it in any sense conditional.
Example 10. A note otherwise negotiable in form but retaining the title for purposes of security to property bought by
the maker and for which the note was given is negotiable.20
By statute in some jurisdictions, certain notes given for certain considerations must so state upon their face, and are
then to be purchased subject to any defenses that may exist. Thus, under local laws, chattel mortgage notes, notes
given for patent rights, etc., may be subject to special statutory considerations, that limit their negotiability.
If the reference to the transaction is in form conditional the instrument is not negotiable.
The cases above described in which there is a mere recital of, or reference to, the consideration must be carefully
distinguished from cases in which the payment of the instrument is in any way conditional upon or made subject to
performance of the consideration. The promise to pay must be absolute. Any verbiage qualifying the obligation renders
the note nonnegotiable. There must be an absolute promise to pay.
Example 11. A note reading "12 months after date we promise to pay to ourselves or order $321.25 for value received
and subject to a policy" held not to be negotiable.21
20. Welch v. Owenby, 175 Pac. (Okla.) 746; Chicago Ry. Equipment Co. v. Merchant's Bank, 136 U. S. 268; Mott v.
Havana Nat. Bank, 22 Hun. (N. Y.) 354; contra, Sloan v. McCarty, 134 Mass. 245.
(3) Indication of particular fund, account, credit, etc., as effecting absolute character of promise or order.
Bills, notes and checks sometimes indicate a fund, an account, or other item. This is naturally more particularly true of
bills of exchange in which the drawer refers the drawee to a source of his reimbursement upon his honor of the paper.
Does the indication of a fund destroy negotiability?
If the indication of the fund, account, credit, etc., does not qualify the obligation to pay its presence has no effect upon
the negotiability of an instrument otherwise correctly drawn.
It is permissible in negotiable instruments to refer to a fund or to an account, or to the fact of a credit in the drawer's
favor, out of which the drawee may or is directed to reimburse himself or debit the drawer, provided, the intention is
that the obligation is such at all events, regardless of the existence of the fund, account or credit, or of its sufficiency,
that is to say, provided the obligation is drawn upon the drawer's general credit, and is payable at all events, and not
drawn upon the credit of a fund, account or credit.
Example 12. A bill of exchange directing the drawee to pay to the payee or order a specified sum of money "on
account of contract between you and the Snyder Planing Mill Co." is negotiable.22 It is an absolute obligation and the
reference to the fund is for book-keeping or identification or similar purpose.
21. Amer. Exch. Bk. v. Blanchard, 7 Allen, 333; Mott v. Bank, 22 Hun. 354.
22. First Nat. Bk. v. Lightner, 74 Kan. 736; Alger v. Scott, 54 N. Y..14; Brill v. Tuthill, 81 N. Y. 454, 37 Am. Rep. 454.
If there is an indication of a fund out of which payment is to be made the obligation is not negotiable regardless of the
fact of existence or sufficiency of such fund.
A note, bill or check payable out of a particular fund is not negotiable for there may be no such fund, or it may be
insufficient. The obligation is therefore in form conditional. The existence of the fund and the sufficiency thereof do not
change this rule, for a negotiable instrument must be negotiable on its face and not by the force of extrinsic facts. If
payable out of a fund it is drawn on the credit thereof and is not negotiable.
Example 13. An order reading as follows: " Starkey, New York, Jan. 6, 1869. To A., You will please pay to M. or order
$2000 on demand and deduct the same from my share of the profits of our partnership business in malting," was held
not to be negotiable.23
The court said in the above case: "The true test would seem to be whether the drawee is confined to the particular
fund, or whether, though a specified fund is mentioned, he would have the power to charge the bill up to the general
account of the drawer if the designated fund should turn out to be insufficient. In the final analysis of each case, it must
appear that the alleged bill of exchange is drawn on the general credit of the drawer."
Example 14. A promise to pay "out of the profits on the East 40th Street Job" is nonnegotiable.24
23. Munger v. Shannon, 61 N. Y. 251.
24. Meany v. Pool & McCord, 136 N. Y. 610.

C. "... To Pay A Sum Certain In Money."

Sec. 20. "Sum Certain

Certainty of the sum payable determinable from the language of the instrument itself, is essential to negotiability.
(1) In general
The instrument must be to pay money which is certain in amount and the certainty must appear from the instrument
itself.
Example 15. A note provided for the payment of all taxes which might be thereafter assessed upon the interest of the
holder. Held nonnegotiable as this provision rendered the amount uncertain.25
If a note is secured by a real estate mortgage which provides that the holder may pay taxes if unpaid by the mortgagor
which would then become so much additional indebtedness, or contains similar provisions as to other expenditures,
the negotiability of the note is not affected thereby.
"The note is given as evidence of the debt and to fix the terms and time of payment. It is usually complete in itself - a
single, absolute obligation. The purpose of the "mortgage is simply to pledge certain property as security for the
payment of the note." 26
(2) When sum held not uncertain.
"The sum payable is a sum certain within the meaning of this act, although it is to be paid: 1. With interest; or
25. Smith v. Myers, 207 111. 126.
26. Thorpe v. Mindeman, 123 Wis. 149, 68 L, R. A. 147.
2. By stated installments; or
3. By stated installments, with a provision that upon default in payment of any installment or of interest, the whole shall
become due; or
4. With exchange, whether at a fixed rate or at the current rate; or
5. With costs of collection, or an attorney's fee, in case payment shall not be made at maturity."27
Example 16. A note (otherwise correctly drawn) was payable in two equal installments, with a provision that the whole
amount should become payable upon default in the payment of the first installment. Contended that this made the note
nonnegotiable. But, Held, the note is negotiable.28
Clauses of this sort are called "acceleration clauses" and if of the nature indicated do not destroy negotiability. But
where the holder has a right to call on the maker to do something, as, for instance, to deliver more collateral, or
otherwise the note will become mature, there is a difference of opinion, the weight of authority being that such
provisions destroy negotiability.28a
The Negotiable Instruments Law in finding that a provision for exchange at a fixed rate or at a current rate establishes
uniformity where before its adoption there has been difference of opinion. In many decisions the phrase "with current
exchange" was deemed to make the amount uncertain and therefore to destroy the note's negotiability, inasmuch as
the rate might vary. But
27. Nego. Instru. Act, SEC. 2.
28. Carlon v. Kenealy, 12 M. & W. (Eng.) 139.
28a. Holladay State Bk. v. Hoffman, 35 L. R. A. N. S. 390 and note; Nickell v. Bradshaw, 183 Pac. 13, at p. 17, with
collection of authorities.
such a holding, while possibly consistent with the general theory that the amount must be a sum certain, ignores a
convenient commercial practice. That it should be declared that such a provision shall not be deemed to make the
amount uncertain is highly desirable. Such was hitherto the weight of authority,29 and such is now the statutory law.
A provision in an instrument for payment of "reasonable attorney's fees" for collecting the same is a stipulation which in
many cases was held to make an instrument nonnegotiable. But the weight of authority was that such a provision was
inoperative if the instrument was paid at maturity, and therefore did not destroy negotiability. The negotiable
instruments law has adopted the viewpoint of this line of authority.

Sec. 21. Payment In Money

The instrument must be payable in money to be negotiable.
(1) In general.
To come under the operation of the negotiable instruments law, statutory or nonstatutory, an instrument must be one
providing for payment in money.30 We have already seen how this requirement radically distinguishes negotiable
instruments from negotiable documents of title. An instrument which calls for the payment of anything besides money
may be a good contract or a good order, but falls without the class of negotiable paper, though perhaps drawn in the
form thereof.
29. Hastings v. Thompson, 54 Minn. 184.
30. "Commercial paper shone as it were by reflected light, and derived its negotiable quantities [qualities?] from its
similarity to the money in which it was payable. Hence it is that bills and notes payable in anything but money are not
negotiable." Brown v. Perera, 176 N. Y. S. 215.
Example 17. A promise to pay to bearer a certain amount of "gold" is not negotiable.31
(2) To pay money and do something else.
A promise to pay money and to do something else is not negotiable.32 The obligation is entire and such an instrument
cannot be rendered negotiable by ignoring the promise to do the additional act.
Example 18. A promise to pay money and deliver a horse, is not negotiable.33
(3) To pay money or do something else - debtor's option.
A promise or an order to pay money or something else at the option of the party liable is not negotiable.34
Example 19. A promise to pay to order a certain quantity of grain or a certain amount of money is not negotiable.35
(4) To pay money or do something else - holder's option.
A promise or order to pay money or to do something else at the option of the holder is (the note being otherwise
correctly drawn) negotiable as a promise or order to pay money.
31. Roberts v. Smith, 58 Vt. 492.
32. Martin v. Chauntry, 2 Stra. (Eng.) 1271; Nego. Instru. Act, SEC. 5.
33. Id.
34. Matthews v. Houghton, 11 Me. 377.
35. Id.
Example 19a. A promise to pay a certain amount of money (the other requirements of the law being fulfilled) or to issue
stock in the amount thereof, at the option of the holder, is negotiable.36
(5) What is money.
Payment to be made in "bank notes" is not payment in money and such notes are not negotiable.37
But it is no objection that paper "designates a particular kind of current money in which payment is to be made."38 as
for instance, "United States Gold Coin" or foreign money ("Mexican dollars").40

D. Must Be Payable On Demand Or At A Fixed Or Determinable Future Time

Sec. 22. Demand Paper

A negotiable instrument may be payable on demand.
Instruments to be negotiable must be payable on demand or at a fixed or determinable future time.
What is demand paper? The negotiable instrument act provides that paper is payable on demand:
"1. Where it is expressed to be payable on demand, or at sight, or on presentation.
"2. In which no time for payment is expressed. Where an instrument is issued, accepted or indorsed when overdue, it
is, as regards the person so issuing, accepting, or indorsing it, payable on demand."41
36. Pratt v. Higginson, 119 N. E. (Mass.) 661; Nego. Instru. Act, SEC. 5 (4)
37. Keith v. Jones, 9 Johns. 120.
38. Nego. Instru. Act, SEC. 6 (5).
40. Hodge v. Williamson, 85 Tex. 553; Brown v. Perera, 176 N. Y. S. 215 at 220.
Example 20. A note reading "On demand I promise to pay to the order of," etc. complies with the requirements of the
negotiable instruments law as to time of payment.

Sec. 23. Fixed Or Determinable Future Time

If not payable on demand the instrument must be payable at a fixed or determinable future time.
(1) In general.
It is essential to negotiability that an instrument be payable at a time that is absolutely certain to arrive as shown by the
language of the instrument itself, and not as might be shown by any extrinsic circumstances. If the language in the
instrument makes it doubtful whether the time of payment will ever arrive, no matter how probable that arrival may be,
the instrument is not negotiable.42
(2) What constitutes fixed or determinable future time, (a) Text of negotiable instruments act.
"An instrument is payable at a determinable future time, within the meaning of this act, which is expressed to be
payable,
1. At a fixed period after date or sight; or
2. On or before a fixed or determinable future time specified therein; or
41. Ncgo. Instru. Act, Sec 7.
42. Coolidge v. Ruggtes, 15 Mass. 387.
3. On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of
happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event
does not cure the defect."43
(b) Payment dependent upon event not certain to arrive.
If the instrument is expressed to be payable upon the happening of any event not absolutely certain to take place, the
note is not negotiable.
Example 21. The plaintiff sued on an instrument to which he claimed title, as indorsee, which was to become due and
payable when Henry D. Kelly became 21 years of age. The plaintiff proved that said Kelly did become 21 years of age
before the suit was started. It became material in the case to establish whether this instrument was or was not a
negotiable instrument. The court in deciding that it was not negotiable said, in part, "* * * Was the instrument in
question a [negotiable] promissory note? To constitute a promissory note, the money must be certainly payable, not
dependent on any contingency, either as to the event or the fund out of which payment is to be made or the parties by
or to whom payment is to be made. If the terms of an instrument leave it uncertain whether the money will ever
become payable, it cannot be considered as a promissory note. Thus a promise in writing to pay a sum of money when
a particular person shall be married is not a promissory note, because it is not certain he will ever be
43. Nego. Instru. Act, SEC. 4.
married. So of a promise to pay when a particular ship shall return from sea, for it is not certain she will ever return. But
if the event on which the money is to become payable must inevitably take place it is a matter of no importance how
long the payment may be suspended. * * *
"The fact that the payee lived till he was 21 years of age makes no difference. It was not a promissory note when made
and it could not become such by matter ex post facto."44
(c) Payment on or before time or upon event certain to happen.
An instrument (otherwise correctly drawn) is negotiable if payable at any future date, or on or before any future date.
Instruments so payable are the usual cases.
If an event is certain to happen, as payment to be made upon one's death, or a specified time after one's death, the
note is negotiable.45
If it is provided in a note that the maker may extend the time of payment as he sees fit, this has been held to destroy
negotiability ;45a but it has also been held that a provision that the makers and indorsers consent to extension without
notice does not destroy negotiability.45b Clearly a provision that indorsers so consent would be merely for the purpose
of preventing any extension to release them, and would not effect negotiability.
44. Kelly v. Hemmingway, 13 111. 604.
45. Colehan v. Cooke, Willes, 393, Stra. 217. 45a. Glidden v. Henry, 104 Ind. 278.
45b. First Nat. Bk. v. Buttery, 17 N. D. 326, 16 L. R. A. N. S. 878; Stitzel v. Miller, 250 111. 72.

E. "Must Be Payable To Order Or To Bearer."

Sec. 24. In General

An instrument is not negotiable unless it contains words of negotiability.
An instrument to be negotiable must be payable "to order" or "to bearer."

Sec. 25. When Payable To Order

"An instrument is payable to order where it is drawn payable to the order of a specific person or to him or his order."
"It may be drawn payable to the order of
1. A payee who is not maker, drawer or drawee; or
2. The drawer or maker; or
3. The drawee; or
4. Two or more payees, jointly; or
5. One or some of several payees; or
6. The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or
otherwise indicated therein with reasonable certainty."46
Instruments to order, customarily read "Pay to the order of John Brown" or "Pay to John Brown, or order."
It will be noticed that the person to whose order it is made may be the drawer or maker himself. In connection with this
provision, one should recall the provision that "Where a note is drawn to the maker's own order it is not complete until
indorsed by him."
In practice one should always use the word "order" - rather than any word intended as a synonym thereof.
46. Nego. Instru. Act, SEC. 8.
Example 22. A note payable to "A" "and assigns" was held to be not negotiable, as lacking proper words of
negotiability.47

Sec. 26. When Instrument Payable To Bearer

"The instrument is payable to bearer:
1. When it is expressed to be so payable; or
2. When it is payable to a person named therein or bearer; or
3. When it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it
so payable; or
4. When the name of the payee does not purport to be the name of any person;
5. When the only or last indorsement is an indorsement in blank."48
An instrument payable to bearer, on account of being drawn in any of the five ways signified above, is transferable by
mere delivery.
Below the various situations are discussed.
(1) When it is expressed to be so payable.
In such a case an instrument reads "Pay to bearer," and may be transferred by mere delivery, or by indorsement,
general or special.
(2) When it is payable to a person named therein, or bearer.
In this case the instrument may be transferred by mere delivery, or may be indorsed generally or specially.
47. Zander v. N. Y. Security & Trust Co., 78 N. Y. S. 900.
48. Nego. Instru. Act, SEC. 9.
(3) When it is payable to the order of a fictitious or non-existing person and such fact was known to the person making
it so payable.
This is a provision of the law that has caused some criticism as having dangerous possibilities. The governing idea is
that if one for bookkeeping or some other purpose makes an instrument payable to a payee known to him to be
nonexistent or fictitious, the instrument is really payable to any person to whom it may be transferred, and has
practically the same effect as though payable to cash. But it has been pointed out that in such cases prudent persons
will not take the instrument so payable until the instrument is indorsed with the name of the nominal payee.49
The criticism is that if a note is made payable to a fictitious person and is stolen and indorsed by the thief in the name
of the fictitious payee, the maker becomes liable to the holder, notwithstanding the forgery, because the instrument is
payable to bearer and therefore such holder need not trace his title through the forged indorsement but may disregard
it, even though he supposed the payee was a real person and that such person's indorsement was essential to his title
when he acquired the paper.50
(4) When the name of the payee does not purport to be the name of any person.
Instruments payable to "cash," "bills payable" or any impersonal payee are negotiable and payable to bearer, and need
not have other words of negotiability.
49. Brannan Nego. Instru. Law, SEC. 9.
50. See Bartlett v. First Nat. Bk., 247 111. 490.
Example 23. A check reading "Pay to cash $1000" is negotiable, and may pass by mere delivery.
(5) When the only or last indorsement is an indorsement in blank.
If an instrument, whether payable to bearer or to order, is indorsed in blank, or if being indorsed specially the last
indorsee indorses in blank, it is payable to bearer. The instrument must, however, on its face be negotiable. Mere
indorsement in blank will not cure deficiencies in the instrument as originally drawn; the purpose of this provision being
merely to indicate that an instrument already negotiable is payable to bearer if its only or its last indorsement is in
blank.51 (Blank indorsements may be converted into special indorsements as hereafter shown.)
Example 24. An instrument is payable to John Brown, or order. Its negotiation requires indorsement by John Brown.
He indorses it " Pay to William Smith, (sd) John Brown." Then its further negotiation requires the indorsement of
William Smith. Suppose that William Smith indorses it in blank, that is to say, by simply writing "William Smith." Its
further negotiation may be accomplished by mere delivery or, if the parties choose, by indorsement.

F. "Where The Instrument Is Addressed To A Drawee, He Must Be Named Or Otherwise

Indicated Therein With Reasonable Certainty."

Sec. 27. Meaning Of Provision

This provision refers to bills of exchange and checks. The drawee must be "named or otherwise indicated" in the
instrument itself with reasonable certainty.
51. Wittlaufer v. Baxter, 137 Ky. 362.

Chapter 5. Expression - Negotiable Form. 2. Provisions Not Requisite Which Do Not Prevent
Negotiability

Sec. 28. In General

In the preceding chapter the form requisite to negotiability was considered. In the present chapter we may consider
what nonrequisite provisions may be included without destroying the negotiability of an instrument which has in it all
the requisite matters of form. The inclusion of a reference to the consideration or to a fund was considered in the last
chapter.

Sec. 29. Provision Authorizing Sale Of Collateral Securities

Such provision does not destroy negotiability.
"Collateral notes," that is, notes with a collateral clause, are frequently used, and borrowing money on collateral, in
which such a note is used and the collateral deposited, is a well known commercial practice.
Such a provision aids rather than clogs negotiability.52
52. A provision that in case the securities decline in value, the maker will furnish additional collateral, and in default
thereon the note will become due and payable is held to destroy negotiability in Holliday State Bk. v. Hoffman, 85 Kan.
71, 35 L. R. A. N. S. 390, and held not to destroy negotiability in Finley v. Smith, 165 Ky. 445, L. R. A. 1915 F. 777.
See also page 47 herein.

Sec. 30. Reference To Mortgage Given As Security

If the indebtedness evidenced by the negotiable instrument is secured by a mortgage, a reference to the mortgage in
the instrument does not destroy negotiability.
An instrument secured by mortgage ought to so state, and in practice usually does so. A reference to the mortgage
does not destroy negotiability.53
In some states a reference to a chattel mortgage is required by statute to be made in a chattel mortgage note, and the
purchaser of such a note becomes subject to the defenses that the maker may have against his payee. Such a statute
seriously modifies the negotiable character of the instrument. But notes secured by real estate mortgages (or trust
deeds) are very common and are everywhere negotiable. Bonds issued by corporations are of this character.

Sec. 31. Provision Authorizing Confession Of Judgment

Such a provision does not affect negotiability.
In some states it is a not unusual practice to include in a note a power of attorney by which the maker irrevocably
authorizes some attorney or any attorney to appear for him in court and confess a judgment against him in favor of the
holder for any amount then due thereon. Such a note is called a "judgment note." The negotiable instruments act
provides that the negotiable character of an instrument is not affected by a provision which "authorizes a confession of
judgment if the instrument be not paid at maturity." Under such
53. Nego. Instru. Law, SEC. 5.
a provision a note authorizing a confession "at any time hereafter" is not negotiable.54
The advantage to the holder of a judgment note is that it avoids the necessity of service of process in order to obtain
judgment, and the judgment may be entered without delay and without the usual formalities of suit. But if the maker
has a defense he could make he is not deprived of it by this judgment clause, as the court will upon a proper showing
made by him, open up the case to allow the defense; generally, however, allowing the judgment to stand as a security
to await the result of the trial.

Sec. 32. Waiving Benefit Of Exemption And Similar Laws

A provision whereby the debtor waives the benefit of an exemption law or other law intended for his benefit does not
affect negotiability, but whether a debtor has the power to waive the benefit of such a law depends on local public
policy.
It is generally held that a debtor may waive the benefit of any law, such as an exemption statute, although he cannot
waive the benefit of a law which is also for the benefit of his family. The public policy involved in the enactment of
debtor's laws, and in the right of the debtor to waive their benefit, is a subject that involves the law of negotiable paper
in no wise except to determine whether the insertion of such a waiver, whether effective or not, destroys negotiability of
an instrument otherwise properly drawn. And the act provides that such an insertion shall have no effect on
negotiability.
54. Wisconsin Yearly Meeting v. Babler, 115 Wis. 289, 91 N. W. 678. In Illinois the Act is modified to permit the
negotiability of a note upon which judgment may be confessed at any time hereafter.

Sec. 33. Effect Of Affixing Seal

A seal affixed to a negotiable instrument does not destroy negotiability.
At common law an instrument to be negotiable had to be "open," that is, not under seal. The negotiable instruments act
provides that negotiability is not altered by the fact that the instrument "bears a seal."

Sec. 34. Omission Of Date

The omission of the date of the instrument does not impair its negotiability.
The date is a material part of the instrument but not a formal requisite. The instrument is still negotiable
notwithstanding the lack of a date. In this respect the negotiable instrument law provides:
"Where an instrument expressed to be payable at a fixed period after date, is issued undated, or where the acceptance
of an instrument payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or
acceptance, and the instrument shall be payable accordingly. The insertion of a wrong date does not void the
instrument in the hands of a subsequent holder in due course, but as to him the date so inserted is to be regarded as
the true date." 55
55. Nego. Instru. Law, SEC. 13.

Sec. 35. Ante-Dating And Post-Dating

Dating instrument before or after its issue, if not for fraudulent purposes, does not invalidate it.
The negotiable instrument law provides: "The instrument is not invalid for the reason only that it is antedated or
postdated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is
delivered acquires title thereto as of the date of delivery." 56

Sec. 36. Technical Rules Of Construction

Where an instrument is ambiguous the following rules of construction are applied.57
(1) Where the sum payable is expressed in words and figures, the words govern, in case of discrepancy.
(2) Interest provided for runs from the issue of the instrument in case no date is stated.
(3) Where the instrument is undated, it will be considered to be dated as of the date of its issue.
(4) Writing prevails over print where in conflict.
(5) If the instrument is so ambiguously drawn that it is doubtful whether it is a bill or note, the holder may treat it as
either.
(6) Where one signs in such a manner that his intention is doubtful, he may be treated as an indorser.
(7) If two or more persons sign a note reading "I promise to pay," both are jointly and severally liable thereon.
56. Id. SEC. 12.
57. Id. SEC. 17.

Chapter 6. Execution And Delivery

Sec. 37. Delivery Essential

The delivery of an instrument is essential to its taking effect. Delivery consists in any giving over into the control of the
other party for the purpose of having it effective.
A negotiable instrument, although complete and regular in form, cannot take effect until it has been unconditionally
delivered, that is, put out of the promisor's control by him into the control of the promisee, for the unqualified purpose of
having it effective as a legal obligation.
Example 25. A makes a note payable to B, or order. B cannot found any legal rights upon this note until A delivers it to
B as his obligation.
An instrument may be delivered absolutely or upon a condition that it shall not be effective unless a certain event
transpires, and such a condition may be orally agreed upon.
Example 26. A delivers his note to B in payment of a premium upon an insurance policy procured by B as broker. A
alleges that the insurance was taken out and the note given upon the express condition of B securing A a loan upon
the insurance policy which B failed to do, and that such note and policy were not to be otherwise effective. Held, that
this could be shown.59
58. Nego. Instru. Law, SEC. 14-16.

Sec. 38. Delivery Presumed In Favor Of Holder In Due Course

Where a completed instrument is in the hands of a holder who has given value, has no notice of lack of delivery, and
has purchased the instrument before it is overdue, a valid delivery thereof by all parties prior to him will be conclusively
presumed.
Delivery is essential; but a chief purpose of negotiable paper being to protect a holder who buys in due course against
irregularities in the prior history of the paper of which he has no knowledge, the law has provided that a delivery by all
prior parties may be conclusively presumed.
Example 27. A signed a note payable to B or order. B got possession of it without authority and sold it to C. Delivery by
A will be conclusively presumed in favor of C.60
Note that the above instrument was complete when procured by B (see next section), and that it needed no
indorsement to make the delivery effective. If a note is delivered by A to B and by B indorsed specially to C, its further
negotiation can be accomplished only by the indorsement of C, so that an unauthorized taking of it from C by D could
accomplish no advantage to D unless C's indorsement in blank or indorsement to D is on the paper, for otherwise D
would have to make the indorsement of C, without any authority, as a forgery or otherwise, and the chain of title would
thus be imperfect. This section therefore assumes an unauthorized procuring of paper that is in shape for delivery
without further necessary indorsement, i. e., paper already indorsed or payable to the party who gets it without delivery
to him, or indorsed in blank, or payable to bearer. And if such is the case, a holder in due course from him may
conclusively presume delivery by the prior parties.
59. Smith v. Dotterweich, 200 N. Y. 299, 33 L. R. A. (new series) 829.
60. Clark v. Johnson, 54 111. 296.

Sec. 39. Incomplete Instrument

Where an instrument is incomplete, that is, not finished as intended by the maker or drawer, and is delivered in that
condition by the maker or drawer any person in whose hands it comes has prima facie authority to complete it, but
such completion must be strictly in accordance with authority and within a reasonable time. But a holder in due course
who comes into possession of it after its completion, may enforce it as though it had been filled up according to
authority whether it was or not. But if an instrument in an incomplete state is never delivered and gets into circulation
without the owner's fault, it is not good even in the hands of a holder in due course against any person whose signature
was made prior to delivery.
In the section just above we have considered the case of the delivery or lack of delivery of an instrument that is
complete. We have now under consideration the case of an instrument incomplete in form, that is, not finished as
intended by the party liable thereon. In the next section we will have the case of an instrument which is in the finished
form intended by the maker or drawer but he has omitted to cancel out the blanks therein.
(1) Delivery of incomplete instrument, prima facie authority to complete.
If the instrument is incomplete, but is actually delivered in that condition, any person in whose hands the instrument
comes has prima facie authority to fill it up, and complete it, but must do so strictly within authority and within a
reasonable time.61
Example 28. "The maker of a note payable to A which is blank as to the amount, gives it to A with instructions to fill in
and negotiate it for an amount not exceeding $100. A takes the note to B in its incomplete state and offers to fill it in for
$500 if B will purchase it for that amount. B agrees. A fills in the note for $500 and indorses it to B who pays the $500
to A. B has no notice of the maker's instructions to A. A absconds. According to most American cases B would be
protected. It is held that A, having lawful possession of the blank note, has ostensible authority to fill in the blank for
any amount (in reason), and that a purchaser may rely upon this ostensible authority, where he has no actual notice
that the authority has been exceeded. Huntington v. Branch Bank, 3 Ala. 186; Bank of Commonwealth v. Curry, 2
Dana, 142; Fullerton v. Sturges, 4 Ohio St. 529; Page v. Moerell, 3 Keyes, 117, and see City of Chicago v. Gage, 95
111. 593. According to the English cases, B, under the circumstances supposed, having actual knowledge that the
instrument was issued blank as to the amount, would not be protected. He would be deemed to take at his peril as to
the extent of A's actual authority. Awde v. Dixon, 6 Exch. 869; Hatch v. Searles, 2 Sm. & Gif. 147; Hogarth v. Latham,
61. Nego. Instru. Law, SEC. 14.
3 Q. B. D. 643. As above stated the English rule is the one adopted in Section 14 of our new act.
"Both English and American cases are agreed that if the note, in the case above supposed, had been filled in before B
took it, and B had no notice it was issued in blank, B would be protected." 62
(2) Delivery of incomplete instrument, acquisition by holder in due course.
As explained in the paragraph next above, one who acquires paper which at the time of his acquisition is incomplete is
put on notice as to the actual authority to fill it in. But if filled in prior to his acquisition, so that he is uninformed as to the
incompleteness when it left the maker's hands, he has a right to enforce the instrument as filled in, notwithstanding it
was not filled in pursuant to authority.
(3) Incomplete instrument never delivered.
We saw above that if a completed instrument is obtained from the maker or drawer by an unauthorized taking (as
where stolen), and is in a shape to pass without further indorsement by the party from whom taken, a holder in due
course acquires rights upon the paper upon the principle that a delivery will be conclusively presumed. If, however,
paper is both incomplete and undelivered, it has no validity even in the hands of a holder in due course, even though it
is filled up and completed prior to his acquisition and he buys it in perfect innocence of its original history
Example 29. Defendant signed a promissory note, leaving date, payee and amount blank. They were stolen from his
desk, and completed, indorsed by the payee and sold to plaintiff. Held that by virtue of Section 15 of the Neg.
Instrument Law, he could not recover.63
62. Professor L. N. Greeley in 2 Illinois Law Review, p. 145.

Sec. 40. Delivery Of Complete Instrument Containing Uncancelled Spaces

If an instrument intended to be complete, but having spaces and blanks therein is delivered, any filling up of such
blanks or spaces is a material alteration, and avoids the instrument, but if such an instrument so altered is sold to a
holder in due course the views differ.
This subject is hereafter considered in treating of the rights of a holder in due course. But it is here mentioned for
purposes of completeness. We indicate here the transaction in which the instrument is intended to be complete and to
be delivered, but there are spaces therein left uncancelled. To fill them up is to alter the instrument. See post, Section
91.

Sec. 41. Execution By Agent

An instrument executed by an agent should be signed by the agent in the name of the principal. If signed by the agent
in his own name he is liable thereon.
We know of course from the law of agency that one cannot bind another as his principal unless there is real or
apparent authority. Assuming that there is such authority we will note the form in which the agent should execute the
instrument in order to bind his principal and not himself personally. First, it is a rule of negotiable paper, that has been
strictly adhered to, that no person is bound upon negotiable paper except one who is named therein by his proper or
assumed name. Again, there is no rule to prevent an agent binding himself even though he have authority to bind
another. So that if the agent executes an instrument in his own name he personally is bound thereon and the principal
is not bound. And this is true even though he describe himself as "Agent" or even "Agent of John Jones," for it is
considered that the words after his name are merely words of identification or description. The conventional and
correct way for him to sign (unless he wants to bind himself) is to sign John Jones by Harry Smith, Agent.
63. Holzman v. Teague, 158 N. Y. Suppl. 211.
The various forms in which one may sign are so numerous in their possibility that it would be difficult to describe them
all.
In the present Uniform Act, there has been an attempt to avoid some of the confusion and injustice of the cases, by the
provision: "When the instrument contains or a person adds to his signature words indicating that he signs for on behalf
of a principal, or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as agent, or as filling a representative character, without disclosing his principal, does
not exempt him from personal liability."64
The evident meaning of this section is to avoid the rule that an agent is liable merely because he does not sign in the
absolutely approved form, if in the instrument he discloses the name of his principal, and really has authority to bind
him.65 But merely describing himself as agent will not avoid liability on his part, nor will the unnamed principal be
liable. However, the only cautious way for an agent to execute an instrument is the way as to the meaning of which
there can be no doubt, as hereinabove indicated.
64. Nego. Instru. Law, SEC. 20.
65. Jump v. Sparling, 218 Mass. 324, 105 N. E. 878; Maderia Alliance Assn. v. Lowell Trust Co., 129 N. E. (Mass.)
440; Adams v. Swig, 125 N. E. (Mass.) 857.

Chapter 7. Consideration For Execution.66

Sec. 42. Necessity Of Consideration

Every negotiable instrument to be enforceable between the parties must be supported by a consideration. But lack of
consideration cannot be availed of against a holder in due course.
As every simple contract must be supported by a consideration, it necessarily follows that negotiable instruments must
as between the parties be so supported. But if the instrument is negotiated before maturity, and for value to a holder
without notice of the want of consideration, the defense cannot be made against him.
Example 30. B's claim against A was discharged in bankruptcy. A's wife thereafter gave her note to B as security for
payment by A. Held, not enforceable as being without consideration.67

Sec. 43. What May Constitute Consideration

Any consideration which will support a simple contract will support a negotiable instrument.68
A note is enforceable so far as consideration is concerned, whenever it is given upon any consideration that would be
a consideration according to the general law of contracts. If the consideration fails the note would not be enforceable
as between the parties, but we are not now assuming its failure. Thus, a note given for an executory consideration is
based upon a legal consideration, and is enforceable as between the parties or in the hands of any holder.
66. Nego. Instru. Law, Article II.
67. Widger v. Baxter, 190 Mass. 130, 76 N. E. 509, 3 L. R. A. (new series) 436.
68. Nego. Instru. Law, SEC. 25.
Example 31. A gives this note for $100 in consideration that B will perform legal services for him. The note has legal
consideration.

Sec. 44. Antecedent Debt As Consideration

An antecedent or pre-existing debt is consideration.
If an indebtedness exists, and a note is given in consideration thereof, by way of renewal or security, the note is
enforceable as being upon valid consideration.69

Sec. 45. Consideration Presumed

Consideration is presumed in a negotiable instrument, but as between the parties and as against any person not a
holder in due course, the presumption may be overcome.
We have previously noted that it is a peculiarity of negotiable paper that in a suit thereon, a prima facie case is made
out by a proof of the execution of the paper without showing what it was given for or whether anything was given; this
being upon a presumption of fact that there is consideration, but it may be shown in rebuttal of the presumption that
there is no consideration as against any one except a holder in due course.69a
69. Many, Blanc & Co. v. Krueger, 153 111. Ap. 327.
69a. On the question who has the burden of proof, where consideration is denied, the courts have differed, both prior
to the adoption of the uniform law, and since its adoption. Bank v. Welch, 76 Ore. 272, 147 Pac. 534; Harney v. Lee,
175 111. Ap. 250.

Sec. 46. Recital Of Consideration

Consideration need not be recited.
We have seen that it is not necessary to recite the consideration in the note, or to recite that there has been a
consideration.

Sec. 47. Want Of Consideration No Defense Against Holder In Due Course

If one is a holder in due course, lack of consideration cannot be made a defense against him.
If there has been no transfer, want of consideration can be shown, but if the instrument is in the hands of a holder in
due course want of consideration cannot be shown. That subject is developed fully elsewhere.
Chapter 8. The Formation Of The Contract Of The Acceptor

Sec. 47a. In General

A bill of exchange is, as has been noted, an order drawn by one person upon another in favor of a named payee, or
order, or of bearer. Such person upon whom the order is drawn is called the drawee. We shall see hereafter that some
bills of exchange are drawn to be accepted by the drawee prior to time for payment; and others may be presented for
acceptance. The failure to present for payment in cases where that is requisite; the refusal to accept in any case; are in
their consequences considered hereafter. In this chapter, as a subdivision of the subject of the formation of the
negotiable contract, we are concerned only with the fact and manner of the acceptance.

Sec. 48. Definition Of Acceptance

"The acceptance of a bill is the significance by the drawee of his assent to the order of the drawer. The acceptance
must be in writing and signed by the drawee. It must not express that the drawee will perform his promise by any other
means than the payment of money." 70
Acceptance consists in the expression of the drawee's assent to the bill and his willingness to be bound thereon.
70. Nego. Instru. Law, SEC. 132.
He then becomes the party primarily liable on the instrument, the drawer and the indorsers being secondarily liable,
that is, liable in case only the acceptor does not pay, the proper procedure being taken to charge them.

Sec. 49. How Acceptance Must Or May Be Made

If the holder demand, acceptance must be on the face of the bill. Otherwise he may treat the bill as dishonored. But a
bill may be accepted by a separate paper in which case it will be binding only in favor of one who received the bill for
value. So an absolute promise to accept a bill thereafter to be drawn will operate as an acceptance in favor of any one
who on the faith thereof received the bill for value.
An acceptance must be in writing. If the holder demand, the acceptance must be on the face of the bill, otherwise the
holder can treat the bill as dishonored, that is, unaccepted. But otherwise there may be an acceptance by way of
extrinsic document, before or after the bill is drawn. An absolute promise to accept a certain described bill, or an
extrinsic written acceptance of a bill already drawn is a good acceptance as to any one who on the faith thereof has
received the bill for value, but not as to any one else.
Example 32. A bill of exchange is drawn by A upon C to order of B. C states orally that he accepts it. C cannot be held
on this acceptance. C says he will write an acceptance, but not upon the face of the bill. B may, but need not receive
such acceptance. He may insist upon a general acceptance written on the face of the bill, or else treat the bill as
dishonored by nonacceptance.

Sec. 50. Acceptance Presumed From Retention

"Where a drawee to whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four hours
after such delivery, or within such other period as the holder may allow, to return the bill accepted, or non-accepted to
the holder, he will be deemed to have accepted the same.71
A Wisconsin decision72 construing the above provision of the Wisconsin Act (which adds "Mere retention of the bill is
not acceptance") says:
"Upon delivery for acceptance the drawee is not bound to act at once. He has a right to a reasonable time, usually 24
hours, to ascertain the state of accounts between himself and the drawer, and until expiration of that time the holder
has no right to demand an answer, nor without categorical answer, to deem the bill, either accepted or dishonored; not
accepted, because of the right of drawee to consider before he binds himself; not dishonored, because both drawer
and drawee have the right that their paper be not discredited during such period of investigation. After the expiration of
that reasonable time the holder has a right to know whether the drawee assumes liability to him by accepting, and if
not, he has a right to return of the document, so that he may protest or otherwise proceed to reserve his rights against
the drawer. The consensus of authority is, however, that the duty rests on the holder to demand, either acceptance or
return of the bill, and that mere inaction on the part of the drawee has no effect. After expiration of this time for
investigation, the drawee may, by retention of the bill, accompanied by other circumstances, become bound as
acceptor; not, however, by mere retention. There seem to be two phases of conduct recognized by the authorities as
charging the drawee: one purely contractual, as where the retention is accompanied by such custom, promise, or
notification as to warrant the holder to the knowledge of the drawee, in understanding that the retention declares
acceptance; the other where the conduct of the drawee, is substantially tortious, and amounts to a conversion of the
bill. This is the phase of conduct which our negotiable instruments statute * * * has undertaken to define and limit as
refusal (not mere neglect) to return the bill, or destruction of it; reiterating the common law rule that mere retention of
the bill is not acceptance."
71. Nego. Instru. Law, SEC. 137. This section is omitted in the Illinois law.
72. Westberg v. Chicago Lumber & Coal Co., 117 Wis. 589.
This is an excellent statement of the common law rule and the reasons therefor. Some cases, however, have held that
mere retention is sufficient to constitute acceptance. It has been suggested that inasmuch as the drawee has 24 hours
in which to decide whether to accept the act ought to be that if after 24 hours he refuses to return it or destroys it, he
will be deemed to have accepted it. In any event it is not believed that it will be generally held that mere retention
without demand, or without some tortious or wrongful refusal will be held an acceptance.
A wilful destruction is an acceptance.72a

Sec. 51. Kinds Of Acceptance

Acceptances are either general or qualified. The holder may demand a general and refuse a qualified acceptance.73
72a. Bailey v. S. W. Veneer Co., 207 S. W. (Ark.) 34. 73. Nego. Instru. Law, Sec 139.
(1) What constitutes general acceptance. Any acceptance which does not vary the terms of the bill is a general
acceptance.
To this acceptance the holder is entitled. He may treat the bill as dishonored if such acceptance is refused. But if he
choose he may take a qualified acceptance. An acceptance is still general though it name a particular place for
payment, unless it expressly states that the bill is to be paid there and not elsewhere.
(2) What constitutes qualified acceptance. An acceptance is qualified which varies any term of the bill.
"An acceptance is qualified, which is:
1. Conditional, that is which makes payment by the acceptor dependent on the fulfillment of a condition therein stated;
2. Partial, that is to say, an acceptance to pay part only of the amount for which the bill is drawn;
3. Local, that is to say, an acceptance to pay only at a particular place;
4. Qualified as to time;
5. The acceptance of some one or more of the drawees but not of all."74
By custom an acceptance is not deemed to be qualified which recites a place of payment unless it further recites that it
is payable only at such a place.

Sec. 52. Effect Of Qualified Acceptance

It binds the acceptor according to the tenor thereof. It discharges the drawer and previous indorsers unless they
consent thereto. They do assent thereto when after notice of such
74. Id. SEC. 141.
acceptance, they neglect within a reasonable time to dissent to the holder.
An acceptor is of course bound by any acceptance made by him and consented to by the holder. But the qualified
acceptance discharges drawer and indorsers unless they consent thereto, but failure to dissent within a reasonable
time after receiving notice, is consent.

Sec. 53. Acceptance (Certification) Of Check

Certification of check by the drawee bank is an acceptance thereof; and charges the bank according to the tenor of the
check; but certification at the request of the holder discharges drawer and indorsers.
Checks are as far as possible governed by rules which govern other bills of exchange. Acceptance of a check is
sometimes termed "certification." The bank thereupon becomes primarily liable to pay the check. If at the holder's
request, the check is certified, that discharges previous indorsers and the drawer, because such holder might have
received payment.75 A certification at his request amounts practically to a deposit by him. If at the drawer's or
indorser's request such drawer and indorser remain secondarily liable.
75. Id. SEC. 188; First Nat. Bk. v. Leach, 52 N. Y. 350.

Chapter 9. The Formation Of The Contract Of Parties For Accommodation Or For Honor

Sec. 54. Accommodation Party Defined

One who becomes a party to a negotiable instrument in order to lend his credit to another is called an accommodation
maker, drawer, indorser, or acceptor as the case may be.
Just as one may become surety for another in any form of indebtedness, so one may lend his credit to another by
signing a negotiable instrument. Such party is bound notwithstanding he receives no benefit from his act, and although
any one who takes the instrument for value knows that he takes no benefit. Thus a party may for another's
accommodation sign as maker of a note, drawer or acceptor of a bill or indorser of a bill, note, or check. In such a case
there are always two parties, at least, besides the accommodating party, namely, the accommodated party and the one
who extends credit to him, otherwise no rights can arise.
Example 33. A makes a note to order of B for B's accommodation. Unless B uses this note by selling it for value to C, A
is not bound thereon. But if B does transfer to C for value, C may sue A, although C knows that A got nothing, for the
purpose of the note was accommodation. This is not the case of a note lacking consideration.76
76. Nego. Instru. Act, SEC. 29; Wilbour v. Hawkins, 38 R. I. 119, 94 Atl. 856.
In the same way one may become joint maker with the accommodated party upon a note, or draw or accept a bill or
indorse any commercial paper in order that his name may give the paper a value which it would not otherwise have.
One who signs as an accommodation party and who has to pay the instrument by reason thereof has his right of
reimbursement against the person who should have paid it.
Whether an accommodation paper is enforceable by one who secures it after maturity with knowledge of its character
can enforce it is questionable under the act.76a In a recent case it was held that it could be so negotiated, but this view
has been strongly criticized as contrary to the intention of the accommodation and of business custom.76b In Illinois,
the act restricts transfer after maturity unless there is proof that such transfer was intended.

Sec. 55. Acceptance For Honor

Acceptance for honor consists in the acceptance of a protested, not overdue bill by one who is not the drawee thereof
nor other party liable thereon, for the honor of some other party thereto.
Acceptance for honor consists likewise in a lending of credit. One who accepts for honor differs from one who accepts
for another's accommodation in the fact that an accommodation acceptor is the drawee named in the bill. He accepts
for some other person's benefit but the bill was drawn on him that he might so accept it. But an acceptor for honor is
one who is no party to the bill, but becomes such by intervention, and who
76a. Marline v. Jones, 138 Wis. 82, 119 N. W. 931. 76b. Brannan, Nego. Instru. Law, 3rd. Ed., p. 123.
volunteers to assume the place of the drawee of such bill, and to do what such drawee should have done or was
expected to do.
An acceptance may be for the honor of any one on the bill, but it is presumed, if not otherwise stated, to be for the
honor of the drawer.
The acceptance for honor may be for part only of the sum for which the bill is drawn. It must state that it is for honor
and be signed by the acceptor for honor.
The acceptor for honor becomes liable to all parties who are subsequent to the party for whose honor the acceptance
is made.
The bill so accepted must be presented to the drawee when due for payment and protested for nonpayment before the
acceptor for honor can be made to pay it. This is true although there may be small hope that the drawee will pay it, as
he has already refused to accept it when it was presented to him for that purpose.
The acceptor for honor will be discharged unless the bill is presented to him for payment within one day after its
maturity, or if he resides in some other place unless it is put in the mails within twenty-four hours after such date of
maturity.
In connection with this Section read Sections 161-170 in Appendix A.
Acceptance for honor is also called acceptance supra protest.

Sec. 56. Payment For Honor

Payment for honor consists in payment by some other party than the drawee or the acceptor for the honor of some
party liable on the bill accepted or for whose account such bill was drawn.
Payment for honor is for the same purpose as acceptance for honor, and consists in the intervention of some one to
take the place of the drawee or acceptor named in the bill where such bill has been presented to the drawee or
acceptor for payment, and protest for nonpayment has been made. A bill might be protested for nonpayment where it
had been accepted or where it had not been accepted, for we shall find that it is not always necessary to present a bill
for acceptance, but sometimes it is sufficient to simply present it for payment when due.
A payment for honor must be stated to be such and must be attested by a "notarial act of honor which may be
appended to the protest or form part of it." This notarial act must set forth the declaration of the payer that he pays the
bill for honor and for whose honor he pays it.
One who pays for honor and who properly saves his rights succeeds to the rights of the holder against the person for
whose honor he pays and parties liable to the latter.
In connection with this Section read Sections 171-177 in Appendix A.

Part III. Operation Of The Contract. Chapter 10. Negotiation. A. In General Of Negotiation
And Indorsement

Sec. 57. Meaning Of Negotiation

By negotiation is meant the transfer of negotiable paper by the payee thereof or his transferee with the intention and
effect of constituting the transferee the holder of the legal title thereof.
To negotiate commercial paper is to transfer it to another for the purpose of investing the ownership in him generally or
for some special purpose.

Sec. 58. Kinds Of Negotiation

Negotiation is by delivery and by indorsement.
Some instruments, we have noticed, are negotiable by delivery. That is when they are payable to bearer. And when
they are payable to bearer has also been stated.77 In such case they may also be indorsed, but this enlarges the
liability of the transferor. But when payable to order they are transferred by indorsement, and the indorsement is
necessary to negotiation. A holder of paper which must be negotiated by indorse77. Sec 26, supra, ment does not
become a holder in due course until indorsement has actually been made, no matter when he acquired the paper.

Sec. 59. How Indorsement Accomplished

(1) Must be in writing. An indorsement must be in writing on the instrument itself or on a paper attached thereto.
An indorsement must be written on the instrument or on a paper attached thereto. This attached paper is called an
allonge.
If a transfer is made by separate writing, it is an assignment; for negotiable instruments may be assigned, as well as
indorsed. The title, in that case, is that of an assignee, that is, it is subject to defenses.
(2) Words sufficient or necessary. The signature of the indorser is sufficient.
The contract of the indorser is implied from his mere indorsement. If the indorsement is special, as noted below, there
is also the name of indorsee, and restrictive, qualified and conditional indorsement also require additional words. But
indorsement may be by signature alone, and there must be such signature. But any word or mark intended as a
signature is sufficient.
The contract of the indorser, though not expressed, except by his signature, is well understood in law. He contracts to
pay if the party primarily liable does not pay, provided the necessary steps are taken to charge him, as we shall see
later. He also contracts that he has good title and that prior parties have competency to contract, etc. All this is
contained in the mere signature on the back of the note. The indorsers contract is noted more at length, later.
Words of negotiability are not necessary in the indorsement. An indorsement "Pay to John Brown" instead of "pay to
the order of John Brown," will not restrict further negotiation provided the instrument itself is in its body in negotiable
form. See forms of indorsement hereafter.
Opinions have differed whether "I hereby assign all my right, title and interest," or "I hereby assign the within note" or
similar words constitute an indorsement sufficient to constitute one a holder in due course. If held a valid indorsement,
it seems it should be at least a qualified one, transferring title and not preventing holder from being holder in due
course, but qualifying liability.77a

Sec. 60. Attempted Partial Indorsement

Indorsement must be of the entire instrument, but if any part of the sum has been paid, there may be a good
indorsement of the residue.78
An indorsement of part of an instrument is not good as an indorsement because if indorsements could be divided up it
would subject the party liable to great inconvenience and expense.

Sec. 61. Effect Of Indorsement To Transfer Incidents

An indorsement of a negotiable instrument is effective to transfer the incidental rights therein to aid or secure the
enforcement of the debt.
The debt expressed in the negotiable instrument is the main thing. Provisions and securities to aid in its en77a. Marion
National Bank v. Harden, 83 W. Va. 119, holds it to be a qualified indorsement. 78. Nego. Instru. Act, SEC. 32.
forcement and which do not destroy negotiability, pass with an indorsement of the note.
Thus one who receives a note which has been secured by collateral, is entitled to the collateral for the purposes for
which it was given; and mortgages should be assigned with the debt which they secure.
So authority to confess judgment, waivers of rights, agreements to pay costs, attorney's fees, etc., all pass to the
holder of the note, because they are incidental to the debt.

Sec. 62. Presumptions As To Indorsement.79

(1) Presumption as to time. Presumed unless dated after maturity to have been before instrument was overdue.
Indorsements after maturity though good to transfer title, subject one to defenses, if any, as we shall note later; hence
the importance of this presumption. Indorsements are not usually dated.
(2) Presumption as to place. Presumed unless contrary appears, to have been at place where instrument is dated.
The place of dating is important to determine what law will govern when there is a conflict.

Sec. 63. Miscellaneous Rules Concerning Indorsement

(1) Indorsement to "Cashier."
An indorsement to the fiscal officer of a corporation or bank, so describing him, is deemed prima facie an indorsement
to the bank or corporation. And may be negotiated further either by the cashier's or the institution's indorsement. This
applies to paper payable to any fiscal officer.
79. Nego. Instru. Law, SEC. 45.
(2) Payee or indorsee misdescribed or name misspelled.
If a payee or indorsee's name is misspelled or he is otherwise misdescribed he may indorse as described, adding his
correct name, if he choose, or is so required.
(3) Striking out indorsement.
Holder may strike out any indorsement not necessary to his title. This discharges the indorser whose name is so
stricken and all indorsements subsequent thereto.
(4) Negotiation by prior party.
If an instrument is negotiated back to a prior party he may re-issue and further negotiate the instrument, but cannot
enforce payment against any party to whom he was personally liable.

B. Kinds Of Indorsements

Sec. 64. Special Indorsement

A special indorsement is one which specifies a particular indorsee.
An indorsement to a certain person naming him in the indorsement is called a special indorsement. An instrument so
indorsed cannot be further negotiated except by indorsement until it is subsequently indorsed in blank. If the special
indorsee indorses in blank, the paper will then pass by delivery. (But if the instrument is payable to bearer, it may pass
by delivery notwithstanding it has been specially indorsed and there is no blank indorse-ment.)79a

Sec. 65. Blank Indorsement

A blank indorse-ment is one which does not specify any particular indorsee.
A blank indorsement is accomplished by merely writing the name of the indorser on the back of the instrument. It may
then pass by mere delivery, but the holder may convert it into a special indorsement by writing above it "Pay to John
Brown."
A special indorsement and an indorsement in blank carry with them the same liability. The contract in each instance is
the same. A blank indorsement is not so safe as a special indorsement, because being transferable by delivery, a thief
or finder thereof could give a good title to an innocent purchaser for value before maturity.
The three following sections relate to indorsements which modify the indorser's contract. Either a special indorsement
or one in blank may be qualified, restrictive, or conditional.

Sec. 66. Qualified Indorsement

A special or blank indorsement may be accompanied with words qualifying, that is to say, limiting the indorser's
contract.
The indorser's contract has already been noted and will hereafter be particularly considered. The indorser may,
however, if the endorsee will consent, qualify his contract. This is usually done by adding the words
79a. Nego. Instru. Act, SEC. 40, which adds "but the person indorsing specially is liable as indorser to only such
holders as make title through his indorsement.
"without recourse," but even in such case the indorser warrants certain things, as noted later. Either a blank or special
indorsement may be so limited. The qualification has no effect on the negotiable character of the instrument and it may
be further negotiated with the same freedom as though not so indorsed.
Sec. 67. Restrictive Indorsement
A special or blank indorsement may be accompanied with words restricting further indorsement.
A restrictive indorsement is an indorsement made not for the purpose of transferring the title to the instrument
generally, but a special purpose, that is to say, for purposes of collection, or in trust, etc. It stops further negotiation
except as authorized by the terms of the indorsement or for the purpose of carrying out the restrictive indorsement.80

Sec. 68. Conditional Indorsement

A special or blank indorsement may be accompanied with words making its effect conditional.
One may indorse to another on some condition. The party compelled to pay the instrument may disregard the
condition, whether it has been performed or not, the condition being between indorser and indorsee. But the
conditional indorsee or his transferee, will hold the instrument or the proceeds thereof subject to the condition.81
80. Id. SEC. 36.
81. Id. SEC. 39.

Chapter 11. Holder In Due Course

Sec. 69. Introduction

A person to whom negotiable paper is negotiated may have a right to enforce it according to its tenor notwithstanding
his predecessor in title had no such right to enforce it, provided, the negotiation has been made under certain
circumstances, and if made under those circumstances, the holder is said to be a holder in due course.
We have seen at the outset that the purpose of having a law of negotiable paper is to permit an obligation to pay
money to be separated from the transaction of which it was originally a part and negotiated as an independent
obligation in itself, the floating, uncontradic-table word of the party who gave it that he will pay according to the tenor to
any one who holds it at maturity. We have seen that if a debt is not drawn in negotiable form it may be assignable, but
in that event the assignment confers no higher right than the assignor has. But in the law of negotiable paper a
transferee may reach a plane of greater protection. He cares not what may have been the original transaction, or
whether there may be defenses of fraud, breach of contract, failure or lack of consideration, uncredited payment, set-
off and the like. These are not available against him and that which he has secured stands enforceable against the
debtor pursuant to its terms. But this is true only in case the acquirer took paper negotiable in form which was complete
and regular on its face, gave value therefor, obtained his title before the instrument was overdue, and had no
knowledge or notice of the defect in his transferor's title. If he did acquire under those circumstances he is known as a
holder in due course, and then has the peculiar protection of the law of negotiable paper. Now it is quite apparent that if
the party liable on the paper has no defense; if it is a debt he must pay if not transferred then no policy demands that
limitations be imposed upon the transfer. Therefore if there are no defenses that could be made against any one, we
are not concerned whether a purchaser acquires as a holder in due course or not. He may acquire an overdue
instrument, may have it as a gift; and of course has no knowledge or notice of any defense, for our hypothesis is that
there is none.
Example 34. A gives B a promissory note in payment of a contract to be performed by B. B breaks the contract. B
negotiates the note to C. To escape being subject to this defense C must have acquired the note under the
circumstances that make him a holder in due course.
Example 35. A borrows money from B and gives his promissory note therefor. B negotiates this note to C. As A has no
defense against any one, it is useless to inquire whether or not C acquired as a holder in due course. All that interests
A is whether C is really the legal owner. C may have acquired the paper by way of gift and may have taken long after
maturity. This is immaterial.
In the present chapter we shall inquire under what circumstances one must obtain paper in order to be a holder in due
course. In making that inquiry we shall assume that there are defenses available against the party from whom the
paper was acquired, and therefore available against this taker unless he is a holder in due course.

Sec. 70. Who Is Holder In Due Course

In order to claim the peculiar advantages of the law merchant, the holder must be a holder in due course, that is, he
must have acquired (1) paper complete and regular on its face; (2) for value; (3) in good faith and (4) before the paper
was overdue.
It is essential that all these circumstances exist to make one a holder in due course. They are discussed in order.

Sec. 71. Complete And Regular Upon Its Face

A holder in due course is one who has acquired an instrument complete and regular on its face.
Manifestly one cannot be a holder in due course unless he acquires an instrument negotiable in form, and if it is
incomplete or irregular when he obtains it, if in fact it does not lack negotiability, it at least imposes upon him the
necessity of inquiry.
Example 36. A note was made payable "four............
after date." In A's hands it was subject to the defense of failure of consideration. A sold it to B, who acquired it for
value, before it was overdue and without notice of the defense. Held that because of the irregularity or incompleteness
B was not a holder in due course and was subject to the defense.82
82. In re Philpott's Estate, 169 la. 555, 151 N. W. 825.

Holder In Due Course. Part 2

Sec. 72. Transferee Must Give Value

In order to be a holder in due course, a transferee of negotiable paper must give value.
(1) Giving value necessary only in case one seeks to qualify as holder in due course.
While it is true that a negotiable instrument which is unsupported by any consideration is not enforceable by the
immediate holder and is not enforceable by any one except a holder in due course, it is nevertheless true that if it is in
its creation based upon good consideration, no consideration is necessary to support an executed transfer where a gift
is intended. In other words if A owes B $100 on a promissory note, he might as well pay it to C as to B and it is
immaterial whether C gave B any value for it if C has the legal title to it. A holder of an enforceable note or bond or
check may give it away to another. But if A has defenses against B upon the note, then it becomes very material
whether C gave value (as also material whether he got it before it was overdue or whether he had notice). He is
subject to such defense unless he gave value.
(2) What constitutes value.
The negotiable instruments law provides that value is any consideration that will support a simple contract, but as
applied to negotiation of an existing contract this needs explanation and qualification. Executory promises to pay or to
deliver value are good consideration in the law of contracts, and are good to support commercial paper, but a holder in
due course is one who has not only agreed to pay or deliver, but who has paid or delivered money or property to the
party from whom he acquired the paper.
Example 37. A note made by A to order of P is indorsed by P to H who agrees to send P the value thereof. There is
sufficient consideration here to support a contract, and if no reason appears why H should not pay P, P can enforce the
contract, but until H has actually paid P, H is not a holder is due course.83
Example 38. Bank credits H with a check drawn by M on another bank, there being enough in H's account to cover
check if dishonored. Bank is not a holder in due course.84 But if the bank honors checks drawn on such fund, it has
given value.
It has been held, however, that giving one's own note or check, is giving value; and certainly any actual detriment
sustained is value within the rule.
(3) Less than face of instrument may be value.
One may be a holder in due course although the value he has given be less than the amount of the instrument. This is
clearly true where the value given is not money. But even if it be money it need not be of the amount of the instrument.
A $1000 note might sell for $500, and the purchaser protected as having given value.85 But whether this might prevent
him from being a purchaser in good faith is another question. Where there is much discrepancy the question of good
faith becomes pertinent as we shall see under the next section. And, of course, we assume here that there is a
defense for, if one owes $1000 on a note the holder may sell it for $100 (or make a present of it) if he chooses. There
is no injury done to the debtor.
83. See paragraph (4) in this section.
84. Citizen's State Bank v. Cowles, 180 N. Y. 346; Warman v. First Nat. Bk., 185 111. 60.
85. Lassas v. McCarty, 47 Ore. 474, 84 Pac. 77.
(4) Payment of value or part thereof after notice of defense.
The law provides86
"Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating
the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only
to the extent of the amount theretofore paid by him."
We shall hereafter see that if a person is a holder in due course he can recover the full amount of the instrument
purchased although he gave less than that amount. In the section just quoted we find an apparent inconsistency in the
law. It has been expressed as follows:
"Suppose a note for $200 against which the maker has an equity of fraud as against the payee. It is sold by the payee
for $150 to the plaintiff, a bona fide purchaser without notice upon terms of payment of $100 cash and $50 a month.
Within the month, plaintiff is notified of the equity. How much should plaintiff recover of the maker? The section says
$100, thereby depriving plaintiff of the benefit of his bargain. On the other hand, suppose plaintiff had paid the whole
consideration of $150 before receiving the notice. In this case plaintiff under section 57, recovers $200, the full amount
of the note, thus receiving the benefit of his bargain."87
This apparent inconsistency is probably better so on the whole consideration though not strict logic. The case would
not usually rise, and though one loses the benefit of his bargain he is not absolutely out of pocket.
86. Nego. Instru. Law, SEC. 54.
87. Brannan, The Negotiable Instruments Law, 3rd Ed., p. 178.

Holder In Due Course. Part 3

Sec. 73. Transferee Must Take In Good Faith

To be a holder in due course, a transferee of negotiable paper must acquire it in good faith.
(1) In general.
If a purchaser has actual notice of an "infirmity in the instrument" or "defect in the title of the person negotiating it,"88
he clearly does not purchase in good faith. But if he have no actual notice, what will constitute lack of good faith? The
act says:
"To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person
to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his
action in taking the instrument amounted to bad faith."89
A rule applied in some early cases that one who buys under circumstances that would put a prudent man on inquiry is
not a holder in due course is supplanted by the simple rule that it is sufficient if one buys in good faith. If that is true, it
is not material that he did not use the prudence of an ordinarily prudent man. The rule of the law is deemed the better
one because there should be no discouragement to the transfer of paper whose chief use is that of negotiation by
setting up a strict standard to which one must conform to be protected against unknown equities. If he buy in good
faith, it is enough.
"However harsh this rule may, on first impression, seem to be, it is based upon the policy of the law which gives full
faith and credit to commercial paper transferred before maturity, so that it may circulate, as far as possible, with all the
conveniences of currency." 90
88. Nego. Instru. Law, Sec 52 (4).
89. Id. SEC. 56.
"Good faith * * * is consistent with negligence, even gross negligence. A blundering fool may therefore be found to
have acted in good faith, though under like circumstances, a shrewd business man might be deemed to have acted in
bad faith." 91
One may, however, have bad faith even if he does not know the exact trouble if he knows there is or must be
something wrong.92 He may be a purchaser in good faith even if negligent, but if he refrains from making inquiry
because he fears to do so unless he discover something wrong, he is not a purchaser in good faith.92a And
furthermore, we may frequently infer that the purchaser does know of the wrong though unable to prove it except
circumstantially by showing the conditions under which he acquired it.
(2) Payment of less than face value as showing bad faith.
We have seen that one who buys an instrument for less than the face value thereof (1) gives value, and (2) may be for
all of that a purchaser in good faith; but the inadequacy of the amount paid may be a circumstance showing lack of
good faith. The circumstances of the particular case are all material: the solvency of the maker, the time the paper has
to yet run before maturity, whether the paper is secured or not, or any other material facts, are pertinent. If one is
offered a note almost due made by a solvent maker, for a great discount, he might thereby be informed that something
was the matter with it, especially if some reasonable explanation were not forthcoming; while a note made by one of
doubtful solvency, having some time yet to run, might readily enough be disposed of at a considerable discount without
advising one that there was anything questionable.
90. Bradwell v. Pryor, 221 111. 606.
91. Schintz v. Bank, 152 111. Ap. 76.
92. Paika v. Perry, 225 Mass. 563, 114 N. E. 830. 92a. Knowlton v. Schultz, 71 N. W. (N. D.) 550.
Example 39. A bought from B a note made by C, a responsible person, the note having but 6 weeks to run, for one half
its face value. There was a good defense against the note in B's hands. A claimed that C was not a holder in due
course as not having bought in good faith: Held: that C's good or bad faith was on this evidence a question for the
jury.93
(3) Knowledge that consideration is still unperformed.
It has been seen that a recital of a consideration in negotiable paper does not destroy negotiability. It consistently
follows from that that a knowledge that there is an executory agreement still to be performed by the payee, does not
make one a holder in bad faith, unless he knows that it is still unperformed in violation of the executory agreement.94

Holder In Due Course. Part 4

Sec. 74. Transferee Must Acquire Instrument Before Overdue

To be a holder in due course a transferee must acquire the paper before it is overdue.
(1) In general.
If paper is overdue, it continues negotiable until discharged. But one who acquires it after it is overdue, takes it subject
to the equities which exist against the party from whom he takes it. He must acquire it before it is overdue in order to
have the standing of a holder in due course. "The question constantly arises, why is it in circulation - why is it not
paid?"95 An instrument is overdue the day after its maturity. As we have seen days of grace are abolished.
93. Becker v. Hart, 120 N. Y. Supple. 220; see also McNamara v. Jose, 28 Wash. 461, 68 Pac. 903; Lassas v.
McCarty, 47 Ore. 474, 84 Pac. 76.
94. Paika v. Perry, supra.
(2) When is demand paper overdue?
Paper payable on demand is due upon demand. But from the standpoint of a purchaser who does not know that a
demand has ever been made, when is the paper overdue? If there is something wrong with the paper, it is hardly likely
that the payee would make a demand, or at least, his demand would be refused. Such paper is negotiated. When is
the party to whom it is sought to be negotiated put on notice by the lapse of time that the paper is overdue? This is a
question of some difficulty. It is the general rule that demand paper is overdue after it has been outstanding a
reasonable length of time. The law provides:
"When an instrument payable on demand is negotiated an unreasonable length of time after its issue, the holder is not
deemed a holder in due course." 96
"In determining what is a reasonable time, or an unreasonable time, regard is to be had to the nature of the instrument,
the usage of trade or business (if any) with respect to such instruments, and the facts of the particular case."97
95. Fisher v. Leland et al, 4 Cush. 456, 50 Am. Dec. 805.
96. Nego. Instru. Law, SEC. 59.
97. Ibid, Sec 193.
Example 40. A bought a demand note 23 days old. The note was void in the hands of the party from whom A bought it.
No demand had actually ever been made. A claims to be a holder in due course and therefore not subject to defenses.
Held not overdue. "It is unquestionable that one day would not be a reasonable time, and that five years would be an
unreasonable delay. Intermediate these times there is nothing settled, and each case must be left to be determined
upon its own peculiar circumstances." 98
Example 41. A bought a note payable on demand, between three and four months after its issue. Held, that it was
overdue and A was subject to defenses. "On this question the authorities are not uniform but no case shows that more
than three months can reasonably be overlooked."99
It is impossible to lay down a definite rule on this subject, but business custom is perhaps in favor of a three months
period as not unreasonable. In a Kentucky case it was said more than four months would be unreasonable by the bank
customs of that state100 and in South Dakota, the statute definitely sets out specific periods of time to govern this
subject. The practical lesson for the business man is to be cautious in taking a demand bill or note more than, say,
about three months old, although this is by no means to be taken as a definite rule.
(3) Is paper overdue if the interest is overdue?
Is the mere fact that interest on an instrument is overdue (for instance semi-annual interest on a threeyear note) a
circumstance to make the instrument overdue to charge a holder as a purchaser of overdue paper? Held, not to be
such a circumstance.101
98. Mitchell v. Catchings, 23 Fed. 710.
99. Paine v. Central Vermont R. Co., 14 Fed. 269.
100. Frazee v. Phoenix Nat. Bk., 161 Ky. 175, 170 S. W. 532.
(4) If an installment of principal is overdue, is instrument overdue?
Held, that such an instrument is overdue, and that the holder is subject to a defense to the entire note.102
(5) If an installment of interest is overdue where paper provides principal may therefor be declared due.
Held: not overdue.103
(6) Overdue paper sold in breach of trust.
If overdue paper is held by the apparent owner thereof in breach of a trust or condition under which he holds it, is the
title of the taker good ?
Example 42. J entrusted to S certain promissory notes which were all indorsed in blank, and which S was to keep for J
pending his absence. S borrowed money from a bank and put the notes up as collateral at a time when they were
overdue. J, upon his return, learned of the facts and demanded the notes. Held, that the bank was entitled to them.
Note, that in this case there was no defense sought to be made that the debt was not owing, but the sole claim was
that S had broken faith and that B becoming a holder after maturity was subject to this defense. J should be bound by
the act of S
1o1. Kelley v. Whitney, 45 Wis. 110.
in this case because by indorsing the notes in blank he gave S apparent title.104 Had the bank gone to the maker and
asked him whether there was any reason why it should not acquire the paper he would have said that he had no
defense. There was nothing within reason here to put the bank on notice, or that it could have done to protect itself.
102. Vinton v. King, 86 Mass. 562.
103. Gillette v. Hodge, 170 Fed. 313; contra, Hodge Bros. v. Wallace, 129 Wis. 84.
(7) How time computed.
In determining when an instrument is overdue the Negotiable Instrument law provides:
"Where the day, or the last day, for doing any act herein required or permitted to be done, falls on Sunday or on a
holiday, the act may be done on the next succeeding secular or business day."105
This provision also is pertinent on the question of presentment for payment, notice of dishonor, etc.

Holder In Due Course. Part 5

Sec. 75. Indorsement Requisite

Where one's legal title is not complete (paper not payable to bearer) except upon indorsement, he is not a holder in
due course until such indorsement has been made.
If indorsement is requisite to one's legal title to the paper, that is, if the paper is not indorsed in blank or otherwise
payable to bearer, and is not indorsed to the holder, he cannot be a holder in due course until that is done.
Example 43. A makes his note to order of B who procures it by fraudulent statements. B sells to C before maturity and
for value and C knows nothing of the fraud. The note is delivered to C unindorsed. C is then informed of the fraud. He
then gets B to indorse the instrument. C is subject to A's defense even though the indorsement was omitted by mere
oversight.
104. Justice v. Stonecipher, 267 111. 448, 108 N. E. 732. (The result reached in this case is right, but the reasoning is
wrong and misleading.)
105. Nego. Instru. Act, SEC. 194.
The uniform act states this in the following language: "When the holder of an instrument payable to his order transfers
it for value without indorsing it, the transfer vests in the transferee such title as the transferror had therein, and the
transferee acquires, in addition, the right to have the indorsement of the transferror. But for the purpose of determining
whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is
actually made."106

Sec. 76. Transferee Of Holder In Due Course As Holder In Due Course

If one acquires negotiable paper from a holder in due course he takes the title and right of such holder in due course.
Example 44. M makes and delivers to P a promissory note payable to order of P. M has a defense to this note. P sells
to H, who acquires under conditions making him a holder in due course. H transfers to S, who gives no value, acquires
after maturity and has notice of the defense. S can enforce payment of the note.
The reason for this rule is that as the title in H is good and M must pay H, no harm comes to him in paying the
transferee of H. Therefore, negotiation should not stop with H.
The Act says: "But a holder who derives his title through a holder in due course, and who is not himself a party to any
fraud or illegality affecting the instrument, has all the rights of such prior holder in respect of all parties prior to the
latter."107
106. Id. SEC. 49; Goshen Bank v. Bingham, 118 N. Y. 349; Osgood's Admr's v. Artt, 17 Fed. 575.

Sec. 77. Burden Of Proof As To Whether One Is Holder In Due Course

If it is shown that there is a defense that would be good against one not a holder in due course the plaintiff must show
he is a holder in due course.
The law on this point is not entirely clear, but it seems sounder that plaintiff must establish by a preponderance of the
evidence that he is a holder in due course.108

Sec. 78. Amount Recoverable By Holder In Due Course

The holder in due course may recover the full amount of the instrument.
While different rules have prevailed on this point the rule now is that if one is not subject to defenses as being a holder
in due course he may recover the full amount of the instrument no matter what he gave therefor.109
107. Id. SEC. 58. See also following cases: Woodsworth v. Huntoon et al, 40 111. 131; Andrews v. Robertson, 111
Wis. 334.
108. Singer Mfg. Co. v. Summers, 143 N. C. 102, 55 S. E. 522.
109. Cromwell v. County of Sac, 96 U.S. 51, Jefferson Bank v. C. W. L Co., 123 S. W. {Tenn.) 641.

Chapter 12. Defenses Against Holder In Due Course. A. Defenses Not Available Against
Holder In Due Course-Personal Defenses

Sec. 79. In General

It has been seen that to accord circulability to an obligation to pay money, which is one of the chief objects of the law of
negotiable paper, it must be established that a paper to which it is sought to give such negotiable quality shall, in its
course of transfer, become detached from the original transaction as such and circulate as an independent obligation
to pay the certain sum of money therein provided for. This means that the defenses that a person who has given
negotiable paper who might successfully defend for some reason against the other contracting party must not be
allowed to interpose such defenses against a transferee, for thereby he would destroy the independent character of the
paper and subject it to all of its original contractual connections. A negotiable paper must be a craft that can be cut
away from its moorings. If all promises or orders to pay money were enforceable between the parties, strictly as drawn,
our inquiry here would not have to be made. But such is not the case, and justice requires that as between the parties,
the merits be ascertained. But a man's negotiable instrument is his bond to any holder in the world and not merely to
his immediate party. Therefore, defenses possible against the party to the contract out of which the instrument arose
must not be possible as against others, provided they are holders in due course, as described in the chapter
immediately preceding.
We will find that notwithstanding this general rule, there are some defenses which may be made, even against a holder
in due course. Therefore it is necessary to inquire into the various kinds of defenses. In the present chapter we will
mention and consider all of those defenses which cannot be made against a holder in due course. They are called
personal defenses and are the usual defenses, that is, defenses going to the merits of the indebtedness, defenses
arising out of the transaction. The so-called "real defenses" (defenses good against any one) are discussed in the
following chapter are what we might term unusual - defenses consisting in some circumstance usually extrinsic to the
merits themselves, such as forgery, minority and the like.
In the following sections the various personal defenses are enumerated.

Sec. 80. Payment Before Maturity

If one pays the sum, or any part thereof, owing but not overdue, on paper which he fails to take up, or fails to have
cancelled, or upon which he omits to see that the proper indorsement is made, and such paper is acquired by a holder
in due course, such defense of payment is not good against such holder in due course.
A defense of payment before an instrument is overdue is a personal defense only and not good against a holder in due
course.
Example. M made a note to order of P. M desiring to pay the note before it was due, P represented same was lost, but
gave M a receipt. P then sold the note to H, a holder in due course. Defense of payment not good against H.110

Sec. 81. Set-Off

Set-off of counter claims not good against a holder in due course.
A holder in due course is not subject to counter claims between the parties.

Sec. 82. Want Of Consideration

The fact that an instrument is not supported by a consideration is no defense against a holder in due course.
A person who as a holder in due course acquires an instrument may assume that it is supported by a consideration,
and that defense, though it might have been successfully interposed against the original party to the transaction,
cannot be interposed as against him.111

Sec. 83. Failure Of Consideration Or Breach Of Contract

The fact that the consideration has failed or the contract has been broken is not a defense that can be set up against a
holder in due course.
If the consideration for the instrument fails or the contract is broken, the holder in due course is not thereby concerned.
Example 47. A bought a machine and gave his note in payment. The machine was not as represented and was
returned. The seller of the machine sold the note no. Wilcox v. Aultman, 64 Ga. 544.
to H, a holder in due course. H is not subject to the defense and can hold A on the note.
111. First Nat. Bk. v. Skeen, 101 Mo. 683.

Sec. 84. Fraud In The Consideration

Fraud in inducement or consideration is not a defense that can be made against a holder in due course.
If a person has been led into a bargain by fraudulent representations, which would entitle him to avoid the contract and
defend against the payment of any instrument therein as far as the right of the other party to the contract is concerned,
a transfer to a holder in due course cuts off such defense.
Example 48. A sold B a horse which he knew to have a hidden disease which B could not discover, and which he
fraudulently concealed. B gave a note in payment which A sold to C, a holder in due course. C is not subject to this
defense.112

Sec. 85. Duress

Duress is not a defense that can be set up against a holder in due course.
By the weight of authority, and independent of local statute, duress is a personal defense and is regarded as a species
of fraud.112a
Example 49. Note was executed by wife under threats of criminal prosecution of husband for embezzlement. Held, no
defense against innocent holder.

Sec. 86. Illegality Of Consideration

That an instrument arose out of an illegal transaction does not af112. Grooms v. Oliff, 93 Ga. 789.
112a. Porter v. First Nat. Bk., 212 111. Ap. 251; State v. Wegener, 162 N. W. (la.) 1040.
fect it in the hands of a holder in due course; except where local statute makes an instrument void if founded on
specified illegal consideration.
In some jurisdictions it is provided that instruments given in certain illegal transactions are void for all purpose, e. g., a
gambling transaction; but the general principle is that the illegality of the consideration or transaction cannot be set up
against a holder in due course.

Sec. 87. Lack Of Authority Of Agent Known To Payee

If an agent purports to bind his principal upon paper which the payee knows he has no authority to bind his principal
upon, a holder in due course has generally no right to hold such principal.
As a general rule of the law of agency, a person is not bound by the act of another unless he assents to be bound
either by prior authorization or subsequent ratification; or unless he has apparently assented by what he has done or
said. If an agent have actual or apparent power to bind his principal upon negotiable paper, as far as the immediate
party is concerned, certainly in that case, no right would be lost by transfer to a holder in due course. If as to the
immediate party there is no representation by the principal of authority in the agent, so that such party could not hold
the principal, generally a holder in due course could not hold the principal.
Example 50. A having no authority, either real or apparent to bind P on negotiable paper, makes a negotiable
promissory note in P's name and signed "P, by A, his agent." The payee sells this to H under the requisite
circumstances to make H a holder in due course. P is not bound.113
If, however, an agent has been given general power to bind his principal upon negotiable paper as the business might
require, and a holder in due course relies on that fact, in purchasing certain particular paper not made for a proper
purpose, the principal would be bound. Most of the cases coming up on this point involve partnerships or corporations,
but there is no reason for a distinction in principle. See following sections.

Sec. 88. Lack Of Authority Of Partner

If a partner purports to bind the partnership upon negotiable paper and lacks real or apparent power to do so, a holder
in due course (ignorant of the lack of authority in the specific instance) may hold the partners if it is a trading concern,
and if not a trading concern may hold the partners if a course of trade has been established on which in the specific
instance the holder relies.
Partners in a trading concern (one that buys and sells) have apparent or implied power to bind the other partners in
partnership matters. A holder in due course may rely on this fact.
Example 51. A being of the trading firm of A, B & Co. (a firm composed of A, B, C, D and E) borrows money for his own
personal purposes from X, who takes the firm note of "A, B & Co., by A." X, obviously, cannot hold the firm, but before
the note is due, X transfers for value to H, who has no knowledge of the facts of the transaction. H can hold the
partners of A, B & Co.114
113. See "Agency" in this Series.
If the firm is non-trading the presumption does not hold, but in that case, there must be some custom established of
issuing paper upon which the holder relies.115

Sec. 89. Lack Of Authority Of Corporate Officer

Where a corporation has power to bind itself on negotiable paper, a holder in due course of paper signed in the
corporate name by some officer thereof can hold the corporation thereon although in the specific instance the paper
was issued without authority.
Even assuming that as between the immediate parties, the corporation could defend because the corporation
representative had not even apparent power, a transfer to a holder in due course is effectual to create a right against
the corporation. This would be true in case of a signature by any officer having apparent or real power or a
presumption of power from the office held by him.116
Example 52. P, president of M. Co., bought stock for himself in X Co., and gave the note of the M. Co. signed by
himself as president in payment therefor. Note was transferred before maturity to H, who had no knowledge that note
was not for a proper corporate purpose. H can hold M. Co.
114. Wright v. Brosseau, 73 111. 381.
115. Dowling v. Nat. Exch. Bk., 154 U. S. 512.
116. Jefferson Bk. v. Chapman-White-Lyons Co., 122 Tenn. 415, 123 S. W. 641.

B. Defenses Available Against Holder In Due Course - Real Defenses

Sec. 90. Real Defenses Defined

A real defense is one good against any one whether holder in due course or not.
There are some defenses good even against a holder in due course. They are called real defenses. They are, at least
generally, defenses of an unusual character, not those going to the merits of a transaction, but rather to its nature as a
legal act. The policy of the law of commercial paper requires that a purchaser (holder in due course) be unaffected by
any defenses between the immediate parties; but the policy of the law in other fields runs at times counter to those
considerations and exerts a pressure that causes the negotiable principle to yield. In this chapter the so-called real
defenses are considered.

Sec. 91. Personal Incapacity Of Defendant

Personal incapacity to contract is a defense good against any holder.
An insane person117 or a minor118 can plead his defense against even a holder in due course.
Sec. 92. Forgery
Forgery is a real defense.
Very clearly a person can set up that an instrument sued on is not an instrument made by him or by his authority; but
there may be elements of estoppel.119
117. Hosier v. Beard, 54 Ohio State 398.
118. Morton v. Steward, 5. 111. Ap. 533.
119. Ehrler v. Braun, 120 111. 503

Sec. 93. Material Alteration

That the instrument has been materially altered is a defense that can be set up against a holder in due course; unless
the alteration was made possible by the careless manner in which the instrument was drawn. But a holder of an altered
instrument may recover on it according to its original tenor.
(1) Material alteration a real defense.
If a material alteration is made with guilty intent, it amounts to a forgery, and the same rules apply as in the section
above. If not made with guilty intent yet still purposely it is nevertheless an alteration and the maker cannot be made
liable upon the instrument as changed.
The alteration must be material in order to give the promissor any defense. The statute declares that "Any alteration
which changes: 1. The date; 2. The sum payable, either for principal, or interest; 3. The time or place of payment; 4.
The number of the relations of the parties; 5. The medium or currency in which payment is to be made; or which adds a
place of payment where no place of payment is specified, or any other change or addition which alters the effect of the
instrument in any respect, is a material alteration."120
(2) Material alteration by filling in uncancelled blanks.
If the maker of the paper leaves uncancelled spaces, so that alteration by filling in is thereby made easy or perhaps
even suggested thereby, a line of cases holds that the maker is estopped to set up the alteration as against an
innocent holder, while another line takes the opposite view. See following examples:
120. Nego. Instru. Act, SEC. 125.
Example 53. Suit was brought upon a promissory note purporting to be made by defendants and reading as
follows:121
"$1300. Kewanee, Illinois, Oct. 4, 1897.
One year after date I promise to pay to the order of ourselves thirteen hundred dollars at Kewanee, 111. Value
received, with interest at the rate of seven per cent per annum.
(sd.) L. Silverman,
H. Clay Merritt." Indorsed on back:
"L. Silverman. H. Clay Merritt."
Boyden & Son, paid $1300 for the note, acquired it before maturity and had no notice of any alteration. The defense
was based on two theories: (1) That the note as originally delivered contained the figures "$100" in the margin, and the
words "one hundred dollars" in the body of the note, and that the figures "$100" were altered to read "$1300," and the
word "one" before "hundred" was erased, and the word "thirteen" inserted in its stead; or that the word "one" was not in
the body of the note, but that there was a blank space in which the word " thirteen " had been inserted.
The court in the course of its opinion said: "First, If the note was altered by (the first method) then the alteration
amounted to a forgery and appellant is not liable on the note, even though appellees were bona fide purchasers
thereof for value without notice or knowledge of the change. If the amount named in the note is raised by erasing what
is written, such alteration is a material one, and the note is thereby vitiated so as to become void. * * * Where a note is
complete at the time when it is signed by the maker, its subsequent alteration by raising the amount thereof through
obliteration of the same by the use of any chemical process, or other ingenious device, without the knowledge or
consent of the maker, will discharge him from liability upon the note. * * * (The court found this theory unsupported by
the evidence.)
121. Merritt v. Boyden, 191 111. Rep. 136; accord, Garrard v. Hadden, 67 Pa. 82; Scotland Co. Nat. Bk. v. O'Connell,
23 Mo. Ap. 165; Hackett v. First Nat. Bk., 114 Ky. 193; Isnard v. Forres, 10 La. Ann. 103.
"The second theory of the defense * * * was that, when he signed and endorsed the note, there was a blank space
before the word 'hundred' and that this blank space was subsequently filled by inserting the word 'thirteen' therein
without the knowledge or consent of the appellant. * * * When the maker of the note has, by careless execution of the
instrument left room for an alteration to be made by insertion without defacing the instrument or exciting the suspicion
of a careful man, and the instrument by reason of the opportunity thus afforded is subsequently filled up with a larger
amount than that which it bore at the time it was signed, the maker will be liable upon it as altered to any bona fide
holder without notice." (This left the contention that the marginal figures had been altered to be disposed of. For even
though the makers of the note were negligent as to the body of the note, the marginal figures must have been erased
and changed.) As to that the Court said: "The marginal figures have been held to be not part of the instrument, but to
be intended merely as a convenient index, and as an aid to remove ambiguity or doubt in the instrument itself. The
alteration or erasure of the marginal figures is an immaterial alteration and will not affect the rights of the holder of the
instrument."
For these reasons the Court gave a decision in favor of the holder in due course.
The other view is as follows:121a
"Whenever a party in good faith signs a complete promissory note, however awkwardly drawn, he should, we think, be
equally protected from its alteration by forgery in whatever mode it may be accomplished; and, unless, perhaps, it has
been committed by some one in whom he has authorized others to place confidence, as acting for him, he has quite as
good a right to rest upon the presumption that it will not be criminally altered, as any person has to take the paper on
the presumption that it has not been; and the parties taking such paper must be considered as taking it upon their own
risk, so far as the question of forgery is concerned, and as trusting to the character and credit of those from whom they
receive it and of the intermediate holders."
(3) Check protection.
It is well in order to secure against alteration to use devices rendering change difficult. Various devices are used,
calculated to prevent check raising. It cannot be said as a matter of law, that it is necessary to use these, but, on the
other hand, their use is very desirable, especially where many checks are written, and especially,
121a. Holmes v. Trumper, 22 Mich. 427, 7 Am. Rep. 661; accord, National Exch. Bk. v. Lester, 194 N. Y. 461,
Greenfield Sav. Bk. v. Stowell, 123 Mass. 196; Knoxville Nat. Bk. v. Clark, 51 la. 264; Critten v. Chem. Nat. Bk., 172 N.
Y. 219.
again, if they are written by agents. One must, as we have said, use all due caution to prevent check raising. If he uses
such caution he is not liable for subsequent alterations and those who recognize such check after its alteration are the
losers. Now he may show that he was not careless if he may show that he adopted every precaution, and that every
check made out by him or his employees must pass through a certain process. In such a case also, the bank may
more readily detect a forgery and the depositor may in such a case more readily charge it with negligence in case it
fails to recognize the forgery. Also in examining returned vouchers, the drawer may the more quickly and surely
discover the tamperings, so as to report them to the bank.
(4) Right to recover on altered instrument according to original tenor.
The uniform act provides that where an instrument is altered and has come into the hands of a holder in due course,
although the alteration is a good defense against him, he may yet recover on the instrument according to the original
tenor.

Sec. 94. Fraud Going To The Execution

The fraud whereby one is induced to execute, accept or indorse a negotiable instrument under the impression that he
is performing some other act with an entirely different legal effect, gives rise to a defense good against every one,
unless one is by his negligence estopped to set up the fraud.
If one is fraudulently prevailed upon to attach his signature to a negotiable instrument, with the understanding that he is
really signing some altogether different paper, he can set up his defense against even a holder in due course provided
he was not negligent. It being the duty of every one to read what he signs, a failure to read would ordinarily constitute
such negligence that the party would be estopped to set up his defense against the holder in due course. But there are
rare cases in which this would not be true. So if by any trick or device another paper than the one read is substituted, a
defense could be made as against even a holder in due course.122
The fraud here discussed differs from that discussed above in section 85 in that the fraud there goes to the
consideration or inducement and not to execution. The party in the other case signs just what he intended to sign. In
such case a true bona fide holder has a good title. Here he has none if there was no negligence.

Sec. 95. Illegality Which By Statute Makes Instrument Void

By statute in many jurisdictions it is declared that if an instrument is founded upon certain illegal considerations, as for
instance, a gambling consideration, it shall be utterly void. In such cases the instrument is of no effect even in the
hands of an innocent purchaser for value.
If the statute declares the instrument void, it becomes so to all purposes and can give no rights to any one. The chief
case in which an instrument is declared void as to everyone is the case of an instrument executed as a part of a
gambling transaction.123
122. First Nat. Bk. v. Hall, 160 la. 218.
123. Alexander v. Hazelrigg, 123 Ky. 677, 97 S. W. 353.

Chapter 13. The Obligations Of The Parties.124

Sec. 96. Of Maker Of Note

The maker's contract is to pay the note, according to its tenor, to the payee, or his transferee. He cannot deny the
payee's existence or his then capacity to indorse. His liability is primary.
The maker's liability is to pay the instrument according to its tenor. Of course, if he has defenses he may set them up
where that is allowable according to the principles hereinbefore discussed. He engages to pay primarily. By this we
mean that no one else is to be resorted to before the maker's liability will accrue.
He engages to pay the amount of the note. It is no defense that the holder did not pay the face value.125

Sec. 97. Of Drawer Of Bill

The drawer's contract is that if the bill be not accepted or paid, according to its tenor, to the payee therein, or his
transferee, he, the drawer, will pay it, provided the necessary steps be taken to charge him. He cannot deny the
payee's existence or his then capacity to indorse. His liability is secondary. He may by apt words negative his liability.
A bill is drawn as an order on someone else. If that other on whom it is drawn does not accept, he may thereby incur a
liability to the drawer if he thereby break his contract, but does not incur any to the payee or other holder, unless he
has accepted. A refusal by the drawee to accept, gives the holder immediate right of recourse to the drawer. Because
the holder must apply to the drawee for acceptance or payment before he can resort to the drawer, the drawer's liability
is said to be secondary.
124. Nego. Instru. Law, Sec 60-69.
125. See SEC. 78, infra.

Sec. 98. Of Drawee Of Bill Or Check

A person, firm, or corporation upon whom a bill or check is drawn cannot be made liable thereupon unless there is
acceptance. But to the drawer there may be a liability for failure to accept or failure to pay, if such failure amounts to a
breach of contract.
One cannot be made liable by reason of the fact that a check or bill has been drawn upon him. His failure to honor
such check or bill may indeed amount to a breach of a previous contract upon his part to honor it when drawn, but his
liability in that event is only to the drawer and only upon the previous contract not upon the instrument.
When a bank refuses to honor a check when there are sufficient funds to cover its amount, that constitutes a breach of
the implied contract that the bank will honor checks drawn upon it when there are funds to pay it and the drawer can
have damages.
It has been held that in such a case the drawer is entitled only to nominal damages, unless he proves substantial
damages actually accruing;126 but other cases have held that there is a presumption of damages, and substantial
damages may be obtained without actual proof thereof.127
126. Clark v. Bank, 83 N. Y. Suppl. 447.
127. Schaffner v. Ehrman, 139 111. 109.

Sec. 99. Of Acceptor

The acceptor of a bill of exchange contracts to pay it according to the tenor of his acceptance. He cannot deny the
existence of the drawer or the payee, or the capacity of the first to draw, the second to indorse the instrument, or the
genuineness of the drawer's signature. His liability is primary.
(1) The Uniform Act.
Section sixty-two of the Uniform Act provides: "The acceptor by accepting the instrument engages that he will pay it
according to the tenor of his acceptance; and admits, 1. The existence of the drawer, and the genuineness of his
signature, and his capacity and authority to draw the instrument, and
2. The existence of the payee and his then capacity to indorse." The acceptor's liability is a primary liability.
(2) Liability of acceptor where drawer's name is forged.
The right of an acceptor to defend on the ground that the drawer's name was forged has been a subject of some
dispute; but his liability on such paper to a holder in due course is established by the weight of authority and seems to
follow beyond question from the Uniform Act above quoted which provides that by acceptance he admits the
genuineness of the signature of the drawer, and consistently with this view is the result that if an acceptor or drawee
has paid forged paper he cannot recover it back. Price vs. Neal 128 is the classic case on this point, and the prevailing
view is that the Uniform
128. 3 Burrows (Eng.) 1354.
Act adopts the same view.129 This applies to checks as to other bills of exchange.
(3) Liability of acceptor of bill or check where amount raised.
Some cases have held that an acceptor can defend that he accepted a raised bill or check,130 but the other view is
that such a defense is not good against a holder in due course.131 This view is contrary to the weight of authority, but
seems to be the view adopted by the language of the act above quoted, although this has been denied.132
(4) Acceptor does not admit genuineness of indorsements.
It is not provided by the Act or held by the cases that an acceptor admits genuineness of indorsements. If a drawee
accepts or pays to a holder whose claim of title contains a forged indorsement, he may make this point against such
holder.133

Sec. 100. Contract Of Unqualified In-Dorser

An unqualified indorser warrants (1) the capacity of prior parties; (2) the genuineness of the instrument; (3) the
genuineness of his title thereto; (4) that the instrument will not be dishonored by non-acceptance (if bill) or non-
payment; and undertakes that if for any of these reasons or otherwise the instrument is unpaid at maturity he will pay
the amount thereof to the holder provided proper steps are taken to charge him. His liability is secondary.134
129. National Bank v. First Nat. Bk., 141 Mo. Ap. 719; Berg-strom v. Ritz-Carlton Co., 157 N. Y. S. 959.
130. Espy v. Cincinnati First Nat. Bk., 85 U. S. 604.
131. Cherokee Nat. Bk. v. Union Trust Co., 33 Okla. 342.
132. McLendon v. Bk. of Advance, 188 Mo. Ap. 417, 174 S. W. 203.
133. Holt v. Ross, 54 N. Y. 472, 13 Am. Rep. 615.
A special or blank indorsement may be, and usually is, unqualified. The indorser's liability is secondary, that is, he need
not answer unless the party primarily liable fails to pay, and then only in case the proper steps of presentment, notice,
etc., are taken to charge him; unless such procedure is excused or waived.
The indorser may be thought of as having a dual liability - that of a warrantor and that of a guarantor.
As a warrantor he undertakes
(1) That prior parties have capacity to contract;
(2) That the instrument is genuine; and
(3) That the indorser's title is good;
As an indorser he undertakes that the instrument will be accepted or paid, or both, as the case may be, according to its
tenor, and if not, and the proper steps are taken to charge him, he will pay the amount to the holder or to any
subsequent indorser, who may be compelled to pay it.
Or in other words, as a vendor of paper he warrants that it is what it seems to be; as an indorser he engages that it will
be paid.
Example 54. M makes a note to P who indorses to I who indorses to H. H presents the paper at maturity to M for
payment. M is solvent but does not pay. M gives notice to I. I must pay the amount to H and may look to his recourse
against P, who in turn can sue M. H may hold P, or ignoring all indorsements may sue M.
134. Nego. Instru. Act, SEC. 66.
Example 55. As a warrantor in the above case I warrants that the note is valid and subsisting; that H, P and M have
capacity to contract; that the instrument and all indorsements thereon are not forgeries; and that his own title to the
paper is good.

Sec. 101. Warranty Where Negotiation By Mere Delivery

In case the instrument, being payable to bearer, is negotiated by mere delivery, that is, without indorsement, there is a
warranty as set out below.
" (1) That the instrument is genuine and in all respects what it purports to be;
(2) That he has good title to it;
(3) That all prior parties had capacity to contract;
(4) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless."135
These warranties (i. e. of one who negotiates by mere delivery) extend only to the immediate transferee.
If one who transfers paper whose title might pass by mere delivery puts his indorsement thereon, he becomes liable as
any indorser.

Sec. 102. Contract Of Qualified Indorser

The contract of a qualified indorser is the same as that set forth in the section above, except that it extends in favor of
all succeeding holders.
The contract of a qualified indorser (one who indorses "without recourse," or similar words) is that of a warrantor only.
His qualification eliminates the liability of the indorser, as is the intention thereof. But he still remains liable to
subsequent holders upon his warranty.
135. Id. SEC. 65.
Example 56. M makes a note to order of P. P indorses "without recourse" to H. If M is a minor and does not pay on that
ground, H can hold P upon the warranty.136 If M, however, being an adult, does not pay merely for financial reasons,
H cannot hold P.

Sec. 103. Contract Of Irregular Indorsement

An irregular indorser (that is, one who not being otherwise a party to the instrument indorses before delivery) contracts
according to the following rules:
"If the instrument is payable to the order of a third person, he is liable to the payee and all subsequent parties;
" If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties
subsequent to the maker or drawer;
"If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee."137
Such an indorser is also called an "anomalous" indorser.

Sec. 104. Order Of Liability Among In-Dorsers

"As respects one another indorsers are liable prima facie in the order in which they indorse; but evidence is admissible
to show that as between or among themselves they have agreed otherwise." 138
Example 57. M makes a note payable to A, which is by A indorsed to B, and by B to C, and by C to D.
136.
137. Nego. Instru. Act, SEC. 64.
138. Id. SEC. 68.
In order to hold any one except M, D must present the note to M for payment at maturity and save his rights against the
indorsers by notice. He then may sue A, or B, or C. If he sues B, B may sue A, but not C.

Chapter 14. Presentment For Payment And For Acceptance

Sec. 105. General Statement

In order to fix the liability of parties secondarily liable on a negotiable instrument, it is necessary to take certain steps
provided by law for the benefit of such parties; except where owing to peculiar circumstances they are excused, or not
required, and except where they are waived.
A party primarily liable on an instrument is, generally speaking, the real debtor and should pay the instrument when
due, and is no more entitled to any procedure to charge him than any other debtor; but parties occupying positions
which normally signify a secondary liability are liable only in case the party primarily liable does not pay. They are not
the ultimate debtors, and therefore are entitled to have the holder use a degree of diligence to obtain payment from the
party primarily liable. If we assume that A in borrowing money has given a note to B or order, and B has indorsed to C,
and C to D and D to E, the present holder, then normally A is the only party on whose books there is an item to be
debited against him, and E is the only party on whose books there is an item to his credit. The books of B, C and D,
balance. They have received and given value. A must pay E to balance the books of each of them - one is a debtor
and the other a creditor. Now under the law B, C and D, if indorsers, assume a liability, but it is secondary, and if
enforced, means a payment which
A ought to make, and which the indorser can shift upon A if he be financially responsible. This is an onerous
undertaking by the indorser, and the law rightfully throws around him the safeguards of a certain procedure whereby
promptness in attempting to collect from the party primarily liable, and promptness in notifying the indorser (or drawer)
is insured. It is not necessary that the holder sue the party primarily liable before he can charge the party secondarily
liable. All he needs to do is to fix the liability of the parties secondarily liable, and then may sue any time before the
statute of limitations bars him, any party liable to him, primarily or secondarily. By taking this procedure, he does not
elect which one he will hold. He may still sue and collect from the main debtor.
The procedure to charge a drawer or indorser is as follows:
(1) Presentment to party primarily liable or to drawee for payment;
(2) Notice to party secondarily liable of nonpayment by party primarily liable or by drawee;
(3) In some cases, presentment for acceptance to drawee;
(4) Notice to party secondarily liable of nonacceptance;
(5) In some cases protest.
These various steps will now be considered.

A. Presentment For Payment At Maturity To Parties Primarily Liable

Sec. 106. Not Necessary To Charge Parties Primarily Liable

Presentment of a note to the maker thereof, or of an accepted bill to the acceptor thereof, is not necessary to charge
such parties. They are already liable.
The law provides:
"Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if the
instrument is by its terms, payable at a special place, and he is able and willing to pay it there at maturity, such ability
and willingness are equivalent to a tender of payment on his part."139
We have noticed above the reason for this rule. Note the effect of putting a place of payment in the instrument. Such a
provision protects the party liable for it enables him to make a tender at maturity which, if he keeps it good, will prevent
accruing interest and costs, where otherwise, the instrument not being presented, he might not know who is the holder,
and so could not make tender.
If an instrument is payable at a certain bank, and on the date of the maturity of the instrument the party liable thereon
has funds on deposit at such bank, is the bank authorized to pay out of such funds, there being no express direction?
Courts have held both ways. But the Negotiable Instrument Act settles it that a provision in an instrument that is
payable at a bank, is equivalent to an order upon the bank to pay the instrument if there are funds sufficient for that
purpose.140

Sec. 107. Presentment For Payment Necessary To Charge Drawer And Indorsers
Presentment for payment at maturity to the party primarily liable, is necessary to charge parties secondarily liable;
except where excused or waived.
139. Id. SEC. 70.
140. Id. SEC. 87. As adopted in Illinois, Nebraska and South Dakota, this section has been omitted.
To fix the liability of the drawer and the indorsers on a bill (which has not been previously dishonored by non-
acceptance) it is necessary to present the bill for payment at maturity to the drawee or acceptor. To fix the liability of
the indorsers on a promissory note, it is necessary to present the note for payment at its maturity to the maker. If this
step of presentment is not taken, the drawer or indorser might well enough claim that if the presentment had been
made to the party primarily liable thereon, he might have paid it. That being so, the party only secondarily liable ought
not to have to pay it. Accordingly he is discharged. There are certain exceptions. Presentment may be waived by the
drawer or indorser, or the circumstances may excuse presentment.

Sec. 108. What Presentment Sufficient

In order to charge parties secondarily liable, presentment for payment must be made (1) by the holder or his agent in
that behalf; (2) on the day of the maturity of the instrument; (3) at a proper hour as by the law defined; (4) at a proper
place, as by the law defined; (5) to the person primarily liable, or in his absence or inaccessibility, to any person found
at the place of presentment; (6) by exhibiting the paper and demanding payment thereof.
The law sets forth clearly and in detail what presentment shall be deemed sufficient and reference is made to sections
70-78, Appendix A in connection herewith.
(1) Presentment by whom.
This must be the holder or his agent in that behalf. Possession of a negotiable instrument payable to bearer, or
properly indorsed shows prima facie authority to receive payment. One may hold paper merely as an agent to receive
payment, as shown by the form of the indorsement, or by any other evidence.141
If the holder is dead, his personal representative should make presentment.
(2) Date of presentment.
This is the date of its maturity. If it is demand paper it must be presented within a reasonable time to charge the drawer
or indorsers. What time is reasonable depends on circumstances. Paper matures on the date specified for payment,
without grace, for grace, which was allowed at common law, has been abolished in most states. If, however, this day is
a holiday, or Saturday or Sunday, the following business day is the proper day on which to make presentment, though
demand paper may be presented before 12 o'clock noon on Saturday when not a holiday.
Time is computed by excluding the day on which it begins to run and including the day of payment. A month is a
calendar month.
Thus, a note payable 30 days after date, and which isdated May 30th would be due on the thirtieth day after May 30th.
That is, the first of the thirty days would be May 31st. The last of such thirty days would be June 29th, and this would
be the day of maturity on which presentment must be made to charge the indorsers, if any, though of course, failure to
then present it would not discharge the maker. A note dated January 31st, due one month from date would be due
February 28th, or, if leap year, February 29th. A note dated January 15th, due one month from date would be due
February 15th.
141. Fowler Paper Co. v. Best, 183 111. Ap. 310.
(3) Hour of presentment.
This must be a reasonable hour or if payable at a bank, during banking hours, unless the party liable have no funds
there during banking hours, in which case presentment before the bank is closed is sufficient.
What is a reasonable hour depends on the particular customs of the community.142 What might be a reasonable hour
in a rural district might not be such in a large city.
(4) Place of presentment.
If there is a place of presentment specified, of course, that governs. If there is no place specified, then the law provides
the place of presentment. We may say that the instrument must be presented (1) at the place specified, or if none, then
(2) at the address given, or, if none, then (3) at usual place of business or residence, or (4) in any other case where the
party can be found, or at his last known place of residence.
Unless presentment at the proper place is made at the proper time the parties secondarily liable are discharged.143
(5) To whom presented.
This must be to the person himself, or to his agent, or if he is absent or inaccessible, then to any person found at the
place where presentment is made. If the person liable is dead, his personal representative must be sought out, if with
reasonable diligence he can be found.
142. Columbian Banking Co. v. Bowen, 134 Wis. 218, 114 N. W. 451.
143. Ironclad Mfg. Co. v. Lackin, 114 N. Y. S. 43.
Where several parties are liable as co-makers or co-acceptors, whether presentment must be made to all, or may be
made to only one, depends on their relationship to each other. If they are partners presentment may be to any one,
unless a place of presentment is stated. If not partners, then presentment must be to all, unless a place of presentment
is stated, or unless one or more of them is agent of the others in that regard.
(6) Instrument exhibited.
The party called upon to pay an instrument is entitled to have it exhibited. Therefore due presentment has not been
made without such exhibition.144 It has been held, however, that if the instrument is lost or mislaid, presentment of a
copy with a promise of reasonable indemnity, is a good presentment to charge the drawer and indorsers.
(7) Presentment of unaccepted bill of exchange or check to drawee for payment.
In order to hold drawer or indorser on an unaccepted bill of exchange, which need not be presented for acceptance, it
is necessary to present such bill of exchange or check for payment at its maturity. In case of a bill of exchange payable
on demand, presentment for payment must be made within a reasonable time after its issue, or within a reasonable
time after its last negotiation.
144. Gilpin v. Savage, 201 N. Y. 167, 94 N. E. 656. (Demand over telephone to maker not sufficient to change
indorsers.)
In the case of a check, presentment to the drawee bank must be made within a reasonable time after its issue or the
indorsers will be discharged, and the drawer will be discharged to the extent of the loss caused by the delay, but not
otherwise. Under rules of law merchant, a check must be presented within reasonable time after it is received. If the
holder resides at the place the check is payable it must be presented the day following. If drawer bank is at another
place check must be forwarded on next business day after receipt, and be presented not later than day immediately
following day of its receipt at place of payment. Otherwise drawer will be discharged to the extent of his delay and
indorser will be discharged in any event.144a

Sec. 109. When Presentment For Payment Not Required

Presentment for payment is not required when the circumstances excuse it or it is waived. In these cases the party
secondarily liable is not discharged, notwithstanding such lack of presentment.
(1) Where drawer has no right to expect or require the drawee or acceptor to pay, presentment is not required.
If one draws on another without reasonable grounds for believing that the drawee will pay, he has no right to require
presentment for payment. This depends on the circumstances. Even if he has no funds with the drawee, he may
reasonably expect acceptance.
(2) Where an instrument is made or accepted to accommodate an indorser, he cannot require presentment for
payment.
We may thus illustrate the text: A for B's accommodation, that is, to loan B his credit, makes a note
144a. Swift & Co. v. Miller, 113 N. E. 447 (Ind. Ap. Ct).
to B, which B indorses to C. B is in this case the only real debtor, and A has indorsed-on the theory that B will pay
when the instrument is due. B therefore has no right to complain because it was not presented to A, for payment.
(3) Presentment for payment is dispensed with, where after the exercise of reasonable diligence it cannot be made.
What constitutes reasonable diligence depends on the circumstances. Looking one up in a directory and not availing
one's self of other available means of information would not be reasonable diligence. But it is impossible to lay down
definite rules. One must simply do what an ordinarily prudent person would do under the circumstances where one has
made no presentation. The burden of showing that he exercised reasonable diligence is on him.
(4) Presentment for payment is dispensed with where the drawee is a fictitious person.
(5) Parties entitled to presentment may waive it by word or conduct.
A waiver of presentment for payment (as well as other steps to fix liability) is often embodied in the instrument itself. If
so, all parties are bound by it including all subsequent indorsers. Sometimes a waiver is embodied in the individual
indorsement. Any one could also waive right to presentment in any separate instrument or by his conduct.145
145. Bessenger v. Wenzel, 161 Mich. 61, 127 N. W. 750; Simon-off v. Granite City Nat. Bk., 279 111. 248.

B. Presentment Of Bill For Acceptance.146

Sec. 110. Presentment For Acceptance Necessary In Certain Cases To Charge Drawer And
Indorsers
In order to charge the drawer, presentment for acceptance to the drawee is necessary (except where excused by
circumstances) in the following cases:
"First: Where the bill is payable after sight, or in any other case where presentment for acceptance is necessary in
order to fix the maturity of the instrument; or
"Second: Where the bill expressly stipulates that it shall be presented for acceptance;
"Third: Where the bill is drawn elsewhere than at the residence or place of business of the drawee."
In these cases, the presentment of a bill of exchange for acceptance is necessary to charge the drawer and indorsers.
In other cases presentment for payment at maturity is sufficient.
Where presentment for acceptance is not required it may nevertheless be made, for two purposes:
First: To obtain as soon as possible the liability of the drawee, as an acceptor; and, second: To give, in case of
nonacceptance, a right of immediate recourse against the drawer and the indorsers.

Sec. 111. What Presentment For Acceptance Sufficient

In order to charge parties secondarily liable presentment of a bill for acceptance must be made, (1) by or on behalf of
the holder; (2) within a reasonable time (or negotiated within a reasonable time) on a business day before the
instrument is overdue; (3) at a reasonable hour; and (4) to the drawee, his agent in that behalf, or his personal
representative.
146. Nego. Instru. Act, Article III.
(1) Party who must make presentment for acceptance.
This must be the holder of some one who acts in his behalf. The holder might be the original payee or a transferee of
such payee.
(2) Date of presentment for acceptance.
There is no exact date on which presentment for acceptance must be made, but it must be made before the instrument
is overdue on a business day. It may be presented for acceptance on any day on which an instrument may be
presented for payment, as above stated. When Saturday is not a holiday it may be presented before 12 noon on such
day. This day must fall within a reasonable time from the time the instrument is delivered to the payee, or within a
reasonable time from the last transfer. For one who holds an instrument which requires acceptance, must present it for
acceptance or negotiate it within a reasonable time. So it might be negotiated a number of times before it was finally
presented for acceptance and if such succeeding negotiation was made within a reasonable time since the former
negotiation and the presentment for acceptance made within a reasonable time after the last negotiation and before
maturity, there would be no discharge of the drawer or prior indorsers.
(3) Hour of presentment for acceptance.
A bill of exchange may be presented at any hour at which a bill might be presented for payment, as above stated.
(4) To whom presented for acceptance.
It must be presented for acceptance to the drawee personally, or to an agent who has authority to accept or reject. If
several drawees, acceptance must be made to all, except where one or more are agent for the others in that behalf or
are partners. If the drawee is dead presentment may be made to his personal representative; if he is a bankrupt or has
made an assignment presentment may be made either to him, or his trustee or assignee.

Sec. 112. When Presentment For Acceptance Is Excused

In the cases in which ordinarily presentment for acceptance must be made, it is excused in certain cases, and in those
cases the bill may be treated as dishonored for non-acceptance.
(1) "Where drawee is dead, or has absconded, or is a fictitious person, or is a person not having capacity to contract by
bill;
(2) "Where after the exercise of reasonable diligence, presentment cannot be made;
(3) "Where though presentment has been irregular, acceptance has been refused on some other ground."147

Sec. 113. Rights Of Holder Where Bill Not Accepted

If a bill is presented for acceptance within the time and in the manner stated, and is not accepted, or if presentment is
excused, the bill may be treated as dishonored by non-acceptance and an immediate right of recourse accrues against
the drawer and indorsers.
Where the bill is dishonored by nonacceptance, an immediate right of recourse accrues against prior parties.
147. Id. SEC. 48.
This is true not only in cases where presentment for acceptance is required in order to fix the liability of the prior
parties, but also in any case where actual presentment has been made and acceptance refused. Thus suppose that on
January 2, 1910, A draws a bill on B, to order of C, due in three months. On the same day the bill is delivered to C, and
he indorses to D. D on January 3rd applies to B for acceptance. B refuses to accept. D may proceed at once against A
and C if he has duly notified them, and need not wait until the three months have expired.

Notice Of Dishonor

Sec. 114. Notice Of Dishonor Necessary To Charge Drawer And Indorser

Notice to the drawer of a bill or check and to the indorser of a bill, check or note, that it has been dishonored by non-
payment, or non-acceptance, as the case may be, is necessary to charge such drawer and indorser; otherwise they
are discharged; except where owing to the circumstances of the particular case, notice is excused, or where it has
been waived.
A party secondarily liable on negotiable paper is entitled to immediate notice that the party who should have accepted
it, or paid it, has failed or refused to do so. Accordingly the law provides in detail as to the time, manner and sufficiency
of the notice. And unless notice is given according to the provisions of the law, any party entitled to such notice, who
did not receive it, is discharged. See sections 89 to 118 in Appendix A in connection with this text.

Sec. 115. What Notice Sufficient

In order to charge parties secondarily liable on a negotiable instrument notice of dishonor must be given to such party
(1) by the holder, or any one who might be compelled to pay it to the holder, or an agent duly authorized, (2) within the
times provided by the law, (3) at the place provided by law; unless owing to peculiar circumstances notice is excused,
or has been waived.
148. Id. Secs. 89-118.
(1) By whom notice to be given.
"The notice may be given by or on behalf of any party to the instrument who might be compelled to pay it to the holder
and who upon taking it up would have a right of re-imbursement from the party to whom the notice is given." (And see
also Sections 91 to 94, Appendix A.)
(2) Notice to be given within what time.
If the parties reside in the same place notice must be given before the close of business hours if given at the place of
business, and before the usual hours of rest if given at his place of residence. See Section 103, Appendix A, post. If
the parties reside in different places it must be deposited in the mail the day following the day of dishonor or given in
any other way to reach the party in the time it would have reached him if given by mail. See Section 104 in Appendix A,
post.
If notice is properly addressed and mailed it is as sufficient although it does not reach the sendee.
(3) Form of notice.
The essential thing is that the party secondarily liable shall have notice. As a matter of practice form should be in
writing and signed; but it is legally sufficient if oral, or partly oral, or if unsigned. It should describe the instrument with
sufficient definiteness to designate it.
(4) Place of notice.
See Section 108 in Appendix A for the requirements.

Sec. 116. When Notice To Drawer Is Excused

Notice to drawer is excused when after the exercise of reasonable diligence it cannot be given to or does not reach
such drawer, where drawer is fictitious or lacks capacity contract, or where drawer is the person to whom the
instrument is presented for payment, or where drawer has no right to expect or require the drawee or acceptor to honor
the instrument, or where the drawer has countermanded payment.
The law does not require notice to a drawer of an instrument where it would be superflous, or where there is no right to
expect it, or where it cannot with reasonable diligence be given.
Sec. 117. Where Notice To Indorser Excused
Notice to indorser is excused where after the exercise of reasonable diligence it cannot be given or does not reach
such indorser, or where indorser at the time of the indorsement knew that the drawee was fictitious or had no capacity
to contract, or where indorser is the person to whom the instrument is presented for payment, or where the instrument
was made or accepted for his accommodation.

Sec. 118. When Notice Of Dishonor Waived

The party entitled to notice may waive it by waiver embodied in the instrument or in his indorsement, or by word or
deed, before or after time for giving notice.
A party otherwise entitled to notice may waive it. This he may do either by his express language or by his conduct. The
waiver may be embodied in the instrument itself, and in that case, it binds all who indorse the instrument or it may be in
the individual indorsement. Waiver may be made at any time, even after the right to have notice has gone by. Thus if
an indorser promises to pay the instrument when he would be discharged by lack of notice, that operates as a waiver
and he will be bound.
Where one "waives protest," he thereby also waives presentment and notice of dishonor.

Chapter 16. Protest

Sec. 119. Protest Necessary To Charge Drawer And Indorser On Foreign Bill
Where a foreign bill is dishonored by non-acceptance or nonpayment it must be protested; otherwise the drawer and
in-dorser are discharged.
Protest is another item of procedure in the steps to be taken to charge the parties secondarily liable. Yet it is not so
much another step as it is the form or manner of taking the step of presentment already considered.
Any bill which on its face appears to be a foreign bill must be protested for nonacceptance or nonpayment, as the case
may be, else the drawer and indorsers will be discharged. Inland bills and promissory notes do not need to be
protested, yet often are, to furnish evidence of due presentment and giving notice of dishonor.
A form of protest is set out in Appendix B.
Protest is made when the officer or party entitled under the law to make protest, takes the instrument to the place
where it may be under the law presented for acceptance or payment and there presents the instrument, and demands
payment thereon. He then sets forth in writing the details of such presentment, and the demand and the refusal, giving
the time and place of presentment, the fact of presentment, and the manner thereof, the cause or reason for protesting
the bill, the demand made and the answer given, if any, or the fact that the party sought could not be found. Such
protest must be under the hand and seal of the notary making it, if it is made by a notary, as is usual.
149. Id. Secs. 152-160.

Sec. 120. Who Authorized To Make Protest

Protest may be made by a notary public; or by any respectable resident of the place where the bill is dishonored in the
presence of two or more credible witnesses.
Protest is almost universally made by a notary public. The other provision is made in case a notary is unavailable.
Such notary must make the protest in person.
Sec. 121. Time, Place And Manner Of Protest
The protest must be made at the time, in the place and in the manner set forth by the law.
The details of making protest are set out fully in Appendix A, in sections 153 to 156, and are so complete as to require
no comment.

Sec. 122. Protest Dispensed With Or Waived

Protest is dispensed with in any case which would dispense with notice of dishonor. So it may be waived in the same
way that notice of dishonor may be waived.

Part IV. Discharge Of Negotiable Instruments. Chapter 17. Manner And Effect Of Discharge

Sec. 123
MEANING OF TERM "DISCHARGE." A contract is discharged when it loses its force and effect as a legal obligation.
A discharged contract is one which for some reason is no longer in force. It has lost its former legal effect. A paper may
express a promise to pay money, yet the promise may be without any life in it, and not be expressive of any legal
obligation. This may be true because the promise has been performed, or for other reasons that we will note.

Sec. 124. Causes Of Discharge Of Paper

Discharge may be (1) by payment in due course by or for the debtor; (2) by payment of accommodation paper by
accommodated party; (3) by intentional cancellation by holder; (4) by the acquisition of the paper at or after maturity by
the principal debtor.
(1) By payment in due course by or for the principal debtor.
Payment by the maker or acceptor is the most usual method of discharging a note or bill. Assuming that there are no
accommodation parties, but that the party primarily liable on the paper pays it when it becomes mature or after its
maturity this discharges it and it thereafter becomes only so much waste paper so far as any legal obligation is
concerned. One who pays such paper ought, of course, as a matter of ordinary precaution, to see that it is cancelled
and given to him. And we have seen that one who pays negotiable paper must take care that he is paying it to the
holder.
150. Id. Secs. 119-125.
If a party secondarily liable upon an instrument pays it, the instrument is not discharged
(2) By payment in case of accommodation paper by the party accommodated.
The real debtor may not be the maker or acceptor. One may have become maker of a note or acceptor of a bill for the
accommodation of another, that is, in order to lend him credit. Such accommodator is liable just as a surety or
guarantor is liable, although the creditor may know it is not really his debt. In such a case it is the real debtor's duty to
pay the debt and if the accommodating party pays it, he may sue the party whom he has accommodated. If the real
debtor pays the instrument, then it is discharged.
(3) By intentional cancellation by holder.
If a cancellation is by the holder with the intention of destroying the instrument, as such, it destroys it, but if the
cancellation is unintentional, or under a mistake or by anyone without authority, the instrument is not destroyed.
(4) By acquisition of the instrument by the principal debtor, at or after maturity.
If one makes a note and at or after its maturity buys it from the holder that is the same thing as paying it so far as
discharging the instrument is concerned.

Sec. 125. Discharge Of Party Secondarily Liable

A party secondarily liable is discharged (1) by an act that discharges the instrument; (2) by intentional cancellation of
his signature by the holder; (3) by a valid tender of payment by a prior party; (4) by release of the principal debtor
without express reservation of right against party secondarily liable; (5) by extension of time of payment without
reserving right against the party secondarily liable; (6) by failure of the holder to take the proper steps to hold him.
A party secondarily liable is discharged by a failure of a holder, as we have seen, to take the proper steps to fix his
liability. In such a case the instrument itself is not discharged; it still continues as a bill, note or check, as the case may
be, and the parties primarily liable may be sued upon it.
So in other ways a party secondarily liable may be discharged though the instrument continues in force. One is a valid
tender of payment by a prior party. This does not discharge the instrument. One who owes money on a note is not
allowed to escape his liability if he may succeed in making a tender which is not accepted. Tender of money under a
debt due must be kept good. But such tender does discharge a party secondarily liable. This debt is not really his. He
is to be held only in case the party does not pay who ought to pay. Consequently his rights are strictly guarded, and if a
tender is made to such holder which such holder ought to have accepted, such secondary party may say that he will
not be held for a failure of the party primarily liable to pay when the holder might once have had payment of his debt.
Such tender, however, must be a valid tender. A tender in something not "legal tender," or a tender of the wrong
amount or a tender before the instrument was due, would not be good tenders, and would not discharge.
If the holder releases the principal debtor, this will discharge the party secondarily liable, unless at the time the release
is made there is an express reservation made by the holder of his rights against the party secondarily liable.
The same may be said of a contract to extend the time of payment. A mere failure to sue, or a mere unenforceable
agreement, which is too indefinite to amount to a contract or is without consideration, and which therefore could not be
enforced by the debtor, would not release the party secondarily liable, if his liability had been duly fixed by the taking of
the proper steps.

Sec. 126. Effect Of Payment By Party Secondarily Liable

A payment by a party secondarily liable does not discharge the instrument, but such party is put in his former position
and may assert his rights against prior parties, or again negotiate the paper.
A party secondarily liable may pay the paper without discharging it, because it yet has to be paid by the party primarily
liable. Thus suppose A makes a note to B, who indorses to C, who indorses to D. D being unable at maturity to secure
payment by A, or any other party, C, in order to avoid suit, pays it. He now stands in the same situation as though he
had not indorsed it, and may sue the prior parties as he could have done before indorsement. Or, striking out his
indorsement to D, he may negotiate it to E, and thus make himself again secondarily liable if the instrument cannot be
enforced byE.

Sec. 127. Material Alteration As Releasing Those Not Parties Thereto

If an instrument is altered in any material respect it releases all parties who did not authorize or assent thereto except
that an innocent purchaser for value may enforce it as it was before the alteration.
If an instrument is materially altered, it releases those who do not authorize or assent to such alteration except as far
as innocent purchasers are concerned, and these may enforce the instrument as it was in its original form. We have
already noted what is a material alteration, and have considered how one by a negligent drawing of paper may estop
himself to say that it is altered as against innocent parties.

Sec. 128. Renunciation Of Rights

A holder may expressly renounce his rights against any party either by so stating in writing or delivering up the
instrument.
One may renounce rights against any party or may renounce all rights upon the instrument. If he does so, the party or
the instrument, as the case may be, is discharged. The discharge must be in writing, or in case of renunciation of rights
against the principal debtor, it may be by delivery up of the instrument.

Part V. Added Chapters On Banks And Suretyship. Banks And Banking. A. Definitions

Sec. 129. Banks Defined

A bank is an institution which borrows and loans money and deals in negotiable securities and keeps money on
deposit. A banker is one who conducts a banking business. Banks, now are usually incorporated.
A bank is "An institution generally incorporated, authorized to receive deposits of money, to lend money and to issue
promissory notes - usually known by the name of banknotes - or to perform some one or more of these functions."151
Banks are said to be of three sorts - those which receive deposits, those which discount commercial paper, and those
which issue banknotes for circulation. But these activities are usually performed by the same bank.
A bank that is not incorporated is called a "private" bank. A bank organized under a state law is called a state bank,
and under the Federal law, a national bank.
151. Bouviers Law Dict., title, "Banks."
A bank which receives money for deposit, not subject to check, and upon which it pays interest, is called a "savings
bank."
Banks are peculiarly susceptible to governmental regulation. Operating as depositaries of money and issuing
banknotes their responsibility determines the prosperity of the community. They are, in effect, although maintained by
private funds, a part of the monetary system of the country. The soundness of the banking system is vital to the welfare
of the people. Hence, the propriety of intimate regulation by the state.
In this chapter, only a very general discussion may be attempted; and the purpose is to give a general understanding
of the scope of the law of banks and banking.

B. The Bank As A Corporation

(a) Organization.

Sec. 130. Procedure To Incorporate

The procedure to incorporate is regulated by the banking act - national or state.
The steps requisite to incorporation are determined by the state or national act under which incorporation is attempted.
These statutes provide the amount which is requisite to be subscribed, the amount necessary to be paid in, the number
and qualifications of directors, the filing of the statement of incorporation, etc. It is impossible to go extensively in these
provisions here.
Under the National Banking Act, an existing state bank may, by following the requisite procedure, become a National
Bank.
Banks cannot be formed under general corporation laws.

Sec. 131. The Charter

The charter of a bank consists in the certificate filed or issued under the banking act, in which is to be read the entire
statutory law.
The certificate filed or issued under the banking law and passed upon by the proper officials as in accordance with law
is the bank's "charter." The entire bank Act is to be considered a part of this charter. Amendments of the charter must
be made in conformity with the statutory provisions.

Sec. 132. By-Laws

The By-Laws are for the purpose of internal government; are enacted by the stockholders or directors and can be
changed at pleasure.
By-laws are enacted by the stockholders if no statute governs; but the Federal Banking Act puts the power to enact by-
laws in the directors; as do various state laws. The comptroller requires a copy of the by-laws to be filed with him. He
also requires certain provisions to be included, as for the meeting of the board of directors at least once a month.
(b) Stock and Stockholders.

Sec. 133. Statutory Provisions As To Amount Of Stock

The National Bank Act, and usually the state acts, require a certain capitalization as an essential element in corporate
existence.
The National Bank Act provides the following in reference to requisite capitalization:
"No association shall be organized with a less capital than $100,000, except that banks with a capital of not less than
$50,000 may, with the approval of the Secretary of the Treasury, be organized in any place, the population of which
does not exceed 6,000 inhabitants; and except that banks with a capital stock of not less than $25,000 may, with the
sanction of the Secretary of the Treasury, be organized in any place the population of which does not exceed 3,000
inhabitants. No association shall be organized in a city the population of which exceeds 50,000 persons with a capital
of less than $200,000."
This stock must be one-half paid in; the remainder to be paid in installments of at least ten per cent on the whole
amount of the capital at the end of each succeeding month after authorization to commence business.
State laws have like provisions.

Sec. 134. Liability Of Subscriber To Bank

The subscriber's obligation to the bank is to pay the amount agreed upon in the subscription contract.
Subscriptions to unissued stock of banks are enforceable as contracts. The amount of the subscription being paid, the
liability has been executed, and further assessments or calls cannot be made except in case of insolvency as shown
hereafter.
Sec. 135. Bank's Lien On Unpaid Stock
A National Bank has no lien on unpaid stock; unless state law forbids, a lien may be provided for; but by common law,
none exists.
By the common law there is no lien on unpaid stock. Under the National Bank Act, there is no lien.152 Banks
organized under state laws may provide for such a lien.
152. Bank v. Lanier, 11 Wall. (U. S.) 369.

Sec. 136. Liability Of Stockholder In Case Of Insolvency

The National Bank Act, and generally the state bank acts create a liability of stockholders for benefit of creditors, in
addition to the express liability to the corporation contained in the subscription.
(1) Statutory liability.
The National Bank Act provides that shareholders shall be individually liable "equally and ratably and not for one
another" for the indebtedness of the bank, to the extent of the amount of their stock, at the par value thereof, in addition
to the amount invested therein. State laws have similar provisions in case of state banks. This is a peculiarity of
banking laws that does not obtain in case of corporations generally. The subscriber's liability to the bank on his
subscription is fulfilled when he has paid the amount of his subscription. The provision now under consideration
provides a further liability for benefit of creditors. It is a liability of a statutory, not contractual nature.153
(2) Who liable.
Under the National Bank Act, the real owner is liable, and so is any one who has permitted himself to be held out as
the real owner. One who appears on the books to be a stockholder will be regarded as the real owner154 in the
absence of evidence to the effect that
153. Christopher v. Norvell, 201 U. S. 216. (Held, in this case that a married woman, residing in Florida under whose
laws she had no contractual power, is liable upon an assessment by the comptroller upon stock inherited by her.)
154. Richmond v. Irons, 121 U. S. 27. (In this case the stockholder had sold his stock several months before failure,
but the transfer was not made on the books. He was held liable.) he is not the real owner, and it would be an injustice
to so hold him, he not being responsible for the condition of the books showing him to be such holder.155
A pledgee in accordance with these principles, is not liable if he does not have himself registered as the real owner, or
in case he takes out new certificates, has himself described as pledgee.156
In any event, no matter what the books show, the real owner can be assessed.
(3) When liability ceases.
The liability for the benefit of creditors ceases when the stockholder makes a bona fide transfer while bank is still
solvent. If the transfer is made (1) to avoid pending insolvency, (2) after insolvency, the transferror is liable. But in such
a case the transferror is liable for existing debts only, not those subsequently arising.157
(4) How liability enforced.
The liability of the stockholder under the double liability provision is enforced by assessment in a proceeding to
liquidate the affairs of the bank; in the case of National Banks when the receiver, at the direction of the comptroller,
directs an assessment.
155. Whitney v. Butler, 118 U. S. 655. (In this case the stock and power of attorney to make the transfer had been
handed to the president of the bank, but the transfer had not actually been made. The seller had no reason to suppose
it had not been made and it was held it would be inequitable to hold him.)
156. National Bank v. Case, 99 U. S. 628. (Pledgee liable when appearing upon the books as the owner.)
157. McDonald v. Dewey, 202 U. S. 510.

B. The Bank As A Corporation. Part 2

Sec. 137. Rights Of Stockholders

Stockholders in a bank have the same general rights that obtain in other corporations.
The right to hold meetings, to inspect the books, to receive dividends, is governed by the same general principles that
govern corporations generally.
c. Directors and Officers.

Sec. 138. The Bank's Directors

Under the National Bank Act, the directors must number at least five, and three-fourths of the directors must live in the
state and own ten or more shares of stock.
Aside from the special qualifications and duties that may be imposed by statute, the powers, duties and manner of
action by directors is the same in case of banks as in any other corporations.
There is some difference of opinion in respect to the degree of care which a bank director should exercise in looking
after the bank's interests, although all agree that it is a high one on account of the nature of the trust undertaken to be
administered, and it is generally laid down that it is not enough that the bank directors refrain from being dishonest, nor
even that they act in good faith, but also that they act with the prudence of reasonably prudent men. It is to be
remembered that directors are chosen that they may see to it that the bank is honestly conducted and wisely managed.
First: Directors are liable to the bank or its depositors and creditors if they are parties to fraudulent or dishonest
banking transactions.
Second: Directors are liable for damages following their participation in ultra vires and illegal acts, though there may be
no actual dishonest intention.
Third: Directors are liable for not giving proper attention to the affairs of the bank. What attention should be given
depends upon the circumstances, and it is here that the authorities have differed. The directors must, however, act with
care in respect to employing officers, in demanding and considering reports, and particularly in conducting the general
policy of the institution which is peculiarly their duty.158
In one case159 the Court said:
"First. The language on this topic of judges, as reported in the books, must, in all cases, be construed in the light of the
facts of the particular case.
"Second. The various directions in which the care of directors of banking institutions should be exercised in order to
protect against fraud and theft of employes has greatly increased in number and variety within 50 years. Experience
has developed modes of theft by such employes unknown and unthought of half a century ago, and these
manifestations of ingenuity on the part of the thieves has been met by new safeguards on the part of the directors; so
that what years ago would have been considered due diligence cannot be so considered today.
"Third. So numerous have been the defalcation and dishonest abstractions of money by employes of high grade, who
had by years of right living and acting earned the confidence of their employers, that it has become well-nigh a
maximum with such institutions to, so to speak, trust nobody beyond what is necessary to the practical business of the
bank, and to subject the work of each one, from the highest to the lowest, to periodical investigation.
158. Briggs v. Spalding, 141 U. S. 132; Hun v. Cary, 82 N. Y. 65.
159. Campbell v. Watson, 50 Atl. (N. J.) 120.
"Fourth. That at one time and in some instances bank directors were unpaid servants, who were not expected to spend
much time or to give much attention to the affairs of the institution, and on that account were dealt with leniently by the
courts; but at this day such officers are not expected to work gratuitously, and are usually paid a fair compensation;
and, whether paid or not, they are entitled to no indulgence on that account. Their names give credit and standing to
the institution, and are a guarantee to dealers that its affairs will be conducted with reasonable prudence and care, and
according to law. They are, in my opinion, bound to acquaint themselves with the extent and mode of supervision
exercised by officers of well-conducted banking institutions in the neighborhood. I cannot yield to the suggestion of
some of the defendants' counsel that the fact that the institution in question was a small country bank relieved its
directors from adopting the same practical measures for protection against frauds and thefts as were in use by its
greater neighbors in the larger towns.
"Fifth. Another observation is that the directors cannot be held liable for a mistake in an honest judgment upon matters
properly mere matters of judgment, as distinguished from matters of administration. In matters of administration, where
a duty to perform certain functions devolves upon them, they are justly held liable either for their nonperformance,
nonfeasance, or for their lack of ordinary diligence in their attempted performance, whereby loss is incurred. By
'ordinary diligence' I mean such as is exercised by other prudent and diligent officers under like circumstances."
In this case, the directors were held liable for peculations continuing undetected over a period of years. An examination
of the correspondent's accounts would have revealed the peculations, but this was trusted entirely to the cashier. The
bank's by-laws requiring examination by the directors every three months were ignored. Held, that the directors were
liable upon the bank's insolvency, to the receiver, for the benefit of creditors.

B. The Bank As A Corporation. Part 3

Sec. 139. The Bank President

The bank president by virtue of his office, has the authority to represent the bank in a general way, and to conduct its
litigation and employ counsel. By custom or usage very broad powers may be conferred upon him.
A President of a bank is supposed to exercise a sort of general supervision over its affairs, and by some authorities is
said to be presumed to be its manager having very broad powers. Yet it seems to be the weight of authority that while
by usage, by by-law or by some sort of conferring of authority, the President may be given any sort of power, yet in the
absence thereof his office is to a large extent merely honorary and he cannot bind the bank, except in a narrow
compass. It seems to be admitted that by virtue of his office alone, he may handle the litigation of the bank, bringing
suits, employing counsel, etc.160
So it has been held he may bind the bank by offering a reward for the purpose of securing the arrest of a defaulting
officer as within the President's power, in the absence of any limitation on such power.161 But aside from acts of this
sort, looking to the bank's general protection, the cases usually hold that the president has no authority of any specific
sort, except as is actually conferred on him by the bank in each case. As a matter of fact he frequently has a very
general and broad authority, being in effect the bank's managing officer.
160. Citizens Nat. Bank v. Berry, 53 Kans. 606.
161. Bank v. Griffin, 168 111. 314.

Sec. 140. The Bank Cashier

The cashier of a bank is the officer who has charge of the financial dealings of the bank and his authority depends
upon the particular facts of each case, the usages of the bank in question and of the community, and the particular
authority in any wise conferred.
The cashier of a bank is its chief fiscal officer, having the charge, as an executive, of the financial matters of the bank
and the will of its directors. He does not control the financial policies of the bank, but he executes them.
He cannot determine upon the general policies of the bank, but he carries them out as determined by the directors.
The authority of the cashier, like the authority of the president, depends largely on the particular facts in the case, the
usages of the bank in question, etc. Yet by virtue of his office, he necessarily has certain well known authority in every
case, pertaining to the management of the routine financial matters of the bank. Thus he may draw cashier's checks on
the funds of the bank, receive moneys payable to the bank, certify checks regularly drawn,162 indorse and transfer
commercial paper,163 discount commercial paper, etc. He may borrow money for the bank, pledging its personal
property in security therefor.164 In other words, he has the implied power to take all the usual and necessary steps to
carry on and manage the financial operations of the bank, so far as the usual and regular banking business is
concerned. He cannot direct general financial policies, for that right is in the directors, and his implied authority by
virtue of his office is strictly limited to those matters which fall within the daily routine of the banking business. But
within his own sphere his implied authority is quite extensive. As one court says:165 "The cashier of a bank is its
executive financial officer. It is under his direction that its moneys are received and paid out, that its debts are collected
and paid, that its securities are kept and transferred. Such powers as are habitually exercised by cashiers must be
held, so far as the public are concerned, to have been conferred upon Fuller by his election to the office."
162. Merchant's Bank v. State Bank, 10 Wall. 604.
163. Auten v. Manistee Nat. Bk., 67 Ark. 243.
164. Coats v. Donnell, 94 N. Y. 176.
He may of course have enlarged authority in any particular case, expressly given him or to be inferred from usage. In a
recent case166 the court says: "It is apparent from the evidence in this case that the directors gave but scant personal
attention to the management of the bank, and that the control of its affairs was left largely to the cashier. The board of
directors met infrequently, sometimes only once a month. There is no question but that the action of the cashier in
making the certificates was something which he might very properly have been authorized by the board of directors to
do, had the matter been brought to their attention. * * * The law is well settled that where the directors of a bank,
through long usage, permit the cashier to act without their express authority, in matters in which they might lawfully
authorize him to act, they cannot, after such action on his part, be heard to deny his authority, to the detriment of those
who have relied upon it.
165. Loring v. Brodie, 134 Mass. 453.
166. Nat. Bk. v. Equit. Trust Co., 223 Pa. 328.
* * *"
This case is one of many which might be cited to show how the facts of each case must be considered when the act
falls without the routine financial operations of the bank.
Sec. 141. The Bank Teller
The bank teller is a clerk authorized, as the case may be, to receive or pay out deposits. In the one case he is known
as a receiving teller; in the other a paying teller. He is a subordinate of the cashier.
The teller's authority is practically confined to receiving or paying out deposits on checks presented for that purpose.
He may have a larger authority as for instance, to certify checks, for in some banks it seems to be the custom for him
to exercise this function in the cashier's stead and name. The teller is an employe, exercising a branch of the cashier's
office. He is under the supervision of the cashier.
c. Banking Business.

Sec. 142. What Business Bank May Do

A bank organized under general banking acts may carry on all sorts of banking business, established by custom as
such. The banking business includes (1) The receiving deposits on checking accounts or otherwise; (2) Investing its
funds; (3) Making loans and discounts; (4) Making collections; (5) Issuing negotiable paper; and doing all those things
reasonably necessary in the pursuit of such activities.
A bank's business may extend over a very large range. In carrying on that business, it becomes necessary for the bank
to do many things incidental thereto. Primarily a bank is a place for the deposit of money, but in receiving money for
deposit it must do many other things. Whatever it does, however, must not tend to endanger the safe keeping of the
funds entrusted to it. Many statutory safeguards have been thrown around the business of banking. Whatever business
a bank may do, whatever powers it may exercise, must be done and exercised within the law.
The branches of the banking business are quite clearly outlined and definitely known. We will take up separately the
branches of the bank's activity.

B. The Bank As A Corporation. Part 4. A. Investments

Sec. 143. Investments In Real Estate

A bank has no power to deal in real estate, except for incidental purposes. It cannot invest in real estate for the mere
purpose of investment. The banking laws usually set out for what purposes a bank may hold real estate, but such
purposes are always of a merely incidental sort.
To buy real estate for purposes of investment, or speculation, is no part of the business of a bank. Its power to deal in
real estate is very limited. It may purchase, hold and sell real estate only in an incidental way. Two general divisions of
the cases where it properly holds real estate, might be made (1) cases in which it purchases and holds real estate for
the purpose of providing itself with a home; and (2) cases in which in the protection of its interests it finds it necessary
to take real estate. The National Bank Act provides:
"A National banking association may purchase, hold and convey real estate for the following purposes, and for no
others:
First. Such as shall be necessary for its immediate accommodation in the transaction of business.
Second. Such as shall be mortgaged to it in good faith by way of security for debts previously contracted.
Third. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings.
Fourth. Such as it shall purchase at sales under judgment, decrees or mortgages held by the association or shall
purchase to secure debts due it."
It will thus be seen that a bank cannot deal generally in real estate, but may only acquire and hold it when it needs it
(as for a home) to enable it to carry on its business, and when it finds it necessary to take it in satisfaction of debts
previously contracted, or at an execution sale, etc.

Sec. 144. Lending Money On Real Estate

A bank has no rights to loan money on real estate, though it may for debts previously contracted, take mortgages in
good faith, for purposes of security in order to protect its loan. But the United States court has held that where a
National Bank loans money on real estate, the bank's power cannot be questioned except by the United States, and
the mortgage as between the parties, may be enforced.
Unless permitted by State Law, a bank cannot loan money on real estate. It may indeed take mortgages as a further
security for debts previously contracted, where the original loan was made in good faith. The United States Supreme
Court however has held, that if a national bank exceeds its power in this respect and loans money on real estate, the
mortgagor cannot raise the question and the mortgage may be enforced. The United States may in such case call the
bank to account for abusing its authority and exceeding its charter powers, but the parties cannot object.167 Under
some state laws, loaning money on first real estate mortgage security is permitted.

Sec. 145. Investments In Personal Property

Generally speaking a bank has no power to deal in personal property, except as it needs the same to enable it to carry
on its business, or as it acquires the same for the purpose of protecting its interests.
Generally speaking, a bank cannot buy and sell goods or personal property of any description, except as it may need
such property, or must take it to protect its own interests. It needs its equipment and its office paraphernalia, and such
things it may of course buy, but it is not a merchant and cannot buy up personal property, and cannot put its funds for
purposes of investment or speculation into personal property of any sort. Thus it cannot buy and sell stock or bonds,
although it may always receive such stock or bonds, or indeed any personal property when necessary in the protection
of its interests, as to secure or receive payment of debts previously contracted.

B. The Bank As A Corporation. Part 5. B. Deposits

Sec. 146. The Depositor A Creditor

A depositor is a creditor of the bank. The funds deposited, unless specially deposited, are funds loaned to the bank.
The depositor loses his ownership of such funds and becomes a creditor.
The relation of banker and general depositor is that of debtor and creditor, not that of trustee and benefici167. Nat. Bk.
v. Whitney, 103 U. S. 09.
ary. The depositor loans his money to the bank and the bank thereupon becomes the owner of such money and
indebted to the depositor for the amount thereof. See, however, next section, as to character of special deposits.

Sec. 147. Kinds Of Deposits

Deposits are known as general, special and specific. A general deposit is a deposit made generally, to be mixed with
the other funds of the bank, the depositor becoming a general creditor; a special deposit is a deposit under an
agreement that the identical funds shall be returned; a specific deposit is a deposit made for some particular purpose,
as of transmission.
A general deposit is the usual one. The deposit is set down to the depositor's general account, he becomes a general
creditor and loses his right to the particular funds deposited. A special deposit is made for the pur pose of safe keeping
and return by the bank of the particular funds deposited. In such a case the bank becomes, not a general debtor, but a
trustee. A specific deposit is one made for a particular purpose as where particular money is to be transmitted by the
bank.
For a number of reasons it is important to know whether a fund is general or special or specific. Perhaps the most
important is, that on the failure of the bank, the general depositor must share pro rata with other general depositors,
while a special depositor can claim the very fund deposited by him.
Where money is deposited, and even where checks are deposited, which are credited as cash received, the deposit is
general. Thus A has on hand $100 in currency, and $25 in the shape of a check received from B. He makes out a
deposit slip for, and is credited in his bank book with a deposit of $125. This deposit is general. A becomes a general
creditor. If the bank fails A must share pro rata with other creditors. He cannot claim payment in full, unless the funds of
the bank are sufficient to pay 100 per cent to all general depositors.
A bank may, however, receive deposits for special keeping, as where it receives money in a bag or box to be kept in
that manner by it; or where it receives money or funds specially in trust, or where it receives a package of bonds or
other securities for safe keeping and return. In such a case it must return the very thing received, must keep the same
with due care, and if the bank fails, the depositor can receive the very thing deposited. On the other hand, the
depositor runs the risk of its theft or loss, without the bank's negligence, and also of its depreciation. In case of the
bank's failure, however, the special fund must be capable of identification; otherwise the special depositor stands on
the footing of a general depositor.

Sec. 148. Certificates Of Deposit

Certificates of deposit are certificates issued by the bank reciting the receipt of a certain amount of money received by
the holder, an equivalent of which is to be returned to the depositor or to the holder, upon return of the certificate
properly indorsed. It is negotiable if drawn in accordance with the rules that govern commercial paper.
Banks issue certificates of deposit which when drawn to order or to bearer are negotiable if otherwise in accord with
the rules governing commercial paper. They are forms of promissory note. In such a case the money represented by
the deposit is not subject to check. The holder of the certificate is a general depositor of the bank, to be paid out of its
general funds. Usually also a certificate stipulates that it shall draw interest at a certain rate.

B. The Bank As A Corporation. Part 6

Sec. 149. The Bank's Undertaking With The General Depositor

The bank's undertaking with a general depositor, that is, one having a general checking account, is to pay the
depositor or his order on demand; to return cancelled checks as vouchers; and to render periodic statements. It may
also agree to pay him a rate of interest on his deposit or on his daily balance.
When one opens up a checking deposit with a bank, the contract of the bank with the depositor is to keep the account
in accordance with general banking customs, to honor the checks of the depositor when there are funds sufficient to
meet the same, in the order in which they are received, to return cancelled checks as vouchers and to render periodic
statements; perhaps, also, to pay a certain rate of interest on daily balances.
(1) To pay the depositor or his order on demand.
The bank agrees with the depositor that it will repay him the amount of his deposit on demand and will also honor his
properly drawn checks and drafts, so long as when the same are presented, there is a sufficient amount to his credit on
which the bank has no valid lien.
If he draws more checks for larger amounts than he has to his credit, the bank need not honor them.
The bank's obligation being to pay the checks of the drawer, it is responsible to him in damages if it improperly refuses
payment upon such checks. It has been held in a New York case,168 that the depositor cannot recover any substantial
damages, unless he shows substantial loss, but it was decided in an Illinois case169 that a depositor, whose check
has been improperly dishonored, may recover substantial damages for the dishonor, even though the dishonor was on
account of an honest mistake on the part of a bank clerk.
168. Clarke v. Bank, 83 N. Y. S. 447.
(2) To return cancelled check as vouchers.
The depositor is entitled to have his cancelled checks, delivered to him as vouchers, whereby to preserve the evidence
of his check payments. This is a universal banking custom. Cancelled checks are returned on the first day of every
calendar month.
(3) To render periodic statements.
The bank renders monthly statements showing the credits and debits, and the balance due the depositor.

Sec. 150. The Depositor's Undertaking And Duty

The depositor undertakes that he will not overdraw his account and that he will promptly examine the cancelled checks
and report errors and wrongful payments.
169. Shaffner v. Ehrman, 139 111. 109.
170. 117 U. S. 96
It is the depositor's duty to examine vouchers and statements within a reasonable time after they are returned to him,
that he may report to the bank if anything wrong appears. In Leather Mfgrs. Bank v. Morgan,170 the Court held: (1)
That if a bank pays forged checks not negligently drawn, it commits the first fault and pays them at its peril. (2) That the
depositor, however, is under a duty to exercise diligence and care to examine his returned statements and vouchers.
(3) That this is a duty he may, in the due course of business, delegate to agents, provided he uses due care and
diligence. (4) That if the forgeries are so skilfully done that such careful examination being made, they are not thereby
reasonably discovered, the depositor does not thereby lose his rights against the bank. (5) That if the forgery is by the
agent of the depositor, the depositor is chargeable with the fault of his agent, at least if he does not show that he
exercised reasonable diligence in supervising the conduct of the agent. "In the absence of such supervision, the mere
designation of an agent to discharge a duty resting primarily upon the principal, cannot be deemed the equivalent of
performance by the latter." (6) That whether the depositor is negligent so that he is estopped to charge the bank, is a
question of fact for the jury.
From this case, we find that there is a duty on the depositor to examine his account with the bank from time to time,
and that while the bank is liable for paying forged checks, whenever from the failure to give due examination such
forgeries are permitted to continue, the depositor is responsible for those particular forgeries so committed; that while
the duty of examination may be entrusted to agents, still the depositor is bound to use due diligence in that respect,
and if the forgeries are by the agent himself, the principal must show that he is in no way chargeable with diligence in
discovering the errors, or in suspecting their existence.
B. The Bank As A Corporation. Part 7. C. Loans, Collections, Etc.

Sec. 151. Loans And Discounts

To loan money is one of the principal functions of a bank, and it may loan on any sort of security except as forbidden
by law, and in any amount except as restricted by statute, and may charge the rate of interest allowed by the law of the
state.
The State banking laws regulate loans by state banks. The idea which governs banking loans is that they shall not be
made for long periods, and that the securities upon which they are made shall be readily convertible. The collateral
usually taken consists of stocks, bonds, first mortgage notes and the like. The National Banking Law forbids National
Banks to loan upon real estate. This does not forbid them from loaning on first mortgage notes, or from taking
mortgaged property when necessary for protection under a loan already made.
The rate of interest upon loans varies, according to the state laws. The National Banking Law with the intent of making
its loaning operations uniform with those permitted by State Laws, provides that National Banks may charge the same
rate of interest that the State Law in which the bank is located allows, and charge above that amount is usury.
If interest is deducted in advance this is referred to as discount, and is the customary banking practice.

Sec. 152. Collections

The bank has power to act as agent in the collection of commercial paper.
The bank must use due diligence in the collection of such paper, and protect the rights of the parties by the proper
procedure.
A bank doing a general banking business may collect commercial paper sent to it by the holder thereof, for that
purpose; such paper may be indorsed generally to the bank, or indorsed restrictively "for collection."
The bank becomes the general agent of the holder of the paper. The bank must use due diligence in collecting said
paper, and if on account of this delay loss ensues to the holder, the bank is liable.
If the bank must collect at distant points, through correspondents, one set of cases holds that this duty is discharged
when it has used due care in the selection of a reliable correspondent, but the other rule is that the default of the
correspondents is the default of the first bank, and unless there is a special contract to the contrary.
The bank must be sure to follow the proper procedure in case the paper is not paid in reference to presenting the
instrument for paper giving notice of dishonor of the paper and protest where necessary, unless directed not to take
such steps or such steps have been waived.

Sec. 153. The Bank's Negotiable Paper

The bank's negotiable paper consists of bank drafts, certificates of deposit, and bank notes.
The bank draft or check is a draft payable on demand drawn by one bank upon another. These are also sometimes
called cashier's checks.
The bank issues certificates of deposit reciting that it has received a certain amount of money from a certain person,
and will pay the same to his order upon the return of the certificate properly indorsed. It is a form of promissory note.
A banknote is an instrument issued by a bank to circulate as money and is a form of promissory note, and is
negotiable.171 It is payable on demand, and to bearer. The right to issue banknotes is governed by statute. Banknotes
can be issued either by National
171. Miller v. Race, 1 Burr. 456.
Banks, or by State Banks, but the United States has power to tax state banknotes and thus virtually accomplish their
prohibition. The National banking act provides that a United States bank must secure its issue by deposits with the
United States treasury, which issues the National Banks bank bills in various denominations, which are signed by the
bank officers after receiving them.

Sec. 154. Savings Banks

A Savings Bank is a bank organized to receive money on deposit not subject to check and subject to a regulation that
withdrawals cannot be made as a matter of right until a certain stipulated notice is given.
The depositor in a Savings Bank is governed by the rules and regulations which are usually set forth in the pass book,
and such pass book must be presented upon withdrawal, and it is usually provided that the bank may pay out funds to
any person who presents a pass book, but this provision will not protect the bank unless it also uses reasonable
diligence and care in making the payments. The right to receive a certain notice before a withdrawal will be permitted is
not usually insisted upon.

Sec. 154a. Trust Business

State banks are authorized by state laws to carry on the business of acting as trustee under the federal law. A National
bark may be likewise accorded this privilege.
It has become an important part of the business of banking to act as trustee of estates under appointment in wills or by
the court. The trust business may be carried on by the separate institution or by the bank itself. National banks may
now act as trustees when given that privilege under the federal reserve act.172

Sec. 155. Clearing Houses

A Clearing House is the central organization constituted by the various banks for the purpose of simplifying the daily
statement of the banks with each other, and of effecting settlements with each other.
Where there are a number of banks in any community, they must of necessity receive from their various depositors, or
otherwise for collection, checks drawn upon each other. For the purpose of expediting settlements with each other,
clearing houses are established. This is an essential organization organized by the various banks through which all
paper upon the members thereof is payable. Each bank sends through the clearing house on the day next after it is
received all the paper which it has received on other banks which are members of the clearing house or which by
arrangement clear through such house. After this paper has been received from the various banks, each bank is either
a creditor or debtor of the association and must settle according to the balance struck.
With reference to the right of priority where a number of checks have been drawn on a deposit which is of insufficient
amount to pay all of them, the rule is that they must be paid as presented, the time of presentment governing the
priority. If, however, a check upon a certain bank is not presented for payment to that bank, but is sent through the
clearing house by its deposit for collection in some other bank, this situation is likely to arise - that when the bank
receives from the clearing house the checks drawn upon the same deposit, the deposit will not be sufficient to pay all
of the checks; in such a case what check is entitled to priority? They are all presented at once for payment and the rule
appears to be that none of them are entitled to priority in such a case, even though some may antedate others, for it is
the time of presentment which governs priority, and in such a case the payment of all such checks must be refused on
account of insufficient funds
172. Held constitutional in National Bank of Bay City v. Fellows, 37 Sup. Ct Rep. 734.
B. The Bank As A Corporation. Part 7. D. Failure And Dissolution

Sec. 156. Bank Failures

The bank fails when its assets are not sufficient to pay its liabilities.
In this section the results of bank failure are briefly discussed.
Failed banks are closed up and a receiver appointed under the laws of the jurisdiction under which the bank is
organized. The bankruptcy act does not apply to banks organized either under the State or Federal law, although it
does apply to private banks.
General depositors of a bank are general creditors and share pro rata with other general creditors. Special depositors
may recover the special deposit in full provided its identity has been kept intact.
The owner of a note left at a bank for collection can in case of its failure recover the same from the bank or the
proceeds of such collection provided they have not been credited to a general account. It has also been held that a
deposit made after a bank is hopelessly insolvent may be recovered even if it has lost its identity by mingling with the
general fund if there was enough on hand continuously to cover the deposit.173
173. Massey v. Fisher, 62 Fed. 958.
The receiving of deposits when a bank is insolvent and so known to be is made a criminal offence.
The liability of the stockholders in case of a failure of the bank has already been considered.

Chapter 19. Guaranty And Suretyship

Sec. 158. Guaranty And Suretyship Defined

By the terms "guaranty" and "suretyship" we indicate that one person has agreed with a creditor or promisee of another
person to be responsible for the debt or default of that other person.
In suretyship and guaranty we consider the cases in which one person agrees to be sponsor for another. We have the
case of A becoming indebted to B, and C agreeing with B to be responsible for A's debt; we have the case of A under
contract to perform services for B, and C undertaking with B that A will be honest and faithful; and other cases of
responsibility.
Two terms describe the situation: "guaranty" and "suretyship." Essentially they indicate the same general idea; but
guaranty is a form of suretyship which we may devote some separate attention to.
A contract of guaranty is a contract to pay the debt of another if that other does not; the contract of the surety is to pay
the debt or answer for the default of another when the debt is due or the default occurs.
Example. C tells B that if B will extend credit to A, he, C, will pay the debt if A does not pay it; ordinarily and in most
states in such a case B must sue A, or show that suit is unavailing, before he can sue C. This is a contract of guaranty.
Example. A, being about to appeal a case which has gone against him in the lower courts must file an appeal bond
conditioned to pay the judgment below if the appeal is not successfully prosecuted. The law requires a surety on the
bond, and C becomes such surety by becoming a co-obligor in the bond. If default is made B can sue C, or A, or A and
C at once as co-makers of the bond. This is a contract of suretyship as distinguished from guaranty.
Example. B makes a promissory note to A and C joins with him as a surety. C's liability as far as A is concerned is the
same as the other maker's and he is liable on the maturity of the note.
A surety, then, is one who makes himself a co-maker a co-promisor, to pay the debt when it is due, relying upon his
ability to secure reimbursement from the real debtor, if he shall have to pay, while a guarantor makes himself a
collateral promisor saying in effect not that he has made the debt or obligation his, but that it is another's debt which he
will pay if the other doesn't. It is true that in some states there is what is called an absolute guaranty upon which the
guarantor may be sued at once upon the maturity of the debt, as where one signs or indorses a note, describing
himself as guarantor; he, practically, here is in the same position as a surety. His liability is substantially as onerous.
Contracts of guaranty are usually on separate instruments, as a letter to a merchant that if he will let the bearer have
goods, the writer will pay if the bearer does not; while contracts of suretyship are usually upon the same instrument, as
in case of a bond, or note.
Guaranty and suretyship are, however, fundamentally the same relationships - the obligation of one person to stand
sponsor for another, and guaranty is sometimes called a form, or subdivision, of suretyship.

Sec. 159. Kinds Of Guaranty

Guaranties are called absolute, conditional, limited, unlimited, general and special.
An absolute guaranty has been defined. It is sometimes called a guaranty of payment, as distinguished from a
guaranty of collection.
A conditional guaranty is a guaranty to pay if the other does not, due diligence by suit having been had against the
main debtor, unless it can be shown that suit would be unavailing.
A limited guaranty is one limited in amount or limited to a certain or certain transactions.
Where unlimited in time, or where extending over a period of time, it is sometimes called continuing.
A general guaranty is to the public at large as a letter of credit, or to any one of a certain class of the public.
A special guaranty is a guaranty of a particular debt.

Sec. 160. Form Of Contract Of Guaranty

The form of contract of guaranty (as distinguished from suretyship) is usually that of a collateral agreement. Under the
statute of frauds a guarantor cannot be held unless his promise is provable by written memorandum signed by him or
duly authorized agent.
A form of guaranty may be very informal as in a letter addressed by one merchant to another. But there must be a
writing signed by the guarantor in order to hold him, as this is an agreement within the fourth section of the statute of
frauds. (See Volume on Contracts in this Series.)

Sec. 161. Acceptances Of Promises Of Guaranty. Notice Of Acceptance

The acceptance of the offer of guaranty consists in doing the act or making the promise which the offer of guaranty
contemplates and calls for; but the guarantor is entitled to notice that his offer has been accepted, and if he has no
notice he is not bound.
Where a guaranty is made when all parties are present there is only the question whether the guaranty was in fact
made and accepted.
Frequently, however, guaranties are in the form of letters addressed to the creditor, the acceptance of which consists
in supplying credit on the strength thereof, but the guarantor is uninformed whether the guaranty has been accepted or
not. In such a case, the guarantor is entitled to notice that his guaranty has been accepted, and this notice should be
given within a reasonable time. This matter is very important where one relies upon a guaranty in extending credit. He
should always at once notify the guarantor of his acceptance, and state that he has supplied goods, and if it is a
continuing guaranty that he will continue to supply goods on the faith thereof; and should keep the guarantor supplied
from time to time with information as to the state of accounts; and when the account is closed, should notify the
guarantor of the amount due.

Guaranty And Suretyship. Part 2

Sec. 162. Consideration In Guaranty

A guaranty must be supported by a consideration, which usually consists in extension of credit.
As every simple contract must be supported by a consideration, a guaranty must be so supported and otherwise it is
unenforceable. What is the consideration that supports a guaranty? We know that a consideration is defined as a
detriment to the promisee; it need not be a benefit to the promisor. If the credit is extended on the strength of the
promise of the guarantor, that is sufficient and is the usual consideration. If the guaranty is made after the debt has
been incurred, there must be a further extension of credit, and extension of time to the debtor, or some new element of
detriment.

Sec. 163. Forms Of Suretyship

Suretyship (as distinguished from guaranty) is usually in the form of a written instrument signed by the main promisor
and the surety, but may be upon a separate instrument.
Suretyship may be and usually is on the same document as the principal's undertaking, although it may be on a
different one.
Suretyship on notes. One form of suretyship is that on a note in which the surety signs as a co-maker. The surety may
in such a case describe himself as a surety or not. He could in any event prove himself a surety to get reimbursement
from the real debtor if compelled to pay the instrument.
Suretyship on bonds.
(1) Bonds defined.
A surety bond is an instrument under seal, in which the surety is named, and which he executes as an obligor with the
principal, conditioned to perform an obligation described in the bond, the breach of which is recited to impose the
payment of a penalty and is called penal bond. Penal bonds may be executed by the principal alone, but almost all
public bonds are required by law and most all private bonds are required by the obligee, to have a surety. Surety
companies do in the aggregate an immense amount of business by becoming surety upon public and private bonds.
The bond is in form a recital of an absolute obligation to pay a certain sum. It then recites that the condition is that a
certain undertaking has been entered into, and if it is performed the bond shall be void, otherwise to be in full force and
virtue.
The penalty named is not recoverable as such. Damages must be proved and constitute the amount of the recovery.
(2) Bonds required by law.
Bonds required by law include official bonds and judicial bonds. An official bond is given to cover defaults in public
office, such as bonds of sheriffs, treasurers, executors and administrators. An injunction bond, or an appeal bond, is a
judicial bond.
(3) Other bonds.
Bonds are given for a multitude of purposes, bonds of building contractors, bonds given by employes and officers
(fidelity bonds), etc.

Sec. 164. Validity Of Surety's Offer

The offer of a surety (or guarantor) may be invalid by reason of the invalidity of the principal's obligation, or by reason
of some cause operating peculiarly upon the surety.
(1) Fraud on principal by obligee.
Fraud, duress under influence and similar defenses practiced by the obligee in the bond or the guaranteed party, upon
the principal, are available to the surety provided the principal does not waive them. These matters make a contract
only voidable and not void and they may be waived.
(2) Principal's personal incapacity.
That the principal is incompetent or limited in his contractual powers, is not available as a defense to the surety. One
mercantile reason for having a guarantor or surety is to overcome the defect of the personal incapacity of the principal;
and no reason appears why the law should not allow this commercial requirement.
Example. A minor buys goods from A, upon G's written assurance that if A does not pay, G will. G cannot defend that A
is a minor.
(3) Fraud on surety or guarantor.
If fraud, duress and similar impositions are practiced on the surety or guarantor, the surety may for any such reason
defend; unless the facts show a ratification by him.
(4) Concealment of facts from surety or guarantor.
A surety or guarantor must be apprised of facts material to the risk. This principle has its greatest application in case of
fidelity bonds.
(5) Personal incapacity of surety or guaranty.
If the surety is under age, or insane, or has any personal incapacity, this may be made a defense on the bond or other
writing. Such defense is good even against a holder in due course.
(6) Lack of capacity of corporation.
A corporation acting as a surety or guarantor may have no such charter power. Usually corporations cannot enter into
contracts of guaranty or suretyship as proper corporate enterprises unless chartered under the law as surety
companies. But if the act of guaranty or suretyship is incident to a proper corporate undertaking, the corporation is
bound. See corporations in this series.

Sec. 165. Suretyship From Change Of Legal Relations

If one assumes another's existing debt which the other still remains responsible for, the former debtor becomes a
surety for the latter, as between the parties, and if the creditor assent, as to him also.
Example. A owes B $1000 and C purchasing A's business, assumes this indebtedness. A cannot thus avoid his
indebtedness to B, and B may refuse to recognize C, but if he does, and as between A and C if he does not, A is a
surety for the payment by C of the indebtedness.
So if land is sold subject to a mortgage which the buyer assumes, a relationship of principal and surety arises. (Flagg
v. Geltmacher, 98 111. 293.)
Guaranty And Suretyship. Part 3

Sec. 166. Re-Imbursement And Exoneration Of Surety Or Guarantor

The right of re-imbursement is the right of the surety to be re-imbursed for payments made by him; the right of
exoneration is the right to have the court to order the debtor to pay in order that the surety need not.
In case of suretyship and guaranty, the principal debtor is of course the real debtor. The burden should ultimately rest
on him. The surety or guarantor has simply loaned his credit, even as in the case of surety companies there has been
compensation for doing so.
Example. P and S, as principal and surety, sign a penal bond. S is held liable on this bond. S may sue P for
reimbursement frequently; of course, P is insolvent is such cases. S's lack of remedy in such case is merely a
misfortune of fact, not a deficiency of law.
Courts of equity will take jurisdiction at the suit of the surety to compel a debtor to pay his debt where it is shown that
the principal has assets subject to the indebtedness, and can be made to pay. This is called the right of exoneration.

Sec. 167. Subrogation

Subrogation is the right of the surety upon paying the debt to have and make use of all the remedies which the creditor
had against the principal debtor.
Where the surety pays the debt to the creditor or obligee, the creditor or obligee has no longer any need of his various
remedies against the principal debtor and these remedies accrue to the surety. The right of the surety to avail himself
of the remedies of the creditor is called the right of subrogation. It is often said that he is entitled " to stand in the shoes
" of the principal debtor.
The right of subrogation is an equitable doctrine and enforceable only when it accomplishes justice. It arises
independent of contract (though it may also arise out of contract) and is a creature of the courts of equity for purposes
of justice.
The doctrine applies to give the surety the right to enforce mortgages, judgments and to apply the securities of the
debtor.
Where the creditor's debt is secured by mortgage and the surety pays the debt he is entitled to foreclose the mortgage
against the principal debtor. Where the surety was debtor, now, having paid the debt, he becomes creditor, and is
entitled in equity to foreclose the mortgage. The mortgage debt is not in equity considered as having been paid in the
sense that the remedy is thereby gone; but rather as assigned to the surety.
Where the creditor has a judgment against the principal debtor, the surety pays the debt, he is entitled by filing his bill
in a court of equity to avail himself of the rights which one would have to whom the judgment had been assigned. He is
said to be subrogated to the rights of the judgment creditor.
Where the creditor has in his hands securities from the principal debtor, the surety upon paying the debt is entitled to
these for the purposes of his security.
Subrogation is enforced by filing a bill in a court of equity setting up the facts and praying the court to give the surety
the right and remedies of the principal debtor.
A surety may secure his protection by having assignments made to him or to trustees for him at the time of paying the
debt. Or he may find it necessary to file his bill in a Court of Equity because of the unwillingness of the parties to clothe
him with or to admit his rights.

Sec. 168. Contribution

The right of contribution is the right of a surety to have the cosureties bear their part of the burden when he has borne
more than his part.
Where there are several sureties for the same debt or obligation, each surety is liable for the whole debt as far as the
creditor or obligee is concerned. But as among themselves, co-sureties ought to bear the burden equally, or in
proportion to their undertaking. The right of surety to have his co-sureties reimburse him when he has paid more than
his share, is called the right of contribution. This assumes, of course, that the principal is insolvent and cannot be made
to reimburse the surety.
The right of contribution accrues when the surety has actually borne more than his share of the burden.
Not until the surety has borne more than his share of the burden does he have any right to insist upon contribution by
the others. He must actually have paid more than his proportionate part.
The amount each surety must contribute is determined by the number of responsible sureties.
The amount each surety is liable to contribute is governed by the number of sureties.
Contribution is enforceable in courts of law or courts of equity. In courts of law a surety can compel his co-sureties only
to pay the amount as determined by the actual number of sureties, whether any of them are insolvent or not, or in the
jurisdiction or not; in courts of equity, however, the surety may have the amount of contribution measured according to
the actual number of solvent and accessible sureties.
By releasing the principal, giving him a definite extension of time or surrendering security in his hands, a surety may
lose in whole or part his right to contribution.
The surety must be careful not to jeopardize the interests of his principal, or he will lose his right of contribution.
If he pays the debt and then releases the principal from his liability to him, or if he gives the principal a definite,
enforceable extension of time, he loses his right of contribution. So if he has security in his hands, belonging to the
principal and surrenders it to the principal, he loses his right to contribution to the extent of the value of the security
surrendered.

Guaranty And Suretyship. Part 4

Sec. 169. Various Causes Discharging The Surety

(1) By discharge of principal's debt.
When the debt of the principal is discharged, the surety's obligation also falls.
As a general rule, anything which discharges the principal's debt, as payment, of course also discharges the surety's
obligation. The surety is answerable for the debt of another and when that debt is gone, the surety's obligation is
necessarily gone also.
(2) By alteration of the written instrument.
If the instrument on which the surety is bound is purposely altered in a material part, he is discharged.
The general rule is that any purposeful alterations of the written instrument (the bond, or note, etc.), on which the
surety is liable, in a material part, without the surety's consent, discharges the surety, even though the change
operates to his benefit, as in case of reducing the amount of a bond. When sued upon such an instrument he can reply
that it is not the instrument he signed.
Any change is material which changes the time or place of payment, amount of debt, nature of obligation, medium of
payment, number of co-sureties, etc.
If the surety by leaving blank spaces makes alteration easy, he will be liable to any person innocently acting thereon.
(3) By death of principal.
The death of the principal before credit extended or before default, operates to release the surety.
If the principal dies after the debt has arisen, or in case of a bond or similar obligation, after he has made default
thereon, then the death in no way affects the surety's liability because it occurs after his liability has arisen; but the
death of the principal before any debt or default obviously releases the surety.
(4) By death of surety.
The surety's death operates to discharge the liability on continuing guaranties, but on the absolute undertakings of
suretyship the death of the surety, even before breach, does not release the surety's estate.
In cases of continuing guaranty, the death of the guarantor stops the liability for subsequent indebtedness. In cases of
absolute suretyship, as on a note or a bond, the death of the surety does not operate to extinguish the liability, but the
estate is bound even for defaults arising after the surety's death, and also, the heirs are bound in so far as the estate of
the principal comes to their hands.
(5) By extension of time to principal debtor.
If the creditor extends definitely and upon consideration the time of payment, without the surety's consent, the surety is
released unless the creditor expressly saves his rights against the surety.
The surety can maintain that his contract has been changed and himself released if the creditor without his consent
gives a definite enforceable extension of time to the principal debtor. Thus if S is surety on a note signed by D as
principal to the order of C, and C when the note is due extends D's time another year in a definite way so that C can
enforce the extension, S is released. This does not mean that a mere delay on C's part to prosecute suit will have this
effect. There must be an extension for a definite time, upon an enforceable agreement, because, a mere promise not
to sue at once or for a little while, is not enforceable, and though carried out amounts to nothing in the way of releasing
the surety.
The principal may, however, avoid this consequence by expressly stipulating at the time that the surety is not to be
released, even though he does this without the knowledge or consent of the surety. Such a reservation must be
express. The creditor must, in effect, say, "Hereby expressly reserving all rights against the surety," or "It is hereby
understood and stipulated that the rights against the surety are hereby reserved."
(6) By failure of the creditor or obligee to sue or use diligence against the principal debtor.
The mere failure of the creditor or obligee to use diligence to enforce his rights against the principal debtor does not
release the surety, unless there is a local statute to that effect.
By the common law, it is established that the mere delay on the part of the creditor to sue the debtor within a
reasonable time will not discharge the surety. The surety's remedy in such a case is to pay the debt and then sue the
principal debtor for the reimbursement.
Under the statute of some states, the laws provide that a surety or guarantor may notify the creditor after the debt is
due to begin suit against the debtor, and in that case the surety is released unless the creditor proceeds within a
reasonable time. Of course the creditor in such a case could also sue the surety with the principal debtor.
(7) By release of principal debtor.
The surety is released if the creditor released the principal debtor, unless the creditor expressly reserves his right
against the surety.
The surety is released by a release of the principal debtor, unless at the time, the rights against the principal debtor are
expressly saved. The same reasoning governs here which governs the subject-matter of section 36.
(8) By relinquishment of security by creditor.
In so far as the creditor relinquishes security, the surety is released.
We have seen how the surety on payment of the debt is entitled to be subrogated to the remedies and titles of the
creditor. Where the creditor has security from the debtor and voluntarily releases it to him, the surety will be released to
the extent of the value of the security.
(9) By failure of obligee to report defaults, etc.
Where the principal obligor makes default, and this is known to the obligee, he must report to the surety, otherwise the
surety will be discharged.
The subject we now discuss has its most frequent application in the case of fidelity bonds given by employes. If the
employer learns of a default on the part of the employe, he must report it, otherwise the surety will be discharged. Thus
A employs B and requires a bond. B gives bond signed by himself and the C Surety Company. B afterwards breaks the
condition of the bond by stealing some money with which under his contract he is entrusted. A learns of the matter but
decides to retain B, and does not report the default to the C Surety Company. The C Surety Company is discharged in
case of subsequent default.
(10) By change of duties or enlargement of liability.
Where the obligee enlarges the liability of the main obligor or materially changes his duties, the surety is released.
If the contract of the surety by its terms covers a possible liability in respect to nonperformance of certain duties, or the
misappropriation of certain funds, the change of the duties of the employe without the consent of the surety will
discharge the surety. But this does not mean that a growth of the employer's business, whereby the employe has more
to do or more money to handle, will affect the bond; but it means that where there are certain duties of a general nature
whose performance is sought to be covered by the bond, that a change of those duties, especially such as make
possible a greater appropriation of funds by the employe, will release the surety for subsequent defaults.

Appendix B. Forms
(NOTE: The forms in this series of books are not numerous owing to the belief of the author that they serve no useful
purpose, and may in fact be misleading, as it is very clear that there is no way to meet the requirements as to all
jurisdictions; forms suited to local needs may always be obtained from local stationers insofar as it is desirable for the
layman to attempt the use of such forms. The forms in this series are for illustrative purposes, or else are forms in such
general use and are so fundamental and fixed in nature that the layman may follow them without danger - as he is in
fact using them daily.)
1. Promissory Note.
(See form set out on page 23 herein.)
2. Bill of Exchange.
(See form set out on page 25 herein.)
3. Check.
(See form set out on page 26 herein.)
4. Certificate of Bank Deposit.
(See form set out on page 27 herein.)
5. Trade Acceptance.
(See form set out on page 29 herein.)
6. Forms of Indorsement.
(1) Blank indorsement.
William Jones
(2) Special indorsement.
Pay to the order of John Smith. WILLIAM JONES.
or, Pay to John Smith.
William Jones
(3) Qualified indorsement.
without recourse, WILLIAM JONES.
(4) Restrictive indorsement.
Pay to John Smith, for collection. WILLIAM JONES.
7. Notice of Dishonor of Note Where Note Not Protested.
July 1, 1921. You are hereby notified that a promissory note made by John Smith, dated June 1, 1921, payable one
month after date to the order of William H. White, and indorsed by said William H. White, was this day presented by the
undersigned for payment which was refused and the undersigned as holder looks to you as indorser for payment,
damages, interest and costs.
(sd) JOSEPH BLACK,
1820 Blank Street, Chicago, Illinois.
To William H. White, 190 Blank Street, Chicago, Illinois.
8. Certificate Of Protest.
(Here attach original instrument or copy thereof.)

Be it Known, That on this first day of July in the year of our Lord One Thousand Nine Hundred and Twenty-One, I,
Henry N. Green, a Notary Public, duly commissioned and sworn, and residing in the City of Chicago in said County and
State, at the request of Henry W. Jones, the holder of the above bill of exchange, went with the original bill of exchange
which is above attached, to the Office of The First National Bank, where such bill is payable, during the usual business
hours and demanded payment thereon, which was refused for the following assigned reason - not sufficient funds and
no instructions to pay.
Whereupon I, the said Notary, at the request aforesaid, did PROTEST, and, by these Presents, do SOLEMNLY
PROTEST, as well against the drawer of said bill and the indorsers thereof, as all others whom it may or doth concern,
for exchange, re-exchange and all costs, charges, damages and interest already incurred by reason of the non-
payment of the said bill of exchange.
And I, the said Notary, do hereby certify, that, on the same day and year above written, due notice of the foregoing
Protest was put in the Post-Office at Chicago, Illinois, as follows:
Notice for Walter W. Johnson, 12 Blank Street, Cincinnati, Ohio. Notice for William H. White, Blankville, Illinois.
Each of the above-named places being the reputed place of residence of the person to whom this notice was directed.
IN TESTIMONY WHEREOF, I have hereunto set my hand and affixed my Official Seal, the day and year first above
written.
Notary Public.
FEES - Noting for Protest,.. .25 cents; Protest,.. .75 cents; Noting Protest,.. .25 cents; Notices,.. .50.
Certificate and Seal,........25 cents; Postage,... 4 cents;
Vol. 1; page 272; $2.04.
(NOTE: If the protest is for non-acceptance this same form may be used by writing in "non-acceptance" for
"nonpayment.")
9. Notice Of Protest Of Note.

July 1st, 1921. A promissory note for $100.00 payable to the order of William Jones, dated July 1st, 1920, payable July
1st, 1921, signed by John Smith, indorsed by William Jones, being this day due and unpaid, and by me PROTESTED
for non-payment, I hereby notify you that the payment thereof has been duly demanded, and that the holder looks to
you for payment, damages, interest and costs.
Done at the request of Henry W. Jones, 1711 Blank Street, Chicago, Illinois.
Henry N. Green,
Notary Public. To William Jones, 1512 Blank Street, Chicago, Illinois.
(NOTE: It is not necessary to protest a note or inland bill, but a foreign bill must be protested.)
10. Notice Of Protest Of Bill.

Chicago, July 1, 1921.

Take notice that a bill of exchange for $100.00, dated June 1, 1921, drawn by Walter W. Johnson, 12 Blank Street,
Cincinnati, Ohio, in favor of William H. White, on Oliver Smith, Chicago, Illinois, indorsed by said William H. White,
accepted by said Oliver Smith, payable at 16th National Bank, Chicago, was this day presented for payment, which
was refused, and therefore was this day protested by the undersigned notary public for non-payment.
The holder therefore looks to you for payment thereof together with interest, costs, damages, etc., you being the
drawer thereof.
Henry N. Green,
Notary Public. To Walter W. Johnson, 12 Blank Street,
Cincinnati, Ohio.

Questions And Problems

Chapter One
1. What three qualities had negotiable paper which distinguished it from simple contracts under the common law?
2. What is negotiability?

Chapter Two

3. Define a promissory note. Write a form of one.

4. Define a bill of exchange. Write a form of one.
5. What is meant by drawing a bill in a set? What is the purpose of doing bo?
6. What is a check? How does it differ from a bill of exchange?
7. What is a certificate of deposit? Is it negotiable?
8. Is a corporate bond negotiable?
9. What is the purpose of a trade acceptance? Is it negotiable?
10. Define a bank draft.
11. Are bills of lading negotiable? Warehouse receipts?
12. Is a certificate of stock negotiable?
13. Is a mortgage negotiable?

Chapter Three

14. What was the origin of bills of exchange? When did they come into use in England? What was the first digest of the
subject?
15. In what way was negotiable paper introduced into American law? What is the form of the negotiable instruments
law in this country today?

Chapter Four

16. What are the formal requisites of a negotiable instrument?

17. Is a note made by lead pencil and signed by a rubber stamp negotiable ?
18. A note given by "Auto Accessories Concern, Uninc." and so signed. There are five partners. Are they liable on this
note?
19. A note contained a statement "This note is given for the next month's salary of the payee." Does this destroy
negotiability?
20. A note otherwise in usual form read: "This note secured by G. W. Davis note copy of contract hereto attached and
made a part of this note. Negotiable and payable at "Southeast Missouri Trust Co." Is this note negotiable? (Robertson
v. Kochtizky, 217 S. W. (Mo.) 543.)
21. A bill drawn on a person directing him to "charge the same to the 1800 payment." Does this language impair
negotiability?
22. An order contained the provision: "Pay out of the proceeds of the Armstrong deal." If the bill is otherwise correctly
drawn does this destroy negotiability?
23. Is a promissory note which is secured by real estate mortgage and which refers to such mortgage, negotiable?
24. May an installment note be negotiable? Suppose it is provided that on non-payment of any installment or of interest
the holder may declare the entire note due. Does such a provision destroy negotiability?
25. May instruments be negotiable which provide for payment "with current rate of exchange"? with "attorney's fees if
not paid at maturity"?
26. A note was due five years from date, but at the foot was written, "Due if ranch is sold or mortgaged." Does this
destroy negotiability? (Nickell v. Bradshaw, 183 Pac. (Ore.) 12.
27. A note due in one year contained a provision: "If in the judgment of the holder of this note, said collateral
depreciates in value, the undersigned agrees to deliver, when demanded, additional security to the satisfaction of said
holder; otherwise this note shall mature at once." Is this note negotiable if otherwise correctly drawn? (Ibid.)
28. A promise to pay a certain amount of money in merchandise; a promise to pay a certain amount of money and
certain merchandise; a promise to pay a certain amount of money or certain merchandise; are any of these
negotiable?
29. A note is payable in New York "in pounds sterling." Is it negotiable ?
30. What is demand paper? Is it negotiable?
31. A desires to borrow money from his brother, B, who is engaged to be married. A makes out a note in usual form
providing that he will pay when the payee marries, and delivers it to the brother, but his brother fails to give him the
money. The note is sold to a bank; B marries; A desires to defend that he never got the money. Can he do so?
32. A note payable one month after maker's death. Is it negotiable ?
33. A note giving the holder right to extend payment as he pleases. Is note negotiable?
34. What are "words of negotiability"?
35. When is an instrument payable to order?
36. When is an instrument payable to bearer? How may an Instrument originally payable to the order of a specified
person be made payable to bearer? If an instrument is not payable to order or bearer will an indorsement in blank
make it payable to bearer?
Chapter Five

37. What is a collateral note? Is it negotiable?

38. If a note refers to a trust deed (mortgage), which secures it, is the negotiability of the note merely affected?
39. What is a "judgment note"? Is it negotiable?
40. If a maker of a note waives benefit of exemption laws, does this affect negotiability?
41. Does the addition of a seal destroy negotiability?
42. If a note is undated, ante-dated or post-dated, what is the effect thereof?
43. State the rules of construction of an ambiguously drawn instrument.

Chapter Six

44. What is meant by "delivery"? State its importance.

45. H holds a note made by M to order of P. It was purchased by H under circumstances that make him a "holder in
due course." M contends he never delivered the paper to P. Is this a good defense against H?
46. M makes a note to order of P, in order to enable P to borrow money, and leaves the amount blank to be filled in by
P with the amount which he succeeds in borrowing, but not over $1000. P borrows $1500, fills in for that amount and
delivers the note to L. the lender indorsed by P and disappears. Can L hold M? Discuss from all angles.
47. M puts an incomplete and undelivered note on his desk. The payee sees it there, steals it, completes it, and
indorses to H for value. Can H hold M?
48. What is the rule where uncancelled spaces In a complete instrument are filled up?
49. A promissory note is made by John Smith who describes himself in it as "John Smith, agent" in which manner he
also signs it. He had authority to sign this note for William Jones, which fact was known to the payee. Can the agent
avoid liability on this note?

Questions And Problems. Part 2

50. The R. T. Company gave the following note in payment for goods purchased:
Albany, N. Y., June 1, 1920. $7,500.
Three months after date we promise to pay to order of A. B. Corporation Seventy Five Hundred Dollars.
John Smith, Pres. Elmer H. Brown, Treas.
This note was written on a blank note on the margin of which "R. T. Company" was printed. The note was discounted
by a bank who sue Smith and Brown. Are they liable?

Chapter Seven

51. Must negotiable paper be supported by consideration? What may constitute consideration?
52. What is meaning of statement that consideration is "presumed"? May it be shown lacking? Is it necessary to recite
consideration or to say "value received"?
53. A is sued by the payee on a note for $2000. He pleads that $250 of the note represents value and 1750 an
intended gift which he does not now desire to make. Is he entitled to make this partial defense? (Sharp v. Sharp, 4
Ohio Ap. 418.)

Chapter Eight

54. Define acceptance.

55. Can acceptance be made orally? Can there be a written acceptance not on the bill itself?
56. A bill of exchange is drawn on D. He fails to return it accepted or unaccepted within twenty-four hours. Can he be
sued on the bill as acceptor?
57. What are the two kinds of acceptances?
58. Is an acceptance which names a place of payment qualified?
59. Must the holder take a qualified acceptance? What effect has a qualified acceptance on drawer and indorsers?
60. State the effect as to having a check certified.

Chapter Nine

61. What is meant by term "accommodation" party; in what capacities may a person sign as accommodation party?
Can such a person be held if the holder knew he signed for accommodation?
62. Distinguish between an accommodation maker and a maker who signs without consideration, showing why a
holder with knowledge can hold the maker in the first place, but not in the second.
63. A for B's accommodation makes a note payable to B. Has A a defense if sued by B on this note?
64. A makes an accommodation note to B or order, due July 1st. On July 15 B transfers it to C for value, who knows
that A was an accommodation maker. Has A a defense?
65. Define acceptance for honor; how does an acceptor for honor differ from an accommodation acceptor?
66. If not stated, for whose honor is the acceptance presumed to be?
67. To whom is an acceptor for honor liable?
68. How is acceptor for honor discharged?
69. Define payment for honor.

Chapter Ten
70. What is meant by negotiation? What paper is negotiable without indorsement?
71. Can there be an indorsement apart from the instrument indorsed? If there is no room for indorsement on the paper,
how can its indorsement be accomplished?
72. Can an indorsement be on the face of the paper? (E. D. Fisher Lumber Co. v. Robbins, 180 Pac. (Kans.) 264.)
73. Are words of negotiability necessary in indorsement?
74. What is the rule about partial indorsements?
75. Distinguish between special and blank indorsements.
76. A, being payee of a note indorsed it "without recourse in any way" and delivered it to B for value. The name of the
maker was forged. Can A be held on his indorsement? (Miller v. Stewart, 214 S. W. 565.)
77. What is a restrictive indorsement? What is its effect?
78. M made a note to order of P who indorsed to E who indorsed to H "upon condition that H deliver his automobile car
on the maturity of this note." H presented the note to M for payment. Must M make inquiry? Suppose he knows that H
has not delivered the car, should he pay the note?

Chapter Eleven

79. Define a "holder in due course."

80. A purchased a note that was not stamped according to the U. S. Federal Law. Is he a holder in due course? (Lutton
v. Baker, 174 N. W. 599.)
81. If one purchases paper at an unusually large discount, is he a "holder for value"?
82. A, having a note made by M, deposited it in a bank which credited it to his account. Is the bank a purchaser for
value? (Marion Nat. Bk. v. Harden, 83 W. Va. 119.)
83. P has a note made to him nearly six months previous and having four days yet to run, and secured by mortgage,
discounts it to H for 2/3 of its value. Is H a holder in due course? (Knowlton v. Schultz, 71 N. W. (N. D.) 550.
84. If one buys a note knowing that the consideration is yet to be performed, is he a purchaser in good faith?
85. Is negotiable paper negotiable after maturity? What is the rule as to a purchaser's rights on overdue paper?
86. When is demand paper overdue?
87. Is paper overdue because interest is overdue? If an installment of principal is overdue? Is there a provision that on
default of payment of interest, the principal shall become due, and such default occurs?
88. H buys a note from P which is made by M to P's order. P neglects to indorse it. After the note becomes overdue, H
gets P to indorse it. H then learns that M has a defense. Is H a bolder in due course?
89. M makes a note to order of P and P sells to II, a holder in due course. After maturity of the note H presents it to
plaintiff. M claims that the consideration for the note has failed and that plaintiff is not a holder in due course. Is plaintiff
subject to the defense?
90. On whom is burden of proof as to whether holder is holder in due course?
91. H buys a $1000 note made by M, from the payee, P, for $750.00. Assuming that H is a holder in due course, what
amount is H entitled to recover?

Chapter Twelve

92. What is meant by "personal" defenses; what by term "real defenses" ?

93. M borrows money from P, and gives him his promissory note for three months. He pays this money back before
maturity but neglects to take up the note. P sells to H, a holder in due course. Is M's defense good against H?
94. Is a set-off a defense against a holder in due course?

Questions And Problems. Part 3

95. M desiring to remember P after his death, gives P a note to P's order. P sells it to H who knows nothing of its origin.
P dies and the note is presented for payment. If H is a holder in due course is the defense of no consideration good? If
H is not a holder in due course?
96. P succeeds in selling real estate to M by false statements as to its productivity. Is the defense good against H, a
holder in due course ?
97. Is duress a real or personal defense?
98. It is made illegal for a bank to issue a certificate of deposit unless there are funds represented thereby received by
the bank. A bank issues a certificate to A who has deposited no money. A sells to II, a holder in due course. The bank
claims the certificate is void in any one's hands. What would you say?
99. A treasurer had authority to bind a corporation by giving its notes for proper corporate purposes. He borrowed
money for personal purposes from P, as P knew and gave the corporation's note. P sold to H, a holder in due course.
The corporation defends that P had no authority to issue such a note. Is the corporation bound on this note?
100. What is the rule as to liability of partners to a holder in due course upon commercial paper issued in the firm's
name by one partner for improper partnership purposes?
101. M, a minor, gives his note to P. P sells to H, who does not know M, but is told by H that M is of legal age. Can M
defend against H, a holder in due course?
102. Is forgery a real defense?
103. In what way may a negotiable instrument be materially altered ?
104. Is material alteration a real or personal defense?
105. M wrote a note to order of P, leaving blank spaces before the amount P enlarged the amount by filling in the
uncancelled spaces and sold the note to H, a holder in due course. Can H enforce the instrument as altered against
M?
106. If an instrument is materially altered so that the maker can defend against an innocent purchaser on that account,
is there any right to recover on the instrument in its original form?
107. Is it necessary to use a "check protector" to guard against material alteration of a check?
108. M signs a paper which he is told is a receipt. Not having his eye-glasses present he signs without reading it. It is
in fact a negotiable note which is sold to H, a holder in due course. Can H recover ?
109. Does illegality ever make a negotiable instrument absolutely void in the bands of any person?

Chapter Thirteen

110. State the obligation of the maker of a note.

111. What is the undertaking of a drawer of a bill or check? Of a drawee?
112. Is an acceptor primarily or secondarily liable?
113. A drawee accepts a bill upon which the drawer's name is forged. The bill comes into the hands of a holder in due
course. Can the drawer defend that the bill is forged? Is the same answer true of a certified forged check?
114. A drawee accepts a bill (or check) that has been raised. A holder in due course comes into possession thereof
after alteration. Can he sue the drawee upon the acceptance?
115. D draws a bill upon A to P's order. F forges P's Indorsement and transfers to H, an innocent purchaser. A accepts
the bill. Has A a defense against H?
116. What is the contract of an unqualified indorser? Is there any difference in this liability if the unqualified
indorsement is in blank or special?
117. What is one's liability who transfers without indorsement, (where negotiation does not require indorsement) ?
118. State the contract of a qualified indorser.
119. In what order are indorsers liable?

Chapter Fourteen

120. Why does the law provide a certain procedure before a holder can sue an indorser or a drawer?
121. Does a holder have to bring suit against a drawee, an acceptor or a maker before he can hold a drawer or an
indorser?
122. For what purpose is presentment for payment necessary? State (1) By whom presentment for payment must be
made; (2) date and hour thereof; (3) place thereof; (4) to whom.
123. A bank having a note upon which there are indorsements telephones the maker who responds that he will not pay
it. The indorsers are then notified. Can they be held?
124. A has a check made by M and indorsed by P. He fails to present it to the bank within a reasonable time. Under
what circumstances is M discharged? P?
125. What is the rule as to time of presentment for payment of bills of exchange other than checks?
126. When is presentment for payment not required?
127. A corporation makes a note indorsed personally by its directors. The note is not presented for payment at
maturity. The directors thereafter say that they will pay it. Can they afterwards raise the point that it was not properly
presented to the maker for payment?
128. When is presentment for acceptance necessary to charge drawer and indorsers? May such presentment be made
when not required? What are the rights against drawer and indorser in case acceptance is refused?
129. State the details required to make presentment for acceptance sufficient.
130. When is presentment for acceptance excused.

Chapter Fifteen

131. What is "notice of dishonor" and for what purpose is it necessary ?

132. H holding a note on which I is indorser calls up I and notifies him that he has presented the note to the maker for
payment and that it was not paid and that he will hold I as indorser. On a suit against I he objects that he received no
written notice. Is this a valid defense ?
133. Within what time must notice of dishonor be given?
134. When is notice to drawer excused? When to indorser?
135. When is notice of dishonor waived?

Chapter Sixteen

136. What is protest? When is it necessary? How is it made? Who is authorized to make it?
137. State time, place and manner of protest.
138. When is protest dispensed with? May it be waived?
Chapter Seventeen

139. What is meaning of discharge?

140. What is the most usual means of discharge?
141. Why is paper not discharged if a person secondarily liable thereon pays it?
142. In what case does a party occupying a position of secondary liability on the paper discharge the paper by paying
it?
143. A having a note made by M, tears it up with the idea of releasing M. Later, he changes his mind and sues M. M
replies that A tore up the note. A claims that this was without consideration. Is M's defense good?
144. Recite the various ways in which a party secondarily liable may be discharged.

Chapter Eighteen

145. Define a bank. What is a private bank?

146. Can a bank be formed under a general incorporation law? Under what law must it be formed?
147. What is the charter of a bank? Who has the power to enact by-laws?
148. How much of the stock of a national bank mast be paid in upon incorporation?
149. Does a bank have a lien on unpaid stock?
150. What is the statutory liability of a stock holder of a bank for benefit of creditors? Is this liability peculiar to banking
corporations?
151. May a stockholder be liable to creditors after he has sold his stock? In what cases? Is a pledge liable upon the
stock held by him in pledge?
152. How is this statutory liability enforced?
153. What are the provisions of the National Bank Act as to number and qualifications of directors?
154. What can you state as a general test for the degree of attention to be devoted by a bank director to his duties?
155. What are the powers of duties of bank president?
156. Same as to bank cashier? Bank teller?
157. Name the various sorts of business a bank may do.
158. To what extent may a bank deal in real estate?
159. Can a bank loan money on its real estate? Can its power to do so be questioned by a party to whom it has made
such a loan?
160. What relationship does a general depositor sustain to the bank?
161. What is a special deposit? In what legal consequences does it differ from a general deposit?
162. What is the bank's contract with a depositor who has a checking account?
163. If a bank pays forged checks, who is loser between depositor and bank?
164. What duty does the depositor have in respect to paper forged with his name?
165. What is the bank's commercial paper? Describe a banknote.
166. What is a savings bank?
167. Can a National Bank carry on a business as trustee?
168. What is the function of a clearing house?
169. If a deposit is made in a failed bank after failure can it be recovered in toto?

Chapter Nineteen

170. Define guaranty; suretyship ; give an example of each.

171. Must one who extends credit on a guaranty, notify the guarantor?
172. If the guarantor receives no benefit, where is the consideration ?
173. Define a bond.
174. If the principal is not capable of contract, can the surety defend against liability on this ground?
175. Can a surety plead that the principal was defrauded?
176. Can a corporation become surety?
177. What is the surety's right of re-imbursement? exoneration?
178. Define subrogation.
179. What is the right of contribution?
180. Enumerate the various causes that will discharge a surety.

The Law Of Property. Part I. Introductory. Chapter I. Definitions And Distinctions

Sec. 1. The Term "Property" Defined

The word "property" is used in two senses: to indicate the right and interest which a person has in anything which the
law makes the subject of ownership, and second, to indicate the thing in which this right and interest is held.
The word "property" as frequently used, indicates the right of dominion which one person may have over anything
which the law makes the subject of ownership and it is this significance we have in mind when we say that the property
in an automobile is in A. B. But the term is used also to indicate the thing itself which is the subject of such right of
dominion.
The word "title" is used synonymously with "property" to indicate ownership, as when we say the title is in A.
"Possession" is a term indicating that one actually has a thing. He may have no right to have possession yet still have
it, and he may have a right to possession, but not possession itself; and he may have a right to possession though
another is the owner, as where he is contractual bailee.

A. The Division Of Property Into Real And Personal Property

Sec. 2. Real Property And Personal Property Defined

The term real property signifies that property which is of a fixed, immovable nature. The term personal property
signifies property which in its present state is of a movable, temporary character.
It has been said that the distinction between real and personal property is merely historical and not logical. But there
are important differences in the very nature of things between that which we call real property and that which we call
personal property and this distinction is entirely logical. There is a real difference between that sort of property, as a
pocket knife or cane, which we can carry away, conceal or destroy, and a piece of land which is fixed and permanent.
And the law makes, as men in the usual dealings of life, make, important distinctions. Real property includes the
ground and all that is attached thereto for its permanent improvement. Personal property is every other species of
property. Thus A owns several acres of land. He puts thereon a house, a barn, fences, and a windmill. All of these
things are real property. He may indeed remove them and make them personal property. But until he does so, they are
a part of the real estate. If he sells the farm, describing it by metes and bounds, all of these improvements become the
property of the buyer of the farm though no mention is made of them.
Property must be either real or personal, although we will find that from different standpoints, some property which is
near the border line may be regarded as either real or personal. But judged from the same standpoint (and as for most
property judged from any standpoint) at any given moment property is either personal or real.1
Property though at any time either personal or real may be at different times personal and real. Thus clay in its natural
state is real property. Being removed and placed in wagons, it becomes personal property. Baked into bricks, it is
personal property. Built into a house it becomes again real property. The house is torn down and the bricks scattered
upon the ground. The property is again personal. The same may be said of a tree, cut down, made into benches and
these nailed to the floor of a schoolhouse.
Real property we also call "realty" and "real estate;" personal property we call "personalty," and "personal estate."
We will now consider some practical differences in the law applicable to these two sorts of property.

Sec. 3. Some Practical Differences In The Law, Based Upon This Distinction
(1) As to descent and distribution.
Real property of a deceased person in case he leaves no will goes direct to his heirs, and in case he leaves a will,
direct to the devisees therein named. Personal property of a deceased person, in case he leaves no will
I. Property is sometimes said to be real, personal or mixed. But by the word "mixed" is indicated property which may be
regarded either as real or personal from different standpoints. It is believed that in all cases property is from any
particular standpoint at any instant of time either real or personal. It either goes with the real estate or it doesn't and the
use of the word "mixed" is unfortunate.
goes to the administrator, or in case he leaves a will to the executor (or administrator if no executor). After payment of
debts it is to be transferred to the distributees, or legatees.2
(2) As to transfer of title inter vivos.
The law makes a distinction between personal and real property in respect to the method of transfer from one living
person to another. Real property can be transferred only by deed, a formal instrument of much importance. It is true
title to real property may be acquired without any writing, as by adverse possession, but this is not transfer by one
person to another. But personal property may be transferred (as it usually is) by mere delivery of possession, as where
one purchases goods at store and when a bill of sale or other writing is given it is more to be regarded as the evidence
of the transfer, while the deed to real estate when delivered, itself effectuates the transfer of ownership.
(3) As to dower and title by marriage.3
By the common law a husband had certain rights in the property of his wife. He took her personal property as his own
absolutely. In her land he got merely a temporary estate called, while the wife is living, an "estate during coverture" and
after her death, the husband surviving her, called an "estate by curtesy." These estates are only life estates and
therefore cease entirely with the death of a husband just as a tenancy in land ceases when a term expires for which it
was created. Modern statutes have taken away the right of the husband to his wife's personal property and many
states have also changed the estate of curtesy, although in all states a husband has still certain rights in the land of his
wife. The wife by her marriage acquired no rights to the personal property of her husband and does not do so now. Of
course upon the husband's death the wife has certain rights and takes a part of the personal property of which he may
die possessed but that is an entirely different matter. In the land of the husband the wife gets a dower interest which is
called inchoate during his life and which becomes at his death, if she survives him, a dower estate, which is a one-third
interest for life which the wife has in the land of her deceased husband. It is only a life estate and terminates absolutely
at her death.
2. See Part VIII post for extended discussion on the subject of Estates and Wills.
3. Considered more at length hereafter.
(4) As to right to remove.
We will see in our study of fixtures that certain property may be removed if it is to be regarded as personal estate and
cannot be removed if it is to be regarded as real estate. Of course the owner of the land can always tear down his
buildings or dig up his soil and thereby convert real property into personal property, but where the rights of two parties
are concerned, as that of landlord and tenant, or that of seller and buyer, one claiming the real property and the other
the personal property, the question becomes very important what is to be regarded as personal property and
removable as such.
(5) As to local law applicable.
We may say as the general rule that the law of the place in which real estate is situated governs it entirely, while for
some purposes personal property is to be regarded as situated at the domicile of the owner no matter where it actually
is.

B. The Division Of Real Property Into Lands, Tenements And Hereditaments

Sec. 4. In General
Blackstone 4 stated that things real are usually said to consist in lands, tenements or hereditaments. There is little if
any practical distinction between "tenements" and "hereditaments," but they are both words of greater significance than
"lands." All three terms may be included in the term "real estate," but their separate consideration may serve to
illuminate the meaning of that term.
"Land comprehends all things of a permanent substantial nature, being a word of very extensive signification, as will
presently appear more at large. Tenement is a word of still greater extent, and though in its vulgar acceptation, it is
only applied to houses and other buildings, yet in its original, proper and legal sense, it signifies everything that may be
holden provided it be of a permanent nature; whether it be of a substantial and sensible, or of an unsubstantial, ideal
kind. * * * But an hereditament, says Sir Edward Coke, is by much the largest and most comprehensive expression for
it includes not only lands and tenements, but whatsoever may be inherited, be :- corporeal or incorporeal, real,
personal or mixed." 5
4. Blackstone's Commentaries, Cooley's Ed. Book II, star page 16.
5. Id.
Sec. 5. Land, Or Corporeal Hereditaments
Land is a term meaning the ground, and all that is permanently added thereto by nature or the hand of man, and the
earth under the soil and the space above.
"Land" is a term synonymous with "corporeal hereditament" and signifies that sort of real estate which is substantial
and permanent, as distinguished from that which is of an intangible nature. By the word land we mean the ground, and
that which grows thereon or has been attached thereto, for permanent purposes. It includes not only the surface, but all
below to the center of the earth, and all above "ad coelum." Hence, ownership of lands signifies ownership of all
minerals under the earth, with right to use the same; and signifies the right to prevent projections above his land by the
property of others.6
If the tree of one adjoining owner extends its branches over the other land, the owner of such land, so overhung may
cut off such branches, but in so far only as they overhang. He is not entitled, however, to the fruit of the overhanging
branches.
Land is capable of division horizontally into superimposed legal ownerships, so that one person may own the surface;
another person, the minerals beneath the surface.7
Water is also included in the term land "which may seem a kind of solecism; but such is the language of the law; and
therefore I cannot bring an action to recover possession of a pool or other piece of water by the name of the water
only; either by calculating its capacity, as, for so many cubical yards; or, by superficial measures, for twenty acres of
water; or by general description, as for a pond, a watercourse or a rivulet, but I must bring my action for the land that
lies at the bottom, and must call it twenty acres of land covered with water. For water is a movable wandering thing,
and must of necessity continue common by the law of nature, so that I can only have a temporary, transient,
usufructuary property therein." 8
6. Murphy v. Bolger, 60 Vt. 723, 15 Atl. 365, 1 L. R. A. 309 (suit in ejectment will lie to oust defendant whose property
overhangs plaintiff's property).
7. Neuhoff v. Mayo, 48 N. J. Eq. 619, 23 Atl. 265.

Sec. 6. Incorporeal Hereditaments

An incorporeal hereditament is a right issuing out of a thing corporate whether real or personal, or concerning or
annexed to, or exercisable within the same.9
We usually think of real estate as being something very tangible, indeed, and usually any intangible rights are
considered in the nature of personal property, but there are some so closely connected with the use of real estate, that
they partake of its nature, and are classed as real estate.
An incorporeal hereditament is real estate of an intangible nature. It is distinguished from a corporeal hereditament
mentioned in the last section in that it is not the land itself, but some right in the land and exercisable in connection
therewith. But these rights although incorporeal are real estate. Blackstone's use of the phrase "whether real, personal
or mixed," is unfortunate in conveying a contrary impression, which he does not mean to give, for his illustrations of
"personal property" which constitute hereditaments are those of articles that are by custom or usage to be treated as
real property, descending to the heir. The different sorts of incorporeal hereditaments are described below, very briefly.
They are,
8. Blackstone, Book II, p. 18.
9. Id., page 19.
mostly, obsolete, and many of them never obtained at all in this country.
(1) Advowson.10 An advowson was an old form of property of an intangible sort signifying a right of presentation to a
church, that is to say, it was the right which a person had because he had built a church or made some gift, to name
the minister to officiate therein. This form of property is unknown in America.
(2) Tithes. A tithe was a right to a tenth part of the increase yearly rising from land and animals.11 Those things were
tithable which were of annual increase. This was a species of property belonging to a church or the clergy and existed
as a matter of right in various cases. Any person may now give a tenth part of his income to a church but this probably
would not be called a tithe, because the church has no legal right to demand it; but tithes in the old days were legally
demandable. These like advowsons are unknown to our law although they were known to the English law from early
times.
(3) Commons. A common was a right which a man had to make substantial profit from the land of another. This sort of
right is also known by the name of "profit a prendre." Commons are of four sorts, and are discussed later.12
(4) Ways or Easements. A way or an easement is the right of one to go upon the land of another.13 It differs from a
common or profit in that it does not give the right to take anything from the land but merely to make a certain use of it. It
differs from the right of a tenant, because he occupies the land, while the owner of an easement has no exclusive
possession, but merely a right to go and come upon the land which is in the possession of another.
10. Id., page 21.
11. Id., page 24.
12. See SEC. 136, post.
13. See Sections 130-135, post.
Easements are of two sorts, "appurtenant" or "in gross" but as they are hereafter discussed at length we may not dwell
upon them here.
(5) Offices.14 An office was a right to exercise a public or private employment and to take the fees and emoluments
thereunto belonging.
(6) Dignities.15 Dignities consisted in the right to honors and offices, as those of dukes, marquesses, earls, viscounts,
and barons. They are unknown to our American law.
(7) Franchises16 A franchise is a right which one has to do things which by the general law he would have no right to
do: Thus we may have the right of certain persons to carry on business as a corporation. This they cannot do except
by the franchise of the state. There were many sorts of franchises in the old law which are now obsolete, and which
consisted in rights claimed by grant of the king, to have certain privileges, as the right to wrecks, estrays, etc. Under
our American law franchises are not presumed to be given to favored individuals but merely to those who comply with
the law. The possession of a franchise signifies the possession of a right which could not be exercised without the
franchise, thus, with the right to be a corporation, or to operate street railways. The franchises that we know would not
be classed as real, but personal property.
(8) Corodies or Pensions17 A corodie or pension is a right to receive certain allotments for one's maintenance.
14. Blackstone, Book II, 36.
15. Id., 37.
16. Id.
17. Id., 40.
(9) Annuities.18 An annuity is the right to have a certain amount every year from some layman. By contract, as with an
insurance company, one may now have an annuity, but we do not have annuities as they were originally known in
England.
(10) Rents. A rent is defined as a certain profit issuing yearly out of land and tenements corporeal. It may consist in
money or goods or services. There were various sorts of rent at common law which we need not take the time to
discuss here. The modern law of landlord and tenant is discussed fully hereafter.'

C. Division Of Personal Property Into Tangible And Intangible Personal Property

Sec. 7. In General
Personal property includes all tangible objects (not classified as real property) and all intangible rights not classified as
real property.
We have already considered that real estate may be tangible or intangible, although it is in great part tangible, the
intangible species being quite generally obsolete. Personal property may also be divided into that which is tangible and
that which is intangible and the intangible classes are large and numerous.
Tangible property consists, of course, in objects, as chairs, tables, animals, and the like, and inasmuch as the object of
this subdivision is to merely notice the different kinds of personal property, nothing further need be noticed in respect to
tangible personal property.
18. Id.

Sec. 8. Intangible Personal Property: Choses In Action

A chose in action is a right to reduce something to possession by a suit at law.
Personal property which one has in his possession or enjoyment is frequently termed a chose in possession, and a
right to sue to reduce something to possession is called a chose in action. Thus, a chair possessed by one is a chose
in possession, but a right to sue on a promissory note, or a right to sue for breach of contract to sell a chair, is a chose
in action. Choses in action are therefore of the nature of intangible personal property, but all intangible properties are
not choses in action, as for instance a patent, but an infringement of the patent would give the owner of the patent a
right to sue and thus would be a chose in action for the recovery of damages. The word is not always used in the same
sense, but more generally describes rights to sue in contract or for the commission of torts consisting in injuries to
property.19

Sec. 9. Various Forms Of Intangible Personal Property

Below are enumerated some forms of intangible personal property.
(1) Patents. A patent is a right, granted by sovereignty to exclusively make, use and vend an invention, for a period of
years.
(2) Copyrights. An author has a right to prevent others from making use of his intellectual productions, until he
publishes the same to the world. By statute, he is allowed to retain the exclusive right of publication for a period of
years by complying with the copyright law.
(3) Trademarks. A person may acquire a right in connection with his trade, to the exclusive use of a mark or word used
by him upon the goods sold by him, provided his use thereof has been prior to that of others on the same class of
goods and provided the mark or name is fanciful, that is not merely descriptive or geographical.
19. Gibson v. Gibson, 43 Wis. 23.
(4) Good will. A good will of a business is a very valuable species of property. It may be sold in connection with the
business, but cannot be disposed of independently.20
(5) Stock in corporations. Stock in a corporation is personal property. The property is the stock, itself, and the
certificate is a mere evidence thereof, useful but not essential. Stock in the corporation is personal property though the
corporation own nothing except real estate.21
(6) Partner's interest in partnership. A partner's interest in a partnership is intangible personal property. It is true he
owns, in tenancy in partnership the property of the partnership, but his right in that property is not to any portion
thereof, but merely to have his share of the profits after the debts are paid, the assets disposed of, an accounting had.
His right is personal property, although the property of the partnership is all realty.22
20. Metropolitan Bank v. St. Louis Dispatch Co., 149 U. S. 436, at 446.
21. Arnold v. Ruggles, 1 R. I. 165; In re Jones, 172 N. Y. 575, 65 N. E. 570 (joint stock company) citing cases.
22. Uniform Partnership Act.

Chapter 2. History Of The Law Of Property

Sec. 10. Ancient Laws Of Property

The laws of property from early until modern times were based upon feudalism, and in our law, even to-day, we see
the influences of feudalism though the system itself no longer exists.
Space will not permit us to go at length into a discussion of the subject of feudalism, and the reader is referred to other
authors for extensive inquiry therein.23 But we should take occasion to examine very briefly this system which entered
so extensively into the life of our European ancestors and from which our laws of property have been historically
developed.
Feudalism concerned itself almost wholly with real property. Personal property in those days was inextensive in
quantity and had little value. Only real property was held in feudal tenure.

Sec. 11. Feudalism And The Feudal Tenures

Feudalism was a military system whereby all land was held from the sovereign, mediately or immediately, who
parcelled it out in return for fealty and service.
Whatever may have been the origin of feudalism, it was established in Europe by the tribes that swept over Europe at
the decline of the Roman empire. It was firmly established on the continent by 800; and in England under William the
Norman.
23. See Blackstone's Commentaries, Cooley's Ed. Bk. II, ch. IV. Pomeroy, Municipal Law, ch. 2.
By the feudal system the absolute ownership was in one person, a lord, or "landlord," while the use was in another
known as the tenant, to whom the possession, or, as it was called, the "seisin" was given.
In England the ultimate owner was the king. But in course of time the tenant further parcelled out the land in the same
way to his vassals, and these in turn, again, so that the actual occupiers and users of the soil might be many times
removed from the king in whom the true ownership theoretically existed.
The system was in its origin and early development entirely military. The lord allotted the lands in return for fealty and
service.
These allotments were known as "feoda, feuds, fiefs or fees." The holder of the feud was said to be enfeoffed.
The manner of enfeofment was as follows: First, the vassal established his homage to the lord. This was a ceremony in
which the vassal entered into submission to his lord and became his "man," saying apt words to that end. After
homage came an oath of fealty. Then came the transfer of the land.
This was done by conferring the present possession either by actual yielding of possession or by symbol. By the first
method the land was given over before witnesses, the tenant going upon the land and publicly taking possession. By
the second method a twig, piece of sod, or other symbol taken from the land was handed over in view of witnesses. No
method of conveying land to take effect in the future was known, From this practice, it came to be said that in the
conveyance of the fee by deed of feofment there must be livery of seisin.
The service which the vassal was to furnish was originally of military character and the system was purely military and
arose out of military needs. The vassal was under obligation to furnish military aid as his lord might call upon him. If a
vassal of the crown were called upon he could bring in a large array of his retainers to whom he in turn had granted
lands.
Blackstone says that fiefs were at first granted at the lord's will, but others doubt this, and assert they were granted for
life subject to fealty. In course of time they became inheritable.
At first the lord could not transfer his right of allegiance nor the tenant his land. But after a time the tenant was
permitted to alien the land. Rules of descent came to be established and it became the law that the descendants of the
tenant were to be his successors in the possession and ownership of the fee, but in order to keep this inheritance from
division, the eldest son was the particular descendant in whom the right vested. Thus arose the rule of primogeniture.
The incidents or consequences of the feudal estate were as follows:
(1) Escheats. If the vassal died leaving no heir, his estate would return to the lord, who owned it; also, by disloyalty the
estate escheated.
(2) Aids. Aids were payments of money made to the lord for certain purposes; to ransom his person; to pay the
expense of the knighting of the eldest son; to raise a marriage portion for the lord's daughter. These payments were
probably voluntary at first, but came later to be demanded as of right, and new causes of aids were invented until they
became a source of great burden. Magna Charta provided that no aids should be demanded except for the three
purposes mentioned.
(3) Reliefs. A relief was a sum of money to be paid by the heir upon coming of age and taking the inheritance. It was at
first an arbitrary sum and grew to be so burdensome that a law was passed to fix the amount payable.
(4) Primer Seisin. This was a sum payable to the king by the crown's vassals equal to the first year's profits when the
heir came into possession; it was in addition to the relief.
(5) Fines upon Alienation. A fine payable by the vassal to his lord upon the conveyance of the fee.
(6) Wardship. Where the tenant died before the heir was of age, the lord had the right to be guardian of the heir and
take the profits of the fee until he arrived of age. This was a very onerous incident.
(7) Marriage. A lord who had a female ward (the tenant having died before the heir was of age), could dispose of her in
marriage. If she would not accept the proffered husband she was liable to a heavy fine. This power was supposed to
be based on the right of the lord to have no one except his friends and supporters marry the female occupiers of the
fee.
These burdens became so great as not to be borne. By statute in the time of Charles II they were utterly abolished.
The relation which the tenant had to his lord was governed by the tenure or kind of holding by which the tenant held the
land. Tenures were very numerous, but were principally of three general kinds:
(1) The Military Tenure, whose incidents we have just mentioned, the services to be granted being of a military nature.
This is the true or proper feudal tenure.
(2) Tenures in Free Socage to which by statute all tenures were ultimately reduced. The services to be rendered were
not those of war, yet such as were not regarded as base in nature, as, to pay a sum as rent. These are not pure feudal
tenures, but are a natural development with the growth of society. These tenures had all the burdens as those above
mentioned except of wardship and marriage.
(3) Tenures in Villenage or Base Tenures. Tenures in villenage were tenures calling for what were then regarded as
base services, that is, menial duties. These tenants lived in villages near the lord's castle, and were called villeins.
There were two sorts of tenures in villenage, those in pure villenage in which the tenant must give all services called
for, and villenage in socage, in which the amount of the services he could be called upon to do was limited.
This was the system of feudalism so far as we may notice it here. It made great distinctions between real and personal
property which are preserved to some extent to-day. It made personal property subject to seizure for the ancestor's
debts, but not real property. This is not wholly true to-day, but the personal property of a deceased person is first
subject to the ancestor's debts, before the land can be taken. This is a remnant of the feudal system. So doubtless is
the rule that passes the real estate direct to the heir but puts the title to personal property in the executor or
administrator.

Sec. 12. The Tenure In American Law

Land in America is held allodially, that is, by all owners in equality without superior.
The fee (a term which we get from the feudal system), is in America held allodially. There is in theory no superior. An
owner can indeed rent his land for services to be rendered, but there is here nothing resembling the feudal system.
Land is not held of the government, and there is but one sort of tenure.

Sec. 13. History Of The Law Of Personal Property

As the age became commercial, personal property grew in importance and a large body of law concerning it
developed.
In the day of feudalism personal property was of little importance. The activities were those of war and agriculture. With
the dawn of our commercial age, personal property became of much importance and there are now more litigated
cases concerning personal property than concerning real property. A great portion of this law deals with sales.

Part II. Whether Certain Property Is Real Or Personal. Chapter 3. Things Annexed To The
Land, The Law Of Fixtures. A. The Manner Of Annexation

Sec. 14. Introductory

It has been seen that the term "land" comprehends not only the earth but things that are attached thereto. Popularly, as
well as technically, this is understood. When we speak of a person's "real estate" we mean his improved lands as well
as his vacant lots. An owner may, of course, at any time sever the attachments from the realty and thus make the
detached property personalty. But whether attachments to the real property are always and from all standpoints real
property, is a question that arises when there are conflicting interests involved based on the question whether property
is real or personal. A tenant of the land may at the end of the term remove from the land all his personal property - are
all the annexations made by him to the real property themselves real property or do they retain their character as
personalty? An owner who sells his real property may take therefrom his personal property - are all attachments made
by him a part of the realty which is included in the sale? What does a mortgage of real estate include? If a testator
gives his real estate to one son and his personal property to the other, does the first son take all that is annexed to the
realty? It is in ways of this character that the question arises whether property is or is not a part of the real estate. And
the subject involved is called the law of fixtures.
The word fixtures is employed in two senses: sometimes to indicate that the property described as a fixture can be
removed and sometimes to indicate that the property so described cannot be removed. In the latter sense it is perhaps
more frequently employed as when we say a certain article is a fixture and must go with the real estate; but it is used
also in the former sense, as when we say that a tenant can remove fixtures. We will avoid this difficulty by speaking of
annexations, and attempting to indicate when and for what purposes they are to be considered as part of the real
estate and when and for what purposes they are not.

Sec. 15. Annexation To Real Estate May Be Actual Or Constructive

Articles may be annexed to the real estate so as to become, for some purposes, real estate, by actual annexation and
by constructive annexation.
Ignoring for the present time, considerations that might prevail to make a specific annexation realty for some purposes,
but not realty for other purposes, we may notice that there may be incorporation into the real estate by actual fastening
to the real estate, or by constructive annexation.
Actual annexation consists in actually joining to the real estate, as by nailing shelving to a house, or imbedding posts in
the ground, or by installing a bathtub by attaching it to the plumbing system of the building.
But it can readily be seen that this circumstance of actual joining ought not to be always determinative. Things may be
as actually joined for permanent improvement purposes without any actual fastening as they may be with such actual
fastening. For instance, a rail fence which maintains its permanent position by mere weight, is obviously as much a
part of a farm as a fence consisting of boards nailed to posts sunk in the earth. It is apparent therefore, we must seek
some other test than that of actual joining to the real estate. It is true that actual joining by nailing, imbedding in the
ground, or otherwise, generally makes the article so affixed a part of the real estate (for certain purposes) but that, after
all, cannot be the true test, but obviously also it will generally be the evidence of the true test.
What is the test ? It is, in general language, the intention of the party making the annexation, that is, the intention the
law must impute to him (whether his actual intention or not) in annexing the article. What intention? The intention to
make the added article a permanent part of the place for its improvement as real estate, and that depends on (1) the
relationship of the party to the place, and (2) the character of the annexation. An owner's annexations are obviously
from a different motive than those of a tenant. But even a tenant cannot remove what he has added when the removal
would injure the freehold. In such a case we must presume he intended to make it permanent notwithstanding his own
transient interest.
As before stated, the annexation may be actual or constructive; for even though not actually nailed to, or screwed
down, or imbedded in, or otherwise actually joined, if an article is placed upon real estate with the intention (within the
test proposed in the above paragraph) of making it a permanent improvement thereof, it becomes a part thereof. There
are two well known cases of constructive annexation - one, where mere weight is the usual and practicable way of
making the addition for permanent purposes, the other, where removal is made at times without the intention of
permanent removal, as screens that are taken off for the winter season, or storm doors that are removed for the
summer season, or a part of a machine is removed for the substitution of another in the same place.
Generally speaking, a piece of furniture is not a fixture. But it may be one, as a bench that is built in, or a mirror that is
a part of the wall or door.
Generally also utensils are not a part of the real estate, but they may be, as some illustrations below will indicate.

Sec. 16. Annexations To Real Estate By The Owner Of The Real Estate
Whatever is constructively or actually attached to the real estate by the owner for the purpose of improving such real
estate in the use to which it is being put, becomes real estate, and on sale of the real estate by the owner without
reservation, the attached articles pass therewith as a part thereof, though not mentioned.
Real estate to be useful, must be improved, and the improvements add to its value. Whatever is put upon the real
estate by the owner thereof obviously to improve it as real estate, and not merely to furnish it, is deemed to be put
there to add to its efficiency and increase its value. True, the owner may remove at any time what he has attached, but
if the rights of purchasers intervene, he cannot remove. What is it that becomes real estate, so that it will pass by a
transfer of the land, unless reserved, even though the deed is to the land alone?

Things Annexed To The Land, The Law Of Fixtures. A. The Manner Of Annexation.
Continued
Clearly all buildings will pass, as will the fences, the pumps, the windmills, the walks and other improvements; as will
all things that are part of such things, as shutters and screens, although perhaps stored in the basement or attic.24 But
mere furniture will not pass, as an organ, yet if as in the case of a church an organ is a part of the general scheme of
architecture, it will pass.25 So chairs put in a theater for the purpose of seating the audience are a part of the theater
and pass with a sale thereof.26 As of course are the scenery, curtains and the like27
So if a manufacturing plant is sold, all will go therewith which is essential to its completeness as such plant 28 even
though not actually attached, or attached by mere weight, or out of place because a substitute is at the time in place
(as circular saws for use on the same shaft). But supplies for use in the factory, as for instance paper in a newspaper
plant, would not pass. The question is what articles have been added by way of permanent improvement, and what by
way of mere furniture, stock in trade, supplies, etc.?
Whether ice boxes, electric light fixtures, cooking ranges, and the like in dwelling houses become a part thereof seems
not uniformly established. It would seem that if they are an integral part of the building they ought to pass. It would
doubtless surprise the purchaser of an apartment building if it should be said that the seller could strip it of electric light
fixtures, gas ranges and ice boxes. And it is doubtful if it would be held that they could be removed. Thus ice boxes
have been held part of a flat building although not physically attached where one, was placed in each flat.29 So, the
New York Court (in a mechanic's lien case30) while saying inconsistently in one breath that "gas and electric fixtures,
as ordinarily attached to a house or other building for use, are in actions between grantor and grantee, landlord and
tenant and mortgagor and mortgagee, held to be personal property" immediately follows with the statement "we may,
however, take judicial notice of the fact that such fixtures often pass with real property bought or leased, and are unlike
articles of furniture, pictures, carpets and hangings, which are easily and customarily moved. They resemble rather
furnaces and ranges which are built in and left as a part of the property itself, passing with it from vendor to vendee
and from landlord to tenant."
24. Roderick v. Sanborn, 106 Me. 159, 76 Atl. 263.
25. Rogers v. Crow, 40 Mo. 91.
26. Gould v. Springer, 206 N. Y. 641, 99 N. E. 149.
27. Murray v. Bender, 125 Fed. 705.
28. Equitable Guarantee & Trust Company, 8 Del. Ch. 106, 67 Atl. 961.
This latter view certainly seems the sound one and consistent with custom and the understanding of sellers and
buyers.

Sec. 17. Annexations By Seller In Possession After Sale

The annexations of a seller who is in possession after the sale are to be regarded in the same way as those
annexations before the sale.
The same rule applies here as in the section above. The annexations of the former owner, unless he has a lease (in
which case he is to be considered as any ordinary tenant), become a part of the real estate and accrue to the new
owner.
29. Williams v. London, 115 N. Y. Suppl. 547.
30. Wahle-Phillips Co. v. Fitzgerald, 225 N. Y. 137, 121 N. E. 762 (1919).

Sec. 18. Annexations By Purchaser In Possession Under A Defeasible Title

A purchaser who goes into possession under a title that may revest in the seller is to be regarded as making
annexations for the permanent improvement of the land and if the title revests in the former owner the annexations
pass to him.
One who goes into possession under a defeasible title or under a contract of sale or under a conditional sale of any
sort whereby because of nonpayment of installments or other failure the title may revest is to be regarded as having a
permanent interest in the land and therefore his improvements are to be regarded as permanent ones, and the same
rule applies in his case as in the case of any owner, and the annexations will pass upon the defeasance of his title to
the former owner. Thus if A sells property to B under a contract of sale whereby B is to make twenty monthly payments
before he shall get a deed, articles annexed by B to the real estate become a part thereof and if B's title by reason of
his failure to keep up the installments revest in A, A gets the improvements.30a The same rule is true where title has
actually vested, subject to a condition that may defeat it.
Sec 19. ANNEXATIONS OF A MORTGAGOR IN POSSESSION. The same rule applies here as in the case of a
grantor as set out in section 16.
A mortgagor in possession is to be regarded as having a permanent interest in the land and his annexations become a
part of the security of the mortgagee and cannot be removed after attachment.
30a. Smith v. Moore, 26 111. 392.

Sec. 20. Annexations Of A Mortgagee In Possession

The annexations of a mortgagee in possession become a part of the real estate.
The same rule applies here as in the case of the grantor as described in section 16.

Sec. 21. Annexations By A Tenant

The annexations of a tenant for household or trade purposes do not become a part of the real estate unless attached in
an extensive manner so that their removal would seriously injure the real estate or destroy the identity of the thing
attached, but the fixtures must be removed during the term.
When we come to the case of a tenant we consider one who has only a passing right to the land and he is not to be
considered as permanently improving the real estate except as the extensive character of the annexation may show
that to be true. If a tenant erects permanent buildings upon the land, or fences, or plants trees, or puts up any
permanent structure, these are unquestionably a part of the real estate and therefore as soon as annexed belong to
the owner, subject to the lease, and cannot be removed by the tenant,31 but the articles which he attaches for
household, ornamental,32 or trade purposes33 can be removed by him even though they are screwed or nailed to
buildings, provided a severance of them is not difficult. If a tenant should equip a building with pipes extending through
the walls or should place panes of glass in the windows, or should build a porch to the house, he could not take any of
these down without the consent of the owner, but if he attaches brackets to the wall, towel hangers, etc., in the
bathroom, globes to the gas fixtures, or if in his shops he puts up pulleys, sets up printing presses or attaches any sort
of machinery not actually built in the place, he can remove them; so a nurseryman can remove trees planted by him for
nursery purposes, but not trees of other sorts. The same would be true of shrubs and bushes. The rule to apply in
every case is, that if the article is removable without seriously injuring the real estate at that place the tenant can
remove it, as it is not to be presumed that he put it there for permanent improvement.
31. Fletcher v. McMillan, 103 Mich. 494, 61 N. W. 791.
32. Raymond v. Strickland, 124 Ga. 304.
33. Pool's Case, Salk. (Eng.) 368; Ballard v. Alaska Theater Co., 93 Wash. 655, 161 Pac. 478.
The tenant must remove the fixtures during or immediately at the expiration of the term; he cannot afterwards come
back and claim the property left by him. The cases do not all agree as to whether he must remove during his term, or
immediately after the expiration thereof.
It has been held that a tenant loses the right to remove if he renews the lease.34 This is an essentially unjust rule and
has been changed or modified in some jurisdictions.
34. Chicago Sanitary District v. Cook, 167 111. 134.

Chapter 4. Increase Of The Earth

Sec. 22. This Term Defined

By increase of the earth we mean the product which grows thereupon either with or without man's assistance.
We are to consider in this chapter the character of those things which grow upon the earth. They may be broadly
defined into those things which reproduce themselves perennially and those things which are produced in yearly crops
by man's toil. Those fruits of the earth which grow without yearly planting, as vines, trees and grasses are called
fructus naturales. Those which are produced by man's toil are called fructus industriales.

Sec. 23. Character Of Trees, Vines, Etc

Those things which grow perennially as trees, vines, grasses and the like are real property for all purposes.
Trees except those planted for nursery purposes are a part of the real estate and to be considered as a part of the real
property for all purposes. This is true of vines, grasses, and the produce of every sort which is of a perennial nature.35
35. Owens v. Lewis, 46 Ind. 488. There is some authority that a contract of sale of standing trees is a sale of
personalty but in most jurisdictions, it is considered a sale of realty. Clearly a sale of logs or lumber is a sale of
personalty although the vendor may have to reduce growing timber into the lumber or logs in order to perform his
contract.

Sec. 24. Ownership Of Crops As Between Buyer And Seller Of Land

As between the buyer and seller of land, crops pass with the sale unless reserved.
Crops, whether they are mature or immature, pass with the sale of the land unless reserved at the time and the buyer
may claim them as a part of the real estate.36

Sec. 25. Ownership Of Crops As Between Mortgagor And Mortgagee

The mortgagor is entitled to the crops except upon default.
In the mortgage of the land the crops are to be considered as a part of the real estate. But it must be noticed that the
mortgagee has no right to the crops so long as the debt is immature and the mortgagor is in possession. The
mortgagee cannot claim the crops in any case even where default has occurred except to reduce the debt.37

Sec. 26. Ownership Of Crops Between Landlord And Tenant

The tenant is entitled to the crops except where he plants them to mature after the tenancy ceases.
A tenant is entitled to crops planted by him unless he plants crops to mature after his term is at an end. Where the
tenancy is of an indefinite duration the tenant cannot be deprived of the crops which he has been permitted by the
landlord to plant, by the landlord's termination of the tenancy.38
36. Firebaugh v. Divan, 207 111. 287.
37. Wooten v. White, 90 Md. 64.
38. Bittinger v. Baker, 29 Pa. St. 66.

Sec. 27. Crops Real Or Personal For Purposes Of Sale

Crops are considered as personal property for purposes of the sale of the crops.
Growing crops may be sold as personal property.29

Sec. 28. Crops, Real Or Personal, For Purposes Of Levy

Crops are personal property for the purpose of levy by an officer of the law under an execution.
Crops are to be considered as personalty for the purpose indicated.40
39. Davis v. McFarlane, 37 Cal. 634.
40. Polley v. Johnson, 32 Kan. 478.

Chapter 5. Water And Ice, Etc

Sec. 29. Character Of Water As Personal Or Real

Water is real property while in ponds, rivers, etc., but becomes personal property upon being piped out or bottled or in
any way separated from the soil.
The water in a pond or river or lake is not susceptible of ownership, in the sense that any particular particles thereof
can be permanently claimed, for water is a "movable, wandering thing"42 subject to evaporation, and passing from one
man's land to another, but in the sense that the rights to ponds and rivers pass with the real estate, the water which is
at any particular time on the property may be considered a part of the property. When water is bottled or carried away
in any manner it becomes personal property.

Sec. 30. Character Of Ice As Personal Or Real

Ice is to be considered as a part of the real estate unless cut therefrom, in which case it becomes personal property.
The ice on a man's land is real estate; being gathered, it becomes personal property.43
42. See quotation from Blackstone, on page 29, supra.
43. But it is held that ice while in its natural state may be sold as personal property. Higgins v. Custerer, 41 Mich. 318.

Sec. 31. Character Of Rocks, Stones, Etc

Rocks and stones whether imbedded in the soil or lying upon it in the natural position are a part of the real estate; but
being gathered they become personal property.
It is clear that rock, and stones are a part of the real estate, and pass with a sale thereof.44 Rock quarried out of the
land, would by becoming detached therefrom, lose its character as real estate.
44. Oil is a mineral and is real estate until it comes into a well. Nonamaker v. Amos, 73 Ohio St. 163.

Part III. The Acquisition Of Title To Personal. Property. Chapter 6. A. Acquisition by

Purchase

Sec. 32. In General

The title to personal property may be transferred by sale from one owner to another.
By the word "sale" we mean the transfer of ownership of personal property from one person to another for a
consideration called the price. By a contract to sell we mean a contract to make such a sale. When ownership passes
from one person to another, we say that title passes. There are a number of rules for determining when this title
passes, the two basic rules being that title to future goods and to unascertained goods cannot pass; and that when the
goods are ascertained, title passes according to the intention of the parties; there being a number of rules designed to
arrive at that intention. As a separate volume in this series is devoted to Sales of Personal Property, further discussion
is not made here.

B. Acquisition By Gift

Sec. 33. Gift Defined

A gift may be defined as a transfer of ownership of personal property without consideration.
A gift is a transfer without consideration. There may be a valid contract to make a sale, but none to make a gift, for if
we assume we have an enforceable contract our definition of a gift prevents us from calling this contract or any
execution or result of it, a gift. A gift is gratuitous, made as a favor and not as a duty. It becomes apparent then that a
gift must take effect at once and that there can be no executory contract to make a gift. Either title passes when the gift
is made or there is no gift.

Sec. 34. Gifts Are Inter Vivos Or Causa Mortis

Gifts may be described as those made between living persons or those made in contemplation of death, to take effect
upon death.
Most gifts are those between living persons, but a person may make a gift in contemplation of his impending death. We
call the former class of gifts those inter vivos and the latter class those causa mortis.45 There is an importance in
distinguishing between these two sorts of gifts because the gift inter vivos when finally made is irrevocable while a gift
causa mortis does not take effect if the giver recovers from what he thought, when he made the gift, was his last
illness. If a giver then desires to revoke a gift it might depend upon whether it were a gift inter vivos or causa mortis
whether he could do so. (Gifts by will are not discussed here.)

Sec. 35. Essential Elements Of A Gift Inter Vivos

In a gift inter vivos it is essential that possession be delivered to the donee with the purpose of at that time transferring
title.
As we have said there is no such thing as a contract to make a gift of personal property. In order to transfer by gift the
gift must actually be made; the giver must hand over the article with the intention and for the purpose of transferring
title at that time. It is not necessary that he make a manual delivery provided he does some act which may be regarded
as a symbolical delivery. Thus, if he should give an article in the warehouse it would be sufficient if he transferred the
warehouse receipt, or if he should give a trunk or the contents thereof it would be sufficient if he finally transferred the
key.46
45. Telford v. Patten, 144 111. 611.

Sec. 36. Irrevocability Of Gift Inter Vivos

An executed gift inter vivos is irrevocable.
Though there may be no enforceable agreement to make a gift, yet when a gift is actually made, it transfers as
complete a title as a sale or barter does. One who receives property by gift becomes the owner thereof, the giver has
parted with his rights thereto and no matter how much he may repent he cannot recover what he has given away. A gift
actually completed by final delivery is irrevocable.

Sec. 37. Essential Elements Of A Gift Causa Mortis

In a gift causa mortis there must be actual delivery; the giver must regard himself as in his last illness and must give
the property because of his impending death.
In the gift causa mortis the same elements in respect to transfer of possession with the intention of passing title must
be present. But to constitute a gift causa mortis as distinguished from one inter vivos, it must be made on account of
the death which the giver expects to soon ensue.47 As we have noticed, if a gift were really made because of death
and death does not ensue the article may be recovered and this is the reason for inquiry whether it was a gift causa
mortis. It must be borne in mind that in a gift causa mortis, the possession of the thing must be given over to the donee
as completely and finally as in a case of a gift inter vivos for if there is simply a promise to make a gift at death this
confers no rights to the article and if the statement is made that a person may have a certain article at death this gives
no rights unless the statement is made in a regularly executed will.
46. Marsh v. Fuller, 18 N. H. 366.
47. Telford v. Patten, supra.

Sec. 38. Rights Of Creditors Of The Giver In Respect To The Gift

A debtor who is insolvent cannot deprive his creditors of his assets by giving them away.
While a gift transfers as good title as a sale or barter, yet there is a phase of the law which we will notice here which
prevents the donee from getting a good title, as against the creditors of the giver, provided the giver is insolvent when
he makes the gift or by the gift brings on insolvency. In that case the creditors may, by appropriate judicial
proceedings, take the property from the person to whom it was given and this is no hardship upon him for he parted
with nothing on account of the gift and ought not to be enriched at the expense of the creditors of the giver.48

C. Acquisition By Finding

Sec. 39. Difference Between Lost Property And Mislaid Property

Lost property is that which has been dropped by the owner, while mislaid property is that which has been put in a
certain place and then forgotten.
We know what we mean in popular sense when we speak of a thing as having been "lost" and in such a sense this
term is often used to include property which was put in a certain place and its whereabouts then forgotten, but this in
the law is known as "mislaid" property as distinguished from lost property. To be lost, property must have accidentally
dropped.
48. See Subject of Bankruptcy in this Series.

Sec. 40. The Title Of A Finder Of Lost Property

One who finds lost property becomes the owner thereof as against all the world except the true owner.
One who finds personal property which has been lost by the owner becomes the owner against all the world except the
true owner no matter upon whose property the lost article was found. Thus, if A loses a diamond while walking over B's
land and C finds the diamond, C is the owner as against B and all the rest of the world except A and if A does not claim
the stone it becomes C's.49
An exception must be made to this rule in the case of chattels which are buried in or attached to the earth for this
becomes a part of the real estate and belongs to the owner of the soil. An exception to this exception was made in
early days in the case of "treasure-trove" which was gold, silver, or other coin or bullion or plate concealed in the earth
and this went, as in the case of lost property, to the finder if the owner was unknown. By an early statute this rule of the
common law was changed and treasure-trove vested in the crown but in this country it seems to be the law that
treasure-trove belongs to the finder.
49. Hanaker v. Blanchard, 90 Pa. St. 377. In this case a domestic servant found a roll of bills on the floor of a hotel.
Held: entitled to it against the owner of the hotel.

Sec. 41. The Title Of A Discoverer Of Mislaid Property

Mislaid property belongs to the owner of the place where it is mislaid as against the finder and all the rest of the world
except the true owner.
If A goes into B's shop and while there lays a book upon B's counter and then departs forgetting it and C comes in and
discovers the book, the title is in B as against C and all the rest of the world except A. As to A, B is bailee of the book
but if A never claims it B becomes the owner as to everyone. Thus the rule in case of mislaid property is different from
the rule in the case of lost property.50

D. Acquisition Of Title To Personal Property By Reduction To Ownership

Sec. 42. Property Without Ownership; Wild Animals, Etc

Animals of a wild nature and any property which has been abandoned by the former owner may be made the subject of
ownership by reduction to possession.
Property may be without any private ownership. In such a case it belongs to the sovereign as the representative of the
people. It does not belong to the sovereign in the sense that property does which is owned exclusively by the
sovereign. Thus, the state of Illinois may own property in the same sense that an individual may, but its ownership of
wild animals is of another nature, in this, that anyone may take the title by reduction to ownership. Any such animal can
become the subject of ownership by the one who so reduces him but animals of a wild nature remain the subject of
ownership only while they are confined or kept within the control of the capturer, or domesticated. If a wild animal
escapes or is allowed his liberty and not recaptured, he becomes again without ownership except by the state. It is also
true that the state for the benefit of the people may make such rules concerning hunting or killing wild animals as it
deems expedient.
50. Kincaid v. Eaton, 98 Mass. 139. In this case money was left in a bank and discovered by a customer. Held, bank
legal custodian thereof as against discoverer.
If one is a trespasser upon the land of another he cannot reduce to his possession the wild animals upon that land.51
One acquires title to fish in the same way that he acquires it to other wild animals. One cannot fish in the waters
belonging to another but he may fish in public waters except that the abutting owner has the exclusive right to the
shore above high water mark. For example, any one may fish in the Great Lakes but may not trespass upon the land of
riparian owners, in order to do so.52

E. Acquisition Of Title To Personal Property By Confusion And Accession

Sec. 43. Confusion Defined

Confusion consists in the mixture of goods belonging to different persons so that the property of each cannot be
identified from that of the others.53
We now consider the case of property which becomes commingled with the goods of another so that it is impossible to
separate the property into the original masses.
51. State v. Repp, 104 la. 305.
52. Cortelyou v. Van Brundt, 2 Johns (N. Y.) 357.
53. Hesseltine v. Stockwell, 30 Me. 237.
The question then arises: to whom do the goods belong ? The mixture might be either innocent or wrongful.
Sec. 44. The Title Acquired By Confusion
If confusion is wrongful it seems to be the law that the title of the wrongful doer is lost and the mass belongs to the
other party. If the confusion is innocent or by accident each one owns his proportional part and the former owners are
owners in common.
The law on the subject of confusion is itself in confusion and the cases have been decided differently, but it seems to
be the weight of authority, however, that if goods are wrongfully mixed with the goods of another, the wrongdoer loses
his title, especially if the value of his goods is less than the value of the other goods and the same rule seems to apply
in the case of one who is merely negligent.54 It is necessary in these cases in order to have this result, that the goods
cannot be separated, for if the mixer can prove the identity of his own goods he does not lose ownership in them.
Where the mixture is innocent then if both parties are responsible they become tenants in common; if wholly due to
one party's act the courts will make equitable distribution.

Sec. 45. Accession Defined

Title by accession is that title which one gains because the property of another is incorporated with his own, or
because he has changed the character of another's property by the bestowal of his labor thereupon.
In confusion we have a mixture of similar masses, the character of the new mass thus formed remaining un54. Stone
v. Marshall Oil Co., 208 Pa. St. 285.
changed, and remaining capable of separation into the original masses by mere division; in accession we have the
incorporation of one person's property with the property of another so that the separation into the original masses
becomes either impossible or at least a matter of tearing down, or we have a change in the character of one's property
by the labor of another. We assume also that there is no contract or understanding between the parties as to the result.
Thus one without another's consent, either with wrong motive or innocently, uses that other's boards in his carriage, or
makes that other's clay into bricks, or in making wine uses his own and another's grapes. What of the resultant title?

Sec. 46. The Title Acquired By Accession

Where accession is innocent the weight of authority seems to be that the owner of the property may follow it and retake
it so long as he can identify it but where the accession is wrongful he may retake it together with the articles to which it
is added and together with the value of the services which have been bestowed upon it.
The subject of accession like that of confusion is not entirely clear,55 the cases not being as numerous as might be
expected and the authorities being in conflict. It is therefore hard to lay down the rules. It seems, however, that the law
may be generally stated about as follows: That if the accession of goods to other's goods has been wrongful the party
who has made the addition or bestowed the labor will lose the property and has no right of compensation for his labor,
while if the accession is innocent and there has been no loss of identity, the original owner may follow the property, but
must make reimbursement for the labor bestowed or additional value. In this case it is necessary that the property do
not lose its identity by the accession. It is difficult to state at what point the article loses its identity. Turning wood into
lumber, grain into whiskey, and similar changes have been held not enough to destroy identity. Where the accession is
wrongful but the increase in value is very great it is doubtful if the original owner would acquire the right to the new
article unless it was a deliberate case of theft or malice. Where the article innocently taken does lose its identity, then
all the former owner has is a right to recover its value when it was taken.
55. Lampton v. Preston, 1 J. J. Marsh, 454.
The authorities are in conflict when it comes to illustrations. Does cloth made into a coat lose its identity? Milk made
into cheese? Grain made into malt? Clay made into brick? The authorities are in conflict. In reference to title by
confusion, one judge says, "Few subjects in the law are less familiar, or more obscure than that which relates to the
confusion of property." 56 In reference to accession, one court says: "There is therefor no definite settled rule on the
question."57
56. Rider v. Hathaway, 21 Pick. (Mass.) 298.
57. Lampton v. Preston, supra.

Part IV. Estates In Real Property. Chapter 7. Classification Of Estates In Real Property

Sec. 47. General Statement

An estate in land is that duration of ownership which one has therein.
A person may own property absolutely or own a limited estate therein. There are many estates. From the following
section and the chapters just following we may gain a clear conception of the meaning of this term.

Sec. 48. A Tabulation Of Estates

Estates may be tabulated as follows:
A. Present Estates.
I. Freehold Estates.
(1) Estates in fee, that is, estates without limitation in time.
1. Fee simple estates, being estates that upon death of the owner without a will go to his heirs generally.
2. Estates in fee tail, being estates that went on down perpetually to a class of heirs. 66
(2) Life estates.
1. Conventional life estates.
a. Estates for one's own life.
b. Estates for the life of another.
2. Legal life estates.
a. Estates of dower.
b. Estates of curtesy. II. Estates Less Than Freehold.
(1) Estates for years.
(2) Estates from year to year.
(3) Estates at will and by sufferance.
B. Future Estates.
I. Estates in Remainder.
(1) Vested remainders.
(2) Contingent remainders. II. Estates in Reversion.
This table is not strictly logical as the future estates in reversion and remainder are also to be classed as estates in fee
simple. But it is the table usually employed and fairly indicates the various legal estates. In subsequent chapters we
discuss all of these estates.
A freehold estate may be defined as any estate which may last a life time and may be of inheritance. Life estates and
estates in fee, are freehold estates.
Any estate less than the fee and less than a life state, is called an estate less than freehold. A lease for 99 years is less
than freehold.

Chapter 8. Estates In Fee

Sec. 49. The Fee Simple Defined

"Tenant in fee simple (or as he is frequently styled, tenant in fee) is he that hath lands, tenements or hereditaments to
hold to him and his heirs forever, generally, absolutely and simply, without mentioning what heirs, but referring that to
his own pleasure, or the disposition of the law."
The above definition is that of Blackstone (Book II, Ch. 7, p. 104). A fee simple estate is an estate unlimited in time,
that is to say, an estate which one holds absolutely, to do with as he pleases (within the law) and which being
undisposed of by him at his death goes to his heirs generally, as named by the law. We say that A owns a lot in
Chicago; we mean thereby that he owns it in fee simple; that he is not merely a lessee; that he is not merely an owner
for life, the real ownership being in another ; but that it is his forever, and that he may sell the entire interest in the land
or dispose of it by will. We say that he holds it to himself and his heirs, meaning that no other person except his heirs
may claim it if he dies having not disposed of it by deed, will or otherwise; that B cannot claim as remainderman; that C
cannot claim it as reversioner, but that X, Y, and Z, A's heirs, can claim it because it was real estate that belonged to A,
whom they succeed. The fee to all privately owned land, must be in some one - the party to whom or to whose heirs it
must ultimately come. Thus the lot owned by A, may be rented to B, or C may have a life estate therein, but A owns the
fee. As owner of the fee he may sell it to M, who then becomes the owner of the fee, subject to the briefer estates that
may be held therein.

Sec. 50. History Of The Estate In Fee Simple

The fee simple estate was originally the estate which was enfeoffed under the feudal system, in return for service or
rent to the lord who allotted it, and was distinguished from lands held allodially, that is, without superior.
The term "fee" comes to us from feudalism, meaning the same as feud or fief, which we have heretofore described,
being that estate which one had of a superior, and for which he was bound in fealty and must render a service or a
rent, which land as we have seen, came ultimately to pass to the feoffee's heirs. But now we simply mean land held
absolutely, that land in which one has the highest estate possible in the law - the ultimate ownership.

Sec. 51. Words Necessary To Create Fee

At common law the word heirs was necessary to create a fee but this has been changed by statute in many states.
By the common law in the creation of a fee simple it was necessary to use the word "heirs." Thus a fee was created by
conveying to "A and his heirs," for if one conveyed simply to A, A took a life estate with reversion of the fee to the
grantor. By statute this has generally been changed so that a deed to A by one owning the fee vests the ownership of
fee in A and the word heirs is not necessary and frequently not used.
Sec. 52. The Rule In Shelley's Case
The rule in Shelley's case was a rule of the common law, still in force in many states, and abolished in others, that if, in
any gift or conveyance, a freehold estate was disposed of to a person with remainder to his heirs in fee or in tail, the
word "heirs" was used not to give the heirs any estate therein, but to describe the first taker's estate as one in fee or in
fee tail as the case might be.
One of the most famous cases in judicial history is that of Shelley's Case,58 which set forth a rule to be henceforth
called by the name of that case ("the Rule in Shelley's Case"), although it had been the rule prior to that time. Suppose
that A, by will or deed, gives or transfers property to B with remainder to B's "heirs." Now if A had transferred "to B for
life with remainder to B's son C," B would take a life estate and C would take the balance of the fee, i. e., C would be
the owner of the fee subject to B's life estate. But if the phraseology was to B for life with remainder to B's heirs, B
would (by the Rule in Shelley's Case) take the entire fee. There are a number of explanations given for this. We have
already considered that an estate given to B and his heirs, created a fee simple in B, and the heirs could claim nothing
after B's death by virtue of this language, if A in his life time had divested himself by deed or will, or been divested, of
the fee. The word "heirs" in that case described, and was necessary to describe, B's estate. Now, if the language is to
B, for life, with remainder to B's heirs, the effect, by the operation of the rule in Shelley's Case is to make the legal
result the same as though the conveyance or gift had been simply to B and his heirs. B gets the entire estate and the
heirs get nothing, save as they may take as B's heirs. B, owning the fee may transfer it and the heirs cannot complain.
58. 1 Coke, Rep. 93.
The rule is said to be a "rule of property," that being meant to indicate that it will operate even if it defeats the grantor's
intention, even if he should say in the instrument that he intended the rule not to operate.
A reason frequently given for the rule is that it is "to obviate the mischief of too frequently putting the inheritance in
abeyance or suspense and that it is founded somewhat upon a desire to facilitate the alienation of land, and to throw it
into the track of commerce one generation sooner, by vesting the inheritance in the "ancestor [the first taker] than if he
continued as a tenant for life [only]."
A case setting forth, at considerable length, the history of, and reasons for the rule, and adopting it, and containing a
dissenting opinion which is in favor of getting rid of the rule in Shelley's Case "and other debris from past ages and
primitive conditions," is that of Doyle v. Andis, 127 la. 36, 102 N. W. 177, 69 L. R. A. 953, to which the reader is
referred for extensive discussion. In that case Robert Andis conveyed the land in question to Samuel S. Andis "during
his natural life, and then to his heirs." Now this language to one unacquainted with this rule would naturally mean that
Samuel Andis got a life estate only. But Samuel Andis, believing that he had the entire fee, purported to convey the
same by deed. After Samuel Andis death, the heirs of Samuel Andis claimed the land asserting that Samuel did not
have the fee to convey, but only a life estate, and the deed was therefore inoperative to convey the fee, and that they
took under the deed from Robert. But the court held the Rule in Shelley's case gave Samuel the entire fee and that the
heirs had no case.
The rule applies both to legal and equitable estates, and whether the transfer was by will or deed.
The rule does not apply unless the word "heirs" is used, at least some synonym therewith. Generally, a conveyance to
B for life with remainder to his children, would give B a life estate and the children the remainder, which B could not by
deed, will, or otherwise, deprive them of, for they have the estate from A and not from B, but merely subject to B's life
estate.
By statute in many states (at least twenty-seven) the rule has been abolished, but is in force in many in all its ancient
strictness.
Estates In Fee. Continued

Sec. 53. Qualified And Base Fee Simples

A qualified or base fee simple is a fee upon condition or subject to a qualification.
It is possible to hold a fee and yet hold it in a qualified or conditional way as where land is granted to A and his heirs as
long as they shall continue to occupy it, or so long as A shall remain unmarried. In the latter case, if A never marries,
the qualified fee passes into an absolute one, and A's heirs have the fee simple.

Sec. 54. Fee Tails

A fee tail is an estate which one has under a conveyance or gift to him (the tenant in tail) and a particular class of his
heirs. It is not known in this country.
An interesting chapter in the English law of estate is that concerning "fee-tails," which we do not have in this country.
If there was a gift or conveyance to a person and a certain class of his heirs (not to him and his heirs generally) as for
instance to "John Doe and the heirs male of his body," this would mean, if effectual, to his lineal male descendants,
and so perpetually down that line of descent so long as he should have posterity. But the courts in very early times
gave a construction to such gift or conveyance as follows: They determined that such an estate was a gift to John on
condition that he have male issue, otherwise to revert to the grantor. If he did have issue (male in the case supposed)
they said that he had performed the condition, and therefore took an absolute estate in fee which he could sell;
although if he did not sell the same, the land would go to the person or persons coming within the class of heirs
designated, or if they had not outlived the first taker (John Doe), would revert to the grantor or his heirs. Therefore, in
order to defeat this possibility of reversion, John Doe in the case supposed would sell the land as soon as he had
issue, and then would buy it back again and have an estate in fee simple absolute. Thus, by this artificial mode of
reasoning the happening of the very condition which would logically vest in the heirs male of his body an estate, was
made to defeat it, and the motive underlying such reasoning was to evade the "inconveniences which attended these
limited and fettered inheritances." Such limited and fettered inheritances were, however, favored by the nobility and the
above construction not favorably received by them and they therefore procured the passage of a statute called the
statute de donis (concerning gifts) which enacted that the will of the donor should be observed and wiped out the
fictitious reasoning above outlined. By virtue of this statute the gift above illustrated (to John Doe and the heirs male of
his body) divided the fee into two parts one called a tenancy in tail which was John Doe's life estate; the other part of
which, the rest of the fee, was to go to the class of heirs named, and on down forever in that class of heirs, subject to
reversion to the donor or his heirs upon failure of such class. This was called entailment of estates and took the land
out of commerce. It resulted in rendering prevalent many evils, which the courts prior to de donis had avoided by the
construction described. "Children grew disobedient when they knew they could not be set aside; farmers were ousted
of their leases made by tenants in tail; * * * creditors were defrauded of their debts; for if tenant in tail could have
charged his estate with their payment, he might also have defeated his issue, by mortgaging it for as much as it was
worth; innumerable latent [hidden] entails were produced to deprive purchasers of lands they had fairly bought; * * *
and treasons were encouraged; as estates tail were not liable to forfeiture longer than the tenant's life." 59 It would be
considered sufficient evil in our day that the land was taken out of commerce. This statute continued in all its force for
two centuries, when the courts applied a method of defeating fee tails, and this was by the invention of fictitious suits at
law known as common recoveries, which Blackstone describes as a kind of pious fraud. And by this process and other
development of the law, estates tail were practically made obsolete and the statute de donis overcome.
In the creation of an estate tail, the word "heirs" had to be used; the gift being to a certain class of heirs. If to John Doe
and after his death to his son William and his heirs, John would have a life estate, and William the fee simple subject to
such life estate. To constitute an estate tail there had to be a gift to a class of heirs, even though in fact only one
person made up that class.
In this country various statutes have been enacted to govern a gift which at common law would have created an estate
tail, as that he who would have been tenant in tail shall have a life estate, the heir in tail taking a fee simple, and some
have enacted that language that would have created a fee tail shall give the tenant in tail a fee simple.
59. Blackstone, Book II, p. 116.

Chapter 9. The Life Estates Of Dower And Curtesy

Sec. 55. Dower Defined

Dower is a life estate which a widow has in one-third of the lands of which the husband was seized during coverture.
The estate of dower is often misunderstood. Many persons think it to be a portion of the husband's lands which the wife
inherits at his death. But this is a misapprehension. Dower is that estate which the wife has in those lands of which the
husband was seized during coverture, and that estate is defined by the law to be a life estate in one-third of all such
lands. There is no estate of dower unless the wife outlives the husband and if she does outlive him the value of her
estate depends on her age at his death. If the husband dies leaving a wife of eighty years of age, the likelihood is that
the wife will not long survive and her dower estate is consequently of small value. A dower estate may be perhaps
better understood if we liken it to an estate for one year. When the year passes, the estate is gone and the fee is clear
thereof. An estate in dower differs from an estate inherited, because the inheritance goes to one absolutely to descend
to one's heirs or be disposed of as one chooses. But an estate by dower cannot go to one's heirs because it ceases
with one's life; it cannot be willed for the same reason; it cannot be sold except as one may dispose of any life estate.
In some states a wife inherits real estate under certain conditions (as where there are no children) and in that case the
estate so inherited goes to the wife in fee, as her absolute property, to be disposed of as she sees fit, and to descend
to her heirs at her death. Thus in Illinois, if a man dies without children, the wife inherits one-half his real estate; in the
other half she has dower. The one-half she may convey in fee by deed; it goes to her heirs upon her death; her estate
is worth what the property is worth; though she is ninety years of age she may sell the property at its market value; but
her dower is in that case well nigh worthless, for it expires with her.
Dower is of one-third the husband's lands. It really amounts to this: that she is entitled to one-third the rents and profits
of all his lands during her life; or all the rents and profits of one-third his lands.
Dower is a one-third interest in all the lands of which the husband was seized during coverture, that is, all the lands
owned by him in fee, to which he had title, or to which he was entitled to possession during marriage. It is, therefore,
the practice for a wife to release her dower in land sold by the husband, so that it passes free of this burden, that is, the
possibility of her having an estate in it by surviving her husband.
Dower arises as a legal result. Therefore the wife has dower though not named in a deed to her husband. Naming her
as a joint grantee would not give her dower but joint or common ownership. Therefore, she would not be named,
unless she is to be indeed a co-owner.
Before the husband's death, the wife is said to have inchoate dower, that is, possible dower, in case she outlives her
husband.
The essentials of dower are: marriage; seisin by husband; death of husband; survival of wife.60
60. Id., Book II, 129.
Sec. 56. Waiver And Bar Of Dower
Dower is waived by proper execution and acknowledgment according to local statutes and is barred by divorce of the
wife for her fault.
The wife may release her inchoate dower in her husband's lands by joining with him in a sale thereof, and following the
provisions of the statute in that regard. In some states she simply joins in the deed and the acknowledgment thereof; in
some she must be taken from the presence of the husband and there questioned whether it is her free act and deed.
This matter is purely statutory and the state statutes must be consulted.
The laws usually provide also that if the husband divorces the wife (she being in fault), she shall thereby lose her
dower.

Sec. 57. Assignment Of Dower

After the husband's death the wife is entitled to have her dower set off to her, or valued and its value paid her.
The wife, after her husband's death, may have assignment of dower. She may have one-third of the land set off to her,
or the value of the dower paid her. There are tables of expectancy of life, by which the value of her dower is measured.

Sec. 58. Curtesy Defined; Elements Thereof

Curtesy is the estate which the husband has for life after his wife's death in all the lands whereof the wife was seized
during coverture, provided a child was born by the marriage.
Curtesy was the life estate of a surviving husband in his wife's lands. These were the elements thereof: (1)
Marriage, (2) Birth of child (not necessary to dower) ; (3) Seisin of lands by the wife; (4) Death of wife; (5) Survival of
husband.61
Curtesy, like dower, is merely a life estate. By some statutes, curtesy is abolished, and a husband given an estate
corresponding to that of the wife.
61. Id., Book II, p. 127.

Chapter 10. Conventional Life Estates

Sec. 59. Definition

A conventional life estate is an estate created by deed or will, and may be for the tenant's own life or the life of another.
An estate by dower or curtesy is a life estate arising by operation of law. Mere ownership by one spouse creates the
estate in the other spouse, upon survival of such other spouse, and the owner of the fee cannot defeat dower of
curtesy. A conventional life estate is one created by deed or will, more frequently by will, as where A gives lands to B
for life and after B's death to C. We have already seen that a conveyance or gift to B and his heirs does not give B a
life estate, but gives the entire estate to B. Also we have seen that under modern law (therein differing from the ancient
law) a gift or conveyance to B without use of word heirs gives B the entire estate.
The life estate may be one's own life or for the life of another (per auter vie).
A life estate is one that is measured strictly by a person's life. A lease for 99 years, is not a life estate, as it is not
coterminous with any life.
Sec. 60. Right Of Life Tenant To Enjoyment Of Estate
A life tenant has a right to the possession and enjoyment of the estate, but must not permanently diminish it in value,
and must give it the care of a prudent owner.
The life tenant may enter upon and enjoy the property in which he has the estate, and is entitled to the rents and profits
thereof. His rights and liabilities are set forth further below.

Sec. 61. Liability For Waste

A tenant for life is liable for waste, unless he holds under a gift or conveyance permitting him to commit waste, and
even then, he must not commit malicious or unreasonable waste.
Waste is a word used in real estate law to indicate diminution of value of the estate, or substantial change in its
character. If an estate is granted to A for life with remainder to B in fee, it is a very vital question to B how far A may go
in his use of the estate or his neglect of it.
Waste is said to be voluntary or permissive. Voluntary waste is waste that is committed by affirmative act by tearing
down buildings or cutting down trees. Permissive waste is waste permitted by neglect. The tenant for life must be guilty
of neither.
What acts constitute voluntary waste? The tenant for life is entitled to the fair use of the estate. He may use what wood
he needs out of the timber for fire wood and for necessary repairs, but he cannot clear the timber merely for purposes
of gain. However, in the United States, he may cut timber where his purpose is that of good husbandry and his act is in
fact good husbandry according to the customs of the community and the actual needs of his estate. This is a question
of fact for the jury.62
The old common law rule was that to change the character of buildings was waste, even though beneficial to the
estate, as the remainderman had the right to have the estate come to him unchanged, but this strict rule has been
modified in the United States, and more liberal views prevail.
62. Mooers v. Waite, 3 Wend. (N. Y.) 104.
Tenants for life are sometimes "unimpeachable for waste" under the terms of the will or deed. In such a case, however,
they must not wantonly or maliciously or unreasonably commit waste (as for instance cutting down shade trees), and a
court of equity will prevent such waste. Such waste is therefore known as "equitable waste."
The commission of waste may be prevented by injunction and damages for past waste may be obtained.

Sec. 62. Right To Rents

Under the common law a life tenant was entitled to rents falling due during his tenancy, but rent falling due thereafter
belonged to the remainderman, and could not be apportioned between the two estates.
By the rule of the common law rent was deemed not apportionable. If A were life tenant, and B remainderman, and A
died just before rent was due from C, the rent would pass to B, and not to A's executor, and there could be no
apportionment between A's estate and B.63 This rule has been changed in some states which permit apportionment.

Sec. 63. Increase In The Estate

As between life tenant and remainderman, the general rule is increase in substance or value of the estate, belongs to
the tenant for life, if it be by way of income, and to the remainderman if it be by way of increase in the corpus.
The life tenant is entitled to income; he is not entitled to the corpus, as he has but a life estate therein. There63. Perry
v. Aldrich, 13 N. H. 343.
fore, the general rule is that whether he is entitled to any increase depends upon whether it is income or accretion to
corpus. Thus he may have the interest on bonds, and such interest will be apportioned if he die before it is due,64 but
he is not entitled to increase in the value of the bonds.65
As to the right of the tenant to dividends on stock there is some divergence of view. Dividends that are ordinary cash
dividends are income and go to a life tenant,66 but the authorities differ in the case of extraordinary or stock dividends,
some holding that stock dividends go to the remainderman and not to the tenant for life (or his executor)67 and some
holding that there should be apportionment of such dividends.68

Sec. 64. Liability Of Estate Of Life Tenant For Taxes, Assessments, Etc
A life tenant must pay the general taxes and special assessments for temporary improvements, but assessments for
permanent improvements are to be distributed equitably between the life estate and the remainder.
General taxes are clearly an expense of upkeep which the life tenant must bear.69 So, for assessments for temporary
improvements.70 But special assessments for permanent improvements, as for paving, are for the benefit of the
remainderman and also the life tenant and ought to be
64. Dexter v. Phillips, 121 Mass. 178.
65. Note, L. R. A. 1915 C. 853.
66. Note, 50 L. R. A. N. S. 514.
67. Gibbons v. Mahon, 136 U. S. 549.
68. Note, 12 L. R. A. N. S. 801; 50 L. R. A. N. S. 515.
69. Huston v. Tribbetts, 171 111. 547, 49 N. E. 711, 41 L. R. A. 32s.
70. Id.
apportioned.71 The rules for the division are not in entire accord, one being apportionment on the basis of the
respective values, and one on the basis of interest during the life of the life tenant, and principal by the
remainderman.72

Sec. 65. Liability Of Life Tenant For In-Terest And Principal Of Encumbrances
A life tenant must pay the interest on mortgages, but the remainderman must pay the principal.
A tenant for life must obviously pay the interest on encumbrances, for he has the income. But payment of the principal
is obviously a deduction from the corpus. Therefore if to preserve the estate the tenant pays a mortgage, he is entitled
to be re-imbursed.73
71. Id.
72. 10 L. R. A. N. S. 345, note. 73. 29 L. R. A. N. S. 154. note.

Chapter 11. Estates Less Than Freehold. Landlord And Tenant

Sec. 66. Introductory

In this chapter we will consider the estates less than freehold, and that subject involves a consideration of the rights of
landlord and tenant.
The estates which are less than freehold usually (though not necessarily) involve the relationship of landlord and
tenant, as those terms are used in modern law (for in one sense the owner of any estate in land, including the fee, is a
tenant). We will therefore consider some phases of the modern law of landlord and tenant.

Sec. 67. Estates Less Than Freehold Described

The estates less than freehold are those for years, from year to year, and at will or by sufferance.
An estate for years is any estate for a definite period of time as one year or ten years or ninety-nine years. An estate
for less than a year if of a definite duration is, technically, an estate for years.
An estate from year to year is an estate running by periods of a year, and is terminable by either party by proper notice
at the end of any year. An estate from quarter to quarter or month to month is an estate similar to an estate from year
to year. These estates are called periodic tenancies, to indicate that they run by periods.
An estate at will is an estate terminable at the will of either party at any time, without any special notice.
An estate at sufferance is an estate by the mere sufferance of the landlord. It is an unusual estate and is very similar to
the estate at will, except that it is technically used to indicate certain unusual situations.

Sec. 68. How Periodic Tenancies Are Created

Periodic tenancies may be created by agreement or by holding over by the tenant after an estate for years has expired.
A periodic tenancy (e. g., from year to year) may arise from the agreement of the parties that it shall run by periods
until terminated by notice. Thus an estate from month to month often arises under an agreement that the tenancy shall
be from month to month, that is, not for one month, but indefinitely by the month. But periodic tenancies also arise
where the tenant having a tenancy for a certain length of time, holds over. In that case he holds by periods according
to the period of an original letting. Thus if a tenant for a month holds over he becomes a tenant from month to month.
So, if he holds for a year, by holding over, he becomes a tenant for another year, and from year to year.
It is the law that where a tenant holds over after his term has expired, the landlord may treat him as a tenant for
another like period or may treat him as a trespasser.74 He must, however, treat him as one or the other, and having
made his election he is bound thereby and this election may be shown by act as well as by words. Thus receiving rent
or in any way treating the hold-over tenant as a tenant, shows an election upon which the landlord is bound and the
tenant may then claim a tenancy for the year.
74. Goldsbrough v. Gable, 140 111. 269.
In holding over, the intent of the tenant is immaterial. He holds over at the risk of the landlord electing to hold him as
tenant for the period ensuing, or a trespasser.
The tenancy thus created goes on upon the same terms as the former tenancy. Thus, if a tenant should hold over and
should be recognized as a tenant, the landlord could not raise the rent, any more than he could have done so during
the first year.
What is true in respect to holding over in tenancies for a year is true in respect to tenancies for a month.
Periodic tenancies also arise out of tenancies at will, as the tendency of such tenancies is to become periodic, as
where one rents a residence for no stated time and afterwards it is by payment of rent or otherwise treated as a
periodic tenancy. This would be evidence that it had become such.
Sec. 69. The Contract Of Letting - The Written Lease
The letting may be oral or in writing. But oral tenancies for more than one year are not enforceable unless in writing
signed by the party sought to be charged. A lease is a written document setting out the fact the letting, and all the
terms in reference thereto.
The contract of letting may be oral. If a longer period than one year or if it shall expire more than one year from the
date of the making it is within the statute of frauds, and therefore unenforceable unless in writing and signed by the
party sought to be charged. But tenancies from year to year are enforceable without any writing.
Where the contract of letting is drawn up in regular form the writing is called a lease. See a form in the appendix. This
lease states the rent reserved, the terms of the tenancy, etc., and is usually more favorable to the landlord than to the
tenant because provided by and drawn in the interests of the landlord.
The lease, except as we have shown, is not necessary, but desirable, and its provisions constitute the contract.

Sec. 70. The Rent

Rent is the compensation provided for the use of the premises by the tenant.
The rent is that which is agreed upon as payable by the tenant to the landlord for the use of the premises. It may be in
money or produce. Farms are sometimes rented "on shares." Rent is usually stated to be an entire sum for the period,
payable in monthly installments. It is usually also payable in advance by the terms of the lease. Otherwise it is not
payable in advance.

Sec. 71. Defenses To Payment Of Rent-Eviction By Landlord

The tenant must pay the rent so long as he occupies the premises as a tenant, even though the landlord is not fulfilling
his obligation. But if the tenant is forced to move because of the landlord's default, or is actually ousted from all or a
part of the premises, the tenant's obligation to pay rent ceases.
The covenant of the tenant to pay rent is independent of the covenants of the landlord in respect to the care of the
premises. The tenant cannot hold back the rent for the landlord's neglect to repair, to furnish the proper amount of
heat, etc., so long as the tenant continues to occupy the premises. The tenant's remedy is to make the repairs himself
and charge the landlord, or, where he suffers damages attributable to the landlord, to sue for such damages.
Where the tenant is evctied, his obligation to pay rent-ceases. Eviction is of two sorts, actual and constructive.
and in either case the defense is good. Actual eviction is the actual ouster of the tenant by the landlord from the
premises by force. In case the tenant is thus ousted from only a part of the premises, he may continue to occupy the
rest without any obligation to pay rent or any part thereof. Thus if he rents a flat containing seven rooms and the
landlord enters without leave and occupies one of the rooms, the tenant is under no obligation to pay rent until the
landlord's occupation ceases. This is actual eviction, and might, of course, extend to the whole of the premises.
Constructive eviction exists where the landlord does an act or pursues a course of conduct which justifies the tenant in
leaving the premises and on account of which he does actually leave the premises, as where the landlord is under
obligation to furnish heat and fails to do so in sufficient temperature. Here the tenant may abandon the premises on the
theory that the landlord has evicted him; but until he does abandon the premises, he cannot refuse to pay rent. As long
as one does actually occupy premises he must pay rent, though indeed he might have counterclaims against the
landlord. And in leaving the premises, the tenant must be sure that the conduct of the landlord is such as to justify him
doing so. In constructive eviction, then, there must be actual abandonment of all the premises.75
Estates Less Than Freehold. Landlord And Tenant. Continued

Sec. 72. Duty Of Landlord In Respect To Condition And Care Of Premises

The landlord is under no duty to furnish the premises fit for any particular purpose; and is under no duty in respect to
the care of the premises except as he may have particularly undertaken their care; but is responsible for harm from
hidden defects of whose existence he knows or should know.
75. Boreel v. Lawton, 00 N. Y. 293.
A tenant is presumed to have inspected the premises before he rents them, and therefore cannot complain of their
condition in respect to the purposes for which he intends to use them. The landlord does not impliedly warrant them fit
for any particular purpose.76 Of course he may especially do so. So the landlord is under no duty to give the premises
any special care.
Where the landlord retains a portion of the premises as he does where he remains in control of the halls, roofs,
basements, etc., of apartment houses, he must keep these in such a condition that the rented portions are habitable.77
A landlord is liable for damages caused by hidden defects on account of which the tenant is injured, provided the
landlord knew, or in the exercise of reasonable care, should have known, of their existence. And he is liable, as we
said, to use care in the keeping of such portions of the premises as he may have kept under his control, as halls, etc.,
which is the case in flat buildings, office buildings and the like.

Sec. 73. Duty Of The Tenant In Respect To Condition And Care Of Premises
The tenant is bound to return the premises in the same condition in which he received them, reasonable wear and tear
and causes over which he had no control excepted.
The tenant must use a fair degree of care to keep up the condition of the premises. He need not pay for depreciation
caused by reasonable "wear and tear." So, for destruction of, or injury to, the premises by the elements he is not
responsible unless that is his special contract.
76. Sunasack v. Morey, 196 111. 569.
77. Fairmourtt Lodge v. Tilton, 122 111. Ap. 637.

Sec. 74. Notice Required To Terminate Tenancy

For tenancies of a fixed period no notice is required. For tenancies from year to year, sixty days' notice is usually
necessary before the end of the year. For tenancies from month to month thirty days' notice is necessary. Statutory
notices are also provided for termination for non-payment of rent or other defaults.
Where a lease is for a certain period as one year, no notice is necessary by either side for it terminates by its own
terms. In a tenancy that runs by periods, the tenancy continues from period to period unless it terminates by sufficient
notice. In tenancies from year to year at old common law, a six months' notice had to be given by tenant or landlord,
but in some states this has been changed to a shorter period such as sixty days.
Tenancies from month to month are terminable by either party, landlord or tenant, on thirty days' notice.
Periodical tenancies cannot (except upon mutual agreement) be terminated by the notices mentioned except at the
end of a period. Thus the thirty days' notice to terminate the tenancy must be thirty days before the day on which the
month ends.
Besides these notices there are statutory notices for the purpose of ending any tenancy, periodic or for a certain term,
at any time when the rent is unpaid when due, or any covenant unperformed by the tenant; such as five day notices.
These statutory notices are for use where the tenant has been guilty of some breach, for which the landlord desires to
terminate the tenancy. Such breaches may of course be waived by the landlord and when once waived, cannot
afterwards be asserted. Thus, the failure to pay rent when due is a nominal breach; the landlord by afterwards
receiving rent when tendered would thereby waive the breach.

Sec. 75. Effect Of Destruction Of Premises On Tenancy

The common law rule was that destruction of the premises by fire or other casualty did not abate the rent or terminate
the tenancy if there was anything left to which the tenancy might attach.
Suppose that premises are destroyed by fire - must the tenant continue to pay rent? Is the tenancy thereby destroyed?
The common law rule still in force in most jurisdictions is that in the absence of any provision in the lease, the tenancy
does not terminate, and the rent does not diminish or abate if there is anything left to which the tenancy may attach, for
instance if the tenancy is of the ground and the buildings on it,78 but if merely of the building or a portion thereof, its
entire destruction will relieve him.79
78. McMillan v. Solomon, 42 Ala. 356.
79. Wait v. O'Neil, 76 Fed. 408, 34 L. R. A. 550.

Chapter 12. Estates In Remainder And Reversion, And Executory Devises

Sec. 76. Estates In Remainder; Two Sorts

Remainders are the parts of the fee that remain out after the termination of a particular estate and are of two kinds -
vested and contingent.
Where the fee is granted to begin at the end of another estate granted at the same time, the fee is said to be divided
into two parts called the "particular estate" and the "remainder" of the fee. Thus, if A grants an estate to B for life and
then to C and his heirs, B's estate is known as a particular estate and C's estate is known as the remainder because it
commences after the termination of the particular estate and does not come back to the grantor. If in this case A had
granted to B for life, making no disposition of the fee after B's death the estate would come back to A and his heirs and
A's interest would be known as the "reversion."
At common law a fee could not be granted to take effect in the future. There had to be livery of seizin. But this did not
prevent the creation of remainder to begin after the termination of a particular estate because it was considered that
the particular estate and the remainder together made up the fee and as the tenant of the particular estate could take
the seizin at once the rule in reference to livery of seizin was satisfied. Subsequently by various devices and direct
legislation to that effect the fee could be conveyed in futuro, but a division of the fee in this case is still known as a
remainder.
Remainders are known as "vested" and "contingent."

Sec. 77. The Vested Remainder

A vested remainder is one, the right to enjoy which (after the termination Of the particular estate) has already become
certain.
A vested remainder is one which the remainderman has already acquired, though because of the particular estate, he
has as yet no enjoyment thereof. Thus a grant by A to B for life and after B's death to C and his heirs, C being at that
time alive, vests an estate in C as much as in B, though B has the present enjoyment. Yet C owns the fee and C is the
one from whom title must come to any purchaser thereof. It is true C may not live to enjoy his estate. But so is it true
that one who has leased his land to another for any term, however short, may die before the tenancy ends, yet he is no
less the owner thereof. So in any state of remainder, the remainderman in fee is the owner thereof though his
possession may be delayed beyond his death. But remember that in all cases of vested remainders, the estate must
really have vested. The person to take must have come into existence and there must not be any condition which may
defeat title.
A remainder may vest at the time of the grant or gift, or thereafter on the happening of a contingency.

Sec. 78. The Contingent Remainder

A remainder is contingent when it is not certain that it will ever vest in the remainderman or his heirs.
A contingent remainder is one which may never vest. The contingency happening, it may become a vested remainder.
A remainder may be contingent for a number of reasons. The remainderman named may not yet be in existence and
his coming into existence is therefore a contingency on which the vesting depends, as where an estate is granted to A
for life and then in fee to the unborn eldest son of A, otherwise to B and his heirs. Or it may be contingent because
though the remainderman is in existence, some event may transpire to keep him from ever coming into the enjoyment
thereof, as where a particular estate is granted to B and then over to C in the event that he has a son.

Sec. 79. The Particular Estate

A particular estate is necessary to the creation of a remainder, and in contingent remainders must be a freehold estate.
To have a remainder there must be a particular estate upon which the remainder is supported and the remainder must
begin immediately upon the termination of the particular estate. Thus, a grant by A to B is a mere conveyance of the
fee in its entirety and there is no outstanding remainder. So a grant from A to B to begin in futuro is a mere conveyance
of a future estate and no remainder (a future conveyance of the fee was not possible at common law). To support a
contingent remainder a particular estate of freehold was necessary.

Sec. 80. Of The Vesting Of Remainders

The law favors the vesting of estates, and a remainder will vest as soon as possible. Where the remainder is to a class,
the estate vests in the members of the class as they come into being subject to being opened up for subsequent
members.
It is the policy of the law that estates should vest at the earliest possible moment. For this reason where there is any
doubt as to whether a remainder is contingent or vested, the court will construe it as a vested remainder. For this
reason also an estate will be considered as having vested at the earliest possible moment. Where the gift is to a class
none of the members of which are yet in existence, but who come into existence during the life of the particular estate,
the remainder will vest in each member as he comes into being subject to being opened up for possible future
members.

Sec. 81. The Rule Against Perpetuities

The rule against perpetuities is a rule which forbids the postponement of the vesting of an estate beyond a certain
period. Estates must vest during a life or lives in being or twenty-one years thereafter.
The law forbids the tying up of an estate by remote contingencies whereby it may vest upon their event. The policy of
the law in this respect is expressed in what is termed the "rule against perpetuities." This rule has no application to
vested estates. Thus a gift to A of an estate which is subject to a lease for 999 years would be good and the rule
against perpetuities would not apply to it. The rule is, that if a grant is made to take effect upon a contingency the gift is
void unless the contingency must occur and the estate thereby vest either during the life of the tenant, or lives of the
tenants, named, or within twenty-one years after his or their death. This permits a gift to an unborn son of the living
tenant to take effect on his 21st birthday.

Sec. 82. Estates In Reversion

Where an estate less than the fee is created, the fee, subject to this estate remains in the grantor or testator, his heirs
or assigns, and is an interest known as the reversion.
By the term reversion we indicate the title which one has in property when he has granted an estate to another which is
less than the fee and has not disposed of that fee by way of remainder. Thus, if A owns land in fee and rents it for
ninety-nine years to B, the reversion is said to be in A who is the owner of the fee after the ninety-nine years have
elapsed. He may sell this reversion or dispose of it as he will but it must pass of course subject to the rights of the
tenant.

Sec. 83. Executory Devises

An executory devise is a gift of real estate by will to take effect on a future contingency without the intervention of a
particular state.
An executory devise is, as the name implies, a gift of real estate by will, to take effect upon some future contingency,
as where "one devises land to a femme sole and her heirs upon her day of marriage";80 an executory devise needs no
particular estate to support it, as in the illustration given, and at common law the same gift by deed would have been
void as a conveyance of the fee in futuro. But by executory devise this was permitted.
It was also said that one by executory devise could "limit a fee upon a fee" which was not permissible by deed as "if a
man devises land to A and his heirs; but if he dies before the age of twenty-one, then to B and his heirs."
The executory devise is void if it is contrary to the rule against perpetuities.
80. Blackstone, Book II, p. 173.

Chapter 13. Several And Joint Ownership Of Estates

Sec. 84. Introductory

Titles may be held jointly by a number of persons or by one person in severalty.
We have been considering how an estate may be in fee or for life or for a term of years, etc., without respect to the
person who may own it. We now see that any of these estates may be owned by one person or by several together.
Where several own together there are technical distinctions to be made.

Sec. 85. The Estate In Severalty

An estate in severalty is an estate owned by one person to the exclusion of all others.
Where the title is in one person he is said to own in severalty. Thus, if A owns a life estate or a term of years or a fee,
he owns in severalty. This simply means he is a sole owner but does not exclude the idea that he may have created a
lesser estate; for instance, owning in fee, he may lease for a term. Here he would be owner in severalty subject to a
tenancy.
Sec. 86. Tenancies In Common
An estate is held in common when there is an undivided ownership by several persons who hold by several and
distinct titles.
The ordinary case of plurality of ownership in modern days, is that of tenancy in common. A tenancy in common is a
tenancy by several who hold distinct titles to the whole estate, their interests being undivided, as where A, B, C, and D,
children of X, deceased, inherit his land. Here each owns the entire estate in common with the others. So if two parties
purchase property jointly taking a title in the name of both, they are owners in common.
Where land is held in common, each of the tenants in common may have a partition when he so desires (provided of
course there is no express restriction of that right in the particular case), that is to say, any tenant in common may
demand a division of the estate according to his interest and if this is refused the court will make this division upon suit
being filed to that end. Where the land is of such a nature that it cannot be partitioned without manifest injury to the
property or the interest of the tenants it will be ordered sold and the proceeds divided.
Tenants in common need not hold in equal interest. Thus one tenant might have one-half interest and two others each
a one-fourth interest. So one may hold by descent, another by deed, another by will, etc. A tenant in common may sell
his interest or dispose of it in any way he sees fit and his successor has the same rights in the land that he had. Upon
the death of a tenant in common his interest passes to his heirs or to his devisees. In this it differs from an interest by
joint tenancy, which on the death of the tenant passes to his survivor.

Sec. 87. Joint Tenancies

A joint tenancy is a tenancy held by two or more by the same title in the same interest.
A joint tenancy was a common law estate where several persons came by grant or devise (deed or will) into an
ownership of the same estate. Thus, if A granted to B
1OO and C for life or in fee, B and C were joint tenants. A joint tenant could not compel a division and when he died his
interest passed to his survivor. Joint tenancies are now generally abolished, except where expressly created, and
except in cases of trustees and the like, where survivorship of title is desirable. The language which would have once
created a joint estate now creates an estate in common.

Sec. 88. Estates In Co-Parcenary

An estate in co-parcenary exists where several persons hold as one heir.
An estate in co-parcenary was an old common law estate existing where several took the same land by inheritance.
Thus there being no eldest son, the daughters inherited in co-parcenary, and also by the custom of gavel kind in Kent,
all the sons inherited together. To-day such parties hold in common.

Sec. 89. Estates In Entirety

Estates in entirety were estates held by husband and wife.
Where an estate was given to a husband and wife, the title was known as a title in entirety, as they held as one person.
This estate has become unknown in our modern law and now husband and wife hold either as tenants in common or
joint tenants. Of course, either the husband or wife may own property in severalty subject to the dower of the other
one.

Chapter 14. Estates Owned Legally Or Equitably - Uses And Trusts

Sec. 90. In General
The law permits one person to hold legal title to property upon obligations to use it in declared ways for the benefit of
another, that is, one may have the legal title, while another has a beneficial estate therein.81
In our law, it is possible to clothe one with legal title, upon declared uses or trusts for the benefit of another; the legal
ownership is in one and an equitable ownership or claim in another. Thus we may have A granting the fee to B subject
however to a provision that B shall use the land for C's benefit and to convey it to C after a certain period. We speak of
obligations of this sort as uses and trusts. There are a variety of reasons why an estate might be granted in this way; to
keep it intact for a period instead of being divided among several; to give the legal title into capable hands, the
beneficiary being a spendthrift or inexperienced; to perpetuate certain purposes, etc. Uses and trusts may also arise by
operation of the law.
The owner of the legal title is called the trustee, the person for whose benefit he holds it is called a beneficiary or a
cestui que trust.

Sec. 91. A Use Defined

A use may be defined as a right to the benefits and profits of land the legal title to which (or in early days the seizin of
which) was in another.81
81. See Historical discussion in Blackstone, Book II, p. 327 and following.
The term "use" was once of more importance than now, as we shall see. We now generally use the term "trust." A use
was a right in one to the benefits of land of which another had the title.
The idea of a use was probably taken from the German law, and was originally applied in England to give the benefit
and profits of land to a religious order forbidden by law to hold real property. Thus if A desired to convey to a church
and the church was forbidden to hold real property, A would convey to B "to the use" of the church, setting out the
uses. Courts of equity took jurisdiction of uses and enforced them. The law which forbade the ownership of lands by
the church was called the "Statute of Mortmain," to prevent excessive holdings "in dead hand," and this statute was
evaded by the adoption of the use and its recognition by courts of equity. Other purposes of the use were soon found,
and it was created to unjustly evade the liabilities and burdens incident to ownership.

Sec. 92. The Statute Of Uses

The statute of uses was a statute passed to prevent holding land upon use, by putting the legal title in the beneficiary.
The courts decided that certain uses were not covered by the statute and these survived under the name of trusts.
Owing to the evils possible under the device of the use, Parliament in 1535, passed the "Statute of Uses." It provided
that whenever a person should be seized to uses, the person having the use should by operation of law be deemed to
have the seizin or legal title.
The courts in course of time decided that the statute did not execute:
(1) A use upon a use.
(2) Uses in personal property.
(3) Active uses.
To distinguish what uses it did not execute, the court called them "trusts."
First, as to a use upon a use. Here A conveys to B to the use of C to the use of D. The courts of law declared the title
in C by virtue of the statute and the use to D void, as there could be no use upon a use; but courts of equity enforced
the use to D as a trust. Thus C would hold to the use of or in trust for D, notwithstanding the statute. Thus by a few
words the court permitted the evasion of the statute, and the very condition existed which the statute was enacted to
prevent.
Second, uses in chattels. Uses in chattels were not covered by the statute. Such uses were known as trusts.
Third, active uses. An active use is one in which the feofee to uses has active duties to perform as where he must
collect rents, or perform services of any sort. Other uses were known as passive or dry uses in which the feofee to use
held the bare naked title with no duty to perform except when demanded or at a certain period to convey the fee to the
beneficiary.

Sec. 93. Conveyances Under The Statute Of Uses

The statute of uses was availed of by the conveyancers to transfer the title without livery of seizin.
We have elsewhere noticed that in transfers of the fee there must be "livery of seizin" at common law. Under the
Statute of Uses, a number of forms of conveyance were invented which did away with this necessity and also permitted
the transfer of the fee in futuro. This was accomplished by creating such a use as the statute would execute. Thus A
desiring to convey the fee to B covenanted to stand seised to B's use. The statute of uses thereupon operated to give
B the seizin and B without more ado became vested with the seizin and the ownership. This was the "covenant to
stand seized," but it afterwards fell into disuse in favor of the "lease and release" and the "bargain and sale." Thus
conveyancers made use of the Statute of Uses in ways not contemplated by the enacters, and by its aid the fee could
be granted without livery of seizin.

Sec. 94. Trusts Defined And Tabulated

A trust may be defined as an obligation upon the legal owner of land to hold or use it for the benefit of another upon
uses not executed by the statute of uses; or it may be used as synonymous with the term use.
From our discussion of a use, we understand already what we mean by the term trust which is the modern term and
indicates a common situation.
Trusts may be tabulated as follows:
(1) Express trusts.
1. Active trusts.
2. Passive or dry trusts (either so in their creation or by performance).
(2) Implied trusts (or trusts that arise by operation of law.
1. Constructive trusts.
2. Resulting trusts.
An express trust is one created by the language of a deed, will or other instrument. If there are active duties to perform,
as to manage the property, collect rents, etc., it is called an active trust. A passive trust is one in which the trustee has
nothing to do except convey the legal title to the beneficiary. If so in its inception, and concerns real estate it is properly
a use and not a trust, and the statute of uses immediately by operation of law executes the legal title in the beneficiary.
Or it may become passive because all the duties thereunder have been performed, except the conveyance of the legal
title. Implied trusts are such as arise by operation of law in order to give the real ownership to one who in equity ought
to have it instead of the nominal holder of the title.
Estates Owned Legally Or Equitably - Uses And Trusts. Continued

Sec. 95. The Creation And Evidence Of The Trust

The trust may be created by deed, will, or contract, and if in real property cannot be enforced unless declared in writing
by the party legally capable of declaring it; except resulting and constructive trusts.
Trusts may be created by almost any form of declaration. They are perhaps most frequently declared in wills. They
may be declared by deed or any form of agreement.
Trusts in real property must be declared in writing, except constructive and resulting trusts. They need not be created
in writing so long as a declaration follows. In that case the trust will be enforced from the time created. The form of
declaration is immaterial so long as sufficient in substance. It may be found in letters, pleadings in litigated cases, etc.
Usually of course, it is declared when created, as in wills, deeds, and the like.
The declaration must be by the one who can impress a trust upon the property, that is, the owner. Thus A conveys to B
declaring the trusts. Or he conveys to B on trust but omitting the written declaration, depending on B's integrity. Now B
is the only one who may declare the trust.
The declaration must be signed.
In every trust there must be certainty. The property affected must be certain, the person to be benefited must be
certain, the use must be certain, though a discretion in the trustee is permissible; and there must be a trustee named or
described and capable of identification.
Trusts cannot be created to offend the rule against perpetuities. The trust cannot be a perpetual one. There must be a
vesting of the estate within the time provided in that rule. This, however, does not apply to charitable trusts, which may
be perpetual.

Sec. 96. Precatory Trusts

A precatory trust is a trust inferred from the use of words of hope, confidence and the like.
A precatory trust is sometimes said to be an implied trust, but it is really an express trust, because it is expressed in the
words used, though not directly and clearly. Thus suppose A leaves property by will to B "having full trust and
confidence" that B will devote to certain uses for C's benefit. Has it been conveyed upon trust in the sense that B must
perform the trust, or is that a matter left to his own discretion or sense of right ? The rule is that where words of hope,
desire, confidence, etc., are used in this way there must really be an intent manifest from all the instrument to create a
positive trust. The language though consisting in pleading or prayerful words, must be mandatory, and it must contain
all of the elements of a trust, as certainty of party, certainty of property affected, certainty of purpose, etc.

Sec. 97. Charitable Trusts

A charitable trust is a trust for the benefit of the public at large or of some class of persons of the public.
A charitable trust is also called a public trust. It is a gift made in a charitable purpose to the public, or to some class of
the public. as a gift to maintain a home for crippled children, to found a hospital, to endow a chair in a college not
conducted for private profit, etc.82 A charitable trust differs from a private trust in perhaps three ways:
(1). The objects of the trust must be members of a class. The gift cannot be for the benefit of John, Henry or William
(for then it would be a private trust), but for the benefit of a class in which John, Henry and William are to be found.
(2). The rule against perpetuities does not apply. A charitable trust may be in perpetuity.
(3). A doctrine called the cy pres doctrine applies. By this doctrine the court will not allow a charitable trust to fail
because it is incapable of literal execution. If the particular object fails, the court looks to find the general intent of the
donor and then applies the trust as nearly as may be to the object of the donor.
In other ways a court treats a charitable trust in a different fashion from a private one. Such trusts are encouraged and
favored by the law. So, if a trustee has not been named in a charitable trust the court will appoint one.
It has been held that a gift to maintain a drinking fountain for horses is a charity. But trusts to maintain a private burial
lot are not charitable, and therefore must not be made in perpetuity.
Whether a trust is private or charitable is important under inheritance tax laws, in respect to exemption from tax.
82. By statute 43 Eliz., C. 4 various purposes of charitable trusts were enumerated. This statute is usually regarded as
illustrative and not exhaustive.

Sec. 98. The Trustee, His Title, Duty, Etc

The trustee has the legal title, and must perform the trust, in its letter and spirit, and manage the estate in a prudent
and profitable manner. He must look first to the safety of the investments made by him and secondly to the income.
A person named as trustee need not accept the trust. In case he does not desire to accept, he should for his own
protection make an immediate and unequivocal rejection. But if he undertakes to act, he must act as a prudent man.
He is not protected in merely acting in good faith. He must not undertake the trust if he is incapable of performing it
with prudence. He must make repairs, keep up insurance, etc., and do all things that a prudent man would do in
managing his own property. Where the trust consists in funds to be invested, the first requisite is safety of investment.
To this end the courts have said that a trustee must invest in such securities as first mortgages on real estate,
government bonds, etc. Some statutes make an extension of this and allow a trustee to invest in municipal bonds,
corporation bonds, etc., where a reasonably prudent man would regard them as safe. Of course, if the trust directs the
investment in a particular way the trustee must act in that way.
The profit from the trust fund is of second consideration. That must be made as large as possible compatible with
safety of the investment.

Sec. 99. Spendthrift Trusts

A spendthrift trust is a trust which provides that the beneficiary cannot by assignment or otherwise impair the trust fund
or income and that creditors shall have no recourse to the fund or income. If of public record it is in most jurisdictions
upheld as valid.
A spendthrift trust, as above described, is for the purpose of preventing waste of the funds or income by an
irresponsible beneficiary. In most jurisdictions it is regarded as valid,83 largely on the theory that creditors take a risk
when dealing with a person in such a situation. After the beneficiary actually gets his income, then it loses its character
as a trust fund and creditors may attack it or the beneficiary may spend it as he chooses.
One cannot convey his own property to a trustee upon a spendthrift trust in his own favor. He cannot thus place his
own property beyond the reach of his creditors.

Sec. 100. Implied Trusts

Implied trusts are trusts raised by the law on account of the equities of the circumstances. They are of two sorts;
resulting and constructive.
Where one is in the ownership of property which from the circumstances evidently in equity belongs to another, the law
raises a trust so that the legal title may be made to come to him who is the real owner. There are two sorts - resulting
and constructive.

Sec. 101. Resulting Trusts

A resulting trust is one which arises under circumstances from which it appears that one who becomes clothed with the
legal title was not meant by the parties to have the beneficial title thereto though no trust has been declared.
We will find that constructive trusts are trusts which arise largely out of circumstances which are fraudulent or in the
law amount to fraud. A resulting trust is one in which the parties have entered into some transaction by which one
becomes clothed with the legal title but it is evident from the circumstances that he is not to have the beneficial title.
One class of cases is that in which purchase money is paid by one person and the title taken in the name of another.
Here the law presumes a trust unless it affirmatively appears that a gift was intended. Another class of cases is that in
which a trust is made upon purposes which thereafter fail or upon purposes which are to be announced later but are
not announced.84 There are also some other classes of cases but these are the chief ones in which a trust results.
83. Wagner v. Wagner, 244 111. 101.

Sec. 102. Constructive Trusts

A constructive trust arises where there is fraud or inequitable conduct by which one comes into the legal ownership of
property which he does not otherwise possess.
Where one acquires a title through fraudulent conduct or through inequitable conduct, the court may impress the title
with a trust in favor of the real owner or person who ought to be the real owner. The circumstances are multitudinous.
Thus, where property is about to be conveyed in trust and a third person induces the donor not to name the trust but
convey to him and he will perform the trust, as where A being about to make a will in B's favor is induced by C to
convey to him upon his representation that he will convey to B.
So where an agent takes title in his own name; so where trust funds are used by the trustee for investments of his own.
In these and many other cases the court impresses the property with a trust.
84. Trapnall v. Brown, 19 Ark. 39.

Chapter 15. Absolute And Conditional Estates

Sec. 103. In General

Estates may be held in absolute title, or upon a condition that may defeat them.
One may convey an estate absolutely or upon condition. A condition may be precedent, keeping an estate from
vesting, or, it may be a condition subsequent which defeats a vested estate. A condition precedent is one which
prevents any ownership accruing at all, as where an estate is to pass to one provided she marries. Thus, all contingent
remainders are estates depending on conditions that may prevent them from ever vesting.
We shall notice an estate upon condition in the case of a mortgage which of old (and even now in form), was an estate
subject to defeat by the payment of the mortgage debt, but by failure thereof, passing into an absolute estate.
So we shall notice other estates upon conditions as to the use of the land.
Chapter 16. Estates In Mortgage. A. The Nature And History Of The Mortgage

Sec. 104. Mortgage Defined

EARLY VIEW AND HISTORY. A real estate mortgage at common law was a conveyance of the legal title subject to a
condition subsequent that the mortgagor might revest the title in himself by paying a debt or performing other obligation
at a time stated. The courts of equity permitted redemption notwithstanding breach of condition.
(1) Common law view of mortgage.
A common law mortgage was a deed to property conveying the fee to the mortgagee; subject, however, to a condition
that the title should revest in the mortgagor upon his performance of an obligation therein stated. This condition had to
be literally performed in order to entitle the mortgagor to his former estate. The condition was usually of course to pay a
debt which matured on a certain day. If the day passed without the condition being performed or tendered, the title
thereafter became absolute. The time for the condition having elapsed, it could not be performed.
The courts of law enforced these provisions of the mortgage literally.
The day on which the condition was to be performed came to be called the "law day," the day on which in the law court
the title became absolute.
(2) Equity of redemption.
The result of the strict enforcement of a mortgage was of great harshness to the mortgagor. He would thereby lose his
estate through his inability to pay, notwithstanding it might be many times more valuable than the indebtedness. The
mortgagee would thereby obtain the repayment of his debt many times over and become unjustly enriched by a loan of
money on which he never took any risk. It may be said that the mortgagor should never make such a bargain and if he
did it was his own folly, but this overlooks the fact that the terms of a loan cannot be dictated by a necessitous
borrower. Courts of equity disfavor harsh penalties and forfeitures. They therefore permitted a mortgagor after
condition broken to file a bill for redemption of his estate upon his payment of the debt. Under the common law view
the transaction was what it literally purported to be - a conveyance on condition. But courts of equity, looking beyond
the form saw that the transaction was really one of indebtedness, with the conveyance as security. The mortgagor did
not go to the mortgagee to sell his property. He went to barrow money. The amount of money he got was not an
agreed purchase price; it was simply money borrowed, perhaps much less than the property was salable for. The
injustice of enforcing the mortgage in its strict literalness to cut the mortgagor off by his nonpayment on the law day led
to the relief stated. From the fact that a mortgagor had this relief in equity, his estate came to be called his "equity," or
"equity of redemption" - words which we use today, although his interest is now the legal title.
(3) Foreclosure of equity.
The fact that the court would entertain a bill for redemption by the mortgagor, laid a cloud on the mortgagee's title after
the law day passed. He could not alienate for there was ever the possibility that the mortgagor might redeem. Hence in
case the mortgagor did not redeem, the mortgagee appealed to the court to compel him to redeem, or be forever
barred and foreclosed of his equity of redemption. The court would therefore enter a decree giving the mortgagor a
specified time in which to redeem, otherwise to be barred of his right to redeem. By this process, the mortgagee's title
became absolute.
It will be noticed that by this foreclosure proceeding the mortgagor lost his estate, as completely as under the legal
theory, and the mortgagee became entitled thereto regardless of the excess value over the debt unless the mortgagor
redeemed within the time granted by the court. In other words, the court did not work out its equitable view to its logical
and just conclusion. It remained for that to be done by future development of the equitable idea.85
Sec. 105. Modern Views Of A Mortgage
The modern view of a mortgage is that it is a conveyance in security for a debt, the debt being the main thing and the
mortgage merely incidental thereto.
In modern days we regard the mortgage as a lien though in form it is still a conditional conveyance conveying the fee,
but for practical purposes it is merely a lien by which one secures payment of his debt and no more. The debt is
regarded as the main thing and the conveyance a mere shadow thereof without existence apart from the debt.86 When
foreclosure is had, the mortgagor is not barred but a public sale is conducted and the debt paid out of the proceeds,
the surplus being rendered to the mortgagor after deduction of the proper expenses incidental to the sale. Where the
mortgagee is still regarded as having legal title, he has it only for the limited purpose of his security. The mortgagor as
to all the world has the legal title. He can convey, subject to the mortgage and his wife has dower in the equity.
85. See Pomeroy, Chapter Fifth.
86. Lightcap v. Bradley, 186 111. 510.

B. The Creation Of The Mortgage

Sec. 106. The Form Of A Mortgage Deed

The deed or mortgage is in form a conditional conveyance of the fee.
By reference to the form in the appendix the modern form of a mortgage deed may be seen. The fee is conveyed upon
a condition.

Sec. 107. Trust Deeds

The trust deed is a form of mortgage in which a trustee is appointed and it has some advantages over the other form.
A trust deed is set out in the appendix and should be studied. It is in reality for all purposes merely a mortgage. A
trustee is appointed who holds the property in trust subject to the terms of the deed. In some states this trustee is given
a power of sale and he is the person who releases to the mortgagor when the deed is paid. A trust deed is for many
purposes preferable. One reason is that a trust company of reliability may be appointed trustee and thus is excluded
the danger of change of trustee by death; another reason is that the debt may be more easily transferred, the notes
being simply indorsed in blank by the debtor and circulated among succeeding purchasers of the debt while in the case
of a mortgage, an assignment thereof would be desirable.

Sec. 108. The Evidence Of The Debt

The evidence of the debt is usually in the shape of promissory notes of a negotiable character.
When a mortgage is made there are two instruments to be executed; first, the mortgage or trust deed itself; and
secondly, the notes which express the indebtedness. There may be one note or there may be a series of notes and the
note may have interest coupons attached or simply bear interest. It is often preferable to make the note payable to
one's self and then indorsed in blank.

Sec. 109. Equitable And Constructive Mortgages

Where the transaction is in reality a mortgage a court of equity will so construe it and enforce it even though its
character is not apparent upon its face.
Applying the maxim that a court of equity looks beyond the form and into the substance of a transaction, a court will
enforce a transaction as a mortgage where it was the intent of the parties that a mortgage would exist though the form
of the transaction seems to indicate an absolute deed or other transaction. Thus if one borrows money and to secure
the mortgage makes a deed to the lender upon an oral agreement that the lender will re-convey when the debt is paid,
this is in reality a mortgage, though it does not so appear upon the face of the instrument, and if the grantor in the deed
can show that the transaction was really a mortgage the court will give him redemption of the property.87
87. Helm v. Boyd, 124 111. 370, 16 N. E. 85.

C. Provisions In Mortgage Deeds

Sec. 110. The Power Of Sale In Mortgages And Trust Deeds

The mortgage or trust deed usually contains a power of sale whereby the mortgagee or trustee can foreclose the
mortgage except in some states where mortgages must be foreclosed in the courts.
If the law permits, the mortgage or trust deed contains a power of sale by virtue of which the mortgagee can foreclose
the mortgage without going into court, by simply having a public sale, paying the debt out of the proceeds and
rendering the surplus to the debtor.
In some states it is provided by the law that all mortgages of real estate must be foreclosed by a judicial proceeding
and in such a case a power of sale would of course be nugatory. Consequently, in these states no power of sale is
contained in the forms used.

Sec. 111. Attempted Waiver Of The Right Of Redemption

The right of redemption cannot be waived by the parties to the contract.
As soon as the court came to the assistance of the mortgagee to give him redemption after the law day, the attempt
was made by lenders to secure back the advantage thus taken away. By express contract it may be provided that there
should be no right of redemption, but the courts have held that if a transaction is a mortgage then the incidents of a
mortgage will exist irrespective of the agreement of the parties. The phrase in this connection has often been used
"once a mortgage, always a mortgage" and this means that once the court has decided the transaction is a mortgage it
will treat it as such for all purposes and the parties cannot deprive the mortgage of its nature by the addition of a few
words. Since borrowers will in their necessities, often consent to anything, the lender could get back the old harsh
remedy of forfeiture for nonpayment if the courts did not take this attitude.

Sec. 112. Recording Laws Concerning Mortgages And Trust Deeds

Recording laws are in effect in all states by which the creditor can perfect his lien against all the world by making
proper record of the mortgage or trust deed.
Between the parties the mortgage is good without record and it is also good as to third parties who have notice, but it is
the desire of one who has notes secured by mortgage to know that his security is good against the whole world. This
he may accomplish by recording the mortgage in the place where the real estate is situated. Every party thereafter who
desires to deal in respect to that real estate or acquire any rights against it must take notice of what the record is,
which as a matter of fact, he may secure by examining an abstract brought down to date. Thus if a mortgage is
properly put on record, subsequent judgment creditors of the mortgagor take a secondary lien; the subsequent
mortgagees of the same property likewise take a junior lien, and purchasers of the land take subject to the mortgage.
Sec. 113. Possession By Mortgagee
If a mortgagee takes possession, this gives notice to all the world of whatever rights he may have.
It is customary to always record a mortgage whether the mortgagor remains in possession, which he usually does, or
whether the mortgagee goes into possession. But it is still the law, if the mortgagee does take possession, this
possession is a notice to everybody that he has rights in the property and will protect him against subsequent
purchasers and encumbrancers.

D. Incidents Of A Mortgage

Sec. 114. Right Of Possession

The right of possession is in the mortgagor unless agreed otherwise though by the common law it was in the
mortgagee.
Who shall have the right of possession depends upon the contract of the parties but if there is no express provision in
the contract the mortgagor has the right of possession until breach occurs on his part. By the common law the
mortgagee had a right of possession but now in most of the states the mortgagor has this right and cannot be deprived
of it at least until breach.

Sec. 115. Duties Of The Parties

The duty of the mortgagor is not to impair the value of the property. The duty of the mortgagee in possession is to treat
the property as a prudent owner.
The general duty of the mortgagor is not to decrease the value of the security by pulling down buildings or other acts of
destruction, though he can hardly be said to have any duty to keep the place at its original value. When a mortgagee
goes into possession he must give that care to the land that a prudent owner would give. He must see that it is insured,
that taxes are paid, etc., though he may add expenses of this sort to the debt. He also must allow a reasonable rental
for the value of the premises while in his possession to go to reduce the debt, and whatever rents and profits there may
be from the land he is not entitled to except in payment of the debt.

E. Sale Of The Mortgaged Property And Transfer Of The Debt

Sec. 116. Sale Subject To Debt

A sale of premises by the mortgagor cannot deprive the mortgagee of his lien if the mortgage is properly recorded, but
as between the mortgagor and the buyer, the buyer may or may not assume the debt as a part of the consideration.
We have seen that if the mortgagee properly protects himself, his lien is good against the whole world and that if the
mortgagor sells the property the buyer must take subject to the lien of the mortgage.
Where land which is sold is subject to a mortgage the mortgage is generally assumed by the buyer, for this is the best
way he can protect himself, because otherwise he must rely upon the financial ability of the mortgagor to pay the debt
when due, and the buyer in that case runs the risk of having to pay the debt twice, once to the mortgagor and then to
the mortgagee to prevent foreclosure. Accordingly it is the usual rule for the buyer to assume the payment of the
mortgage paying the difference in value to the mortgagor. Thus, if land worth ten thousand dollars is mortgaged for five
thousand a buyer pays five thousand and assumes the debt. In such a case he is said to be buying the "equity," though
he is in reality buying the legal title subject to the mortgage.
Where the buyer assumes the payment of the debt he becomes the principal debtor and the original mortgagor
becomes the surety. In such a case, both mortgagor and purchaser can be held liable for a deficiency of the security
upon foreclosure.

Sec. 117. Transfer Of The Debt

The mortgagee may transfer the debt and in that case the security is also transferred as an incident thereto.
Just as the mortgagor may sell the land subject to the debt, so the mortgagee or holder of the trust deed notes may
transfer the debt. As the mortgage is an incident of the debt and has no existence apart from it, the right to the
mortgage cannot be assigned independently of the debt and always passes as an incident of the debt.
The usual manner of assigning the debt is as follows: If the mortgage is in the mortgage form the notes are transferred
and the mortgage assigned usually by a separate deed of assignment. If the mortgage is in the form of a trust deed the
notes are simply transferred. Very often the notes are made payable to the order of the maker and then indorsed by
him in blank, and in that event may be transferred by the mere delivery of the notes. This makes the transfer of the
debt very simple.

F. The Remedies Of The Mortgagee

Sec. 118. Injunction To Prevent Waste

The mortgagee may have an injunction to prevent waste by a mortgagor in possession.
Where a mortgagor is in possession of the property we have seen that it is his duty not to commit waste and he may be
prevented by an injunction.

Sec. 119. Ejectment Of The Mortgagor

The mortgagee could at common law eject the mortgagor and take possession, but in the United States the
mortgagor's right to ejection depends upon the right of possession, and we have seen that the mortgagor has the right
of possession until condition broken and in some states has it at all events except upon a contract to the contrary.
Where the mortgagee does eject the mortgagor he does it merely for the purpose of satisfying the debt and when the
debt is gone the mortgagee has a right to the premises again. Ejectment in such cases is not common as the
mortgagee resorts to foreclosure.

Sec. 120. Suit On The Debt

The mortgagee may sue upon the notes or upon the debt in whatever form it is.
A mortgagee has a claim which is secured by mortgage. He need not resort to the mortgage for his remedy but may
have a judgment in a common law court upon the debt and by virtue of his judgment can take out execution on the
property of the debtor, but not the property included in the mortgage, for this would give him foreclosure in a manner
not contemplated by law.

Sec. 121. Foreclosure

The ordinary remedy of a mortgagee is that of foreclosure.
At common law this meant the barring of the mortgagor's equity of redemption and under modern statutes means the
sale of the property through judicial proceedings or at a non-judicial sale, in states where that is allowed, for the
purpose of satisfying the debt and paying a mortgagor the surplus. Where a mortgagor fails to pay the debt when it is
due and the mortgagee finds that he must pursue some remedy to obtain satisfaction the usual remedy is that of
making use of his security and is done by means of foreclosure.
In the event that he does not thus secure satisfaction of his debt, the mortgagor still owes him the balance.
By statute a mortgagee may have in a foreclosure proceeding a "deficiency decree" to cover the deficiency, if any
results, in the foreclosure sale.

Sec. 122. Kinds Of Foreclosure

At common law foreclosure was by judicial proceeding to bar the equity of redemption. Under the modern practice it is
either by judicial proceeding to sell the property and pay the debt out of the proceeds or to sell at a non-judicial sale
under a power of sale in the mortgage.
(1) Foreclosure at Common Law. Foreclosure in early days as we have already indicated meant the taking of the
estate mortgaged through a judicial proceeding whereby the equity of redemption was cut off after giving the mortgagor
a certain time within which to redeem. By this method the mortgagor was given a chance to get his estate back but
upon failure to comply with the terms of the decree the mortgagee obtained the property as his own though it might
have been of a value largely in excess of the debt.
(2) Under Power of Sale in Modern Practice. It is the practice in some states to put in a mortgage or trust • deed a
power of sale whereby the mortgagee or trustee is given the authority to sell the property at public or private sale and
pay the debt from the proceeds, rendering the surplus to the mortgagor after payment of costs and accrued interest. In
almost every state the old common law remedy of strict foreclosure is abolished.
(3) Foreclosure Through Judicial Proceedings Under Modern Practice. Where there is no power of sale in the
mortgage the foreclosure must be through judicial proceedings and in some states powers of sale are not legal and in
that case it must be foreclosed in the courts. The courts of equity foreclose a mortgage these days by ordering a sale
of the property by a master in chancery or other judicial officer at which the best amount obtainable is secured by
auction, out of the proceeds of which the mortgagee is paid his debt and expenses and the surplus then turned over to
the mortgagor. Strict foreclosure as it existed in early times whereby the estate itself was taken is not now permitted as
a general rule and never permitted where the security is of more value than the debt. From this sale the mortgagor has
a certain time to make a redemption and this we.consider in the section 124.

G. The Remedies Of The Mortgagor

Sec. 123. Redemption From The Mortgage

The mortgagor may redeem from the mortgage by applying to a court of equity offering to pay the debt with accrued
interest and costs.
We have already seen how after the law day had passed the mortgagor was permitted by the courts of equity to get
back his estate notwithstanding his breach of the condition, by paying the debt. This was called redemption and the
mortgagor's right was known as his "equity of redemption." Ordinarily it is not necessary in these days for a mortgagor
to apply to a court of equity for this remedy for the simple reason that if he can pay the debt the mortgagee is willing to
receive it and to release the title without any court intervention. If, however, the mortgagee is unwilling to accord the
mortgagor his rights then the mortgagor has the remedy named. A bill for redemption is accordingly brought where
there is no bill for foreclosure. This is the way also that a mortgagor proceeds when he has given an absolute deed
which he now claims to have been by way of mortgage.
This right of redemption from the mortgage must be strictly distinguished from the right of redemption from a sale in the
foreclosure proceeding given by statute and which we consider in the next section.

Sec. 124. Redemption From Sale

Where the mortgagee forecloses by means of a judicial or non-judicial sale the mortgagor has the right of redeeming
his property from the sale for a certain period of time by paying the debt with a rate of interest provided by law and
perhaps a certain penalty.
There is a right of redemption given by the statute where there has been foreclosure. This redemption is entirely
distinct from the one named in the last section because that is resorted to when the mortgagee will not recognize the
mortgagor's equity of redemption. The redemption we now notice is a statutory one provided in cases of foreclosure
whereby after the sale the mortgagor has a certain length of time in which to pay the debt and get back his property
from the purchaser at the sale. Thus, suppose that A, mortgagee, forecloses against B, mortgagor, and C purchases at
a sale decreed by the court. The sale brings three thousand dollars more than the debt and all costs, accrued interest,
etc. This surplus is turned over to B. Now C obtains a certificate showing that he has purchased the property and that
in course of time he will be entitled to a deed if B does not redeem. The statute, however, gives B twelve months, say,
in which to redeem from the sale and B can avail himself of this right and thereby secure back his estate by paying to C
all that C has paid out with interest thereupon.

H. Junior Mortgages

Sec. 125. Rights Of Subsequent Mortgagees

Assuming that a mortgagee has protected his security by record or otherwise, subsequent mortgagees take a lien
which is subject to the first mortgage, each in order of time.
Sometimes junior mortgages are given upon land. This is really a mortgaging of the equity of redemption and those
subsequent mortgages cannot in any way affect the rights of the first mortgagee, assuming that the first mortgagee
properly protects himself by record or taking possession. To illustrate the effect of a second mortgage, let us assume
that A has mortgaged his property, worth ten thousand dollars, to B for five thousand dollars. Here A has an equity
worth five thousand dollars. A then again mortgages the property to C for two thousand dollars. Suppose now that B
forecloses. The property is sold without any lien upon it on account of C's mortgage, because otherwise A could
prejudice B's rights by subsequently putting a lien upon the property in favor of C and at a sale the property would have
to be sold subject to C's lien which would mean that less cash would be offered for it. What, then, are C's rights? They
are practically to pay the first mortgage when it is due (if A will not do so) and step into B's place, having in that case a
lien upon A's property for $7,000.00; or C may redeem in A's place for he is subrogated to this right. A junior
mortgagee then has his protection in being able to take care of the first mortgage if the mortgagor does not do so, the
security being ample to cover both mortgages.

Part V. Boundaries; And Rights In Another's Lands. Chapter 17. Boundaries And Riparian
Rights Sec. 126. In General
The inquiry to be made here is as to the territorial extent of ownership, i. e., what are the boundaries of the land. There
may be, in any particular case, no difficulty, unless it be merely of survey, as where John Smith's property lies
contiguous to and is bounded by Henry Jones' property. But in case there is a road, river or lake, between the two, or
Smith's property lies along the lake shore, where is the boundary deemed to be? The answer is the subject matter of
this chapter. Description of boundaries is covered in Chapter 27, post.

Sec. 127. Land Bounded By Highways

Land bounded by a highway extends to the center thereof, subject to the public's use, unless under the law the
ownership is in the public.
The law of Highways is largely a matter of local law, but the general rules so far as they effect boundaries may be
stated here.
The fee of a highway may be in the Public or in the adjoining owners. If in the adjoining owners, each owns to the
center of the highway, subject to the right of the public to use the highway. If, however, the state or city owns the fee,
the adjoining property extends of course only to such road or street. In some states dedication of a street by the owner
or owners puts the fee in the public, while under other statutes or practices the fee remains in the owners subject to the
use of the public.
If the fee to a highway is in the adjoining owners, it is a presumption, subject to rebuttal, that a conveyance of the
property carries with it the title to the center of the roadway, and a description of the land only, without mentioning the
street will carry with it the title to the street.

Sec. 128. Land Bounded By Rivers

By the common law if land is bounded by a navigable river the title to the bed of the river is in the sovereign and the
adjoining owner owns to the high water mark, but if the stream is non-navigable, the adjoining owner owns to the
thread of the stream. The terms navigable and non-navigable described respectively streams in which the tide did or
did not ebb and flow. This rule is still adhered to in some states, but not in others.
In order to determine whether a person owned to the middle of a stream or merely to the shore, it is necessary by the
common law rule to establish whether the stream is navigable or non-navigable, but those adjectives had a special
meaning to convey in the one case that the influence of the tide was felt, in the other, that it was not. Navigability in fact
did not make the stream navigable within this rule. The tide must be felt therein.
If within this rule, a stream is non-navigable (whether navigable in fact), the adjoining owner owns to the thread of the
stream, and owns any islands or parts of islands on his side of the thread of the stream, subject to the easement of the
public in the water; but if navigable he owns to the high water mark only, the bed of the river being in the sovereign,
and the land between high water and low water mark being a public common.88
In some jurisdictions the question of navigability is one of actual fact, and this will determine whether the boundary
stops with the shore or goes to the edge of the stream.
If the owner owns to the thread of the stream a conveyance by him of the land will carry title to the thread of the stream
unless reservation is made.
The stream, if navigable in fact, whether navigable in law or not by the above test, is subject to a public easement, that
is, the right of the public to navigate it and make reasonable uses thereof, including the right to temporarily tie up at the
wharves thereof, or to seek shelter upon the shores.
Although the owner of the adjoining land may own also to the thread of the stream, he owns subject to the public
easement, and also subject to the rights of others, whose property abuts upon the stream. He must therefore make no
use of it that will pollute it, or unreasonably diminish it or stop or impede its natural flow. In other words, his use of it
must be a reasonable one.
Sec. 129. Lands Bounded By Lakes
If a lake is navigable, generally the title is in the sovereign. If not
88. Middleton v. Pritchard, 4 111. 510. (This case held that the Mississippi River adjoining the Illinois shore, to be non-
navigable by the common law test and that the owner of the land on the river owned title to trees on an island on his
side of the thread of the river and that defendant was liable to him in damages for cutting and carrying them away.)
navigable the adjoining owners own the bed of the lake in proportion to their water frontage.
There is a good deal of confusion in the cases as to the rules to apply in case of lands bounded by lakes. The English
common law was about the same in case of lakes as in case of rivers, as stated in the above section. But America has
problems which England did not have on account of the number and size of the lakes in this country. We can perhaps
with accuracy lay down the general rule that if a lake is large enough to be navigable in fact, the bed of the lake
belongs to the sovereign subject to the riparian rights of the owners of the adjoining shores, but if not navigable in fact
the owners own the lake bed. But it has been held that if the lake is meandered in making the original survey, the title
passes to the water's edge, but if not large enough to be meandered then title passes to the bed of the lake as the
boundary of the adjoining land.89
A meander line is a line drawn by the surveyors along the shore from point to point following the general outline of the
lake, and does not in itself constitute the boundary.
If the bed of the lake is in the adjoining owners, it may be a difficult task to assign to each his proportionate part. On
account of the fact that the lake is circular in form, and there is no thread of the stream, lines of the adjoining
boundaries cannot be extended, as in the case of rivers. Different tests have been suggested generally to the effect
that the adjoining owner owns that portion of the lake which is proportionate to his water frontage.
80. Fuller v. Shedd, 161 111. 462; see note to Gouverneur v. National Ice Co., 18 L. R. A. 695, for conflicting
authorities on question of title to bed of lake.

Chapter 18. Proprietary Rights In The Land Of Another. A. Easements And Profits

Sec. 130. Easements Defined

An easement may be defined as a right which a person has by grant or proscription to have a certain enjoyment or use
in land of another in which he has no estate of possession.
By the term easement we convey the idea that one person possesses land and another person out of the possession
has the right to make a certain use of the land, as to have a roadway or path over it or else to have the owner refrain
from making a use of it. It is to be regarded as a permanent interest; interests of a temporary character by mere
permission are called "licenses."

Sec. 131. Kinds And Elements Of Easements

Easements are either positive or negative, appendant or in gross.
The first division of easements may be made into those which are positive and those which are negative. A positive
easement is a right which one has to do something upon the land of another, as to go across it, to flood it with water,
etc. A negative easement is the right to compel the owner to refrain from making a certain use of it, thus the right which
one has to have light and afr over the land of another is a negative easement. Easements of light and air in this country
can arise only by express grant and not by prescription as in England.
Easements are also divided into those which are appendant and those which are in gross. An appendant easement is
one which goes with an estate irrespective of the ownership and exists in favor of that estate over a neighboring estate.
The benefited estate is called the "dominant estate," and the burdened estate is called the "servient estate." An
easement in gross is one possessed by a certain person irrespective of his ownership of any estate. It is purely
personal and cannot be assigned.91 Easements in gross are uncommon.

Sec. 132. Acquisition Of Easements

Easements may be acquired by grant or by prescription.
An easement may arise in the first place by agreement as where it is contained in a deed or any form of grant, or it
may arise by long continued usage, in which case we say that it arises by "prescription." To acquire an easement by
prescription there must be a claim of the right continued for twenty years and the enjoyment of the easement must be
continuous and adverse, that is, claimed as a right and not as a mere favor, and must be open and notorious.
An easement sometimes is said to arise not by express grant or by prescription but impliedly from the circumstances.
The chief implied easement is an "easement of necessity," existing where land is granted with no outlet except over the
land of the grantor. As long as this condition of affairs continues an easement of necessitv
91. Knecken v. Voltz, 110 111. 264.
exists. But no easement can ever so arise over the land of a stranger.92
We see herein how an easement differs from a license. An easement is claimed as of right - an estate irrevocable and
vested, the enjoyment of which, when the right is established, the court will protect, as any other estate, while a license
exists by consent of, or contract with, the recognized owner, not in opposition to the owner's estate, but by his consent.

Sec. 133. Increase Of Burden

The owner of the easement must use it only for the purposes for which it was granted or acquired. He cannot change
Or increase the burden.
The easement must be used for the purposes acquired. It cannot be turned to other purposes.

Sec. 134. Transfer Of Easements

Easements may be transferred by the transfer of the land involved.
We have seen that easements are called appendant when they are in favor of one estate, called the dominant estate,
against another estate, called the servient estate, and that being incidental to the use of the land may pass with a
transfer of the land without any express statement in that respect, although the deed sometimes does provide that all
easements, ways, etc., are to pass with the grant. Appendant easements cannot be separated from the estate and
therefore cannot be transferred independently of it.

Sec. 135. How Easements Are Lost

Easements are lost through abandonment, by express release and by change of condition making them necessary.
92. Collins v. Prentiss, 15 Conn. 39.
A person having an easement may abandon it. We cannot say that a mere disuse of an easement is an abandonment
of it but it would be evidence thereof. An easement may be relinquished by express agreement. So by change of
circumstances the easement may become no longer of necessity or convenience and thereby be lost, as where
buildings are torn down, etc., or where a roadway is opened up to which there is convenient access, etc.
Sec. 136. Profits A Prendre
A profit a prendre is a right to substance of another's land as the right to take coal, wood, fish or turf.
An easement is a mere right to use the land of another for some purpose. But there may be a right to take something
from the land of another. These rights are not common in this day, but in English history a peasant or land-holder might
have the right to go upon the land of his lord and take wood, coal, etc., and this right was called a "Profit a prendre," or
a Common. There were four chief sorts of commons; first, common of estovers, or the right to take fuel; commons of
pasture, or the right to pasture one's cattle; commons of turbary or the right to take turf; commons of piscary or the right
to fish. These commons were acquired by grant or prescription and perhaps we need not examine them more at
length.93

B. Right To Lateral Support

Sec. 137. Statement Of The Right

Every owner of land, has the right to have it supported in its natural state by the adjoining land or by artificial supports
supplied in place thereof.
93. See Blackstone's Com.
It is a natural right that land owned by one person should not have the support of the adjoining land withdrawn, unless
some substitute support is put in its stead. But this right applies only to land in its natural state. A, cannot place the
burden on B, of the support of the buildings erected on A's lands. It may be said therefore that buildings on a person's
lands must have their own sufficient foundations. In Transportation Co. v. Chicago,94 the court said: "The general rule
may be admitted that every land owner has a right to have his land preserved unbroken, and that an adjoining owner
excavating on his own land is subject to this restriction that he must not remove the earth so near to the land of his
neighbor that his neighbor's soil will crumble away under its own weight and fall upon his land. But this right of lateral
support extends only to the soil in its natural condition. It does not protect whatever is placed upon the soil increasing
the downward and lateral pressure. If it did, it would put it within the power of a lot owner, by erecting heavy buildings
on his lot, to greatly abridge the right of his neighbor to use his lot."

Sec. 138. Duty In Making Excavations

An owner who excavates his land, must take reasonable care not to cause damages to the adjoining land or buildings
thereon and must notify the neighbor of his intention to excavate.
It follows from the last section that an owner may excavate his land without any liability unless he take from the
adjoining land its support in its natural condition. However, this does not mean that he can cause damage to the
neighboring buildings that might have been reasonably
94. 99 U. S. 635 at p. 645.
avoided. City of Quincy v. Jones, 76 111. 231. For this reason it is held that he must use due care in making such
excavations, and must give notice of his intentions so that the owner of the adjoining building may take such
precautions as are necessary.95
95. Davis v. Summerfield, 131 N. C. 352.
Part VI. Of The Acquirement Of Title Except By Deed, Will, And Descent. Chapter 19. Various
Ways Of Acquiring Title Other Than By Deed, Will, Or Descent. A. Title By Prescription And
Adverse Possession

Sec. 139. In General

A title to real property may be acquired by long continued occupation of an adverse character.
One may acquire title to real estate by a possession adverse to that of the owner.
Also under some statutes an adverse title may be acquired without possession where it is under color of title, and the
lands are of unimproved character.

Sec. 140. The Period Of Limitation

The common law period of limitation was twenty years. But by statute shorter periods may avail under specified
circumstances.
To acquire title by adverse possession at common law there had to be (1) actual possession (2) of an adverse
character (3) continuously and (4) for twenty years. This is also generally the law today.
But statutes have provided shorter periods of adverse acquisition where there are other elements present, such as
possession and payment of taxes for, say, seven years, or possession for seven years under color of title. The law of
each state will manifestly have to be consulted on these additions to the common law of adverse claim.

Sec. 141. What Constitutes Adverse Possession

The possession to be adverse must be an actual possession which need not consist in residence upon the property but
must be of some use which would notify the world at large that this person is in possession of the property.
The possession required must be a possession which is not merely constructive but actual. This does not mean,
however, that the person claiming the land must live upon it, for if he fences it or farms it or in any way uses it
constantly so that the public would be apprized that he was in possession, this would be considered adverse, provided
it is really of an adverse character, that is, under a claim of right.

Sec. 142. Tacking Successive Interests

Parties who claim in adverse possession may make out the period of limitation by tacking the possession of several
together provided their possessions were continuous and their claims in privity.
It is not required that the same person remain for twenty years in adverse possession but his purchasers and heirs or
devisees may complete the adverse possession by continuing to hold it adversely. There can be no tacking of the
interests of parties where they hold without privity of title. In the cases we have just mentioned there would be privity of
title, but suppose that A holds for ten years and then abandons the possession and B takes it up and continues it for
ten years more. Here B could not claim title by reason of A's prior ten years possession, for the holdings cannot be
tacked together, being of an independent character.

B. Title By Escheat And Forfeiture

Sec. 143. Meaning Of Escheat And Forfeiture
An estate was forfeited to the king for various reasons. It is said to escheat when there is no heir. There is no such
thing as forfeiture of estate in this country.
Where a person had committed certain crimes he forfeited his estate as a portion of his punishment. In this country we
have no such thing as forfeiture of property to the state for punishment for crime, but it remains in the person and he
may dispose of it by will and at his death without a will it goes to his heirs. Escheat is a term meant to describe the
forfeiture of the title to the King or over-lord where there were no heirs. One might be deprived of heirs by a "corruption
of his blood," as it was called, where he had committed a crime or there might be no heirs simply because he died
without kin. In this country there is no such thing as corruption of blood and therefore no escheat for that reason, yet of
course a man may die without heirs and the law must in that case provide some disposition of his property. In such a
case it goes to the state or county.
It is contrary to the policy of the law to take an estate for lack of heirs, unless this becomes necessary. We see in
another connection, that there is no failure of heirs until not only those in direct line, but collateral relatives fail.

C. Title By Accretion

Sec. 144. Title By Accretion Defined

Title by accretion is the title that a riparian owner acquires by gradual additions to his lands by the action of the water.
One who has land bounded by water may acquire title by accretion, or lose it by erosion. These words mean the
gradual addition or subtraction of the riparian land by the action of the water in adding to of wearing away the shore.
Such changes may add to land on one side of the water and take land from the other, changing the thread of the
stream, and the extent of the land of the respective owners grows or diminishes accordingly.
The sudden breaking away of a perceptible body of land is said to be "avulsion," and it is said that the owner can claim
the same unless he allows it to remain contiguous to other land until it becomes attached thereto.96

Sec. 145. Division Of Accretions

The rule generally applied in the apportionment of accretions is set out below.
In Kehr v. Snyder,97 the court says:
" 'Measure the entire river front of survey 759 as it existed in 1860, when the third division of Cahokia commons was
first laid out,' and note the aggregate number of feet frontage, as well as that of each parcel or lot; then measure a line
drawn as near as may be with the middle thread of so much of the stream as lies opposite the shore line so measured.
Having done this divide the thread line thus measured in as many equal parts as there are lineal feet in the shore line
giving to each proprietor as many of these parts as his property measures feet on the shore line; then complete the
division by drawing lines between the points, designating the lot or parcel belonging to each proprietor both upon the
shore and the river lines."
96. Missouri v. Nebraska, 196 U. S. 23.
97. 114 111. 313, at p. 317.
Part VII. Of Title By Deed. Chapter 20. The Capacity Of Parties To Grant And To Receive By
Deed

Sec. 146. Corporations

A corporation has the general capacity to receive and to grant real estate.
The powers of a corporation depend upon its charter and as far as the state is concerned a corporation may not have a
right to hold an excessive amount of real estate and can be compelled to dispose of the same. But almost every
corporation has the power to own some real estate whether that is mentioned in the charter or not because that is a
power which is incidental to its other powers. If it has any power to hold real estate it may take a good title to any real
estate and give a good title to any real estate whether as far as the state is concerned it has a strict right to hold it or
not. A purchaser of real estate from a corporation is therefore usually not concerned whether it has a right to hold the
particular estate in question or not as he takes a good title if it has any power whatever to hold real estate.98
98. See title Corporations in this Series.

Sec. 147. Aliens

Aliens may as a general rule under the statutes sell or buy real estate to the same extent that citizens may but some
statutes give the state a right to compel an alien to sell his real estate after he has held it for a certain number of years.
We may say that an alien may buy and sell real estate almost as freely as a citizen. Some states protect themselves
against possible large holdings by an alien by statutes to the effect that after a period of years an alien may be
compelled to dispose of the property at the suit of the state and thus convert his property into personal property.

Sec. 148. Minors

A minor may take and receive real estate but his deeds are voidable by him upon becoming of age.
A person under legal age is called an infant or a minor. He may be a grantee in a deed and also may sell his property
but after becoming of age he may have the deed set aside provided he acts within a reasonable time."

Sec. 149. Insane Persons

An insane person has, generally speaking, no power to grant real estate though he may take a title by deed.
An insane person's contracts are either void or voidable and he has no capacity to make deeds of a binding character.
It is possible of course that an insane person shall have property deeded to him. He has the capacity to receive real
estate.
99. See Volume I, of this Series as to contracts and deeds of minors.
144 The Law of Property.

Sec. 150. Married Women

A married woman at common law was incapacitated to make contracts but modern statutes have given her as full
power to grant and to receive real estate as a married man has.
A woman's capacity to contract was taken from her at common law. There were indeed ways worked out by the
conveyancers whereby title to her real estate might pass from her. By our modern laws in respect to married women,
she has power to receive and grant real estate. The husband has, of course, an inchoate right of curtesy or dower in
her real estate, so that he must join in her deed to convey an unclouded title; but a married man's conveyances are
also subject to similar considerations.

Chapter 21. Of The Various Classes Of Deeds

Sec. 151. The Ancient English Deeds

The ancient English deeds were the original deeds of feofment, gift, grant, lease, exchange and partition; and the
derivative deeds of release, confirmation, surrender, assignment and defeasance.
We will examine the ancient English deeds very briefly in this section. The time was when the subject of conveyancing
was much more complex than at present as our times tend towards simplicity in such matters. Deeds were formerly
executed upon parchment, sometimes in counterpart and sometimes singly. Where the deed was executed by both
parties the counterparts were written upon the same parchment, which was then cut into in an irregular fashion so that
each part fitted the other and this form of deed Was called an "indenture" because of the indented edge, and we have
this word until this day in legal instruments which begin, "This Indenture Wit-nesseth," although the indenting itself has
long since been abolished. Deeds which were not indented were called "deeds poll," meaning that they were "polled"
or "shaved" even and not indented.
Old English deeds may be known as those which are original and those which are derivative or which in some way
affect an original deed.
A deed of feofment was the deed whereby the fee was conveyed in praesenti and to this deed livery of seisin was a
necessary ceremony to convey the fee; that is, there must be a present delivery of possession in order to transfer the
fee. Land could not be enfeofed .to take effect in the future. The fee could only be transferred by present transfer
accomplished by actual livery of seisin.
The deed of gift was a technical name given to a deed whereby an estate tail was granted; it was similar to the deed of
feofment, and livery of seisin was likewise essential.
The deed of grant was a deed whereby all estates were granted of which in the nature of the case there could be no
livery of seisin, as in the case of a grant of the reversion. But if livery of seisin could be had the deed must be one of
feofment with livery of seisin.
A deed of lease was a deed for life or years or any less time than the lessor had in the premises; and was the same
deed in effect that our lease is today.
A deed of exchange is a deed whereby the parties mutually exchange estates.
A deed of partition is a deed whereby both tenants or tenants in common or copartners agree to divide the land among
them each taking a distinct part.
Coming now to the derivative deeds, the first of these was the release whereby one who has an estate in land releases
his estate to the other as where the owner of the fee releases his interest to the tenant. In order for a release to
operate at common law it was necessary for the relessee to be in possession.
The deed of confirmation was a deed given to correct or confirm a former deed.
A deed of surrender was the opposite of a release, as where one who has an estate surrenders it to another who has a
higher estate.
An assignment was a transfer of a right in an estate as where one lessee assigns his estate to another.
A deed of defeasance was a collateral deed containing conditions upon the performance of which an estate might be
defeated

Sec. 152. The Deeds Made Upon The Statute Of Uses

Under the statute of uses, conveyancers, invented forms of deeds which took effect by the language of that statute
because they created uses which that statute executed and in this manner livery of seisin was avoided in the
conveyance of a fee. They were the deeds of bargains and sale, lease and release and covenants to stand seized.
We have already noticed the statute of uses and we need not occupy space to examine at length the deeds mentioned
for they are not in common use today. We know that the statute of uses was passed to give the fee to him who before
that time had a mere use in an estate, the bare legal title to which was held in another. Thus if A conveyed to B for the
use of C, the statute of uses gave the legal title to C. Under this statute a number of deeds were invented by which
uses were created and the statute then operated to convey the fee, and this saved livery of seisin. The lease and
release was a form of conveyance whereby a lease was given to one as for a year and then released to the lessee.
The bargain and sale was a deed whereby the grantor bargained to sell and by his bargain became a trustee for the
grantee and the statute of uses then conveyed the estate to the grantee. A covenant to stand seized was the creation
of a use which the statute executed in the covenantee. In all of these deeds a use was created which the statute
executed. We need not examine them further. Black-stone treats them fully if any further study is sought.100
100. Book II, p. 327ff..

Sec. 153. Present Day Deeds

The present day deeds are warranty deeds, trust deeds and mortgages, release deeds, leases, and assignments.
(1) Warranty deeds.
A warranty deed is a deed used today whereby the grantor warrants the title to the property, that is, he contracts that if
the grantee loses the title, or suffers any damage by reason of any defect in it he, the grantor, will make him whole.
There are several warranties of title, such as the grantor is the owner and has the right to convey and that there are no
encumbrances and that he will give further assurance and defend the title. By statute in many states whereby certain
words are used, as "grants and conveys" or as "bargains and sells" certain warranties of title will be implied; and forms
of warranty deeds are set out in the statutes with the legal effect that they shall have. A warranty deed is said to
convey after acquired title. Thus, if A by warranty deed conveys to B and the title is defective and A afterwards
acquires any title it passes to B under the former warranty deed. In all sales of real estate for an agreed price the
warranty deed is the usual deed.
(2) Quitclaim deeds.
The quitclaim deed is a deed used when it is desired that anyone who may have some claim upon land should convey
it but the grantor does not care to make any warranties. By a quitclaim deed one in effect says "I hereby quit my claim
to this land." Where one is thought to have any interest which operates as a cloud on the title he is usually asked to
quitclaim, but would hardly care to warrant in such a case. So when several tenants in common desire to convey to
one of their number a quitclaim deed may be used. A quitclaim deed is as effectual to pass a legal title as a warranty
deed but no warranties are contained in it and the grantor merely parts with what, if anything, he has, without
warranting that he has any interest whatever.
(3) Other deeds.
Trust deeds and mortgages we have already considered.
Leases are deeds by which tenancies are created and we have already considered them.
A release deed is a deed whereby one who has an interest in property under some other deed, releases it. It is used by
a mortgagee to release title to the mortgagor and by a trustee to release title obtained by him under the trust deed. The
release deed always refers to the deed by which the title which is now released was obtained. Thus a trustee when the
debt is paid releases whatever interest he may have by virtue of the trust deed, describing it by date and record
number. See the form in the back of this book.
The deed of assignment is a deed whereby one estate is assigned to another as where a mortgagee assigns the
mortgage to another. Where a lease is assigned it is usually done by a short assignment on the back of the lease.

Chapter 22. The Parts And Essentials To Deeds

Sec. 154. Formal Parts

A deed has certain orderly and formal parts but is now of a simpler nature than it used to be.
A deed is said to have these following parts: first, the premises, which sets forth the number and names of parties and
the consideration and also the description of the property conveyed;101 second, the habendum and tenendum. The
habendum states the quantity of the estate; and the tenendum was formerly used to signify the tenure, but as now
there is but one form of tenure, the tenendum is useless and is seldom used. Where we use the words "to have and to
hold" today they simply read somewhat as follows: "To have and to hold to himself and his heirs forever." But an
examination of the modern deed will show that these ancient provisions which used to extend at length are no longer
necessary; though of course the deed must show the estate granted, whether, for instance, for life or in fee. The next
part of the deed in old days was the reddendum or reservation of rent and this part of a deed we do not find in modern
deeds except in leases. Another part of the deed is that which states the conditions upon which the estate is granted,
and these are not usually put in deeds, except mortgages and trust deeds, though the fee is sometimes
101. See SEC. 214, post, for description of real estate.
I50 made defeasible, as we shall notice further. The next part of the deed is that part containing the warranties but in
our modern deeds the warranties are usually implied in the words used and are not made extensively and are
contained in such words as "grant, bargain and sell," etc., at the beginning of the deed. The next part of the deed is
that in which the covenants are made in reference to the use of the property, etc., and we will find that land is often
granted upon covenants as to its use in our day as well as ancient days. Next comes the conclusions which contains
the date of the deed, and refers to its execution. After this is the signature and the seal.
A brief reference to the modern form of deed will show how simple it has become.

Sec. 155. The Execution Of The Deed

By the execution of the deed we mean the act of making it complete as a deed, by signature and sealing in its
completed form. The deed is executed by signature and seal with the intent of making it complete and final, but, also,
there must be delivery of it before it takes effect.

Sec. 156. Delivery

The deed has no effect without delivery and delivery consists in parting with the deed with the intent of releasing all
control over it and making it effective as a legal document.
A deed must not only be properly signed and sealed but it must be delivered before it can take effect. A person may
have a deed in his possession which is fully signed and complete in form but the grantee therein can claim nothing by it
until it has been delivered to him or to someone for him. The reason of this is very apparent. One may make a deed
before he really makes up his mind to use it and until he finally hands it over it can have no effect.
The lack of delivery frequently renders inoperative deeds evidently intended to be effectual at death, but never given
over by the grantor during his life time to the grantee.
Delivery may be absolute or upon condition and when upon condition it is said to be delivery in escrow. The party to
whom it is delivered is called the escrowee and it is his duty to deliver it to the grantee upon the performance of a
condition, as for instance, payment of certain money. Thus, when property is purchased the deed is often put up in
escrow to be delivered on payment of a certain part of the purchase money. The deed cannot be delivered in escrow to
the grantee himself.

Sec. 157. Acknowledgment

Acknowledgment is the act of the grantor before some official in admitting the instrument to be his own for the
purposes therein set forth. It is not essential as between the parties but is requisite to entitle the deed to record, and for
other purposes.
Before the grantor delivers the deed he generally acknowledges the same before a notary public or other officer and
this consists in his admission, that the deed is his own and was given freely and for the purposes set forth in the deed.
A deed may be effective between the parties without acknowledgment provided it was really delivered, but
acknowledgment is always desirable and is necessary for certain purposes. In the first place a trumped up charge of
fraud on the part of the grantor would be more difficult to sustain. In the second place, acknowledgment is necessary in
most states to make the recording of the deed effectual against third parties. In the third place, dower and homestead
cannot be waived by deed except it is acknowledged and in the fourth place, a deed which is acknowledged is said to
prove itself, meaning that it can go in as evidence without proof of its execution which would otherwise be necessary.

Sec. 158. Acceptance

Acceptance is also necessary to the effect of a deed but in the case of children, insane persons and the like it will be
presumed.
It is said that acceptance is as necessary as delivery and that is true in this sense, that you cannot compel a man to
take an estate against his will, but of course acceptance is usually one with the delivery and does not consist in any
special formality. Children who are of tender age, lunatics and the like are presumed to have accepted and can take
the estate though too weak mentally to signify a willingness to receive it.

Sec. 159. Recording

The record of the deed is not essential to its validity in any sense but is necessary for the grantee's protection against
subsequent acts of the grantor and should never be neglected.
The purpose of recording the deed is to give notice to all the world of the grantee's rights thereunder and for this
reason the grantee should always record the deed for in that only, can he be sure of protection against the acts of the
grantor with innocent persons who still rely upon his ownership of the title having no notice by record or otherwise that
it has been dispensed with.

Chapter 23. Restrictions In Deeds Upon The Use Of Property Conveyed

Sec. 160. What Restrictions Permitted
The law permits restrictions as to the use of the land so long as the restriction is not against public policy.
Restrictions in the use of land are not encouraged by the law102 but are nevertheless permitted so long as they are
not against public policy. Thus, there may be restrictions as to what sort of buildings shall be erected, how far from the
lot line buildings shall be placed, that the building shall cost a minimum figure or be of a certain type, that certain
industries shall never be conducted there, etc. Some restrictions are, however, not permitted, for instance when they
are for the purpose of creating a monopoly, etc.103

Sec. 161. Restrictions By Way Of Covenant Or Condition

The restriction in the deed may be by way of a covenant or condition, the breach of which will defeat the title.
The use of the land may be regulated by the grantor by way of a covenant, the breach of which will give an action for
damages and which will be restrained by injunction; or it may be by way of a condition, that if the land is used in the
way prohibited the title shall thereupon revert to the grantor or his heirs. The breach of the covenant will be enjoined or
an action for damages will lie on account of it. The breach of the condition operates to cause a forfeiture of title.
102. Hutchinson v. Ulrich, 145 111. 336.
103. Burdel v. Grandi, 14 L. R. A. (N. S.) (Cal.) 909.

Sec. 162. When A Restriction Creates A Condition

A restriction will create a condition defeating the title only in case it is expressly declared to be a condition with the right
of re-entry by the grantor and his heirs. Calling a restriction a condition does not in itself make it such.
A court does not favor forfeitures of estates as this is a harsh remedy, and although it permits an estate to be granted
upon a condition the non-observance of which will defeat the title, yet the intent of the parties must be plain, and it will
enforce a restriction as a covenant and not a condition wherever possible.104 Thus if it is stated in a deed that the land
is granted on the express condition that no flat building shall ever be erected there, the parties might not mean thereby
that the breach of that condition would result in a forfeiture of the estate but only mean that the grantee should be
subject to an injunction in case he attempted to break the condition or be subject to damages for actual breach.
Accordingly the court will call a restriction a covenant rather than a condition wherever possible, even though the word
"condition" may have been used, provided nothing further is stated to show that the restriction was meant as a
condition. It is therefore necessary in most states for the grantor to declare somewhat as follows: "That this estate is
granted upon the condition that no saloon shall ever be conducted upon the premises and in case of breach of this
condition the title shall revert to the grantor, his heirs, or assigns, and he shall have the right to reenter and be
possessed as of his former estate."
104. Post v. Weil, 115 N. Y. 361.
Furthermore the cases hold that the estate is not defeated until the grantor does actually make a re-entry.105

Sec. 163. Against Whom Restrictions May Be Enforced

Restrictions as to the use of land may be enforced against the grantee and all succeeding purchasers.
A restriction upon the use of land may be enforced against the grantee or his heirs or any person who by descent, will
or deed comes into the ownership of the property. Assuming that the restriction is on record or known to the party
involved, he takes subject to the restriction. It is not necessary that the restriction be repeated in every successive
deed, but a party purchasing or getting an estate in any way is bound by the record and the grantor may thus govern
the restriction no matter into whose hands the estate may pass.
Sec. 164. By Whom Restriction May Be Enforced
A restriction may be enforced by the grantor or by anyone for whose benefit the restriction was made.
Restrictions are usually made for the benefit of certain other property, as where a person lays out city lots and makes a
building restriction upon each of them. Here the restriction upon each lot is in favor of all the other lots in the same
subdivision or block, and subsequent owners of these lots or any of them may enforce the restriction against the owner
of any lot. Otherwise restriction would be of no value. It has been created for the purpose of preserving the character of
the neighborhood and may be enforced for this purpose by anyone affected.
105. Id.

Sec. 165. Waiver And Loss Of Right To Enforce Restriction

On account of the fact that the court does not favor restrictions upon the use of land the right to enforce such
restrictions is easily waived or lost and may be expressly waived by the parties entitled to enforcement.
A person entitled to the right to enforce a restriction may see fit to expressly waive it by written agreement or otherwise.
So the right may be lost by conduct or by change of situation. The right must be strictly and promptly enforced;
otherwise it will be considered as having been waived.106 Thus if one owns a lot in a block divided into lots upon
which there is a building restriction he will lose the right to enforce the restriction if he permits his neighbors or anyone
of them to break the restriction without protest. Thus if A owns lot No. 1, and B owning lot 9 breaks a building line
restriction without A's protest A will usually be held to have waived the right in respect to lot 2 or 3, etc., and certainly
has waived it in respect to lot 9 by not proceeding on first notice to enjoin B from breaking the restriction.
So where the change in the neighborhood is so great that the original purpose and value of the restriction has become
lost there will be a loss of the right to enforce the restriction, especially in a court of equity; for instance, if the
neighborhood was originally intended as a residence district, it may, owing to the encroachment of business, have lost
its value for that purpose. Here no valuable right would be protected by the enforcement of the restriction and
enforcement would mean the prevention of improvement along the lines of development in the neighborhood. A court
of equity will not enforce the restriction where by change of circumstances, it is no longer of value.
106. Evertsen v. Gertsenberg, 186 111. 344.
Thus, in a very recent Illinois case, there were covenants not to build beyond a certain line, and complainant brought
suit to prevent defendant from violating the covenant. The defendant showed that other parties in the same block had
violated the covenant, without protest, and furthermore that the erection of an elevated railway had changed the
character of the neighborhood. The court refused an injunction on these grounds. Incidentally, it held that the erection
of bay windows, porches and the like, over a building line, is a breach of the covenant.107
107. Knelp v. Schroeder, 255 111. 621.

Part VIII. Title By Descent And By Will. Chapter 24. Title By Descent

Sec. 166. Explanation

Upon a person's death, the law designates to whom his property shall pass; but extends to a person the right to direct
the disposition by a direction, called a will, to take effect at his death.
As the law permits private ownership of property it is concerned that upon a person's death, his property shall pass to
the ownership of others. Naturally, those who are the most logical beneficiaries are his relatives, and to those relatives
the law accordingly disposes it, and calls them his "heirs"; but it also permits a person to name his own heirs, although
in that case they are not called heirs, but (in case of personal property) legatees, and (in case of real property)
devisees. In this and the succeeding chapter we are concerned with this course of descent and distribution where there
is no will, and with the disposition where there is a will.

Sec. 167. Terminology

"Testator" - one who leaves a will. "Intestate" - one who dies without a will. "Devisee" - one to whom real property is left
by will.
"Legatee" - one to whom personal property is left by will; the gift to whom is called a "legacy" or "bequest."
"Heir at law" - one who takes the real property of an intestate.
"Distributee" - one who takes the personal property of an intestate.
"Personal representative" - executor or administrator.
"Executor" - one named in a will to execute it, that is, to administer the estate.
"Administrator" - a person named by the court to administer an intestate estate.
"Administrator with the will annexed" - one who is named by the court to administer a testate estate where the will
names no executor or where the executor named cannot or does not serve.
"Administrator with the will annexed de bonis non" - one who is named by the court to finish the administration of an
estate partially administered by an executor or by an administrator with the will annexed.

Sec. 168. Rules Of Descent

THE ANCIENT CANONS. By the common law there were a number of rules governing descent of real property, called
"canons of descent."
It being once established that it is the' policy of the law to pass the property of a person at his death to someone else,
instead of having it revert to the state it becomes necessary for the law to indicate who those persons are. It may leave
this to the owner himself, but the owner may make no disposition and accordingly the law must have rules of
succession.
The early canons of descent were as follows:
(1) "Inheritances shall lineally descend to the issue of the person who last died actually seized in infinitum but shall
never lineally ascend."
(2) "The male issue shall be admitted before the female." The canon means of course that the sons of man inherited by
the common law instead of the daughter, and that the female inherited only in case there were no sons. This is a rule
that has been abolished in American Jurisprudence, all the children, either male or female, being equally entitled.
(3) "Where there are two or more males of equal degree the eldest shall inherit." This rule is called the rule of
primogeniture and gave the estate to the eldest son. The purpose originally was to keep the inheritance and the
consequent loyalty to the lord undivided.
(4) "The lineal descendants in infinitum of any person deceased shall represent their ancestor." This rule means that
the descendants of a person stand in his place. Thus the eldest son inherits and then his son and then the grandson in
preference to the other brothers of the eldest son. In a modified sense this rule is still true, in this, that a person's heirs,
as named by the law, stand in his stead and have the same estate that he had.
(5) "On the failure of lineal descendants or issue of the person last seized the inheritance shall descend to his collateral
relations being of the blood of the first purchaser." As Blackstone says, "If Jeoffrey Stiles purchases land and it
descends to John Stiles and John dies seized though without issue; whoever succeeds to this inheritance must be of
the blood of Jeoffrey, the first purchaser of this family." This rule is now only true in this sense, that on the death of a
person without children the estate goes to his collateral relations, that is, his brothers, cousins and the like.
(6) "The collateral heirs of the person last seizea must be his next collateral kinsman of the whole blood." We mean by
one of the "whole blood," one that is derived from the same couple of ancestors. In our day the law admits the half
blood and the whole blood equally, that is, a man's nearest collateral relations will take without reference to the whole
or the half blood.
(7) "In collateral inheritances the male stocks shall be preferred to the female unless the land in fact descended from a
female." This rule is an ancient one, now obsolete.
These are the ancient canons of descent but our modern canons differ from them quite essentially as we will note in
the next section.

Sec. 169. The Present Day Canons Of Descent

The rule of descent differs in some respects in the different states but may be generally stated as follows:
In the first place when a man dies leaving children these children take his real estate whether or not he leaves a wife or
other relatives. The wife of course has her dower and she may have also a portion of the personal property, absolutely
as her own in the character of an heir. In the second place if a man dies leaving no children, the estate goes to his
wife, his parents, his brothers and sisters in portions named by the law, as for instance, that the wife shall get one-half
and his parents, brothers and sisters or their descendants shall get the remainder in equal proportions. This in a
general way indicates the course of descent. The children are first preferred, and then the other relatives, if there are
no children or descendants of children. Inheritances descend per stirpes and not per capita, just as at common law.
That is, if A dies leaving two children ana two grandchildren of a child deceased the estate is divided into three parts,
one part to each child and one part to the two grandchildren. If the division was per capita the four heirs would each get
a one-fourth part.

Chapter 25. Title By Will. A. Definition And Kinds Of Wills

Sec. 170. Will Defined

A will is a disposition of one's property to take effect at his death. A supplemental addition to the will is called a codicil.
The law permits one to direct how his property shall go upon his death. The direction, itself, if made according to legal
requirements is called a will. The law sets out certain formalities and these must be observed.
A will is also called a "testament." The term "codicil" is used to describe an addition to an existing will.

Sec. 171. Kinds Of Wills

The usual will is in writing signed and witnessed. Oral wills, permitted under rare circumstances, are called
nuncupative. A will written and signed by the testator entirely in his own handwriting is called holographic.
The ordinary will is one in printed, typewritten, or handwritten form, and signed and witnessed. In one or two states if a
testator writes out the will entirely in his own handwriting and signs it, the will is valid without witnesses. It is then called
a holographic will. The law permits one in his last illness and about to die, to dispose of his personal property (not his
real estate) by oral statement in the presence of witnesses. Such a will is called nuncupative. Such wills are not looked
upon with favor, and are very rare.

B. Of The Capacity To Make A Will

Sec. 172. Minors

A person under age cannot make a will.
The right to make a will is entirely statutory and generally speaking, it is requisite that the party must be of full age in
order to make a will.

Sec. 173. Insane Persons

An insane person cannot make a will except in a lucid interval.
Very clearly one who is insane cannot give his property by will, although if he has lucid intervals he may make a will
during such interval.

Sec. 174. What Mental Capacity Required

A party must understand the nature of his act in making a will.
A person who makes a will must be strong enough mentally to understand the nature of his act. He need not know
enough to perform his ordinary business affairs but he must know what he is doing. Thus, an old man who has become
too feeble minded to perform ordinary business affairs may yet know enough to make a will, provided he understands
that he is disposing of his property by will.

C. Wills Secured By Fraud, Undue Influence, Etc

Sec. 175. Wills Or Devises Secured Through Fraud

Gifts secured through fraud are void.
Where through fraudulent representations a gift is secured which otherwise would not have been made, as where the
beneficiary represents that if the will is made to him, he will do certain things, the will is void.

Sec. 176. Wills Or Devises Secured Through Undue Influence

Where a gift by will is secured through undue influence the gift is invalid.
Undue influence means such influence that the will of the testator is overcome and he practically makes a will at the
dictation of another. Mere persuasion, however great, does not constitute undue influence. Undue influence usually
exists in cases where there is a relationship of dependency, as in case of physician and patient, attorney and client,
parent and child, etc. Where the circumstances show that there was such an influence upon the testator that the
freedom of his mind was thereby destroyed, the will is void. Very often religious beliefs of peculiar nature are involved
in cases of undue influence on the strength of which another person works upon the fears or hopes or prejudices of the
testator and thus secures a gift to himself.
Sec. 177. Wills Made Under Insane Delusion
A gift made by will under an insane delusion is void. An insane delusion is a belief which is unsupported in fact and
refuses to give way to the argument of others.
Wills are often declared void because based upon what the law terms an "insane delusion." An insane delusion differs
from insanity in that it is a delusion upon some one subject while as to other subjects the testator may be perfectly
rational. Queer beliefs do not constitute insane delusions so long as they have any support in fact or if they are of a
mere religious nature. Thus one's belief in spiritualism or religious beliefs by him of a very peculiar sort never constitute
insane delusions because religion is a matter scarcely susceptible of proof and rests in belief only. An insane delusion
is a belief which is not based upon any facts and persists in the face of evidence and the argument of friends. Thus in
an Illinois case, a father believed his son to be guilty of serious crimes and manifested an unnatural hatred for him. As
a matter of fact the son was of high standing in the community and there was no evidence of any sort tending to prove
him anything except a man of the highest integrity. The court held that his disinheritance by will would be set aside
because of an insane delusion respecting him.108

D. The Formal Requisites

Sec. 178. Will Must Be In Writing

A will must be in writing but there is an exception in case of a gift of personal property in one's last illness.
It is the general rule that a will must be in writing. There is one exception to this when a person makes a will of his
personal property when he is in extremis in his last illness. Such an oral will of personal property is called a
nuncupative will and was formerly a will permitted to be made by a soldier or sailor in extremis in respect to his
personal property. By statute the right to make such a will has been extended to others but it is usually provided that
there must be a certain number of witnesses present and they must reduce the will in writing in a certain number of
days. Real property may never pass by such a will. Nuncupative wills are not favored by the law and are very rarely
upheld. This is because of the opportunity for fraud in such cases.
108. Snell v. Weldon, 243 111. 406.
Aside from this exception the will must be in writing. This term includes typewriting or even printing.
Sometimes a reference is made in a will to another document and the testator attempts to make this other document a
part of his will. This is called "incorporation by reference." In such a case the document does not become a part of the
will unless it is clearly identified by the language of the will itself and is then in existence. Thus in the case of "Bryan's
Appeal" 109 a testator left property to W. J. Bryan according to a document to be found among his papers. The court
refused to make this document a part of the will because it was not clearly identified and it did not appear that it was in
existence when the will was made.

Sec. 179. A Will Must Be Signed

A will must be signed by the testator or by some one for him in his presence and at his direction.
It is essential that the testator sign the will. If too weak to sign it another may sign it for him in his presence and at his
direction, but otherwise the signature cannot be made by an agent. The signature may be in any form as by a cross
where the testator cannot write or is too weak to do so.
Sec. 180. Will Must Be Properly Witnessed
It is essential that the will be witnessed by the number of witnesses provided by law.
109. 77 Conn. Rep. 26b.
A will must be witnessed. In one or two states a holographic will need not be witnessed but in all other cases, and in
most states in all cases, the will must be witnessed. A will should not be witnessed by beneficiaries or executors and if
it is witnessed by a beneficiary the beneficiary cannot take under the will. It is very essential therefore that completely
disinterested parties witness the will.
It is not necessary that the witness read the will.
The will must be witnessed in the presence of the testator. Some cases hold that this means in the uninterrupted range
of the testator's vision, that is, the witnesses must be in such a position that he can see them sign, provided he cares to
do so.110 They must not go into an adjoining room or put any barrier between the testator's vision and themselves. An
exception would be made of course in the case of a blind person. It follows therefore that witnesses cannot sign
elsewhere even though they acknowledge the signature in the testator's presence. The testator may acknowledge his
signature to the witnesses but the witnesses must actually sign in the testator's presence.

Sec. 181. The Attestation Clause

The attestation clause is a clause signed by the witnesses asserting the publication of the will and their act of
witnessing it at the testator's request
A form of attestation clause appears in the appendix. It is much better practice to have such a clause, but it is not
indispensable and a will is properly witnessed if the witnesses merely sign their names thereupon.
110. Drury v. Connell, 177 Hi. 43.

E. The Orderly Parts Of Wills

Sec. 182. In General

A will does not have to be in any special form but is usually drawn in a certain orderly way.
We will find that if a will is in writing and signed by the testator and properly witnessed it is good though it is informally
drawn, but a will properly made should be drawn in an orderly way, and we will notice in the following sections the
usual order of a will.

Sec. 183. The Introduction

The introduction is a statement that the testator does make, ordain, publish and declare the writing to be his will.
A reference to the form in the appendix will show the form of expression used in the introduction. This form sometimes
begins with such words as these: "In the name of God, Amen" and sometimes refers to the uncertainty of life and
states that the testator is indebted to Providence for the blessings he enjoys, but these recitals are not now made so
often and at such length as formerly.

Sec. 184. The Devises And Bequests

After the introduction sometimes follows a direction to the executor to pay debts and funeral expenses as soon as
conveniently may be. Then follow in order the devises and bequests.
In this part of the will there should be the utmost certainty and there should also be a provision made for all
contingencies. It very often appears that a will is so carelessly drawn that its meaning is not clear. For example:
Sometimes powers are given which would seem to imply the ownership of property and yet the title is not directly
given; and in the event of the death of the donees before the testator no provision is made for the disposition of the
estate. This is the part of the will which is the heart thereof and exceeding care should be exercised, in framing it. Wills
should always be drawn where possible, by an experienced and able lawyer who knows the legal effect of words used,
the effect of possible events, like marriage or birth of child, and is accustomed to consider all contingencies.

Sec. 185. The Residuary Clause

A residuary clause is often stated which provides for the disposition of all the estate not specially disposed of.
Such a clause is of course unnecessary where all of the estate is given to any one person or class of persons but in
the event the will consists of specific devises and legacies, there should be a residuary clause naming some one to
whom the residue, if any, is to go.

Sec. 186. The Appointment Of An Executor

An executor is to be appointed and his appointment usually follows the gifts though it may be at any place in the will.
It is important to name an executor who should be some person in whom the testator has faith, or a trust company
qualified by law to act as executor. In large estates it is often desirable to name a trust company but in the smaller
estates this is not usual. Several executors may be named, especially if the estate is a large one, and this makes it
reasonably certain that at least one of them will outlive the period of administration. If no executor is named the will is
not for that reason invalid but the court will name an "administrator, with the will annexed" or more shortly,
"administrator w. w. a."

Sec. 187. The Conclusion

The conclusion of the will is a mere statement that the executor has affixed his name on a certain date.
See the Appendix for the form of the conclusion.

Sec. 188. The Signature And Attestation

The will must be signed and attested as we have heretofore seen.

F. The Revocation Of Wills

Sec. 189. The Right To Revoke

A will may be revoked at any time before the testator's death unless he is under contract not to revoke.
A will is a revocable instrument. It confers no rights except upon the death of the testator. It takes effect upon death
and then only. A will is completely within the power of the testator until his death and he may make any number of wills,
and yet finally die intestate.
It is true that a testator may be under contract to make a will, or not to make a will, and where this contract is upon a
full and fair consideration the courts will enforce it.
Sec. 190. Method Of Revocation
A will may be revoked by another will or codicil or by burning, tearing, obliterating, canceling with the intention of
revoking, or it may be revoked by certain circumstances, as subsequent marriage.
How a will must be revoked is governed by local statutes. However, we may say generally, that a will may be revoked
in the following manners: First, by another will or a codicil expressly declaring revocation or revoking by implication
because covering the same ground. A will does not necessarily revoke the former will, although as a matter of fact it
usually does because it covers the same subject matter. It is also customary not to leave anything to implication but to
expressly revoke all former wills. A will may also be revoked by tearing, obliterating, burning, canceling, and the like, by
the testator or by someone for him in his presence and at his direction with the intention of revoking it. If a will is lost or
destroyed it is still in force if there was no intention of revoking it and the destruction was not by the testator or
someone for him. It is possible for the testator to revoke a part of a will by obliterating or canceling clauses therein but
this is not advisable. Any interlineations made by him are of no effect unless th^ will is subsequently republished and
rewitnessed, otherwise he could make a will without complying with the law of wills. If a testator should write on the
bottom of a will or in the margin or even across the face of it "I hereby revoke this will" that would be without effect
because it is not a revocation in the manner provided by law.
A will is also usually revoked by subsequent marriage of the testator upon the theory that this is a change of
circumstances which he did not have in mind when he made the will.111 Subsequent birth of child does not now
revoke the will although in many states it amounts to a partial revocation. In this case the child will take his portion as
heir, the other gifts abating to that extent unless in the will an express intent to disinherit the child
III.At common law marriage of testator alone did not revoke; but marriage and birth of child did. Marriage alone of a
testatrix revoked her will. Statutes in many states have made marriage alone sufficient in either case.
appears; and this is sometimes advisable because the testator wants to leave his entire estate to the other parent
relying upon such person to properly care for the child and thus keeping the estate from being tied up until the child
becomes of age.

Chapter 26. Administration Of Estates. A. Starting The Administration

Sec. 191. In General

When a person dies, his estate must be disposed of to those who, as creditors, or as heirs and distributees, or as
beneficiaries under a will, are entitled thereto. This requires administration in the court provided for that purpose. We
have already discussed the law of descent and heirship, and the law of wills. Let us now in this chapter concern
ourselves with the settlement of the estate of a deceased person, whether he has left a will or has not left a will. In the
one case he is called a testator, in the other, an intestate. He may die intestate as to some property and testate as to
other, but this is very unusual.

Sec. 192. The Court Of Administration

Courts which have jurisdiction of estates of decedents are called Courts of Probate, Surrogate's Courts, etc.
Courts of administration of the estates of deceased persons are established, called Courts of Surrogate, Orphan's
Courts, Probate Courts, and the like. Generally such courts have also other jurisdiction, as over guardianships of
minors, and of insane persons, and may have also other classes of jurisdiction.
Sec. 193. Application For Letters
The proceedings are formally opened in the court by an application for letters of administration or letters testamentary.
The first step in probating an estate may be the mere filing of the will. But generally this is accompanied with the
petition. The petition sets forth the death, and recites whether there was a will or whether decedent died intestate. It
prays for letters to issue to the petitioner or to the person entitled to them.

Sec. 194. Who Entitled To Be Administrator

The nearest relative is ordinarily entitled to administer.
In case of intestate estates, or testate estates in which there is no executor named, or the one named can not or will
not serve, the statute provides who shall be entitled to administer. This naturally is the nearest relative, if of age and
resident in the jurisdiction, or whatever limitations may be imposed. The statute provides also that the Public
Administrator may serve in the event there is no one else who can or will serve. Creditors may apply for letters of
administration, if the relatives entitled to do so do not act.

Sec. 195. Who Qualified To Act As Executor

The person named in the will as executor is entitled to serve as such, unless he has the general statutory
disqualifications.
The statute usually sets forth some qualifications as that of full age or residence in the jurisdiction, to entitle one to act
as executor. If he is not debarred by these general qualifications, he is entitled to serve, and the court has no discretion
to refuse him. The fact that he is interested in the estate, as creditor or as beneficiary does not debar him. In fact it is
quite frequent that an executor is one to whom the entire estate is given.
One cannot be an executor and also witness to will, but if he is not a necessary witness, he may serve. •

Sec. 196. Bond Of Administrator Or Executor

The personal representative must provide the bond required by law, the amount of which depends upon the size of the
personal estate.
The executor or administrator must furnish bond with such sureties thereon and in such amount as the law requires.
A will however may waive bond, and in that case no bond is necessary unless it appears to the court that the interest of
the estate so requires.

Sec. 197. Proof Of Heirship

Whether an estate is testate or intestate, the heirship must be proved as a part of the record.
In case of a will, the course of descent and distribution has been changed, and those who take, do so as beneficiaries
under the will, rather than as heirs, but whether there is a will or not, the heirship must be proved and the heirs notified,
in order that they may protect their interests.
Any relative is a competent witness to prove heirship who knows the family history even though his information comes
partially from hearsay.

Sec. 198. Proof Of Will

The will must be proved by the witnesses thereto.
When the will is filed the court sets it for hearing. The witnesses to the will must prove it. In case they are absent their
depositions may be taken. If the witnesses are dead, or for any reason their testimony cannot be procured, proof of
their handwriting will suffice.
The witnesses to the will testify as to the mental condition of the testator and that they believed and now believe him to
be of sound mind and disposing memory.
If the will is duly proved then it is "admitted to probate" by formal order.

Sec. 199. Inventories And Appraisals

It is the duty of the administrator or executor to file an inventory of the assets.
The personal representative must file shortly after his appointment and qualification, an inventory of all the assets of
the deceased that have come to such representative's hands or knowledge, describing the estimated value thereof,
and setting forth whether the credits are good, doubtful or desperate.
Generally the law provides for appraisers to value the tangible personal assets.

Sec. 200. Widow's And Children's Awards

By statute generally a certain award is made to the widow, which is a debt against the estate.
By common law there was a right on the part of the widow to occupy the mansion house for a specified time called the
"widow's quarantine." By statute there have been various provisions in the nature of awards to a widow sometimes
enlarged where there are children, and this award the widow is entitled to as a debt against the estate. Its amount is
governed by the statute and the size of the estate. Generally, it is made a debt having priority.

B. The Title Of The Personal Representative

Sec. 201. Nature Of Office

The office of the personal representative is that of a trustee who succeeds to the title of the deceased in respect to
personal property.
The personal representative is a trustee. He holds the property of the deceased in trust, and the rules applicable to
trustees generally apply to him. Of course he is a trustee with a special trust to perform, the duties under which are
limited by the purpose thereof.

Sec. 202. Title Of Personal Representative

A personal representative gets title to the personal property of deceased.
The executor or administrator gets title to the personal property of the deceased. He does not get title to the real
property unless the will gives it to him.
At common law the executor had no power over the real estate whatever and that is also the rule in American
jurisdictions, except that if necessary to pay debts by the insufficiency of the personal estate, the executor or
administrator may apply to the court for leave to sell such real estate or so much thereof as may be necessary to pay
debts.
Sec. 203. What Are Assets
Any form of personal property, tangible or intangible, which belonged to deceased passes to the personal
representative for purposes of administration.
As a general rule whatever things were assets to the decedent at the time of his death are assets to his personal
representative, for purposes of payment of debts and other administration. A few particular species of property may be
considered.
(1) Corporate stock.
This becomes assets of the estate; but it has been held that interest or dividends declared after the owner's death pass
to the specific legatee, of the stocks or bonds, and are not subject to payment of debts (Gordon v. James, 1 L. R. A. N.
S. (Miss.) 461). The personal representative is entitled to vote stock upon proof of his letters, although not transferred
on the books of the corporation.
(2) Partnership assets.
The assets of a partnership pass to the surviving partner, and not to the personal representative of the deceased
partner; subject, however, to the duty of the surviving partner to wind up the affairs of the partnership and account with
the executor.
(3) Insurance money.
Passes to the executor if payable to deceased or his estate, executors or administrators but not if payable to other
beneficiaries. Therefore in the latter case the executor has no title and creditors cannot reach the insurance. (People v.
Petrie, 191 111. 497, 61 N. E. 499.) Insurance money may by statute also be exempt.
(4) Rights to sue.
Rights to sue pass to the executor or administrator, as claims on notes, injury to property, etc. But purely personal
claims, as for personal injury, do not pass.

C. Duties And Liabilities

Sec. 204. Duty To Get In Assets

It is the duty of the personal representative to get in all assets of the estate, bringing suit where necessary.
An executor or administrator should collect the assets for their use in payment of debts or division among legatees and
distributees. He should sue to collect where collection cannot otherwise be made, proceeding however under order of
the court.

Sec. 205. Duty In Making Investments

If under the will or because of delay in administration a personal representative has funds to invest, he should invest
them according to the rules that govern investments by trustees.
The duty of a trustee is to invest with regard to safety of investment for as large an income as is compatible with safety,
if under the directions of a will, or because there are substantial funds, that would otherwise lie idle it is the
representative's duty to invest. The same rules govern as govern trustees generally as we have heretofore considered.
It is generally not his duty to change investments unless they are unsafe, in which case he should withdraw them from
the hazard.
Of course the will may be specific as to investment, and it is the duty to follow the directions, but even in such a case,
doubtless a change in the character of such securities might prevent such investments. The court's direction should be
sought in such a case.
If a personal representative does not invest when he should, he is personally chargeable with interest.
Where money is deposited in a bank, it should always be in the name of the estate, or in some way at least that will
designate and set apart the trust. Otherwise he will be personally liable if the bank fails.

D. Payment Of Claims

Sec. 206. Proof Of Claims

If there is any doubt about a claim against an estate, the executor should require it to be proved.
Creditors must prove their claims against the estate, unless allowed or paid by the executor or administrator.
The estate is to be administered within a certain period provided by the law, as one or two years, and claims must be
presented by the creditors of the estate and proved by them by competent evidence.
The law divides claims into classes giving one class priority over others; thus there will be claims of the first class,
second class, third class and so on. Thus funeral expenses, etc., the widow's award, etc., and claims of various sorts
have priority over claims of general creditors. Of course creditors who have security are not deprived thereof and the
security is unaffected by the death of the debtor.

Sec. 207. Sale Of Property To Pay Debts

If the funds of the estate are insufficient to pay debts, the assets must be sold to pay same.
The executor or administrator must convert the estate into sufficient funds to pay the debts thereof. Real property,
even, may be reached for this purpose, although it was unavailable at common law.
In case of a will which makes specific bequests and devises, the general rule is that the general legacies first abate,
then if necessary the specific legacies, and personal property abates before real estate.

E. Settlement And Final Account

Sec. 208. Payment Of Legacies

Legacies are payable as provided for in the will if the estate is sufficient to pay same.
Legacies are specific, as a watch, a horse, or a chair; general, as a sum of money. The general legacies must give way
in favor of specific legacies if necessary.

Sec. 209. Settlement And Distribution

After the estate has been in probate the length of time provided by the law, the estate must be settled and distributed,
and the executor or administrator discharged, from further duty.
We have already indicated the manner of distribution and settlement. The executor or administrator must do this
according to the law of the state in which the probate is had and is then entitled to be discharged. Where the estate is
solvent he need not wait the full period to distribute gifts and advance portions but he does this at his own risk unless
an order of the court is secured.
Part IX. Chapter 27. Conveyancing. A. Contracts To Sell Real Estate

Sec. 210. How Real Estate Is Usually Sold

Real estate is usually sold by first drawing up a contract between the prospective seller and buyer providing that the
seller will sell on certain terms and at a certain price and the buyer will buy upon those terms and at that price provided
the title is found good upon examination of the abstract of title or guaranty policy to be furnished by the seller.
While the contract between the buyer and seller may take any form and while there may be indeed no contract of an
enforceable sort prior to the deed, yet, as a rule, we find that where real estate is sold there is usually a contract of sale
drawn up between the parties whereby the seller agrees to sell and the buyer to buy on certain terms within a certain
time and upon certain conditions. An abstract is to be furnished by the seller and examined by the buyer in order to
discover the soundness of the title. Then after this time, all having been found satisfactory, the deed is made.
As we know from our consideration of the subject of contracts, contracts to sell real estate, though they may be carried
out if oral, are not enforceable unless in writing if one of the parties sees fit to break the agreement and to avail himself
of this technical defense.

Sec. 211. The Form Of The Contract Of Sale

The contract of sale is often upon a blank form prepared for that purpose and it provides the seller shall give a
merchantable title and that the buyer shall assume the burdens and conditions therein named.
A form of a contract of sale is set forth in the back of this book and should be studied by the reader. Customary forms
vary in different localities, but their general purpose is to bind the seller to make a deed" and the purchaser to take the
land provided it appears that the title is good. When parties agree to buy and sell it is desirable that the bargain be
bound between them and yet of course there must be an opportunity to look into the title and fix up the defects if any
there be. In this contract of sale, the terms are all agreed upon. The price is stated and if a mortgage is to be given
back by the purchaser or to be assumed by him, this is there set out. After the contract is signed it becomes the seller's
duty to furnish an abstract of title within a certain time therein stated and it becomes the seller's privilege to then
examine the abstract and to report any defects on the title therein found. These defects are then cleared up, if possible,
by quitclaim deeds, affidavits and the like and the deed is then given. According to some forms, the buyer, when he
signs the contract, agrees to assume all building restrictions which may be of record and consequently he should know
if there are any such restrictions before he signs the contract because by his agreement to assume them he could not
afterwards object to them if any were found. Of course it may be his desire to have building restrictions on the land, but
at any rate he should know what they are. In reference to other burdens of various sorts he does not assume them
unless it is specifically noted in the contract and therefore all these burdens and defects must be removed by the seller
before the buyer can be compelled to take the title. After this abstract has been furnished by the seller and examined
by the buyer and the title found to be or made satisfactory, the deed is then made between the parties.
In some localities the seller agrees to furnish a policy guaranteeing the title instead of an abstract. In that case the
procedure is much the same as above described, except as modified by this difference.
Sometimes when the real estate is sold upon installments the contract provides that a certain number of installments
are to be paid before a deed is to be given and if the installments are of substantially the same amount as rent would
be, it is provided that in case of default by the buyer the installments shall be retained by the seller as liquidated
damages.
It is almost always provided in any contract of sale that a sum deposited with the seller by the buyer shall be retained
by the seller as liquidated damages in case the buyer does not perform his agreement and to be returned to the buyer
in case the seller cannot make a good title or a title satisfactory to the buyer.
This contract of sale must be recorded by the buyer if he would secure absolute protection, unless he goes into
immediate possession. At the same time, it is not desirable from the seller's standpoint that the contract be recorded
because it may result in clouding his title in case the contract is not carried out by the buyer and the buyer refuses to
give him a release from the contract, and this would necessitate proceedings in court to clear up the title. It also if
recorded increases the record of the title, thereby lengthening and increasing the cost of further abstracts. For these
reasons it is customary not to record a contract of sale but merely to wait until the deed is made and then record that.

Sec. 212. Seller To Convey Merchantable Title

The seller agrees to convey a merchantable title subject to burdens assumed by the buyer. A merchantable title is a
title which has in it no serious defects preventing its free transfer by the buyer or subjecting him to expenses to clear up
his title.
The seller is supposed to give and by his contract stipulates to give a good, merchantable title. A merchantable title is
one that is practically free of defects and burdens except such as are specifically assumed in the contract by the
purchaser. Thus outstanding mortgages not assumed by the purchaser, unreleased dower, claims of heirs of prior
owners, unacknowledged deeds found in the record, defective conveyances, etc., are all burdens upon the title and
detract from its merchantability and all these things must be cleared up by the seller before he can compel the buyer to
take a deed. The purpose of examining the abstract is to find the possible defects and report them to the seller that he
may have them cleared if he can.

Conveyancing. A. Contracts To Sell Real Estate. Continued

Sec. 213. Burdens Assumed By Purchaser

The purchaser often specifically assumes certain burdens as mortgages, building restrictions, special assessments yet
unpaid, etc.
We have already noticed that the buyer may assume certain burdens when he signs a contract. There may be an
existing mortgage which as a part of his consideralion he assumes and agrees to pay or there may be building
restrictions upon the record which are assumed by him. In case there is no mortgage, very often one is made as a part
of the transaction where all of the purchase price is not paid down at some later period. Thus the deed is given to the
buyer, and as a part of the same transaction he gives back a mortgage to secure a part of the purchase price. Such a
mortgage is called a "purchase money" mortgage. It may of course be in the form of a trust deed.

Sec. 214. Describing The Property

The property may be described by metes and bounds or by the legal description if there is any such.
It is desirable that we insert at some place in this book something respecting the description of real property, for this is
a very important subject. The reader should be impressed with the importance of care in this respect because a great
deal of litigation has been occasioned by mis-descriptions of real property. Very often the property will be wrongly
described and the mistake will not be noticed for, perhaps, years afterwards, when it becomes very difficult to clear up
the matter. It is very easy to insert "Northeast" for "Northwest," for example.
Property may be described in two general ways: first. by its "metes and bounds" and second, by its "legal description."
Property was formerly described, and it is even now sometimes necessary to describe it, by bounding it with reference
to natural or artificial monuments. This form of description is quite vague and often results in doubt and confusion.
Thus in early days a piece of land would be described by starting at a point indicated by a certain tree, describing the
tree, or a certain artificial monument, then proceeding in a certain direction to another monument, and so on until the
point of beginning. In this description would be found: first, a reference to monuments, natural or artificial; second, the
distance traversed in going from monument to monument; third, the direction; and fourth, the quantity of land thus
enclosed. These four were known as (1) monuments, natural or artificial, (2) measures, (3) courses, (4) quantity, and
are sometimes referred to as the four "calls." Where these were inconsistent they would be regarded as important and
controlling in the order named. Sometimes where we have a legal description it is still necessary to refer to the metes
and bounds as shown in the following example which is a mixture of the old and the new form of description:
Part of the north 52 acres of the south 1/2 of the Northeast Quarter of Section 30, Township 41 North, Range 14 East,
in the City of Evanston, Cook County, Illinois: Beginning at the intersection of the south line of Mulford Avenue and the
west side line of Chicago Avenue, in the City of Evanston; thence southeasterly, along said west line of Chicago
Avenue, 186 feet to a point; thence west, at right angles, 53.5 feet to the easterly right of way line of the Chicago &
Northwestern Railway; thence north along said easterly right of way line of Chicago & Northwestern Railway 200 feet
to the south line of Mulford Avenue; thence east along said south line of Mulford Avenue, being on a line parallel to and
66 feet south of the north line of said South 1/2 of the Northeast Quarter, Section 30, 51.5 feet to the place of
beginning; containing 0.232 of an acre (10,132.5 square feet).
The reader will find it interesting to draw, from this description, a plat of the land described.
Monuments, either natural or artificial, tend to disappear, especially when they consist in trees, posts, etc., and
descriptions by metes and bounds are hard to follow. So it was that in the settlement of the states - West of the Atlantic
Coast States - the surveyors worked out and applied a description which makes the identification of real property a
matter of great simplicity and perfect accuracy. The United States was divided by the surveyors from time to time, as
occasion required, into "meridian lines," running North and South, of which there are twenty-four, the first one of which
is the dividing line between Ohio and Indiana. It is also divided by lines running East and West which are known as
"base lines." East and West of the meridians run parallel lines known as "ranges," which are six miles apart; and North
and South of the base lines run parallel lines known as "township lines," which are also six miles apart. These range
lines and township lines of course cross each other, making squares six miles by six miles, and containing therefore,
thirty-six square miles, and these squares constitute "townships." Each township thus created is divided into thirty-six
"sections," which are therefore one mile square, and these sections are numbered consecutively from one to thirty-six
and contain 640 acres. Sections are themselves subdivided into "quarter sections" and so on indefinitely. Any section
may contain in it a "subdivision," known by the name of the subdivider or some other name, or the sections may be
divided simply into blocks and lots. A description of real estate is thus rendered exact and easy, reading somewhat as
follows: "Lot 9 in block 3, in John Brown's subdivision of the East half of the N. W. quarter of section 18, township 39
North, range 14 East of the third principal meridian, in Cook County, Illinois."
The following outline will show the character of this division:
B. Abstracts Of Title And Guaranty Policies

Sec. 215. The Abstract Defined

The abstract consists in a brief memoranda of all records affecting the title of the real estate in question.
We know that in the country recording laws provide for the record of transactions relating to real estate, otherwise
innocent purchasers and encumbrancers are not affected. Consequently a purchaser of real estate must look to the
record to find out whether the title is good. This record includes the patents from the United States government and all
deeds, wills, administrations of estates, judgments which create liens, mortgages and trust deeds, suits in respect to
the title, and in general any public record that in any way affects the title. Now it becomes a difficult task for the
purchaser or his attorney to look through these records and be sure he has missed nothing, especially in large cities or
in any community where real estate transactions are of frequent occurrence. Accordingly abstracts are made up by
abstracters whereby all transactions affecting the title in question are briefly noted. This abstract is a brief resume of
every transaction affecting the title so that one by going through the abstract can follow the history of the title so far as
it appears of record. In many communities an owner cannot sell his land unless he furnishes an abstract. This abstract
is given to successive purchasers and is brought down to date by each seller.

Sec. 216. Abstracts And Abstract Companies

There are persons and companies who make a business of furnishing abstracts to real estate.
In many communities especially large cities it becomes a matter of great difficulty to discover everything that is of
record, the records being very voluminous. Consequently abstract companies are formed which have experienced
abstracters and these companies keep a record of all transactions and are able to furnish on short notice an abstract of
title concerning any piece of real estate situated in the territory which they cover.

Sec. 217. Guaranty Policy Defined

A guaranty policy is a form of insurance of the title.
Some abstract companies write what are called "guaranty policies" which are assurances by the company that the title
is good, subject to whatever defects may be named therein. This is simply title insurance and the company must stand
good for loss up to the amount named on account of defects not excepted.
A guaranty policy of course does not operate to give a good title but it is merely an insurance upon the title.
This practice is growing in favor and purchasers are now frequently content with such policy and no abstract.

Sec. 218. Opinions Of Title

An opinion of title is a written statement by an attorney or other examiner of the title setting forth that person's opinion
of the title based upon his examination of the abstract.
We have seen that the buyer secures an abstract of the title to be examined. Usually he has his attorney to examine
this and the attorney reports his opinion of the title. This opinion is merely the attorney's conclusion when he has
examined the title. It sets forth that the attorney has examined certain abstracts therein named and that upon such
examination he finds title on a certain day in a certain person subject to the burdens and defects which he then
enumerates. This opinion should give the exact state of the title showing all mortgages, liens and claims of whatever
sort as shown by the abstract which he has examined. As we know parties in possession have rights which must be
taken account of, and consequently the attorney always finds title subject to the rights of parties in possession, if any.
This is merely to protect himself or call attention to the fact that the purchaser must know whether there are any parties
in the possession and what their claims are. This opinion of title may be looked upon in a way as a very brief abstract
of the abstract.
Where guaranty policies are secured the opinion is generally omitted because the guaranty policy is based upon the
opinion of the abstracter's attorneys.

C. The Torrens System Of Registering Titles

Sec. 219. The Torrens System Defined
The Torrens system is a system whereby titles to real estate are registered as being in a certain person at the date of
registration and a certificate of title is issued by the state declaring title in such person.
The method of examining titles by means of the record and the abstracts has seemed cumbersome and wasteful to
many persons. Suppose that A buys land in the year 1912. He must have his attorneys examine the title
notwithstanding this title may have been examined many times in years past by other attorneys and their opinions
given thereupon. Notwithstanding all this examination and bringing down of abstracts there is nothing of record,
nothing of legal effect, which states just in whom title is. It was therefore questioned why there might not be a system of
registering the title and having the state declare by certificate that a certain person at a certain date is the legal owner
thereof, subsequent transfers being registered and new certificates issued. In 1858 Robert R. Torrens introduced a bill
in the Australian Legislature providing for the registration of real estate. This law has been adopted in modified form in
England, Ireland, Canada, and some of the States and Territories of the United States, namely, Illinois, California,
Massachusetts, Oregon, Minnesota, Colorado, Washington, the Philippine Islands and Hawaii.
It is said that there are three basic elements in the Torrens system: first a registered title; second, a governmental
declaration of the ownership and condition of title, and third, a title which may not be disputed.
The registration of title is really the beginning of a suit to have the title settled and declared to be in a certain person.

Sec. 220. Extent And Success Of The Torrens System

The Torrens system has not been widely adopted and has never been generally successful in the sense that it has
very materially decreased the other mode of conveying real estate.
The idea of the Torrens System appears to be excellent but it has had strenuous opposition and has not had the
success in most states that its vouchers have hoped for. It is, however, comparatively new in this country, the first act
having been passed in Illinois in 1895. It is hardly the province of this book to go largely into this doctrine and the whole
matter is now in such a state that a prediction of its future extent and value would be a mere matter of opinion. For a
detailed consideration of this subject the reader is referred to the book cited in the foot note. That author makes the
following statement: "It may be said with confidence that neither the Torrens system nor the recording system is so
complex, insecure, slow or costly as to depreciate the natural value of land. Each system possesses, perhaps with
some varying degree, all the necessary elements of a practical and successful method of conveying and dealing with
land. In the present state of our constitutional law, the Torrens system in this country can never produce what it
purports to effect, namely, a conclusive certificate of an indefeasible title in the registered owner, and can never be
made so simple and secure as the foreign systems. The natural and logical effect of our laws is the development of title
insurance, a guaranteed certificate of title, and not the development of a certificate of ownership of an indefeasible title
to land, issued by the state. Such is the opinion of many thoughtful persons who are equipped to judge of such
matters. But the progress of the Torrens system in this country is not to be impeded by mere adverse opinion as to its
adaptability to our laws. A large part of the people in several states desire to have it tried, and the trial is now on. It is
useless for its advocates to gain little advantages for it from state legislatures, and it is equally useless for its
opponents to throw obstacles in its way. This trial is to be a fair one, it is to be conducted patiently and slowly, and it
will not be concluded until the success or failure of the system is demonstrated."

D. Remedies Of The Purchaser And Seller

Sec. 221. In General

The purchaser of real estate has two general remedies where the seller refuses to convey according to the contract.
Considering now the case of a purchaser of real estate under a contract of sale which has not been carried out by the
seller, that is, where no deed has been given by him, we may say that his remedy is either to sue for damages or to
have specific performance. We know that in the ordinary case of a breach of contract there may be only a suit for
damages but that in some classes of cases a court of equity will compel specific performance, that is, the carrying out
of the contract as agreed upon. Sales of real estate constitute one of these classes.

Sec. 222. The Buyer's Remedy Of Specific Performance

A purchaser of real estate may compel the seller to give him the deed where the contract has been fair and the
purchaser has done his part.
If the purchaser desires he may appeal to a court of equity where the seller refuses to give him a deed and have a
decree of specific performance. He must in such a case show that he is not guilty of a breach of the contract and he
must furthermore show that he has not driven a hard bargain. In case he has made an unjust contract the court will
leave him to his remedy in an action for damages, yet the court will not refuse him specific performance for the simple
reason that he has obtained a good bargain if there has been nothing unconscionable in his bargain.If the seller's title
is defective but the buyer is willing to take it the buyer may have a decree for specific performance with a sum to be
allowed him from the purchase price to offset the defect.

Sec. 223. The Buyer's Suit For Damages

The buyer may sue for damages for breach of the contract by the seller and he will be allowed such damages as the
seller should have foreseen would result from his breach.
If the buyer desires he may, instead of filing a bill for specific performance, file a suit for damages. Assuming that the
buyer is not guilty of a breach of the contract he may have damages for breach by the seller. Damages will be allowed
him which he has actually sustained and which the seller should have foreseen from all the circumstances that he
would sustain if the contract were broken. These damages might be the difference between the contract price and the
market price or there might be damages arising out of special circumstances in any given case.

Sec. 224. The Seller's Remedy Of Specific Performance

The seller may have specific performance against the buyer.
Just as the buyer may have specific performance, so may the seller on his part have this same remedy in case of a
breach by the buyer.
If the seller's remedy is defective he cannot compel the buyer to take it by specific performance because he cannot
show that he is not in a condition to perform his part of the agreement but even in such a case it has been held that if
the defects are slight the seller may still have specific performance if he allows a sum to offset the defect. In such a
case, however, the defect must be trivial as compared with the whole value of the bargain and not of a serious or
enduring nature.

Sec. 225. The Seller's Suit For Damages

If the buyer refuses to perform the seller may sue him in damages.
If the seller has performed his part of the agreement or made all proper tenders he may sue the seller for the damages
which he has sustained from the loss of the bargain
Appendix A. Forms. 1. Contract Of Sale Of Real Property
(The following form which has been filled in by the editor is one of those in use in Cook County, Illinois. It was
approved by the Chicago Real Estate Board, February 4, 1903, and is copyrighted. It is printed and for sale by Geo. E.
Cole & Co., Chicago.)
THIS MEMORANDUM WITNESSETH, That James Brown hereby agrees to purchase at the price of ten thousand
($10,000) dollars, the following described real estate, situated in the County of Cook and State of Illinois: Lot 1, in block
2, in John Doe's Subdivision of the Northwest quarter of the Southwest quarter of section No. 18, Township 39 North,
Range 14 East of Third Principal Meridian, and Walter Johnson agrees to sell said premises at said price, and to
convey to said purchaser a good and merchantable title thereto, by general Warranty Deed, with release of dower and
Homestead rights, but subject to: (1) existing leases, expiring April 30, 1912, the purchaser to be entitled to the rents
from the date hereof; (2) all taxes and assessments levied after the year 1912; (3) any unpaid special taxes or special
assessments levied for improvements not yet completed and to unpaid installments of special assessments which fall
due after the date hereof levied for improvements completed; also subject to any party wall agreements of record; to
building line restrictions and building restrictions of record; (here may be filled in any other encumbrances to which
subject). Premiums on insurance policies held by Mortgagees shall be paid for by said first party pro rata for the
unexpired time. Such purchaser has paid one hundred ($100.00) dollars, as earnest money, to be applied on such
purchase when consummated, and agrees to pay within five days after the title has been examined and found good, or
accepted by him, said insurance premium and the further sura of four thousand, nine hundred ($4,900) dollars, at the
office of John Smith, Chicago, provided a good and sufficient general Warranty Deed, conveying to said purchaser a
good and merchantable title to said premises (subject as aforesaid), shall then be ready for delivery. The balance to be
paid as follows: Five thousand dollars on January 15, 1915, with interest from the date hereof at the rate of six per cent
per annum, payable semi-annually, to be secured by the purchaser's notes and mortgage, or trust deed, of even date
herewith, on said premises, in the form known as the CHICAGO REAL ESTATE BOARD FORM, for improved
property.
A Certificate of Title issued by the Registrar of Titles of Cook County, or complete merchantable Abstract of Title, or
merchantable copy, brought down to date hereof, or merchantable title Guaranty Policy, shall be furnished by the
vendor within a reasonable time, which abstract shall, upon the consummation of this sale, remain with the vendor, or
his assigns, as part of his security, until the deferred installments are fully paid. The purchaser or his attorney if an
abstract or copy be furnished shall, within ten days after receiving such abstract, deliver to the vendor or his agent
(together with the abstract), a note or memorandum in writing, signed by him or his attorney, specifying in detail the
objections he makes to the title, if any; or if none, then stating in substance that the same is satisfactory. In case
material defects be found in said title, and so reported, then if such defects be not cured within sixty days after such
notice thereof, this contract shall, at the purchaser's option, become absolutely null and void, and said earnest money
shall be returned; notice of such election to be given to the vendor; but the purchaser may nevertheless elect to take
such title as it then is, and in such case the vendor shall convey, as above agreed; provided, however, that such
purchaser shall have first given a written notice of such election, within ten days after the expiration of the said sixty
days, and tendered performance hereof on his part. In default of such notice of election to perform, and accompanying
tender, within the time so limited, the purchaser shall, without further action by either party, be deemed to have
abandoned his claim upon said premises, and thereupon this contract shall cease to have any force or effect as
against said premises, or the title thereto, or any right or interest therein, but not otherwise.
Should said purchaser fail to perform this contract promptly on his part, at the time and in the manner herein specified,
the earnest money paid at above, shall, at the option of the vendor, be retained by the vendor as liquidated damages
and this contract shall thereupon become and be null and void. Time is of the essence of this contract, and of all the
conditions hereof.
The notices required to be given by the terms of this agreement shall in all cases be construed to mean notices in
writing, signed by or on behalf of the party giving the same, and the same may be served either upon the other party or
his agent.
If the taxes and assessments to be paid by the vendor cannot be paid at the time this contract is to be closed then the
vendor is to pay same on or before May 1st, next ensuing.
This contract and the said earnest money shall be held by John Smith for the mutual benefit of the parties concerned,
and after the consummation of the sale he shall be at liberty to retain the cancelled contract permanently; and it shall
be the duty of said John Smith in case said earnest money be retained as herein provided, to apply the same, first, to
the payment of any expenses incurred for the vendor by his agent in said matter, and second, to the payment to
vendor's broker of a commission of five per cent on the selling price herein mentioned, for his services in procuring this
contract rendering the overplus to the vendor.
WITNESS the hands of the parties hereto, this 2nd day of January, A. D. 1912*.

2. Opinion Of Title
William H. Jones
Attorney And Counselor At Law
25 North Dearborn Street
Chicago
Mr. Alfred W. Bays,
Chicago, Ill. Dear Sir:
I have examined the abstract of title to the property described as
Lot 14 in Block 1 in Brown's Addition, to Jonesboro village.
*This form (here filled up by the author of this volume), copyright 1903 by the Chicago Real Estate Board.
Said abstract consisting of
(1) Printed copy of forty-four (44) pages, certified to be a true copy by the Chicago Title and Trust Co., from the
government of the United States to March 18, 1874.
(2) A continuation of ten pages consisting of a printed copy certified by the Chicago Title and Trust Co., from March 18,
1874 to October 27, 1894.
(3) A second continuation of 4 pages by the Chicago Title and Trust Co., from October 27, 1894 to June 4, 1902.
(4) A third continuation by the Chicago Title and Trust Co., consisting of 3 pages covering the dates from June 4, 1902
to April 4, 1903.
(5) A fourth continuation by the Chicago Title and Trust Co., consisting of one page, covering the dates from April 4,
1903 to May 4, 1902.
(6) A fifth continuation by the Chicago Title and Trust Co., consisting of 3 pages covering the dates from May 4, 1903
to December 29, 1905.
(7) A sixth continuation by the Chicago Title and Trust Co., of 2 pages covering the dates from December 29, 1905 to
November 11, 1909.
(8) A seventh continuation by the Chicago Title and Trust Co., of 3 pages covering the dates from November 11, 1909
to June 9, 1912.
And from such examination I am of the opinion that the title to said property on June 4, 1912, was in
John Do subject to the following:
First: A trust deed dated June 12, 1911 and recorded June 19, 1911, in book 11245 at page 356, signed by William
Smith and Nellie Smith, husband and wife, to William H. Jones as trustee to secure their note bearing even date
therewith for eight hundred and eighty dollars ($880.00) payable to the order of themselves (and by them endorsed
and delivered) on or before three years after date with interest at 5 1/2% per annum payable semi-annually and 7% per
annum after maturity.
Second: A special assessment for a system of sewers levied for ($38.80) thirty-eight dollars and eighty cents, payable
in twenty annual installments confirmed December 15, 1906, all of the installments which are due having been paid.
Third: Rights of parties in possession, question of error of survey, claims for liens where no notice has been filed of
record. Fourth: Taxes for the year 1912.
Very truly yours,
William H. Jones.

3. Warranty Deed - Statutory Form

. (Illinois.) THIS INDENTURE WITNESSETH, that the Grantor of the..............................in the County of..........
and State of.........................................for and in consideration of the sum of...................................
Dollars, in hand paid, Convey... and Warrant... to..........
of the..............................County of.......and State of.................the following described Real Estate, to wit: situated in
the................of................in the County of......................in the State of..................hereby releasing and waiving all rights
under and by virtue of the Homestead Exemption Laws of this State.
Dated, This.................day of.............A. D. 191...
................................(seal)
................................(seal)
................................(seal)
................................(seal)
State of.....................1
[ss. County of...................J
I. .........................................................
................................in and for said County, in the
State aforesaid, Do Hereby Certify, That personally known to me to be the same person.. .whose name
................subscribed to the foregoing instrument, appeared before me this day in person, and acknowledged
that...he...
signed, sealed and delivered the said instrument as.............
free and voluntary act, for the uses and purposes therein set forth, including the release and waiver of the right of
homestead.
Given Under my hand and.........................seal, this
..........................day of................A. D. 190...

4. Deed Statutory Form

(NEW York.)
NEW YORK: Statutory Form of Deed with full Covenants.
This indenture, made the...............Day of........... in the year nineteen hundred and............, between........., of
(insert residence), of the first part, and............, of (insert residence), of the second part, witnesseth: That the said party
of the first part, in consideration of....................dollars, lawful money of the United States, paid by the party of the
second part, his heirs and assigns forever (description), together with the appurtenances and all the estate and rights
of the party of the first part in and to said premises.
To have and to hold the above granted premises unto the said party of the second part, his heirs and assigns, forever.
And the said party of the first part doth covenant with said party of the second part as follows:
First. That the party of the first part is seized of the said premises in fee simple, and has good right to convey the
same.
Second. That the party of the second part shall quietly enjoy the said premises.
Third. That the premises are free from incumbrances.
Fourth. That the party of the first part will execute or procure any further necessary assurance of the title of said
premises.
Fifth. That the party of the first part will forever warrant the title to said premises.
In witness whereof, the said party of the first part hath hereunto set his hand and seal the day and year first above
written.
In the presence of..........................................
(Acknowledgment before Notary Public.)

5. Quitclaim Deed Statutory Form

(Illinois.) THIS INDENTURE WITNESSETH, That the Grantor of the........................in the County of................
and State of...........................for the consideration of
...................................................... Dollars,
Convey.. .and Quit-Claim.. .to.................................
of the.........................in the County of............and
State of...........................all interest in the following described Real Estate, to-wit:.................................
situated in the County of..........................in the State of Illinois, hereby releasing and waiving all rights under and by
virtue of the Homestead Exemption Laws of the State of Illinois. Witness the hand...and seal...of the said grantor.. .this
..........................day of..................A. D. 191 • • •
..............................(seal)
..............................(seal)
..............................(seal)
..............................(seal)
(Acknowledgment before Notary Public or other officer; see form 3.)

6. Form Of Acknowledgment For Corporation

State of Illinois 1
[ss. County of Cook J
On this................day of......................, 19.....
before me appeared.....................and........,....., both to me personally known, who being duly sworn, did say that he,
the said.............................., is president, and he, the said.......................... is the..............secretary of.............................,
the within named corporation, and that the seal affixed to said instrument is the corporate seal of said corporation, and
that the said instrument was signed and sealed in behalf of said corporation by authority of its board of directors, and
said..............and..............acknowledged said instrument to the free act and deed of said corporation.
In testimony whereof, I have hereunto set my hand and affixed my official seal, this, the day and year first in this, my
certificate, written.
Notary Public in and for said County and State.

7. Mortgage Statutory Form

(Illinois.)
THIS INDENTURE WITNESSETH, That the Mortgagor of the........................in the County of............and
State of.........................Mortgage.. .and Warrant.. .to of the County of..................................and State of
....................to secure the payment of............certain promissory note..., executed by...............................
bearing even date herewith, payable to the order of.............
the following described Real Estate, to-wit: situated in the County of..............in the State of Illinois, hereby releasing
and waiving all rights under and by virtue of the Homestead Exemption Laws of this State.
Dated, This..............day of.................A. D. 19....
..............................(seal)
.............................. (seal)
..............................(seal)
..............................(seal)
(Acknowledged; see form 3.)

8. Assignment Of Mortgage
KNOW ALL MEN BY THESE PRESENTS, That.
the part...of the first part, in consideration of the sum of
...................................................... Dollars, lawful money of the United States of America, to..............
in hand paid by...............................................
the part.. .of the second part, at or before the ensealing and delivery of these presents, the receipt whereof is hereby
acknowledged, has.....granted, bargained, sold, assigned, transferred and set over, and by these Presents, do...grant,
bargain, sell, assign, transfer and set over unto the said part...of the second part ....................................................heirs,
executors, administrators and assigns, a certain Indenture of
Mortgage, bearing date the................................day of..................................................in the year
One Thousand Nine Hundred.................made by........
and all................right, title and interest to the premises therein described, as follows, to-wit: which said Mortgage is
recorded in the Recorder's Office of the
County of.........................................in the State of..................................in Book No...............
of..................at page..................
Together with the...................................therein described, and the money due or to grow due thereon with the interest,
To have and to hold the same unto the said part...
of the second part,..................................executors, administrators, or assigns, forever :............................
subject only to the provisos in the said Indenture of Mortgage contained:
And...............do, for.............................heirs, executors, administrators, covenant with the said part...of the
2IO second part,...................................heirs, executors, administrators and assigns, that there is now actually.........
...............................owing on said.................
and Mortgage, in principal and interest,........................
Dollars, and that................have good right to assign the same:
And.................do hereby make, constitute and appoint the said part.. .of the second part..............true and lawful
Attorney, irrevocably, in................name..., or otherwise, but at..................own proper costs and charges, to have, use,
and take all lawful ways and means for the recovery of the said money and interest, and, in case of payment, to
discharge the same as fully as.............................might, or could do, if these Presents were not made.
In Witness Whereof......................have hereunto set
......................hand...and seal..., this................
day of.............................in the year One Thousand
Nine Hundred........................................
Sealed and Delivered in Presence of }
........................(seal)
........................(seal)
(Acknowledged, see form 3.)

9. Power Of Sale In Mortgage Or Trust Deed

This grant is intended as a security for the payment of the sum of..................dollars, in.......................'years from the
date of these presents, with interest thereon at the rate of..................per cent, per annum, according to the condition of
a bond this day executed and delivered by the said
......................party of the first part, to the said party of the second.part; and this conveyance shall be void if such
payment be made as herein specified. And in case default shall be made in the payment of the principal sum hereby
intended to be secured, or in the payment of the interest thereof, or any part of such principal or interest, as above
provided, it shall be lawful for the party of the second part, his executors, administrators, or assigns, at any time
thereafter, to sell the premises hereby granted, or any part thereof, in the manner prescribed by law, and out of all the
moneys arising from such sale to retain the amount then due for principal and interest, together with the costs and
charges of making such sale, and the overplus, if any there be, shall be paid by the party making such sale, on
demand, to the said party of the first part, his heirs or assigns.

10. Trust Deed - Statutory

. (Under Illinois Law of 1879.) THIS INDENTURE WITNESSETH, That the Grantor, of the..................in the County
of............and State of..............................for and in consideration of the sum of................................................Dollars, in
hand paid, CONVEY...AND WARRANT...to............
...............................of the..................County of........................and State of.....................the following described Real
Estate, to-wit:.......................
situated in the County of.......................in the State of
Illinois, hereby releasing and waiving all rights under and by virtue of the Homestead Exemption Laws of the State of
Illinois, and all right to retain possession of said premises after default in payment or a breach of any of the covenants
or agreements herein contained, in trust, nevertheless, for the following purposes:
Whereas, The said.............Grantor... herein............
justly indebted upon........................Promissory Note...
bearing even date herewith, payable to the order of............
Now, if default be made in the payment of the said-----------Promissory Note.. .or of any part thereof, or the interest
thereon, or any part thereof, at the time and in the manner above specified for the payment thereof, or in case of waste
or non-payment of taxes or assessments on said premises, or of a breach of any of the covenants or agreements
herein contained then and in such case the whole of said principal sum and interest, secured by the
said................Promissory Note..., shall thereupon, at the option of the legal holder or holders thereof, become
immediately due and payable; and on the application of the legal holder of said Promissory Note..., or either of them, it
shall be lawful for the said Grantee, or his successor in trust, to enter into and upon and take possession of the
premises hereby granted, or any part thereof, and to collect and receive all rents, issues and profits thereof; and in his
own name, or otherwise, to file a bill or bills in any court having jurisdiction thereof against the said party of the first
part,................heirs, executors, administrators and assigns, to obtain a decree for the sale and conveyance of the
whole or any part of said premises for the purpose herein specified, by said party of the second part, as such trustee or
as special commissioner, or otherwise under order of court, and out of the proceeds of any such sale to first pay the
costs of such suit, all costs of advertising, sale and conveyance, including the reasonable fees and commissions of
said party of the second part, or person who may be appointed to execute this trust,
and..........................................Dollars attorney's and solicitor's fees, and also all other expenses of this trust, including
all moneys advanced for insurance, taxes and other liens or assessments, with interest thereon at 7 per cent per
annum, then to pay the principal sum of said note..., whether due and payable by the terms thereof or the option of the
legal holder thereof, and interest due on said note...up to the time of such sale, rendering the overplus, if any, unto the
said party of the first part,............legal representatives or assigns, on reasonable request, and to pay any rents that
may be collected after such sale and before the time of redemption expires, to the purchaser or purchasers of said
premises at such sale or sales, and it shall not be the duty of the purchaser to see to the application of the purchase
money.
When, The said note.. .and all expenses accruing under this Trust Deed shall be fully paid, the said Grantee or his
successor or legal representatives shall re-convey all of said premises remaining unsold to the said
Grantor...or..............heirs or assigns upon receiving his reasonable charges therefor. In case of the death, resignation,
absence, removal from said...........
County, or other inability to act of said Grantee................
then..............................of said.............is hereby appointed and made successor in trust herein, with like power and
authority, as is hereby vested in said Grantee. It is agreed that said Grantor shall pay all costs and attorney's fees
incurred or paid by said Grantee or the holder or holders of said note...
in any suit in which either of them shall be plaintiff or defendant, by reason of being a party to this Trust Deed, or a
holder of said note..., and that the same may be a lien on said premises, and may be included in any decree ordering
the sale of said premises and taken out of the proceeds of any sale thereof.
Witness, The hand...and seal...of said Grantor.. .this.....
.............................day of..............A. D. 190...
..............................(seal)
..............................(seal)
(Acknowledged, see form 3.)
11. Long Form Of Trust Deed
(Illinois.)
THIS INDENTURE, Made this........................day of..............................in the year of our Lord, One
Thousand Nine Hundred and....................A. D. 19...
between......................................................
........................................party of the first part and the
Chicago Title And Trust Company, a corporation created and existing under the laws of the State of Illinois and doing
business in the City of Chicago, County of Cook and State of Illinois, party of the second part, as trustee, as hereinafter
specified, witnesseth: That, Whereas the said....................................
............justly indebted to the legal holder or holders of the
Principal Promissory Note hereinafter described in the principal sum of......................................Dollars, secured to be
paid by the one certain Principal Promissory Note of the said ..........................................................
.....................bearing even date herewith, made payable to the order of............................and by..............
duly endorsed and delivered, in and by which said Principal Note the said...........................promise..to pay the sum of
.............................Dollars, in ............years after the date thereof, with interest thereon until maturity at the rate
of................per centum per annum, payable semi-annually, on the...........................day of................and of
...,.........................in each year, which said several installments of interest until the maturity of said principal sum are
further evidenced by........................interest notes or coupons of even date herewith; all of said principal and interest
notes bearing interest after maturity at the highest rate for which it is now in such case lawful to contract, and all of said
principal and interest payments being made payable in gold coin of the United States of America of the present
standard of weight and fineness, at such Banking House in the said City of Chicago, as the legal holder or holders of
said principal note may from time to time, in writing appoint, and in default of such appointment, then at the office of the
Chicago title and trust company, in said City of Chicago; in and by which said principal note it is agreed that if default
be made in the payment of any one of the installments of interest thereon, and such default shall continue for thirty
days after such installment becomes due and payable as aforesaid, then, at the election of the legal holder or holders
of said principal note, the said principal sum secured thereby, together, with the accrued interest thereon, shall at once
become due and payable; said election to be made at any time after the expiration of said thirty days, without notice.
The Identity of said principal note is evidenced by the certificate thereon of said Trustee.
Now, Therefore, the said party of the first part, for the better securing of the payment of the said principal sum of
money and said interest, and the performance of the covenants and agreements herein contained by the said party of
the first part to be performed, and also in consideration of the sum of One Dollar in hand paid, the receipt whereof is
hereby acknowledged, does by these presents Convey and Warrant unto the said party of the second part its
successors and assigns, the following described
Real Estate, situate, lying and being in the.....................
County of Cook and State of Illinois, to-wit:..............
Together with all and singular the tenements, hereditaments and appurtenances thereunto belonging, and the rents,
issues and profits thereof; and all apparatus and fixtures of every kind for the purpose of supplying or distributing heat,
light, water or power, and all other fixtures in, or that may be placed in any building now or hereafter standing on said
land, and also all the estate, right, title and interest of the said party of the first part of, in and to said premises.
To have and to hold the above described premises, with the appurtenances and fixtures, unto the said party of the
second part, its successors and assigns, forever, for the purposes, uses and trusts herein set forth free from all rights
and benefits under and by virtue of the Homestead Exemption Laws of the State of Illinois, which rights and benefits
are hereby expressly released and waived.
And said party of the first part, for said party, and for the heirs, executors, administrators and assigns of said party,
does covenant and agree with the said party of the second part, for the use of the holder or holders of said principal
note, until the indebtedness aforesaid shall be fully paid, to keep said premises in good repair and not to suffer any part
of said premises to be sold or forfeited for any tax or special assessment whatsoever, or suffer any lien of mechanics
or materialmen to attach to said premises nor do, nor permit to be done, upon said premises, anything that may impair
the value thereof, or the security intended to be effected by virtue of this instrument; and in case of failure of said party
of the first part thus to pay such taxes or special assessments before the commencement of the annual tax sale in said
county, or to keep the buildings on said premises in good repair, or to pay any such liens of mechanics or material
men, then said party of the second part, or the holder or holders of said principal note, may at his or their option, pay
such taxes or special assessments, or redeem said premises from any tax sale, or purchase any tax title obtained, or
that shall be obtained thereon; and said party of the second part, or the holder or holders of said principal note may, at
any time, pay or settle any and all suits or claims for liens of mechanics or material men, or any other claims that may
be made against said premises, or make repairs to said premises; and all moneys paid for any such purpose, and any
other moneys disbursed by the party of the second part or the legal holder or holders of said principal note to protect
the lien of this Trust Deed, with interest thereon at the highest rate for which it is now in such case lawful to contract,
shall become so much additional indebtedness secured by this Trust Deed, and be paid out of the rents and proceeds
of sale of the lands and premises aforesaid, if not otherwise paid by said party of the first part; and it shall not be
obligatory to inquire into the validity of such tax deeds, taxes or special assessments, or of sales therefor, or of liens of
mechanics or material men, or into the necessity of such repairs, in advancing, moneys in that behalf as above
authorized; but nothing herein contained shall be construed as requiring the said party of the second part, or the legal
holder or holders of said principal note, to advance or expend money for taxes or special assessments, or for other
purposes aforesaid.

Long Form Of Trust Deed. Continued

And as additional security for the payment of the indebtedness aforesaid, the said party of the first part, for said party,
and for the heirs, executors, administrators and assigns of said party, covenants and agrees to keep all buildings and
fixtures that may be upon the said premises, at any time during the continuance of the said indebtedness, insured
against loss or damage by fire, for the full insurable value of such buildings and fixtures, in such responsible insurance
company or companies as may be approved by the party of the second part, or the holder or holders of said principal
note, and to make all sums recoverable upon such policies payable to the party of the second part, for the benefit of
the holder or holders of said principal note, by the usual mortgagee or trustee clause to be attached to such policies,
except in case of sale under foreclosure hereof, from which time and until the period of redemption shall expire, the
same shall be made payable to the holder of the certificate of sale, and to deliver all such policies to the said party of
the second part, or the holder or holders of said principal note, and in case of failure to insure as above provided, the
party of the second part, or the holder or holders of said principal note, may procure such insurance, and all moneys
paid therefor, with interest thereon at the highest rate for which it is now in such case lawful to contract, shall become
so much additional indebtedness secured by this Trust Deed; but it shall not be obligatory upon said party of the
second part, or any holder of said note, to advance or pay for such insurance in case of such failure to insure.
And it is further covenanted and agreed, that in case of default for thirty days in making payment of any of said notes,
or any installment due in accordance with the terms thereof, either of principal or interest or of a breach of any of the
covenants or agreements herein contained to be performed by the party of the first part, or the heirs, executors
administrators or assigns of said party then the whole of said principal sum hereby secured shall at once at the option
of the holder or holders of said principal note, become immediately due and payable, without notice to said party of the
first part, or the heirs, legal representatives, or assigns of said party.
And thereupon the legal holder or holders of said principal note, or the party of the second part, for the benefit of the
legal holder or holders of said note, shall have the right to immediately foreclose this Trust Deed, and upon the filing of
any bill for that purpose, the court in which such bill is filed may at once, and without notice to the said party of the first
part, or any party claiming under said party, appoint a receiver for the benefit of the legal holder or holders of the
indebtedness secured hereby, with power to collect the rents, issues and profits of the said premises, during the
pendency of such foreclosure suit, and until the time to redeem the same from any sale that may be made under any
decree foreclosing this Trust Deed, shall expire.
And in case of foreclosure of this Trust Deed, in any court of law or equity, a reasonable sum shall be allowed for the
solicitors' and stenographers' fees of the complainant in such proceeding, and also all outlays for documentary
evidence and the cost of a complete abstract of title to said premises, and for an examination of title for the purpose of
such foreclosure; and in case of any other suit, or legal proceeding, wherein the said party of the second part, or the
holder or holders of said principal note, shall be made a party thereto by reason of this deed the reasonable fees and
charges of the attorneys or solicitors of the party of the second part and of the holder or holders of said principal note
so made parties for services in such suit or proceeding shall be a further lien and charge upon the said premises,
under this deed; and all such attorneys', solicitors' and stenographers' fees and other charges shall become so much
additional indebtedness secured by this Trust Deed, and be paid out of the proceeds of the sale of said premises, or
from rents, as other costs, if not paid by said party of the first part.
And out of the proceeds of any sale, under foreclosure of this Trust Deed, shall be paid: First - All the costs of such suit
or suits, advertising, sale and conveyance, including attorneys', solicitors', stenographers', trustees' fees, outlays for
documentary evidence and cost of said abstract and examination of title. Second - All the moneys advanced by the
party of the second part, or any one or more of the holders of said principal note, for any purpose authorized in this
Trust Deed, with interest on such advances at the highest rate for which it is now in such case lawful to contract. Third
- All the accrued interest remaining unpaid on the indebtedness hereby secured. Fourth - All of said principal money
remaining unpaid. The overplus of the proceeds of sale, if any, shall then be paid to the said party of the first part, or
the heirs, legal representatives or assigns of said party, on reasonable request.
A reconveyance of said premises shall be made by the party of the second part, to said party of the first part, or to the
heirs or assigns of said party, on full payment of the indebtedness aforesaid, the performance of the covenants and
agreements herein made by the party of the first part, and the payment of the reasonable fees of the said party of the
second part.
It is expressly agreed that neither the said Trustee, nor any of its agents or attorneys, nor the holder or holders of any
note hereby secured, shall incur any personal liability on account of anything that it, he or they may do or omit to do
under the provisions of this deed, except in case of its, his or their own gross negligence or misconduct.
In case of the inability or refusal to act of the said party of the second part at any time when its action hereunder may
be required by any person entitled thereto, then..................
...................................of said Cook County, shall be and....................is hereby appointed and made successor in trust
to the said party of the second part under this Trust Deed, with identical powers and authority, and the title to said
premises shall thereupon become vested in such successor in trust for the uses and purposes aforesaid.
Witness the hand..and seal..of said party of the first part, the day and year first above written.
........................(seal)
........................(seal)
........................(seal)
........................(seal)
Append. 219
State of......................]
[ss. County of....................J
I.........................................................
A Notary Public in and for said County, in the State aforesaid,
DO HEREBY CERTIFY That......................................
personally to me known to be the same person........whose name........................................subscribed to the foregoing
instrument, appeared before me this day in person and acknowledged that...............................signed, sealed and
delivered the said Instrument as...................free and voluntary act for the uses and purposes therein set forth, including
the release and waiver of the right of homestead.
Given under my hand and Notarial Seal this............
day of................................A. D. 19...
Notary Public The principal note mentioned in the within Trust Deed has been identified herewith. Register
No........................
CHICAGO TITLE AND TRUST COMPANY, Trustee,
By
IMPORTANT For the protection of both the borrower and lender, the principal note secured by this Trust Deed should
be identified by the Chicago Title and Trust Company, Trustee, before the Trust Deed is filed for record.

12. Principal Trust Deed Note

$5,000 Chicago, Illinois, Jan. 15, 1912.
Three years after date for value received, we promise to pay to the order of ourselves the principal sum of Five
thousand ($5,000) dollars, in gold coin of the United States of America of the present standard of weight and fineness,
with interest thereon until the maturity hereof at the rate of six per centum per annum, payable in like gold coin, on the
fifteenth day of
January and of July in each year, and with interest after maturity until paid at the highest rate for which it is now in such
case lawful to contract; which said several installments of interest until the maturity of said principal sum are further
evidenced by six (6) interest notes or coupons of even date herewith, with interest after due at the highest rate for
which it is now in such case lawful to contract, payable in like gold coin, and the said payments of both principal and
interest are to be made at such Banking House in the City of Chicago, in the State of Illinois, as the legal holder or
holders of this principal note may, from time to time, in writing appoint, and in default of such appointment, then at the
office of the Chicago Title and Trust Company, in said City of Chicago.
It is hereby agreed that if default be made in the payment of any one of the installments of interest aforesaid, at the
time and place when and where the same becomes due and payable as aforesaid, and such default shall continue for
thirty days after such installment becomes due and payable as aforesaid, then at the election of the legal holder or
holders hereof, the said principal sum, together with the accrued interest thereon, shall at once become due and
payable at the place of payment aforesaid; said election to be made at any time after the expiration of said thirty days
without notice. The payment of this note is secured by Trust Deed, bearing even date herewith, to the Chicago Title
and Trust Company, Trustee, on real estate in the County of Cook and State of Illinois.
Principal Note No. I.
This is to certify that this is....
the Principal Note___described in a Trust Deed to Chicago Title and Trust Company, Trustee, dated........
Register No.... Chicago Title and Trust Company, Trustee By ............................
James Brown. Nellie Brown.
(Endorsed on back "James Brown, Nellie Brown.")

13. Coupon Trust Deed Note

$.................... Chicago, Illinois, Jan. 15, 1912.
We promise to pay to the order of ourselves, one hundred fifty ($150) dollars in gold coin of the United States of
America, of the present standard of weight and fineness, on the 15th day of July, A. D. 1912, at such Banking House in
the City of Chicago, in the State of Illinois, as the holder or holders of the principal note hereinafter mentioned may
from time to time in writing appoint, and in default of such appointment, then at the office of the Chicago Title and Trust
Company in said City of Chicago, with interest, after maturity, until paid, at the highest rate for which it is now in such
case lawful to contract, being for an installment of interest on our principal note of even date herewith, for the sum of
$5,000. The payment of this note is secured by Trust Deed to the Chicago Title and Trust Company, Trustee, on real
estate in Cook County, Illinois. Coupon No. I.
James Brown.
Nellie Brown.
(Endorsed on back by the makers.)

14. Another Form Of Principal Note

$........................... .....................19..
..............................................after date, for
VALUE RECEIVED, ...............................Promise to pay to the order of........................................
the principal sum of...................................Dollars, with interest thereon at the rate of......................per cent per annum,
payable.............................yearly, to-wit: on the............................... day of............and of
...........................................in each year, until said principal sum is fully paid. Both principal and interest are payable
at....................................................
The several installments of interest, aforesaid, for said period, .................,.........................are further evidenced
by...................................interest notes or coupons, of even date herewith.
It is further expressly agreed, that, if default be made in the payment of any one of the installments of interest
aforesaid, at the time and place aforesaid, when and where the same becomes due and payable, and such default
shall continue for............
....................days after such installment becomes due and payable, as aforesaid, then, and in that event, the said
principal sum of................................................Dollars shall, at the election of the legal holder hereof, at once become
and be due and payable, anything hereinbefore contained, to the contrary notwithstanding; such election to be made at
any time after the expiration of said............days, without notice.
The payment of this note is secured by....................
on real estate in..............................................
No........................ ........................

15. Release Deed

KNOW ALL MEN BY THESE PRESENTS, That I, William H. Jones, trustee, and holder of the note secured by the trust
deed hereinafter described of the County of Cook and State of Illinois, for and in consideration of one dollar, and for
other good and valuable consideration, the receipt whereof is hereby confessed, do hereby remise, convey, release,
and quitclaim, unto James Brown, and Nellie Brown, his wife, of the County of Cook and State of Illinois, all the right,
title, interest, claim, or demand whatsoever I may have acquired in, through, or by a certain Trust Deed bearing date
the 29th day of December A. D. 1905 and recorded in the Recorder's Office of Cook County, in the State of Illinois in
Book 8923 of Records page 47 as Document No. 3801805 to the premises therein described as follows, to-wit: Lots
thirteen (13) and fourteen (14) in block one (1) in Dingee's Addition to Wilmette Village, according to the plat thereof
recorded October 21, 1873, in Book 6 of Plats, Page 26, as Document 131865, in Cook County, Illinois, situated in the
County of Cook, in the State of Illinois. Together with all the appurtenances and privileges thereunto belonging or
appertaining.
Witness my hand and seal this 22nd day of October, A. D. 1910. William H. Jones, Trustee and holder of the note
above described.

I, Walter Johnson, a Notary Public in and for the said County, in the State aforesaid, do hereby certify that William H.
Jones, trustee, and owner of the note above described personally known to me to be the same person-----whose name
is subscribed to the foregoing Instrument, appeared before me this day in person, and acknowledged that he signed,
sealed and delivered the said instrument as his free and voluntary act, for the uses therein set forth.
Given under my hand and notarial seal, this 22nd day of October, A. D. 1910. Walter Johnson,
Notary Public
16. Lease - Short Form
THIS AGREEMENT, Made this....................day of
.....................................A. D. One Thousand Nine
Hundred....................................(A. D. 191)......
Between .....................................................
........................................party of the first part, and...................................party of the second part,
Witnesseth, That the said party of the first part does hereby lease to the said party of the second part, the following
described property, situate in the City of Chicago, County of Cook and State of Illinois, viz.:.........................................
for the term..........................beginning the........day of.......................A. D. 191.., and ending the.......
day of............................................A. D. 191..
And the party of the second part agrees to pay as rent for said premises the sum of......................................
.............................................Dollars, payable
................................in payments of...............
Dollars each, to-wit:..........................................
And the party of the second part covenants with the party of the first part, that at the expiration of the term of this lease
he will yield up the premises to the party of the first part without further notice, in as good condition as when the same
were entered upon by the party of the second part, loss by fire or inevitable accident, and ordinary wear excepted; and
will pay all assessments that shall be levied upon said premises during said term for water tax.
And the said party............of the second part further covenant......that..................will permit the party of the first part to
have free access to the premises hereby leased for the purpose of examining or exhibiting the same, or to make any
needful repairs or alterations of such premises, which said first party may see fit to make; also to allow to have placed
upon said premises, at all times, notice of "For Sale" or "For Rent" and will not interfere with the same.
It is further agreed, by the said party of the second part that neither he nor.....................................legal representatives
will underlet said premises, or any part thereof, or assign this Lease, or make any alterations, amendments or additions
to the buildings on said premises, without the written assent of the party of the first part had thereto, and that neither he
nor............................legal representatives will use said premises for any purpose calculated to injure or deface the
same, or to injure the reputation or credit of the premises or of the neighborhood.
It is further agreed by the party of the second part that he will keep said premises in a clean and healthy condition, in
accordance with the ordinances of the City, and the directions of the Board of Health and Public Works.
And it is further expressly agreed between the parties, that if default shall be made in the payment of the rent above
reserved, or any part thereof, or in any of the covenants or agreements herein contained, to be kept by the party of the
second part .......................heirs, executors, administrators or assigns, it shall be lawful for the party of the first part,
or........
legal representatives to enter into and upon said premises, or any part thereof, either with or without process of law, to
re-enter and repossess the same, and to distrain for any rent that may be due thereon, at the election of said party of
the first part; and in order to enforce a forfeiture for non-payment of rent, it shall not be necessary to make a demand
on the same day the rent shall become due, but a demand and refusal or failure to pay at any time on the same day, or
at any time on any subsequent day, shall be sufficient; and after such default shall be made, the party of the second
part, and all persons in possession under ........................shall be deemed guilty of a forcible detainer of said premises
under the statute.
In witness whereof, the parties have hereunto set their hands and seals the day and year first above written.
,........................ (seal)
,........................(seal)
,........................(seal)

17. Guarantee Of Lessee's Undertakings

For value received..................hereby guarantee the payment of the rent and the performance of the covenants and
agreements of the party of the second part in the within Lease, in manner and form as in said Lease provided.
Witness.........hand......and seal............this..........
day of....................A. D. 19..........
...............................[seal]

18. Assignment Of Lease And Acceptance Thereof

(To be used by tenant in assigning to another tenant.)
For value received..................hereby assign all........
right, title and interest in and to the within Lease unto..........
..............heirs and assigns and in consideration of the consent to this assignment by the Lessor.................guarantee
the performance by said..................................of all the covenants on the part of the second party in said Lease
mentioned
........................(seal)
In consideration of the above assignment and the written consent of the party of the first part thereto.....................
hereby assume and agree to make all payments and perform all the covenants and conditions of the within Lease, by
said party of the second part to be made and performed.
Witness......................hand.........and seal......this
...................................day of..........A. D. 19...
........................(seal)
........................(seal)

19. Consent To Assignment Of Lease

......................hereby consent to the assignment of the within Lease to.................................on the express condition,
however, that the assignor shall remain liable for the prompt payment of the rent and performance of the covenants on
the part of the second party as therein mentioned, and that no further assignment of said Lease or subletting of the
premises or any part thereof shall be made without.............written assent first had thereto.
Witness........................hand ...and seal.. .this........
day of................................A. D. 19.....
........................(seal)

20. Lessor's Assignment Of Lease

(To be used by owner upon sale of the premises.)
In consideration of One Dollar, to..............in hand paid,
........................hereby transfer, assign and set over to
.................................and assigns..................
interest in the within Lease, and the rent thereby secured........
Witness.............................hand.. ..and seal.. ..this
..............................day of...............A. D. 19...
........................(seal)
........................(seal)

21. Will
I, John Doe, of the City of Chicago, County of Cook and State of Illinois, being of sound and disposing mind and
memory do hereby make, ordain, declare and publish this as my last will and testament, hereby revoking all former
wills by me made.
First. I direct that my just debts and funeral expenses be paid as soon as conveniently may be after my death.
Second. I give to my faithful employee William Smith, the sum of One Thousand ($1,000.00) Dollars.
Third. I give to my nephew Harry Wilson my gold watch and chain.
Fourth. All the rest and residue of my estate whether real or personal and wherever situated I give devise and
bequeath to my beloved wife Mary to have and to hold the same as her own forever.
Sixth. I hereby appoint my wife Mary as the executrix of this my last will and testament and I direct that she be allowed
to serve without bond.
In witness whereof, I have hereunto set my hand and seal this third day of March, 1912.
John Doe (seal)
We, the undersigned, hereby certify that the testator, John Doe, made, ordained, published and declared the above
instrument, consisting of one page, to be his last will and testament and in our presence signed the same, and we at
his request and in his presence and sight, and in the presence and sight of each other hereby sign the same as
witnesses thereto believing the said John Doe to be of sound and disposing mind and memory and about the age of
fifty-eight years.
Alexander Jackson, Joseph H. Crossley.

Appendix B2. Questions And Problems

Chapter One

1. On what two senses is the word "property" defined? Define "title"; "possession."
2. Define "real property"; "personal property"; give some illustrations. May property be real and personal at the same
time?
3. What distinction does the law make as to real and personal property in the case of death of the owner?
4. What difference is there between real and personal property in respect to transfer?
5. What kind of property does a wife have dower in?
6. What other distinctions does the law make?
7. Define "land" ; "tenement" ; "hereditament."
8. A and B have adjoining lands. A's fruit tree overhangs B's land. Is B entitled to the fruit on his side of the fence? Can
be cut off the overhanging branches?
9. Is water "land"?
10. Define "advowson" ; "tithes" ; "commons" ; "ways" ; "annuities."
11. What is a chose in action? Chose in possession?
12. Enumerate with short explanation various forms of intangible personal property.

Chapter Two

13. What was "feudalism."

14. What was enfeoffment?
15. What were the incidents of the feudal estate?
16. What were the three general kinds of tenures?

Chapter Three

17. In what two ways is the word "fixture" employed?

18. A sold a piece of real estate describing it by its legal description and making no mention of any improvements or
fixtures thereon. The land had upon it a residence, a barn, a rail fence, a stack of hay, some growing corn, a wind mill;
and the residence had a mirror built into the panel, a heating system consisting of a furnace and steam pipes and coils;
in the house were chairs, beds, tables, and other furniture. On the house was a lightning rod. In the basement were
screens for the windows. State which of these things passed by the deed and which did not.
19. A theater building is sold. It contains chairs for the audience, and an organ which had been used in the
entertainments. Is the buyer entitled to these items?
20. Do gas fixtures, chandeliers, and gas ranges, go with a sale of the real estate?
21. A buys a house on installments, with the provision that on failure of payment, he may be declared in default, and a
forfeiture declared. Before default he had some storm doors put on the house, removable by merely lifting off the same
hinges used for the screens in summer time. Has he a right to these doors if he forfeits his title?
22. What is the rule between mortgagor and mortgagee as to annexations ?
23. A rents a building from B for the purpose of conducting a restaurant on the first floor and living on the second. On
the second floor he places his furniture, fastens a chandelier on the gas system, and puts in a gas range in his kitchen;
on the first floor he puts up counters which are fastened to the floors, builds a substantial petition, puts up a telephone
booth, and puts an awning over the front show windows. What is he entitled to take away at the end of his tenancy ?

Chapter Four

24. In what two classes are growing products placed?

25. A owns a farm. During the summer while crops are maturing he sells the property to B, no mention being made of
the crops. Is B entitled to them?
26. A sells his crops to B under an oral agreement? A afterwards refuses to go on with the bargain and claims that the
sale is unenforceable because a sale of real estate and not in writing. Is it enforceable?

Chapter Five

27. A sells B the uncut ice on his land. Is this a sale of real or personal property?
28. What does the text state in reference to rocks and stones?

Chapter Six

29. Is a promise to make a gift enforceable? Why?

30. What are the two kinds of gifts? What practical distinction between them? Is delivery essential in each case?
31. A tells B that he can have the contents in his trunk, and tells B that he can find the key to the trunk tied to it. B looks
for the key and cannot find it. A then tells B that he will have a search made. That night A dies. B claims the contents of
the trunk and A's heirs claim them. Who is entitled to them?
32. A goes into a barber shop and while being waited upon leaves a book in the window and goes away forgetting it. B,
another customer, comes in, discovers the book and claims it. A is unknown. The barber resists B's claims and brings
a suit for the possession of the book. Who is entitled to the book as between A, B, and the barber ?
33. Assume in the question above that A had dropped the book upon the floor of C's shop and B had found and
claimed it, would your answer be the same?
34. What is treasure trove? To whom does it belong on discovery ?
35. How may one acquire title to wild animals? How is such title lost?
36. What is the rule in reference to acquiring title in fish and other marine animals?
37. What do we mean by title by confusion?
38. A has a lot of sheep and by accident they get mixed with B's sheep. Neither A nor B can identify his own sheep.
Who owns the sheep?
39. What do we mean by title by accession?
40. A finds a board belonging to B which he takes a fancy to and carries it away and builds it into a carriage. What are
B's rights ?
41. Assume under the same circumstances that A thought that the board belonged to him, would this make any
difference?

Chapter Seven

42. What are freehold estates?

43. What two kinds of fees were there at common law?
44. What two general kinds of life estates are there?
45. What were the future estates?

Chapter Eight

46. A deeds land to "B and his heirs." What kind of estate has B? Can B sell this land to C, and thereby cut off his own
heirs or can they claim that they take under the deed from A? If the deed had been to A and his children, would your
answer be the same? In that case would it make any difference whether the children were In fact at A's death all of his
heirs?

Appendix B2. Questions And Problems. Part 2

47. What was the history of the estate in fee simple?
48. What words were necessary to create a fee at common law? Are they still necessary? If a deed was made merely
to "John Doe" at common law, what sort of estate did John Doe get?
49. A transfers land to B for life, and after B's death, with remainder to B's heirs. B makes a deed purporting to convey
the fee to C. After B's death, his heirs claim the land under the deed from A. Who is right? Why?
50. Suppose in the same case, A had deeded to B and after B's death with remainder to B's children, would your
answer be the same? Why?
51. Define and illustrate a "base fee."
52. At early common law before the statute de donis if A gave land to B and the heirs of B by his wife Mary, (a) what
was the estate called? (b) How could B get the fee? (c) If B did not convey and on his death left no heirs by his wife
Mary, where did the estate go? (d) If he did leave such heirs, did they get the estate? (e) What was the purpose of the
statute de donis? (f) By whose influence was its enactment procured? (g) What was the effect of the gift above
described after the statute de donis? (h) How did the courts ultimately virtually overcome the effect of that statute?

Chapter Nine

53. Define dower. Can a husband lawfully defeat his wife of dower? Is it necessary that the wife be named as a
grantee in the deed in order that she may have dower?
54. How is dower waived? If a wife is divorced, does she thereby lose dower in her husband's real estate?
55. What is assignment of dower?
56. Define curtesy. Was birth of child necessary to curtesy? Dower?
Chapter Ten

57. What is a conventional life estate? What is an estate per auter vie?
58. What use can tenant for life make of the estate?
59. What is waste? Voluntary waste; permissive waste?
60. What is meant by saying a tenant is unimpeachable for waste? What is equitable waste?
61. A tenant for life is about to clear timber off of a part of the land. Can the remainderman prevent?
62. A tenant for life wishes to pull down an old store building and erect a modern skyscraper thereon. Can the
remainderman prevent?
63. A is a life tenant. B is lessee of certain of the property with rents payable half yearly on the first of January and July
in each year. A dies December 31st. Do the rents go to A's estate, or to the remainderman C?
64. D in his will gives his estate to T as trustee to hold the estate in trust to pay the income during A's life and after A's
death to transfer the estate to B. In the trust estate there are some bonds worth 90% of par. These bonds increase in
value to par. Who is entitled to increase as between A and B? If A dies between interest days will the interest be
apportioned?
65. Who, as between life tenant and remainderman, is entitled to dividends on stock? Suppose the dividends are
earned during the life tenancy, but not declared until after his death, is the life tenant's estate entitled?
66. What is liability of life tenant for taxes? For special assessments ?
67. Is a life tenant liable for interest on the incumbrances on the estate? The principal?

Chapter Eleven

68. Define estate for years; from year to year; estate at will.
69. T has a lease from L for one year. After the year T stays in possession. What rights has L?
70. Suppose in above case L receives rent from T for the first month. He then advises T he will raise the rent. Has he a
right to do this?
71. Must there be a written lease to create a tenancy?
72. How is rent usually provided to be payable?
73. A rents a flat which is to be heated by steam by the landlord. The landlord does not furnish heat as agreed. Must A
pay the rent? Would he be justified in vacating?
74. What is actual eviction? Constructive eviction? In the latter case must the tenant actually vacate?
75. A rents a house from L. He finds it full of vermin. Will this justify him abandoning the premises?
76. A rents a flat to B and retains care of the halls. He allows them to become dilapidated and B is injured by a loose
board. What are B's rights?
77. A rents a house to B under which there is a defective sewer from which gas escapes. A knows of this defect but B
does not and B's family are made ill. Has B any right against A?
78. What care must a tenant give to the premises? While a tenant is in possession of the premises they are injured by
fire. Must the tenant replace the injury?
79. If a lease expires at a certain day, must either landlord or tenant give notice of termination?
80. If a tenancy is from year to year how can it be terminated ? From month to month?
81. If a tenant fails to pay rent, can the landlord terminate the tenancy ?
82. A rents a dwelling house from B. It burns down. Does this abate the rent or terminate the lease?

Chapter Twelve

83. A conveys to B for life with remainder to C and his heirs. What is C's estate called?
84. In the above case, if C is alive does the estate vest in him at once or in futuro? Suppose C dies before B, does this
destroy the remainder?
85. What is a contingent remainder?
86. Can there be a remainder without a particular estate? Why?
87. What is the rule against perpetuities?
88. What is meant by an estate in reversion?
89. Define executory devise.

Chapter Thirteen

90. Define estate in severalty.

91. A is grantor in a deed, conveying land to B, C and D. What is their title? Is B entitled to partition? Suppose the land
cannot be divided to any advantages, what will be done?
92. Suppose in the above case, before partition, B dies, does C, and D get B's title, or does it go to his heirs or
devisees?
93. What is a joint tenancy? How does it differ from a tenancy in common?
94. Define estate in coparcenary.

Appendix B2. Questions And Problems. Part 3

95. What is the estate in entirety?

Chapter Fourteen
96. D devises lands to T, to manage the same for benefit of B, paying him the net income. What is this arrangement
called. What are T and B respectively called?
97. What was a "use"? What was the Statute of Mortmain? the statute of uses?
98. To what uses was the statute of uses deemed not to apply?
99. Make a table of trusts.
100. Can a trust in real property be declared orally?
101. Testator leaves property to his eldest son, John, stating that he hopes and has full confidence that John will use it
to send his brother through college. Can William compel John to carry out his father's hope?
102. Testator leaves a fund to trustees for them and their successors to perpetually hold in trust for the endowment of
a hospital. Also another fund for the perpetual care of his grave. Are these trusts valid? Suppose the hospital was to be
conducted for profit and the net income paid to named beneficiaries would the trust be valid? Why?
103. What is the cy pres doctrine?
104. A trustee has funds to invest. He invests them in stock of a corporation which fails. Is he personally responsible?
What is the general rule as to nature of investment by trustee?
105. Testator gives property to T in trust for B's benefit, providing that B cannot anticipate the income by assignment or
pledge. B borrows money from L, assigning his future income under the trust for a stated period. Can L get any judicial
relief to prevent B from collecting this income?
106. A buys property with B's funds, and takes title In A's name. What right has B?
107. What is a constructive trust? Give some examples.

Chapter Fifteen

108. What is a conditional estate?

Chapter Sixteen

109. What was the effect at common law of a failure to pay a debt secured by mortgage?
110. What was the equity of redemption? Why was it allowed?
111. What was foreclosure? How did it fail of justice under the early equitable theory?
112. How is a mortgage foreclosed in modern times.
113. D mortgages his lands to C. Who under modern law has the legal title? Can C convey the legal title? Do D's heirs
or C's heirs take the title on death of D or C?
114. What is a trust deed in the nature of the mortgage?
115. A conveyed to B by warranty deed. A now claims that desiring to borrow some money from B, B let him have the
same upon the deed being made with an agreement to reconvey to A when the debt should be paid and that B now
refuses to reconvey. If A can establish this case by proof will the courts give him any, and if so what relief?
116. What is a power of sale in a mortgage? Is it good?
117. What is the meaning of the phrase "Once a mortgage, always a mortgage"?
118. How may the mortgagee make his mortgage good against third persons subsequently dealing with, or acquiring
rights against, the mortgagor?
119. Who is entitled to possession under a mortgage?
120. A sells property to B. The property is subject to a mortgage properly recorded. Can the mortgage be foreclosed as
against B? Can B get a deficiency judgment or decree against B? Can A cut off his own personal liability by such a
transfer?
121. May the debt secured by mortgage be sold? How is this accomplished ?
122. Can the mortgagee eject the mortgagor from possession?
123. Define the kinds of foreclosure.
124. What is meant by statutory right of redemption?
125. Describe a junior mortgage.

Chapter Seventeen

126. If A's land is bounded by a roadway separating his land from that of B, does A own any of the roadway?
127. What was "navigability" at common law for the purpose of determining boundaries?
128. A's land is upon the west bank of the Illinois River. Where is the boundary of his land?
129. Has A a right to prevent B from fishing from his bank? From fishing from a boat floating in the river?
130. Where land borders on a lake where is the boundary line?
131. What is a meander line?

Chapter Eighteen

132. Define an easement.

133. What is a positive easement? A negative easement?
134. Can a person get by prescription an easement to have light come over his neighbor's land?
135. What is an easement in gross? What is meant by dominant estate? Servient estate?
136. What is prescription?
137. What is an easement of necessity?
138. How does an easement differ from a license?
139. A owns lot A and has an easement over lot B for benefit of lot A. He sells lot A to X. Is X entitled to the easement?
If owner of lot B sells to Y, does Y take subject to the easement?
140. How are easements lost?
141. What is a profit a prendre? Name the different kinds.
142. A's land adjoins B. B desires to dig out soil and dirt, but this will cause A's land to give way. Can B make the
excavation without liability to A? Has B a right to build up an artificial wall to give A the same support? If A has a
building on his land, can B make an excavation that would not have affected A's land except for the building? What
precaution must he take?

Chapter Nineteen

143. What is meant by "adverse possession"?

144. What was essential to title by adverse possession at common law?
145. What other periods of limitation have been established by statute?
146. A has adverse possession of X's land for ten years; after A's death, his son B keeps up the adverse possession
for another ten years. Can the two periods be tacked together?
147. Define escheat; forfeiture.
148. A's land, which is bordered by the lake, is gradually added to by the deposit of the sand. Who owns the title to this
new land?
149. What is erosion?

Chapter Twenty

150. A wishes to buy land from the X corporation. Is it any concern of his whether the X corporation owned the land for
proper corporate purposes?

Appendix B2. Questions And Problems. Part 4

151. May an alien own real estate?
152. May a minor dispose of his real estate? be grantee in a deed?
153. What capacity bad a married woman at common law to own real estate?

Chapter Twenty-One

154. Enumerate and define the old English deeds.

155. What is a warranty deed? A purports to convey Black-acre to B by warranty deed. A does not own Blackacre, but
subsequently X, the owner, conveys to A. Has B, without more, good title? Why?
156. What is the effect of a quit claim deed?
157. What is the mission of a release deed?

Chapter Twenty-Two

158. A makes a deed to his brother, and it is found among A's effects at his death. His brother did not know the deed
had been made out. Has B title by virtue of the deed? Why?
159. What is, and what is the purpose of, delivery in escrow?
160. Is acknowledgment essential to the validity of a deed?
161. Why does the statute provide for acknowledgment of deeds?
162. When will acceptance of a deed be presumed?
163. What is the purpose of recording laws? Are deeds valid without record?

Chapter Twenty-Three

164. Does the law permit a seller of real estate to restrict the use thereof by the grantee?
165. What is the difference between a covenant and a condition as to the use of land?
166. A, owning a plat of land, subdivides it into lots and streets, and places a building line restriction on every lot. A
sells Lot 1 to M and Lot 2 to N. Can M enforce the restriction as against N?
167. How may a restriction be lost or waived?

Chapter Twenty-Four

168. Define "testator"; "intestate"; "devisee"; "legatee"; "distributee" ; "personal representative"; "executor";
"administrator."
169. What is a "canon of descent" ? If A dies (a) leaving children; (b) leaving a widow, but no children; (c) leaving no
widow or children, but brothers and sisters; describe generally in each case who gets his real estate.
170. What important distinction did the common law make between the course of descent of real and of personal
property?

Chapter Twenty-Five

171. What is a holographic will? A nuncupative will?

172. Can a minor make a will?
173. A is an old man in his dotage, unable to carry on his business. Has he capacity to make a will?
174. What is undue influence?
175. A is a believer in spiritualism and in his will makes a gift to a leader in spiritualism. His heirs try to have the gift
avoided on the ground that (a) this leader had undue influence over the testator; (b) that testator was a victim of insane
delusion; will either contention prevail? What would have to be shown?
176. What is incorporation by reference? State what was held in Bryan's appeal, and why.
177. A made a will and asked B to sign it. B took it into an adjoining room, signed it and brought it back to A. C, the
other witness, took the will home and there signed it and brought it back to A, saying, "This is my signature." Is the will
properly witnessed by either witness?
178. What is a "residuary" clause?
179. A makes a will giving B a legacy of $1,000. He tells B of this and hands B the will. Before A's death he makes
another will attempting to revoke the first will. Has he a right to do this?
180. If a will is lost or destroyed, does that make it inoperative (assuming its contents can be proved) ?
181. Does subsequent marriage by a man or woman revoke his or her will? birth of child?
182. If A makes a will and then a second will, does the second necessarily revoke the first?
183. In what other ways may a will be revoked?

Chapter Twenty-Six

184. What are "letters of administration"? "letters testamentary"?

185. Who is entitled to act as an executor?
186. May one be an executor who is (a) relative, (b) beneficiary, (c) creditor, (d) witness to will?
187. Must an administrator give bond? an executor?
188. How is heirship established?
189. How is a will proved?
190. What is an inventory? a widow's award?
191. Does an executor get title to real estate of deceased? to personal property ?
192. Same question as to an administrator.
193. Is an executor entitled to vote corporate stock belonging to the estate?
194: Does the executor or administrator take title to partnership assets?
195. If life insurance is payable to a named beneficiary, does same constitute assets of the estate?
196. Can the personal representative sue where deceased could have done so?
197. What is the general rule in respect to nature of investment by an executor?
198. In case it is necessary to sell real or personal property to pay debts, which will be sold preferably to the other?

Chapter Twenty-Seven

199. What is the usual practice in the sale of real estate?

200. What is a "merchantable" title?
201. Should a contract to purchase real estate be recorded?
202. What is a meridian line? How many are there?
203. What is a base line? a range line? a township?
204. What is a section? How many acres does it contain?
205. What is an abstract? a guaranty policy?
206. What is the "Torrens' System"?
207. If A has a contract with B whereby A is to sell B real estate, and A will not convey, can B compel him to do so, or
must he sue for damages?

Bankruptcy. Chapter 1. The History And Purposes Of Bankruptcy Legislation

Sec. 1. Definition Of Bankruptcy

The word "bankruptcy" has a technical meaning to indicate that, under the authority of some statute, a judicial
proceeding has been instituted for the collection of a debtor's assets, their distribution among his creditors, and his
discharge from personal liability to such creditors notwithstanding the insufficiency of his assets to satisfy their claims
in full. A party who is subject to such proceedings is called a bankrupt.
(1) Meaning of word "bankruptcy" as now used.
In the present significance of the word bankruptcy, there is connoted:
(a) A statutory law under which a debtor's assets may be collected for the benefit of his creditors, and the debtor
discharged from his indebtedness;
(b) A court proceeding for that purpose begun under the law.
(2) Derivation of term "bankruptcy."
The term bankruptcy probably comes from the Italian words banco, rotta meaning broken bench. The Century
dictionary says: "It is said to have been the custom in Italy to break the bench, or counter, of a money changer upon his
failure; but the allusion is probably figurative like break, crash, smash, similarly used in English."1
(3) "Bankruptcy" and "insolvency" distinguished.
Insolvency signifies a financial condition; inability to pay one's debts; bankruptcy signifies court procedure. Insolvency
may not induce bankruptcy, but bankruptcy is usually and in most (but not all) cases predicated upon insolvency.2
(4) "Insolvency" laws distinguished from "bankruptcy" laws.
The term insolvency law as used in its larger sense would include any law meant for the relief of an insolvent debtor or
his creditors, including a bankruptcy law, but in a narrower sense is sometimes used to indicate laws which do not give
a bankrupt discharge from his indebtedness except with consent of his creditors or a percentage of them.3 State laws
relating to insolvent persons are usually called Insolvent Laws. The power of the state to enact such laws, and the
effect upon them of federal legislation is considered hereafter.

Sec. 2. History Of Bankruptcy Legislation In Other Countries

The earliest known bankruptcy law was a Roman Law in the time of Julius Caesar.
1. Century Dictionary title, "Bankruptcy"
2. For definition of Insolvency under present law, see SEC. 36 of this text.
3. Sturges v. Crowinshield, 4 Wheat (U. S.) 122.
Bankruptcy laws are in force in most countries and have been in force in England since 1542.
In ancient times, the laws against insolvent debtors were severe. It is said that under the Roman law, the creditors
could put their debtor to death or subject him to bodily torture. In Julius Caesar's time a law (Cessio Bonarum) was
passed providing that a debtor could escape punishment by surrendering all of his goods for the benefit of his
creditors. It was not a true bankruptcy law, as used in the modern sense. It could not be invoked by creditors.
Bankruptcy laws upon the continent in later times we need not stop to consider. In England, the first bankruptcy law
was enacted in 1542, being Statute 34 Henry VIII. Under this act a debtor was still looked upon as in a sense an
offender, and the law was mainly for the benefit of creditors, providing for an equal distribution of the debtor's assets
among his creditors, but not releasing the debtor from his debts.
The preamble of that law indicates that the justification for it in the minds of the members of the Parliament was that of
an offense committed in becoming an insolvent debtor, no distinction being taken between those who are unfortunate
and those who are dishonest. This law was followed by two other bankruptcy acts until the time of Queen Anne when
in 1705 (4th Anne, ch. 17) a bankrupt law was passed providing for the discharge of the debtor from his debts in case
he fully surrendered his property for the benefit of creditors. Since this time, the twofold idea of the benefit of the
creditor and the benefit of an honest debtor has been prevalent both in English and American Bankruptcy acts.

Sec. 3. Legislative Jurisdiction Of The Subject Of Bankruptcy In The United States

The federal government has express constitutional power to enact bankruptcy laws; the states have also such power in
less extensive sense so long as the federal government does not legislate upon the subject, but upon the enactment of
the federal law, the state legislation for practically all purposes becomes suspended.
The federal constitution provides that "Congress shall have power" "to establish . . . uniform laws on the subject of
bankruptcies throughout the United States."4
Is this power, thus expressly given, exclusive? It is well settled that if there is no federal law in force, each state may
pass insolvency and bankruptcy laws. But upon the going into effect of a federal law, the state law is suspended, in so
far as it covers the same ground. It is not abrogated or repealed by the federal act, but merely suspended to come
again into force upon the repeal of federal law.5
The power of the state to enact bankruptcy laws is qualified in a twofold way. First: it cannot pass such a law to affect
the credits of a citizen of any other state, unless such citizen voluntarily submits to jurisdiction;6 and, second: it cannot
enact a law whereby debts may be discharged which take their inception prior to the enactment.7
4. U. S. Const. Art. I, SEC. 8.
5. Sturges v. Crowinshield, 4 Wheat. (U. S.) 122; Ogden v. Saunders, 12 Wheat. (U. S.) 213; Harbaugh v. Costello,
184 111. 110; Stellwagen v. Clum, 245 U. S. 605.
6. Suydam v. Boyd, 14 Pet. (U. S.) 67; Ogden v. Saunders, supra; McMillan v. McNeal, 4 Wheat. (U. S.) 209.
7. Sturges v. Crowinshield, supra.
The second qualification follows from the provision of the constitution that no state shall pass any law impairing the
obligation of contract.8 Manifestly a law providing that a debt arising out of an already existing contract should be
discharged without the consent of the creditor, would be an impairment of a contractual obligation.9 But a contract
entered into after the enactment of a state bankruptcy law, is made with the knowledge of the possibility of that law
being appealed to, and may therefore very properly be said to be subject to that law.10 But in the case of the federal
government, the constitutional inhibition does not apply; it relates in terms to action by the state. The federal Act need
not, and in fact does not save from its operation already existing indebtedness.

The History And Purposes Of Bankruptcy Legislation. Part 2

Sec. 4. The Extent Of The Federal Power; Constitutionality Of Present Act

The Congress is given power to pass uniform laws on the subject of bankruptcies. The only inhibition is that the laws
must be uniform. This refers to territorial uniformity and does not forbid the recognition by general language of local
laws to affect the application of the act. The present bankruptcy act is constitutional.
We have seen in the last section that the United States has jurisdiction, expressly conferred in the constitution to enact
laws on the subject of bankruptcies, and that its action upon the subject causes the suspension of state acts covering
the same ground. We have now to inquire as to the extent of that power conferred upon the Federal government - what
limitations are placed upon the power? We find that, outside of the limitations that apply generally to all acts of
Congress, there is but one limitation - the law must be uniform. But what is meant by uniformity? Does it mean that the
act must affect each individual exactly in the same way irrespective of local laws? Is the federal government forbidden
to recognize local laws as to validity of liens, rights of exemption, and so on? It is well settled that the uniformity meant
is a uniformity in this sense - that Congress must pass a law which shall be general in its provisions to affect all parts of
the country alike.11 It cannot pass a bankruptcy law that shall apply to some states and not to others. It cannot pass
one law for the east and another for the west. But it is not forbidden to say in general terms that state laws as to
exemptions and other rights of debtors or creditors shall not be affected by the act.12
8. U. S. Const. SEC. 10.
9. Sturges v. Crowinshield, supra.
10. Ogden v. Saunders, supra.
The present law after providing for priority among various classes of debtors, then adds that debtors who have priority
by the laws of the state shall have priority under the act; that a debtor shall be allowed the exemptions allowed by the
law of his state; that liens good by the law of a state not acquired by judicial proceedings within four months shall be
good in bankruptcy; and so on. It is readily seen that under the bankruptcy law a debtor of one state may have larger
rights than a debtor of another because of the greater liberality of exemption laws; that a creditor may have greater
rights in one state than in another, because of the difference in lien and priority laws. But it would be highly unfortunate
if Congress could not recognize local conditions. It has been held that a bankruptcy law does not lack uniformity on
these grounds, and that the act of 1898, is constitutional.13
11. Hanover National Bank v. Moyses, 186 U. S. 181. 12. Idem.
Sec. 5. History Of Bankruptcy Laws In The United States
The various states have enacted insolvency and bankruptcy laws in force when there has been no federal law in force.
Congress has passed four bankruptcy laws; and the Act of 1898, with amendments, is in force today.
Not stopping to consider the history of the legislation of the various states upon the subject of bankruptcy, we may
notice briefly the history of bankruptcy legislation of the Federal Congress.
(1) Act of 1800, repealed in 1803.
The first bankruptcy act passed by Congress was the act of 1800. It was repealed in 1803. It was limited to traders. It
provided for involuntary, but not voluntary bankruptcies. It was an unpopular act, owing largely to the popular distrust of
federal legislation.
13. Idem; Stellwegen v. Clum 245 U. S. 605. In the latter case the court said: "Notwithstanding this requirement as to
uniformity, the Bankruptcy Acts of Congress may recognize the laws of the State in certain particulars, although such
recognition may lead to different results in different states. For example, the Bankruptcy Act recognizes and enforces
the laws of the states affecting dower, exemptions, the validity of mortgages, priorities of payment and the like. Such
recognition in the application of state laws does not affect the constitutionality of the Bankruptcy Act, though in these
particulars the operation of the Act is not alike in all the states."
(2) Act of 1841, repealed in 1843.
This act was confined to traders, bankers, factors, brokers, underwriters and marine insurers. It provided for voluntary
as well as involuntary proceedings. It was a law drawn upon modern theories, but was repealed for political reasons.
(3) Act of 1867, repealed in 1878.
The third act of bankruptcy was much longer lived than its predecessors. It provided for voluntary and for involuntary
proceedings. It had many defects in it which are attempted to be remedied under the present act.
(4) Act of 1898 (now in force).
Our present law is the act of 1898. It was amended in 1903, 1906 and 1910. It has been the most permanent and the
most successful federal bankruptcy law. There is no present indication of its repeal or fundamental change. It is the law
to which our attention is particularly devoted throughout this book. Its text is set out in Appendix A.

The History And Purposes Of Bankruptcy Legislation. Part 3

Sec. 6. Function Of Bankruptcy Act To Benefit Creditors

One purpose of the Bankruptcy Act is to give creditors an equal share in the assets of an insolvent debtor.
Under the Bankruptcy Act, as we shall see, creditors share equally in the assets of the estate. To be sure some
creditors are preferred over others, but all creditors of the same class share equally. The filing of a petition in
bankruptcy gives each creditor in the same class the same share in an insolvent's estate. In one way, of course, the
creditors are prejudiced, in this, that the debts of the bankrupt are discharged, and they cannot afterwards compel him
to pay what his bankrupt estate has not yielded, even though he afterwards secures assets. But it is often better for
creditors to take immediately what they can get than to await the rebuilding of their debtor's fortune, whose present
assets may be perhaps seized by one single creditor who has been most diligent in his race toward the debtor's
present assets. The bankruptcy law provides that one creditor cannot get a preference over the others, and that all the
assets of the bankrupt will be divided equally among creditors of the same class. To accomplish this end the more
surely, the present law provides that all payments made to creditors at any time within four months prior to the date of
filing a petition in bankruptcy shall be set aside and shall be returned by the creditors provided the creditor knew or had
reasonable cause to know that a preference was intended.14
It is of course true where a creditor at the time a debt is incurred takes security, as, a chattel mortgage, the creditor is
protected against loss of his debt in so far as the security is ample to cover it. Thus B applies to C for a loan. To secure
the loan C exacts from B a mortgage upon B's real estate. The next day after B secures the money, certain of his
creditors file a petition in bankruptcy. Here C is absolutely protected to the extent of his security. He has practically
purchased an estate in B's property by which he can secure the payment of his debt. But a mortgage given
14. See SEC. 54, post to secure an already existing debt is a preference that may be avoided.
It is also true that certain liens secured by a creditor will be upheld in bankruptcy, although as a rule all liens secured
through legal proceedings within four months prior to the time of filing the petition are dissolved.
These ideas will be fully developed at appropriate points.
Because the bankruptcy law is designed for the benefit of creditors, the creditors may file the petition in bankruptcy. A
petition filed by creditors puts one in what is known as involuntary bankruptcy.

Sec. 7. Function Of Bankruptcy Act To Benefit The Debtor

Another great purpose of the Bankruptcy Act is to benefit the debtor himself.
The Bankruptcy Act gives a debtor a chance to get on his feet again. So long as he has not taken the benefit of the act,
he is a prey to his creditors. Every new piece of property which he accumulates becomes at once the subject of seizure
by his creditors. The Bankruptcy Act provides that his debts (with some exceptions) shall be discharged. He can then
get a new start, knowing that he is safe from interference by his creditors.
Because the bankruptcy law is designed for the benefit of the debtor he himself may file a petition in Bankruptcy. A
proceeding so instituted is known as a case of voluntary bankruptcy.
In Hardie v. Swofford Bros. Dry Goods Co.15 the Court says:
"For these considerations, we are disposed to deny that in the present bankruptcy law the discharge of the honest
debtor is a mere incident . . .; and on the contrary to assert that the release of the honest, unfortunate and insolvent
debtor from the burden of his debts and restore him to business activity in the interest of his family and the general
public, is one of the main, if not the most important objects of the law." 16
15. (C. C. A. 5th Cir.) 165 Fed. 588.

Sec. 8. Bankruptcy Discharges Obligations In The Form Of Money Debts

A discharge in bankruptcy does not discharge one of all his obligations, but only those which may be classed as debts.
Debts (with a few exceptions) are discharged whether mature or not, but one's executory contracts are not affected,
unless the bankruptcy proceedings operate as a breach of contract.
It may be said, it is thought, with accuracy that bankruptcy proceedings discharge obligations which are in the nature of
debts, claims or liabilities, only; but it has been a point considerably mooted whether bankruptcy in itself constitutes a
breach of an executory contract.17

Sec. 9. Brief View Of Proceedings In Bankruptcy Under Present Law

It will perhaps give us a better understanding of our subject, to take a "bird's eye" view of the proceedings in
bankruptcy under our present law, the federal act of 1898, and amendments thereto.
16. In Williams v. Fidelity Co., 236 U. S. 549, the Court says: "It is the purpose of the bankruptcy act to convert the
assets of the bankrupt into cash for distribution among creditors, and then to relieve the honest debtor from the weight
of oppressive indebtedness and permit him to start afresh free from obligations and responsibilities consequent upon
business misfortune." See also Stellwegen v. Clum, supra, at page 616.
17. See Section 68, post.
(1) Filing of the petition. The petition in bankruptcy begins the proceedings. It may be filed by the bankrupt himself, in
which case we refer to the proceedings as voluntary; or by the creditors of the bankrupt, in which case we refer to the
proceedings as involuntary.
(2) Appointment of a receiver. A receiver is an officer provided for in the bankruptcy law to take temporary charge of
the bankrupt's estate where its preservation requires some one to go into immediate possession pending the election
of a trustee by the creditors. The receiver is appointed by the Court. We see, therefore, he is not a necessary officer
and is not appointed unless the condition of the estate requires it. He may be appointed immediately upon the filing of
a petition and before the adjudication.
(3) Adjudication in bankruptcy. The adjudication is the judgment of the Court that the party against whom or by whom
the petition is filed is a bankrupt. In voluntary proceedings the adjudication proceeds as a matter of course in a few
days. In involuntary proceedings, it follows by default unless the bankrupt resists it. He may defend that he ought not to
be adjudicated a bankrupt and is entitled to a trial.
(4) Filing of schedules. The bankrupt upon his adjudication must file a list of his creditors and schedule his assets. In
voluntary proceedings the schedules are filed with the petition.
(5) First meeting of creditors. The creditors hold a meeting at which they elect a trustee and examine the bankrupt.
(6) Examination of bankrupt. The bankrupt must submit to an examination in reference to his assets if the creditors
demand it.
(7) Election of trustee. The trustee is the officer who takes title to the bankrupt's estate and who administers the estate.
He succeeds the receiver. He is a necessary officer in cases where the bankrupt has assets above his exemptions.
The trustee is elected by the creditors; he must file a bond.
(8) Collection of assets. After his election the trustee should proceed to get in all the assets of the estate, bringing suit
where necessary.
(9) Proof of debt. The creditors must file proofs of their debts. These debts are allowed as a matter of course unless
objections are made.
(10) Declaration of dividends. Dividends are declared and paid as we shall note hereafter.
(11) Application for discharge. The bankrupt must apply for his discharge within the time fixed by the act.
(12) Objection to discharge. Any creditor may file objections to the discharge of the bankrupt, setting up as a reason,
that the bankrupt has offended against some provision of the bankruptcy law. In such a case, the objection is heard
and passed upon. If sustained, the bankrupt is denied discharge in bankruptcy.
(13) Discharge. There being no objection or the objections being found baseless, the bankrupt is granted his
discharge. This frees him from his dischargeable debts. Some sorts of debts are not dischargeable in bankruptcy.18
18. These items are developed at length in their appropriate places in the subsequent discussion.
Chapter 2. The Courts And Officers In Bankruptcy

Sec. 10. The Courts That Have Bankruptcy Jurisdiction

Under the act of 1898, the Courts which have jurisdiction in bankruptcy causes, are the Federal District Courts for the
states and territories "the Supreme Court of the District of Columbia and the United States Court of the Indian Territory
and of Alaska." 19
The courts vested with bankruptcy jurisdiction under the present bankruptcy act, are the United States District Courts,
with the courts named for the jurisdictions which the District Courts do not serve, as indicated in the black letter text
above; and all bankruptcy causes must be brought in the appropriate court.

Sec. 11. The Territorial Limits Of The Courts Jurisdiction

The United States is divided into judicial districts, each district being either coterminous with a state or territory or a part
thereof.
The courts of bankruptcy are (with the additional courts named) the federal district courts, and the federal district courts
are the courts established to exercise jurisdiction over the judicial districts established by Congress. Each district
constitutes a state or territory or a part thereof. In other words there is at least one judicial district, with a district court
therein, for each state, and may be several. Thus, to illustrate, in
19. B. A. 1898, SEC. 1, CI. 8; Id. SEC. 2.
Alabama there are three federal judicial districts, known as the northern, middle and southern districts of Alabama. In
Maine, there is one judicial district, known as the District of Maine. In each of these judicial districts, having territorial
jurisdiction over it, there is a court known as the United States District Court, and it is such court which is vested with
jurisdiction over bankruptcy cases which arise within that district.

Sec. 12. Jurisdiction As Determined By The Location Of The Bankruptcy Cause Within The
Jurisdiction
Any court of bankruptcy, as distinguished from the courts of bankruptcies in other districts, has jurisdiction over any
particular cause when the party concerned as a bankrupt has had a principal place of business, resided, or had a
domicile within the territorial limit of the jurisdiction, for the greater part of six months just preceding or has property
within that jurisdiction.
We have seen that there are many courts of bankruptcy throughout the United States on account of the division into
districts, each court of bankruptcy, as so defined, being of equal dignity with any other court, but having jurisdiction
only within its own territorial limits. When may a bankruptcy cause properly be said to be within any particular territory,
so that the court there may fasten its jurisdiction upon it? The law provides that this depends upon the facts of
residence, or domicile, of having a principal place of business, or having property within the jurisdiction. The law
reads :20
"[That the courts of bankruptcy as defined shall have such jurisdiction as will enable them to] adjudge persons bankrupt
who have had their principal place of business, resided, or had their domicile within their respective territorial
jurisdictions for the preceding six months, or the greater portion thereof, or who do not have their principal place of
business, reside or have their domicile within the United States, but have property within their jurisdictions or who have
been adjudged bankrupts by courts of competent jurisdiction without the United States and have property within their
jurisdiction."
20. B. A. 1898, Sec. 2
It is desirable to discuss briefly the following items:
(1) The period of residence, having domicile or principal place of business.
This must be for the greater part of six months next preceding the adjudication. This means any time, at either the
beginning or end of the six months, or interspersed throughout, constituting more than three months.21
(2) Residence of debtor.
If the debtor resides in the district for the greater part of the preceding six months the court in that district has
jurisdiction. Residence is a fact consisting in living at a place. It has been defined as "personal presence in a fixed and
permanent abode."22
But it is not so broad as domicile, for one may have a domicile where he does not presently reside.23
21. In re Plotka, (C. C. A. 7th Cir.) 104 Fed. 967; In re Tully, (D. C. N. Y.) 156 Fed. 634; In re Isaacson, (D. C. N. Y.)
161 Fed. 777.
22. In re Dingelhoef, (C. C. A. 5th Cir.) 109 Fed. 868.
23. In re Garneau, (C. C. A. 7th Cir.) 127 Fed. 677.
(3) Domicile of debtor.
The debtor may be made a bankrupt in the district in which for the greater portion of the last six months he has had his
domicile. "Domicile is the place where one has his true, fixed permanent home and principal establishment, and to
which when he is absent he has the intention of returning, and where he exercises his political rights."24
(4) Principal place of business of debtor.
The petition may be filed in the District in which the debtor has had his principal place of business for the greater part
of the last six months. A principal place of business is a place in which the principal business affairs of a person have
their head - the place where his central offices are located, or his business chiefly carried on.25
As applied to corporations, it has been held that it will be presumed that the principal place of business is the place
stated in the charter.26 But it may be elsewhere and is a question of fact.27 Thus in one case it was held to be where
the coal was mined and the productive operations carried on, although the office in which the books were kept and the
sales made was in another jurisdiction.28
24. Idem; In re Davis, (D. C. N. J.) 217 Fed. 113.
25. In re Gurler & Co., (D. C. la.) 232 Fed. 1016.
26. In re Devonian Mineral Spring Co., (D. C. Ohio) 272 Fed. 527
27. Dressier v. North State Lumber Co., (D. C. N. C.) 107 Fed. 253.
28. Continental Coal Corp. v. Roszelle Bros., (C. C. A. 6th Cir.) 242 Fed. 243.
(5) Concurrent jurisdiction of different courts where domicile, place of residence and principal place of business not in
same district.
It follows from what has been said that a petition in bankruptcy might be filed in more than one district, as residence
might be in one, domicile in another and place of business in a third. Any one of these districts would have
jurisdiction.29 The troublesome cases arise where a petition is filed in more than one jurisdiction where there are two
or three possible jurisdictions. Will the several courts retain jurisdiction? The answer is that the court first obtaining
jurisdiction will retain it and the entire administration removed to that court, the other courts yielding jurisdiction,30
unless the greater convenience of the parties in interest demands retention of jurisdiction by the other court.31
"Parties in interest" includes not only general creditors, but prior and secured creditors, the bankrupt, and every other
party whose pecuniary interest is affected by the proceedings.32
"Greater convenience" depends on all the circumstances - proximity of creditors, proximity of bankrupt and witnesses,
location of assets, and any other factors appealing to the court as in the interest of an orderly, economical and efficient
administration of the assets.33
(6) Where bankrupt, not qualifying otherwise, has property in the jurisdiction.
If the bankrupt does not have principal place of business, domicile or residence within the United States, but has
property within the jurisdiction, the court in which such property is situated may entertain a bankruptcy petition.34 This
provision permits a proceeding against a non-resident debtor where he has property within a district of the United
States. Manifestly personal supervision over him cannot be had or the claims of foreign creditors discharged if he is not
found within the jurisdiction for service, but the property within the jurisdiction can be administered in bankruptcy.
29. In re Gurler & Co., (D. C. la.) 232 Fed. 1016.
30. In re Stern & Levi, (D. C. Tex.) 190 Fed. 70.
31. Idem; Gen. Ord. in Bankr. No. 6.
32. In re Devonian Mineral Spring Co., (D. C. Ohio) 272 Fed.
33. Idem.

The Courts And Officers In Bankruptcy. Continued

Sec. 13. Ancillary Jurisdiction

Under the express authority of the bankruptcy act, ancillary jurisdiction may be exercised in any district other than the
one in which the main proceedings are being had in aid of a receiver or trustee appointed in any bankruptcy
proceedings.
A court of any district having jurisdiction and a receiver or trustee being appointed, it may be very important that some
action be taken in another district for the preservation of assets in that other district. Accordingly ancillary proceedings
are authorized by the bankruptcy act.

Sec. 14. Extent Of Jurisdiction Over Subject Matter

The court of bankruptcy has power to enter any order or entertain any proceeding necessary to carry into execution the
provisions and meaning of the bankruptcy act.
The bankruptcy act of 1898 sets out in section 2 thereof an enumeration in detail of the powers of the bankruptcy court,
adding that "Nothing in this section contained shall be construed to deprive a court of bankruptcy of any power it would
possess were certain specific powers not herein enumerated."35 By the particular enumeration of powers, the extent of
the courts jurisdiction is made clear, and the enumeration is to be taken as a broadening of its general power rather
than a narrowing thereof.
34. Bankr. Act, SEC. 2 (1).
35. Sec. 2 (20)
Sec. 15. Jurisdiction Of Bankruptcy Court To Recover Assets
The bankruptcy court has jurisdiction to recover assets of the estate, held by or in the possession of third persons. If
they are not adversely held, the court may recover them in summary proceedings, but if adversely held there must be a
suit to recover them.
The bankruptcy law gives the court of bankruptcy jurisdiction to recover assets belonging to the bankrupt estate. The
trustee may also sue in other courts, as we shall discover, to recover assets adversely held, and therefore the
jurisdiction is concurrent to this extent. Under the act as originally enacted, there was no power to entertain a suit by
the trustee for the recovery of property without the consent of the defendant to the jurisdiction.36 This was
subsequently remedied by amendment, and now the act provides that a trustee in bankruptcy may sue in the District
Court to set aside a preference to a creditor,37 to enforce liens which should be preserved for the benefit of the estate ;
38 and to avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have avoided, or
recover the value thereof. Otherwise, "Suits by the trustee shall only be brought or prosecuted in the courts where the
bankrupt whose estate is being administered by such trustee, might have brought or prosecuted them if proceedings in
bankruptcy had not been instituted, unless by consent of the proposed defendant."39
36. Bardes v. Bank, 178 U. S. 524.
37. B. A. 1898, SEC. 60b (as amended 1903 and 1910), Collett v. Adams, 249 U. S. 545.
38. Ibid., SEC. 67c
39. Ibid., SEC. 23b.

Sec. 16. Jurisdiction Of State Courts

A trustee in bankruptcy may bring a plenary proceeding in a state court to recover property adversely held whenever
the bankrupt, had not such proceedings intervened, would have had a right to sue in such courts, and may bring any
suit in a state court which he could bring in the District Court of the United States.
The trustee may sue to recover assets in any state court in practically every case where he might sue in a District
Court, and may also sue in such state court whenever the bankrupt, had bankruptcy proceedings not intervened, might
have sued in such state court.40
40. Ibid., SEC. 7oe; Stellwegen v. Clum, 245 U. S. 605 at 614.

Sec. 17. Summary Proceedings In District Court To Recover Property

The District Court of the United States may entertain proceedings of a summary character to recover assets which are
not adversely held. Property is adversely held whenever the possession thereof has been acquired prior to the
institution of proceedings in bankruptcy.
If property is adversely held, there must be a plenary suit, either in the District Court or elsewhere, to recover it. But if
not adversely held, then summary proceedings may be entertained by the District Court. In other words if property
alleged to belong to the bankrupt
estate, is in the adverse possession of another, the trustee must start the usual suit at law to obtain possession of it,
with the regular pleadings, the summons, the time to answer, and the trial. But if not adversely held, the court may
order its possession taken by marshal, receiver or trustee and the right to it summarily disposed of in a hearing before
it brought up on motion.41
It therefore becomes important to determine when property is adversely held and when not adversely held. And in
answer to that it may be said generally that property is adversely held, whenever the claimant has possession prior to
the institution of the proceedings in bankruptcy. But if possession is afterwards obtained, then the property is not
adversely held.42

Sec. 18. Appellate Jurisdiction

The Bankruptcy Act provides for review of proceedings by the Circuit Court of Appeals and the Supreme Court. This
review may be by appeal in certain cases, by petition to revise matters of law in certain cases and upon a certificate
from a Supreme Court Justice where he believes that a determination of the question is essential to uniform
construction.
Chapter 4 of the Bankruptcy Act, contains provisions as to the jurisdiction of the Appellate Courts. A reference to that
chapter and particularly to sections 24 and 25 will disclose the nature of the appellate jurisdiction. It will be seen that
the methods of taking a case up for review are of three sorts (1) By appeal; (2) By petition for revision and (3) By
certificate of importance. In the petition to revise, which goes to the Circuit Court of Appeals, there is only the right to
review questions of law. Any question as to fact must be taken up by appeal.43
41. In re Rathman, (C. C. A. 8th Cir.) 183 Fed. 913; Babbitt v. Ducher, 216 U. S. 102; Stone-Ordean-Wells Co. v. Mark,
(C. C. A. 8th Cir.) 227 Fed. 975.
42. In re Rathman, supra; Stone-Ordean-Wells Co, supra; Weidhorn v. Levy, 253 U. S. 268.

Sec. 19. The Referee In Bankruptcy

The referee in bankruptcy has a jurisdiction somewhat analogous to that of a master in chancery. His powers are quite
broad, but are subject to revision by the judge. The act details his powers.
The referee in bankruptcy is an officer to whom the cases are referred. Such referee has immediate charge of all the
details of administration. His powers are, however, at all times subject to review by the judge, to whom his rulings may
be certified when the party adversely affected is not contented to abide by the referee's decision. The referee has
power to adjudicate debtors bankrupt, dismiss petitions, examine witnesses, declare dividends, examine schedules
and order amendments thereof, give notices to creditors, and generally to attend to the detail of administration.44
A referee has no jurisdiction until there has been a reference to him.45
He is appointed by the judge for a period of two years.
43. Hall v. Reynolds, (C. C. A. 8th Cir.) 224 Fed. 103.
44. B. A. 1898, Secs. 34, 35.
45. Weidhorn v. Levy, 253 U. S. 268. (He has no power except by order of reference and his judicial functions are
subject to review by the court.)

Chapter 3. Who May Be A Bankrupt

Sec. 20. Introductory

Bankruptcy laws originally applied only to traders. One who was not a trader could not become or be made a bankrupt.
The law of 1800 applied to merchants actually using the trade of merchandizing, or engaged as a banker, broker,
factor, underwriter or marine insurer. The present law, however, is a very wide one and has an extensive application.
We shall consider the subject under these general headings: (A) In respect to the business or calling of the debtor, (B)
In respect to the legal status of the debtor, (C) in respect to the amount which the debtor owes.
The bankrupt must come within the provisions of the law. Consent by one not subject to the law cannot confer
jurisdiction.46

A. In Respect To Business Or Calling

(a) Of natural persons.

Sec. 21. In General

Any natural person may file a voluntary petition; and any natural person, except a wage earner, a farmer or tiller of the
soil, may be made an involuntary bankrupt.
We find that the law provides that any natural person (as distinguished from corporations) may file a petition in
bankruptcy. We shall hereafter see that this may not include infants or insane persons, but every sane, adult citizen, no
matter what his occupation or business, may become a voluntary bankrupt.47 We find, however, that when we come to
involuntary bankruptcy there are some exceptions, to-wit: wage earners and farmers or tillers of the soil. These we will
now consider.
46. Vallely v. Northern Fire & Marine Ins. Co., 254 U. S. 348.
To be made an involuntary bankrupt, one must owe $1000 or over, but we shall take further note of this in a later
section.

Sec. 22. Wage Earners

A wage earner, earning $1500 a year or less cannot be adjudged an involuntary bankrupt, but he may become a
voluntary bankrupt.
A "wage earner" under the bankruptcy 'law is one who "works for wages, salary or hire, at a compensation not
exceeding one thousand, five hundred dollars per year."48 Such a person may become a voluntary bankrupt, but
involuntary proceedings cannot be maintained by his creditors.49
A wage earner is one who works for another for wages, salary or hire, as, a bookkeeper, a teamster, a school teacher.
But one who is in business himself is not working for wages, salary or hire within this exception. Thus a lawyer earning
less than $1500 a year in fees would not be exempt, but if he were working for another lawyer at a salary of $1500 a
year, he would be within the exception. So it has been held that a music teacher giving lessons to various students at
so much per hour or lesson is subject to involuntary proceedings, but such if teacher were employed at some home or
school, he could not be proceeded against, unless making more than $1500 per year.50
47. B. A. 1898, Sec. 4
48. Id., SEC. 1, par. 27.
49. Id., SEC. 4b.

Sec. 23. Persons Engaged Chiefly In Farming Or Tilling The Soil

A person whose chief occupation is farming or tilling the soil cannot be made an involuntary bankrupt, no matter what
his income is, but he may become a voluntary bankrupt.
(1) Purpose of this exception.
"The intent of congress to protect men engaged in agriculture who might fall behind from the failure of crops for one or
two seasons, has always been recognized as the basis for this provision in the statute."51
Farmers may file voluntary petitions, but are not subject to involuntary proceedings by creditors.
(2) Who is person "engaged chiefly in farming or tillage of the soil."
A farmer is one who makes farming his chief livelihood. He may be a farmer within the meaning of the bankruptcy law,
although he have other businesses or sources of revenue. The test is whether farming is of chief concern to him as an
occupation of some permanence to which he looks for his chief source of revenue.
For example, B had two farms aggregating 240 acres which he managed himself, employing one assistant besides his
son, and raising crops of wheat, oats, corn, hay, besides owning cows and selling milk. He also had a small store from
which his income was $50 or $60 a year; and he sold $200 worth of fertilizers as agent for
50. First National Bank v. Barnum, (D. C. Pa.) 160 Fed. 245. 51. In re Doroski, (D. C. N. Y.) 271 Fed. 8.
a phosphate concern. Held, he was a farmer and not subject to involuntary bankruptcy proceedings.52
M had a farm of 122 acres, which he tilled, but also conducted a store in which he sold meats and produce. During the
year he sold about $6,000 worth of meat of which about $850 was produced from his farm, the rest being purchased of
others or sold on commission for others. Held, not a farmer within the meaning of the act.53
A person who buys and sells cattle as his main business is not a farmer although he owns a farm which he makes use
of in the business.
Thus, B resided on a farm of 300 acres which he had purchased but upon which he had paid but little. He farmed 100
acres, but his chief activity was to buy cattle which he kept on the farm until he resold them at auction. In this business
he became largely indebted. Held, not a farmer.54
But "stock farming" is as much farming as "grain farming." The distinction between stock dealing and stock farming
seems to be whether he buys and sells stock as a drover or stock dealer, or as a stock farmer using his farm
incidentally in the former case, but as a real farm for cattle or hog raising in the latter.55
Carrying on any business incidental to farming does not prevent one from being a farmer and so not subject to be
made a bankrupt in involuntary proceedings.
W had a farm of 700 acres, which was devoted to cultivation and grazing. He kept about 100 cows which he fed
principally from his farm products. He sold milk from these cows at retail by means of wagon deliveries, employing men
to retail it. Held, to be a farmer and not subject to involuntary bankruptcy.56 A farmer may be a voluntary bankrupt.
52. Rice v. Bordner, (D. C. Pa.) 140 Fed. 566.
53. In re Mackey. (D. C. Del.) 110 Fed. 354.
54. In re Brown, (D. C. la.) 132 Fed. 706; see also similar case, Bank of Dearborn v. Mackey, (D. C. Mo.) 132 Fed. 75.
55. In re Dwyer, (C. C. A. 7th Cir.) 184 Fed. 880; In re Sutter, (D. C. Mo.) 270 Fed. 248.

Sec. 24. Occupation Considered As Of What Date

The occupation at the time the alleged act of bankruptcy is committed governs whether he may be proceeded against
in bankruptcy.
Whether one is in an occupation exempting him from involuntary bankruptcy depends upon what he was doing at the
time of the act of bankruptcy complained of.
A merchant becomes insolvent and commits an act of bankruptcy. Thereafter and before his creditors act he changes
his occupation and becomes a clerk on a salary of $1500 a year. The petition being filed in apt time, the bankrupt
cannot plead he was not amenable to the act being a wage earner.57
(b) Corporations.

Sec. 25. In General

Any corporation except a municipal, railroad, insurance or banking corporation, may become a voluntary bankrupt, and
any moneyed, business, or commercial corporation, except a municipal, railroad, insurance or banking corporation is
subject to involuntary bankruptcy.
(1) History of this section.
The Act of 1898, as originally drawn, did not permit corporations to file voluntary petitions, and limited involuntary
petitions to corporations engaged principally in "manufacturing, trading, printing, publishing, or mercantile pursuits." By
the amendment of 1903, mining corporations were added. This resulted in the necessity of determining in many cases
whether a corporation was within the Act; and there were a great many corporations excluded as non-trading, or non-
manufacturing, as hotel corporations, bond corporations, advertising corporations, etc. By the amendment of 1910, all
corporations were made subject, except certain ones enumerated. This is the logical and less troublesome method.58
56. Gregg v. Mitchell, (C. C. A. 6th Cir.) 166 Fed. 735.
57. In re Crenshaw, (D. C. Ala.) 156 Fed. 638. In re Doroski, (D. C. N. Y.) 271 Fed. 8.
(2) Corporations which can file voluntary petitions.
Unless a corporation is a municipal, railroad, insurance or banking corporation, it may, whether it be commercial or
non-commercial, for profit, or not for profit, file a petition in bankruptcy.
For example, an incorporated Odd Fellows Lodge, which is purely fraternal, can file a petition in voluntary
bankruptcy.59 Such a corporation could not be forced into bankruptcy.
(3) Corporations which are subject to involuntary bankruptcy.
To be subject to involuntary bankruptcy a corporation
(a) Must be moneyed, business or commercial,
(b) Must not be a municipal, railroad, insurance or banking corporation.
58. The earlier decisions on these distinctions, construing the earlier law are of course obsolete.
59. Matter of Carthage Lodge, I. O. O. F., 36 A. B. R. 873.
(4) What are moneyed, business or commercial corporations.
To be an involuntary bankrupt a corporation must be "moneyed, business or commercial." This clause is very broad
and includes practically all incorporations for profit except the corporations expressly excepted (municipal, railroad,
insurance, banking).
(5) Public service corporations.
A public service corporation is a private corporation carrying on a business which is touched with a public use, as
telegraph and telephone companies, electric light companies, street railway companies and the like. Are these subject
to bankruptcy proceedings? Clearly no distinction" can be taken under the language of the law as to whether the
proceedings are voluntary or involuntary as far as this question is concerned and we may simply inquire whether they
are subject to bankruptcy jurisdiction be the proceedings voluntary or involuntary.
Railroad corporations are public service corporations which are exempt by express exception. But unless it be by
implication other public service corporations are not excluded.
And it has been held that they are not excluded. In the cases of in re Grafton Gas Electric Light Company; in re Grafton
Traction Company; and in re Grafton Light & Power Company; in consolidated proceedings 60 it was held that such
corporations were within the act (the proceedings were voluntary) as not having been excepted therefrom.
The most serious question was in reference to the street electric railway line which might be construed to
6o. (D. C. W. Va.) 253 Fed. 668.
be a "railroad company," but the court thought that the congressional intention was to include all corporations except
those specifically excluded, and thought that the reasons for excluding railroads did not exist in case of local street
railways.
(6) Municipal corporations.
That a municipal corporation (a city or town) should be excluded from the act is apparent. Such municipalities must
work out their financial problems.
(7) Railroad corporations.
Railroad corporations are not subject to bankruptcy proceedings either voluntary or involuntary. Such corporations may
operate after insolvency under receiverships, and clearly present many problems that are peculiarly their own.
(8) Insurance corporations.
The problems of insurance corporations are peculiar. They are organized under laws that create state supervision,
require deposits of money with the state, and other regulations. In case of insolvency, their liquidation requires another
solution than that furnished by a court of bankruptcy. They can neither be voluntary or involuntary bankrupts.61
(9) Banking corporations.
A banking corporation, whether state or federal, if incorporated, is not subject to either voluntary or involuntary
proceedings. The exclusion is made because state laws provide for the administration of and winding up of state
banks, and the federal law provides for the administration and winding up of federal banks.
61. Vallely v. Northern Fire Ins. Co., 254 U. S. 348.
Unincorporated banks are subject to bankruptcy proceedings.

B. In Respect Of Legal Status

Sec. 26. Corporations

Corporations, except as noted, may become voluntary or be made involuntary bankrupts.
In considering the application of the bankruptcy act to persons or corporations from the standpoint of nature of
occupation or business, we have incidentally found that a corporation is subject to the bankruptcy act as has been
noted.

Sec. 27. Unincorporated Companies (Which Are Not Partnerships)

An unincorporated company may be adjudicated a bankrupt.
The act provides that "any unincorporated company" (owing the requisite amount) "may be adjudged an involuntary
bankrupt." This designation is used to apply to concerns which are not incorporated and which are not partnerships.
For example. The Order of Sparta was an unincorporated concern whose object was to establish a fund for payment of
death claims. Held, "an unincorporated company" within the meaning of the law and subject to involuntary
bankruptcy.62
62. Order of Sparta, (C. C. A. 3rd Cir.) 39 A. B. R. 523.

Sec. 28. Partners And Partnerships

Partnerships and the partners therein, are subject to voluntary and involuntary bankruptcy.
The Bankruptcy Act gives considerable attention to the subject of partnerships.63
(1) Provisions of act.
"A partnership during the continuation of the partnership business, or after its dissolution and before the final
settlement thereof, may be adjudged a bankrupt." "In the event of one or more, but not all, of the members of a
partnership being adjudged bankrupt, the partnership property shall not be administered in bankruptcy, unless by the
consent of the partner or partners not adjudged bankrupt, but such partner or partners not adjudged bankrupt, shall
settle the partnership business as expeditiously as its nature will permit and account for the interest of the partner or
partners adjudged bankrupt."64
(2) The partnership as an entity under the act.
A partnership is not an entity, but an association of individuals. The partners are individually jointly liable for partnership
debts. Claims of the partnership are the claims of the partners. They are the creditors and debtors of those with whom
they deal, and there is not separate entity existing legally apart from them in the sense that a corporation exists apart
from its shareholders.
63. Bankr. Act 1898, SEC. 5; General Orders in Bankr. No. VIII.
64. See also other provisions of SEC. 5, Appendix A, post.
The language of the partnership act in allowing a petition to be filed by or against a partnership seems to make it in
partnership practice an entity.65 But that this is its legal effect is doubtful. A recent United States Court decision has
said: "Ordinarily it would be impossible that a firm should be insolvent while the members of it remained able to pay its
debts with money available to that end. A judgment could be got and the partnership debt satisfied on execution out of
the individual assets. . . If as in the present case, the partnership and individual estates together are not enough to pay
the partnership debts, the rational thing to do, is to administer both in bankruptcy."66
In an Illinois case, lately decided, the court said: "It necessarily follows that in an involuntary proceeding, where the act
of bankruptcy charged is one involving insolvency of the partnership, there can be no adjudication against the
partnership, unless it and all its members are insolvent, and upon an adjudication of insolvency, the assets of all the
partners are turned into the proceeding for administration."67
These cases point in the right direction. It would be unfortunate to have a different view of a partnership prevail under
the bankruptcy act than prevails under the general commercial law.

Sec. 29. Minors

A minor cannot be adjudged a bankrupt except as to debts which he cannot avoid.
A minor's debts are voidable by him. Hence, bankruptcy proceedings would seem futile.68
65. In re Hansley & Adams, (D. C. Cal.) 225 Fed. 311.
66. Francis v. McNeal, 228 U. S. 695.
67. Abbott v. Anderson, 265 111. 285.
68. In re Duiguid, (D. C. N. C.) 100 Fed. 274; In re Dunni-gan Bros., (D. C. Mass.) 95 Fed. 428.
But some obligations are binding upon a minor. Thus his liability to pay for necessaries supplied him and in some
states his liability if in business for himself is not avoidable. Hence bankruptcy proceedings in such case seem logical.
So it has been held that a judgment for a tort against a minor is a liability dischargeable in bankruptcy.69

Sec. 30. Insane Persons

An insane person cannot be made a bankrupt. If he becomes insane after adjudication and while the proceedings are
pending this will not abate the proceedings.
An insane person cannot commit an act of bankruptcy or be made a bankrupt in an involuntary proceeding and
certainly he is not a proper person to file a petition. If after the petition is filed and the adjudication entered he becomes
insane, the proceedings will not abate.70

Sec. 31. Estates Of Deceased Persons

The estate of a deceased person, though insolvent, cannot be taken into a Court of Bankruptcy. It is to be administered
in the usual way in the Court of Probate.
An insolvent estate of a decedent is to be administered and wound up as other estates, that is, in a Court of Probate.
But where a person is adjudicated a bankrupt and dies while the proceedings are still pending, the estate will continue
to be administered by the bankruptcy court.

Sec. 32. Aliens

An alien who resides or is domiciled or has a place of business, or property in the United States, may file a petition in
bankruptcy or have a petition filed against him.
69. In re Walrath, (D. C. N. Y.) 24 A. B. R. 541.
70. In re Kehler (D. C N. Y.) 153 Fed. 235.
An alien may be a bankrupt under our law provided he lives, has a place of business, or owns property here.71

C. In Respect To Amount Of Indebtedness

Sec. 33. Voluntary Bankruptcy

One who owes debts of any amount whatever may be a voluntary bankrupt.
There is no limitation in the law as to amount of indebtedness which a voluntary bankrupt must owe.72

Sec. 34. Involuntary Bankruptcy

Involuntary bankruptcy proceedings require that the bankrupt owe $1000 or over.
A debtor cannot be made a bankrupt unless his indebtedness is $1000 or over. The petitioning creditors must have
claims aggregating $500 and this sometimes confuses one into the belief that that is the amount which the bankrupt
must owe. But he must owe $1000.73
71. In re Berthoud, (D. C. N. Y.) 231 Fed. 529.
72. Bankr. Act, 1898, SEC. 4a.
73. Id., SEC. 4b.

Chapter 4. Acts Of Bankruptcy. A. Introductory

Sec. 35. In General

In an involuntary petition it is necessary for the creditors to allege some act of bankruptcy. What shall constitute an act
of bankruptcy is set out specifically by the law.
Our National Bankruptcy Law provides that a debtor may be made an involuntary bankrupt when an act of bankruptcy
has been committed by him. It is not enough that a debtor be unable to pay his debts. An act of bankruptcy may be
considered as the indication to the world that the bankrupt is a fit subject for the bankruptcy courts.
The acts of bankruptcy are here enumerated. The law provides:74 "Acts of bankruptcy by a person shall consist of his
having
(1) Conveyed, transferred, concealed or removed, or permitted to be concealed or removed, any part of his property
with intent to hinder, delay or defraud his creditors, or any of them; or
(2) Transferred, while insolvent, any portion of his property to one or more of his creditors with intent to prefer such
creditors over his other creditors; or
(3) Suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings, and not having
at least five days before a sale or final disposition of any property affected by such preference, vacated or discharged
such preference; or
74. Id., SEC. 3.
(4) Made a general assignment for the benefit of his creditors, or, being insolvent, applied for a receiver or trustee for
his property or because of insolvency, a receiver or trustee has been put in charge of his property under the laws of a
state, or of the United States; or
(5) Admitted in writing his inability to pay his debts and his willingness to be adjudged a bankrupt on that ground.
We will consider these "acts of bankruptcy" seriatim.
Usually an act of bankruptcy involves a transaction which may be set aside, but whether it may be avoided is an
entirely different question from whether it is an act of bankruptcy.

Sec. 36. Insolvency Defined; When An Essential Element In Bankruptcy

Insolvency is defined by the Bankruptcy Law, in the quotation, below. It usually exists whenever any act of bankruptcy
is committed and is an essential element in most acts of bankruptcy.
(1) Definition and importance of insolvency.
We have heretofore noticed the difference between insolvency and bankruptcy - that the former term denotes a
financial condition, through which by the indulgence of creditors one can often come successfully without having his
business life, his property or his debts in any way affected, while the latter signifies judicial proceedings for the purpose
of dividing among his creditors the property of one, insolvent, whose debts thereupon become discharged. Bankruptcy
is, in fact, the relief offered to the creditors of an insolvent debtor and to the debtor himself.
It is sufficient to notice here in reference to insolvency as an element of bankruptcy that it is usually essential. Why it
might be held unessential is considered hereafter when we consider the act of bankruptcy in detail.
Insolvency is defined by the bankruptcy law to be as follows:
"A person shall be deemed insolvent within the provisions of this act whenever the aggregate of his property, exclusive
of any property which he may have conveyed, transferred, concealed or removed, or permitted to be concealed or
removed, with intent to defraud, hinder or delay his creditors, shall not, at a fair valuation, be sufficient in amount to pay
his debts."75
Under our former bankruptcy law in force 1867-1879, one was insolvent when he stopped payments in the ordinary
course of trade. In fact, this has been the test of all bankruptcy laws until the present.
(2) How valuation arrived at to determine insolvency.
To determine whether a person is insolvent, we inquire whether all his property, including his exemptions, exclusive of
property fraudulently conveyed by him, when taken at a fair valuation, before bankruptcy proceedings were begun, is
not of sufficient value to pay his debts.
Exemptions of bankrupt. We have noticed, and will note more particularly hereafter that a bankrupt is entitled to the
exemptions that are allowed to him by the local law of his state. In determining whether a person is insolvent these
exemptions must be included as a part of his assets, even though the result is not enough unexempt property to satisfy
the liabilities.
75. Bankr. Act 1898, SEC. I, par. 15.
Property fraudulently conveyed. In the determination of solvency, property that the bankrupt may have conveyed,
transferred, concealed or removed, or permitted to be concealed or removed, with intent to defraud, hinder or delay his
creditors, is to be excluded. The bankruptcy act so provides, and the reason is apparent. By that means a debtor has
accomplished his own insolvency so far as his visible assets are concerned, unless the creditors can set aside the
transfers or uncover the concealments. It may be a question whether the transfers are fraudulent, or whether the
concealments have been made, and if they have, whether they can be set aside or recovered. The debtor has
temporarily, at least, removed these assets out of the way of his creditors, and hence they ought not be considered
even though their recovery may mean more than enough to pay the debts in full.
Assets to be appraised at their fair value. The definition of insolvency requires that the assets are to be taken at a "fair
valuation." It has been held that "fair valuation" means a value that can be made promptly effective by the owner of the
property to pay debts. "Such a price as a capable and diligent business man could presently obtain for the property
after conferring with those accustomed to buy such property."76
This "fair valuation" requires the business to be taken as a "going concern" when the act of bankruptcy was committed.
"The valuation for the test of solvency or insolvency under the issue must relate to the conditions, as a going concern,
when the alleged preference was given, and not to the mere dead matter of the plant after bankruptcy intervened."77
76. Stern v. Paper, (D. C. N. D.) 183 Fed. 228; In re Sedalia Farmer's Co-Op. Packing & Produce., (D. C. Mo.) 268
Fed. 898.
But this assumes that the business was in fact a going concern.78
(3) Defense that debtor is not insolvent.
If a debtor would defend against bankruptcy proceedings on the ground he is not an insolvent he must definitely and
affirmatively put in the defense; if he does not deny it in the manner set out by the law he will be taken to have admitted
it. If he does deny he may demand a jury to try the issues.
Sec. 37. Within What Time Act Of Bankruptcy Must Be Committed
A petition in involuntary bankruptcy must allege an act of bankruptcy committed within four months of the filing of the
petition.
An act of bankruptcy may be considered as an outward expression of one's financial condition entitling creditors to
proceed in bankruptcy. The bankruptcy proceeding is to afford relief from a presently existing financial embarrassment.
Obviously the law must set a limit within which the act of bankruptcy must be done and the petition in bankruptcy filed
in order to join them in an existing state of affairs. This limit has been determined by providing that the act of
bankruptcy will subject the debtor to bankruptcy proceedings only if the petition is filed within four months thereafter.
The petition must allege an act of bankruptcy and is defective unless it does so. It may be amended, but the amended
petition must show an act of bankruptcy within four months of the filing of the amendment.79
77. Butler Paper Co. v. Goembel, (C. C. A. 7th Cir.) 143 Fed. 295.
78. In re Jones, (C. C. A. 7th Cir.) 268 Fed. 818.

B. The Particular Acts Of Bankruptcy

Sec. 38. Fraudulent Transfers

A removal, concealment or transfer of a debtor's property with intent to defraud creditors if made within four months
prior to the filing of the petition is an act of bankruptcy.
(1) In general.
A removal, concealment or transfer made or permitted by a debtor with intent to defraud his creditors is an act of
bankruptcy under the present act.
A fraudulent transfer in the law of bankruptcy has two aspects of importance. It is an act of bankruptcy and it is a
transaction to be set aside by the trustee in his recovery of assets whenever the transferee is actually or constructively,
a party to the fraud. As an act of bankruptcy, it must occur within the four months period immediately prior to the filing
of the petition. As a transaction to be set aside the only limitation is that which would be imposed were creditors
seeking to set it aside had not bankruptcy intervened. In this section we consider the fraudulent transfer as an act of
bankruptcy, but we will also necessarily say much that will be important under the other heading and therefore at that
time our task will be much simplified by a mere reference back to this section.
(2) Fraudulent removals, concealments and transfers defined.
A fraudulent disposition or transfer of property is a transfer made with the intent to hinder, delay or defraud creditors.
The Bankruptcy law creates no new offense against creditors, but adopts one which has long been the law and makes
it an act of bankruptcy. The court has said: "The language of subsection 1 of section 3 is the familiar language of
statutes against conveyances fraudulent as against creditors and we think there can be no doubt that Congress
intended the words employed should have the same construction and effect as have for a long period of time been
attributed to those words.80 And so constructed, the test of conveyances intended by subsection 1 of section 3 is that
of the bona fides of the transfers."81
79. In re Triangle S. S. Co., (D. C. S. D.) 267 Fed. 303.
Fraudulent transfers have been divided into those that are for value or apparent value and those that are gratuitous. A
voluntary transfer of property is looked upon as a fraudulent conveyance when made by creditor while insolvent upon
the theory that a person "must be just before he is generous."
(3) Insolvency as an element in this act of bankruptcy.
Insolvency is not an element in this act of bankruptcy. One court has said :82
"Some acts of bankruptcy must be committed while the person is insolvent. The first act of bankruptcy defined may be
committed by the person charged when perfectly solvent. If a solvent person conveys or transfers, conceals or
removes, or permits to be concealed or removed any part of his property with the intent to hinder, delay or defraud his
creditors, or any of them he commits an act of bankruptcy; and if within the ensuing four months, he becomes insolvent
and a petition is therefor filed against him such petition may allege such acts as the act of bankruptcy, and the person
may be adjudged a bankrupt accordingly."
80. Githens v. Staffer, (D. C. Pa.) 112 Fed. 505.
81. Lansing Boiler & E. Works v. Jos. T. Ryerson & Son, 128 Fed. 701.
82. In re Larkin (D. C. N. Y.) 168 Fed. 100.
Solvency at the time the petition is filed is a defense when this is the act of bankruptcy alleged. The act provides "a
petition may be filed against a person who is insolvent and who has committed an act of bankruptcy within four months
after the commission of such act." If a person has made such fraudulent transfers but still is perfectly solvent when the
petition is filed, there is no ground for putting him into bankruptcy as his estate will pay one hundred cents on the
dollar. But in considering whether a debtor is insolvent property fraudulently conveyed or concealed is to be ignored, as
we have seen in the last section defining insolvency.83 If, therefore, such property were still concealed or conveyed,
one's solvency would have to be determined by leaving it entirely out of consideration. If the trustee in bankruptcy
could thereafter recover such property again, the estate might pay debts in full.

Sec. 39. Preferential Payments Or Transfers

Where within four months before the petition is filed, the debtor, being insolvent, intentionally prefers one or more
creditors over the others this is an act of bankruptcy.
(1) Preference of creditor is act of bankruptcy.
One of the main purposes of the Bankruptcy Law being to secure an equal distribution of an insolvent's estate among
his creditors, a transfer or payment by him while insolvent to any creditor, is logically considered an act of bankruptcy,
justifying the other creditors by acting diligently (i. e. within four months) to put the estate in bankruptcy.
83. In re Hines, (D. C. Ore.) 144 Fed. 142.
(2) Preference as act of bankruptcy as distinguished from preference which trustee may have set aside.
The preference, as an act of bankruptcy, consists in having "transferred while insolvent, any portion of his property, to
one or more of his creditors, with intent to prefer such creditors over his other creditors."84 The law also provides, as
we shall consider at length hereafter, that a preference made to a debtor, within four months immediately prior to the
filing of the petition shall be avoidable by the trustee, if the debtor "shall then have reasonable cause to believe" that
the enforcement of the transfer would effect a preference.85 The effect of preference to constitute an act of bankruptcy
which looks to the bankrupt's intent, and its effect to constitute an avoidable transfer which looks to the creditor's intent
must be kept in mind. A preference might be an act of bankruptcy when it could not be avoided by the trustee, and a
preference that could be avoided might not constitute the act of bankruptcy upon which the proceedings are
founded.86
(3) Intention to create preference requisite.
Under the language of the law, a preference is not an act of bankruptcy unless the bankrupt have an intent to prefer.87
It is true, however, that every person must be intended to presume the necessary consequences of his act. If he is
insolvent and knows that he is insolvent and pays a creditor the full amount of his debt, or any amount which gives that
creditor in fact a substantial preference, he must be taken to have intended a preference. And yet there may be
preferences without intention to create them.88
84. Bankr. Act 1898, SEC. 3.
85. Id., SEC. 60b.
86. In re Smith, (D. C. N. Y.) 176 Fed. 426; Pirie v. C. T. & T. Co. 182 U. S. 438, 455.
87. Goodlander-Robertson Lumber Co. v. Atwood, (C. C. A. 4th Cir.) 152 Fed. 978.
(4) Preference may be by transfer of property or payment of money.
It is not merely the payment of a debt in cash, but any transfer in property by which a creditor obtains a greater
percentage than others would get were the bankrupt's then assets divided among them, constitutes a preference.
(5) Creditor must get greater percentage.
To constitute a preference the payment made must be one that so reduces the estate that the other creditors would not
get so great a percentage as the preferred creditor were the debtor's then assets divided among them.
(6) No preference unless prior debt.
To constitute a preference of a creditor there must be a payment of a debt. "When one gives an insolvent present value
for a transfer of property or when he makes an exchange of property there is no preference."89 In such a case there is
a transfer of values. And it is immaterial in such a case that the property transferred does not bring full value. An
insolvent person who is not yet bankrupt is not precluded from making transfer, buying and selling, borrowing money
and giving valid, unimpeachable security therefor.
88. Goodlander-Robertson Lumber Co. v. Atwood, (C. C. A. 4th Cir.) 152 Fed. 978; In re Hallin, (D. C. Mich.) 199 Fed.
806; In re Columbia Real Estate Co., (D. C. N. Y.) 205 Fed. 980.
89. Ernst v. Mechanic's Bank, (C. C. A. 2nd Cir.) 201 Fed. 664.
A preference means a diminution in value of the estate by a payment of a pre-existing debt. See further of this in
discussion whether preferences can be set aside, section 54 post.
(7) Insolvency as an element in this act of bankruptcy.
A debtor cannot commit this act of bankruptcy unless he is insolvent.

B. The Particular Acts Of Bankruptcy. Continued

Sec. 40. Preferences Secured Through Legal Proceedings As Acts Of Bankruptcy

This act of bankruptcy consists in a person having "suffered or permitted while insolvent any creditor to obtain a
preference through legal proceedings, and not having at least five days before a sale or final disposition of any
property affected by such preference, vacated or discharged such preference."
This act consists in a failure to prevent a preference by one creditor over the others through legal proceedings. It differs
from the other acts in that it consists in no affirmative act on the part of the bankrupt. The terms "suffered and
permitted" as here used indicate not a mere permission of an act that could be avoided, but a failure to prevent an act
that could not be avoided, that is, a failure to prevent a preference through legal proceedings, although he have no way
to prevent such preference.90

Sec. 41. General Assignments For Benefit Of Creditors And Receiverships As Acts Of
Bankruptcy
90. Wilson Bros. v. Nelson, 183 U. S. 191,
This act of bankruptcy consists in having "made a general assignment for the benefit of his creditors, or, being
insolvent, applied for a receiver or trustee for his property or because of insolvency, a receiver or trustee has been put
in charge of his property under the laws of a state, or of the United States."
(1) General assignment for benefit of creditors.
If a debtor assigns his property to a trustee or assignee in order that such assignee or trustee may hold it for the
benefit of his creditors, this is both an act of bankruptcy and a transaction that will be set aside by the court of
bankruptcy.
(2) Application for receiver.
The language of the act contemplates that because of insolvency, a receiver has been applied for by the bankrupt, or
because of insolvency, a receiver (at his suit or the suit of his creditors) has been put in charge of his property under
the laws of a state or of the United States.
The word "receiver" is of course used in this connection not to indicate the officer known as a receiver in a bankruptcy
case.
The receivership proceedings must be on account of insolvency. Receiverships of corporations or partnerships are not
uncommon for other purposes, as in cases of mismanagement, fraud, etc.
To give the bankruptcy court jurisdiction there must be insolvency when the receiver is appointed and when the petition
is filed.91
91. In re Sedalia Farmers Co-Op. Packing & Produce Co., (D. C. Mo.) 268 Fed. 898.

Sec. 42. Admission Of Insolvency And Consent To Bankruptcy

This act consists in having "admitted in writing his inability to pay his debts and his willingness to be adjudged a
bankrupt on that ground."
This is a sort of voluntary bankruptcy - a sort of "confession of judgment." Generally one willing to become a bankrupt
would file his own petition in bankruptcy.
In this act of bankruptcy insolvency, as defined by the bankruptcy act is immaterial.92
The board of directors have authority to make this admission.93
92. In re Dressier, Producing Corp., (C. C. A. 2nd Cir.) 262 Fed. 257. 93. Id.

Chapter 5. The Petition And Proceedings Thereon

Sec. 43. Voluntary Petitions
The voluntary petition should be made out on the official forms itemizing the assets, and the indebtedness and claiming
the bankrupts exemption.
A voluntary petition in bankruptcy is made out upon the Official Form No. 1. Schedule A attached to the petition
itemizes the debts. Schedule B itemizes the assets and claims the exemptions.
Upon the filing of this petition in proper form ad judication follows as a matter of course. A reference to a referee is
made, a date for the first meeting of the creditors is set, and a trustee elected if assets exceed exemptions.

Sec. 44. Involuntary Petitions

The involuntary petition must allege an act of bankruptcy and must show that the debtor is subject to the jurisdiction of
the court. It must be signed by three creditors if there are twelve or more creditors. If less than twelve, a single creditor
may file. But the petitioning creditor or creditors must have claims aggregating five hundred dollars or over and the
bankrupt must owe one thousand dollars or over. The petitioning creditors must have provable debts.
(1) Who may file petition.
(a) Number of creditors. "Three or more creditors who have provable claims against any person which amount in the
aggregate, in excess of the value of securities held by them, if any, to five hundred dollars or over; or if all the creditors
of such person are less than twelve in number, then one of such creditors whose claim equals such amount may file a
petition to have him adjudged a bankrupt."94
If the petition avers that the creditors are less than twelve in number and is filed by less than three creditors, and the
answer avers there are more than twelve, the answer must be accompanied with a list of the creditors with their
addresses, and the court shall delay the hearing and notify such creditors to come in and if prior to or during the
hearing other creditors join, the petition shall be sufficient. Otherwise it shall be dismissed for lack of sufficient
creditors.95
These three creditors are jurisdictional - "the law is now well settled beyond dispute that the existence of three provable
claims held by three petitioners, respectively of the alleged bankrupt, and if challenged by pleading, plenary proof
thereof is jurisdictional and indispensable to the maintenance of an unvoluntary petition in bankruptcy."96
(b) Character of creditors. A creditor is not qualified as a petitioning creditor unless he has a provable claim.97 Hence a
preferred creditor cannot be counted unless he surrenders his preference.98 Hence, a secured creditor cannot be
counted except to the extent his claim ex94. Bankr. Act, 1898, SEC. 59b.
95. Id. SEC. 59d.
96 Cutler v. Nu-Gold Ring Co., (C. C. A. 8th Cir.) 264 Fed. 836.
ceeds his security.99 Unless he waives his security and turns it in for the benefit of the estate generally.100
97. Bankr. Act, 1898, SEC. 59b.
98. Stevens v. Nave-McCord Mercantile Co., 17 A. B. R. 609.
(2) What petition must allege.
(a) That debtor is a person against whom a petition may be filed under the law. The petition must allege that the party
against whom the petition is filed is not within the exempted occupations or kinds of businesses. The court has no
jurisdiction over such persons or corporations. It is as to them as if no bankruptcy act existed.101
(b) That an act of bankruptcy has been committed. The petition must show that an act of bankruptcy has been
committed. It must state the specific facts relied on, with time, place and circumstances, so that the alleged bankrupt
may know what he is required to answer.102 For instance if a preferential payment be alleged, the allegation must
show that thereby one creditor obtained a greater preference than those in the same class.103

Sec. 45. The Adjudication; First Meeting Of Creditors; Election Of Trustee

In voluntary bankruptcy adjudication follows the filing of the petition as a matter of course; in involuntary bankruptcy it
follows if the bankrupt defaults or follows the finding against him if he pleads. Thereupon the creditors hold their first
meeting, examine the bankrupt and elect the trustee.
99. Emerine v. Terault, 34 A. B. R. 55.
100. Morrison v. Rieman, 41 A. B. R. 325.
101. Vallely v. Northern Fire Ins. Co., 245 U. S. 347.
102. Clarke v. Henne & Meyer, (C. C. A. 5th Cir.) 127 Fed. 288.
103. Mills v. J. H. Fisher & Co., 159 Fed. 897, 16 L. R. A. N. S. 656.
(1) Adjudication of bankruptcy in voluntary cases.
If the petition and schedules showing assets and liabilities are in due form, a reference is made and adjudication
follows as a matter of course.
(2) Adjudication in involuntary cases.
If the bankrupt has no defense, he defaults and the adjudication follows. He may attack the petition for insufficiency in
form, as lacking the necessary allegations, or may depend upon an issue of fact, as that he is a farmer or a wage
earner, or that he did not commit the act of bankruptcy alleged, or that he is or was not insolvent. He is entitled to a
jury. In case the issues are found against him he is adjudicated a bankrupt.
(3) First meeting of creditors.
Upon adjudication, the date for the first meeting is set by the referee and creditors notified. They attend for the proof of
their claims, the election of the trustee and the examination of the bankrupt. The examination of the bankrupt and the
questions he must answer is discussed elsewhere.
(4) Election of trustee.
At this first meeting the trustee is elected by vote of the creditors holding the majority in number and amount of claims.

Sec. 46. Duties Of Trustee

The trustees' duties in the administration of the estate are set out in detail under the bankruptcy act.
The Law provides:104
Duties of trustees. (a) Trustees shall respectively
(1) Account for and pay over to the estates under their control all interest received by them upon property of such
estates;
(2) Collect and reduce to money the property of the estates for which they are trustees, under the direction of the court,
and close up the estate as expeditiously as is compatible with the best interests of the parties in interest; and such
trustees, as to all property in the custody or coming into the custody of the bankruptcy court, shall be deemed vested
with all the rights, remedies, and powers of a creditor holding a lien by legal or equitable proceedings thereof; and also,
as to all property not in the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and
powers of a judgment creditor holding an execution duly returned unsatisfied.
(3) Deposit all money received by them in one of the designated depositories;
(4) Disburse money only by check or draft on the depositories in which it has been deposited;
(5) Furnish such information concerning the estates of which they are trustees and their administration as may be
requested by parties in interest;
(6) Keep regular accounts showing all amounts received and from what sources and all amounts expended and on
what accounts;
(7) Lay before the final meeting of the creditors detailed statements of the administration of the estates;

Sec. 47
(8) Make final reports and file final accounts with the courts fifteen days before the days fixed for the final meetings of
the creditors;
(9) Pay dividends within ten days after they are declared by the referees;
(10) Report to the courts, in writing, the condition of the estates and the amounts of money on hand, and such other
details as may be required by the courts, within the first month after their appointment and every two months thereafter,
unless otherwise ordered by the courts; and
(11) Set apart the bankrupt's exemptions and report the items and estimated value thereof to the court, as soon as
practicable after their appointment.
(b) Whenever three trustees have been appointed for an estate, the concurrence of at least two of them shall be
necessary to the validity of their every act concern ing the administration of the estate.
(c) The trustee shall, within thirty days after the adjudication, file a certified copy of the decree of adjudication in the
office where conveyances of real estate are recorded in every county where the bankrupt owns real estate not exempt
from execution, and pay the fee for such filing, and he shall receive a compensation of fifty cents for each copy so filed,
which, together with the filing fee, shall be paid out of the estate of the bankrupt as a part of the cost and
disbursements of the proceedings.

Chapter 6. The Trustee's Title

Sec. 47. As Of What Date In Respect To Bankrupt's Ownership

The trustee takes title to the property owned by the bankrupt at the time the petition in bankruptcy is filed.
The trustee in bankruptcy takes title to all the property of the bankrupt which might have been seized by his creditors
for the payment of his debts, and which was owned by him when the petition in bankruptcy was filed. The line of
cleavage in respect to the property which is subject to division among the bankrupt's creditors, passes through the day
the petition is filed.105 It is on that day, so to speak, that the bankrupt begins a new life. The property he has
theretofore owned goes to his trustee for division among creditors; the property he thereafter acquires becomes his
own.
Even if he acquires property prior to the adjudication but after the petition is filed, it belongs to him, and does not pass
to the trustee. Creditors can get no advantage of it.106
A very interesting illustration of this rule arose in a recent case.107 A debtor owed $4,300 on a note held by a bank.
His mother was ninety-eight years of age and had provided a legacy for him in her will amounting to $20,000. The
debtor filed a petition in bankruptcy.
105. Jones v. Springer, 226 U. S. 143.
106. Sibley v. Nason, 196 Mass. 125.
107. Bank of Elberton v. Swift, (C. C. A. 5th Cir.) 268 Fed. 305.
Shortly thereafter his mother died and he became entitled to the legacy. The bank filed a petition to set aside the
adjudication alleging the filing of the proceedings was a fraud on the bank. But the court held that the bankruptcy act
gave one a legal right to file a petition in bankruptcy with the effect of discharging then existing claims out of the
division of his then existing property. Property acquired after the filing of the petition did not pass to the trustee. Even
though the will then provided for the legacy, it was not then his. Of course the bankruptcy law, as the court remarked,
was not intended for situations of the sort in question. And a debtor who would so use it to evade an honest debt under
such circumstances may well deserve our censure. But the hardship of a particular case does not justify the court in
overriding the plain provisions of the law. But it is not necessary, however, that the bankrupt have possession or right
of possession in order that the trustee may take. It is simply necessary that the bankrupt, at the time of filing the
petition, have a vested interest. Thus if he were the owner of property subject to a life estate of some one else, he
would have property that he could sell and which his creditors could seize. Clearly it would be an asset, possibly a very
valuable one, for the trustee in bankruptcy. This principle is very strongly shown by the following case :108 A debtor
was an insurance solicitor. He sold a considerable amount of insurance upon which he became entitled to
commissions upon future premiums. A petition in bankruptcy was filed. Held: that as these commissions were already
earned although not yet payable, and although contingent upon the premiums being payable, they constituted property
belonging to the bankrupt upon the filing of his petition and passed to the trustees in bankruptcy.
108. Matter of Wright, 19 A. B. R. 54.
The trustee when elected gets title to the property owned by the bankrupt when the petition is filed. Where is the title in
the meantime? The Supreme Court has said: "While for many purposes the filing of the petition operates in the nature
of an attachment upon choses in action and other property of the bankrupt, yet his title is not thereby divested. He is
still the owner, though holding in trust, until the appointment and qualification of the trustee. * * * Until such election, the
bankrupt has title, - defeasible, but sufficient to authorize the institution and maintenance of a suit or any cause of
action otherwise possessed by him."109
A receiver may be appointed to take charge of such property pending the election of the trustee where necessary to
the preservation of the estate.

Sec. 48. Trustee As Representative Of Creditors

A trustee becomes clothed with "all the rights, remedies and powers of a creditor holding a lien by legal or equitable
proceedings" and also "shall be deemed vested with all the rights, remedies, and powers of a judgment creditor holding
an execution duly returned unsatisfied." 110
Under the law as originally drafted, a strict construction thereof by the courts led to the conclusion that the trustee
merely succeeded to the title of the bankrupt, and represented the creditors only to assert rights that they could have
asserted in the then condition of their
109. Johnson v. Collier, 222 U. S. 538. 110. SEC. 47a 2 as amended in 1910.
claims. To be more specific, suppose a general creditor had to obtain a lien of a judgment or attachment before he
could attack unrecorded chattel mortgages or other liens. The filing of the petition in bankruptcy gave the trustee no
better right than the creditor then had as general creditor, unless in fact at that time he were a judgment or attaching
creditor. This construction of the act was highly unfortunate. Clearly a creditor ought not to be deprived of a position he
could have taken had there been no proceedings. For instance, suppose A was a general creditor of X, and B had an
unrecorded chattel mortgage on property in X's possession. B by recording this mortgage before A obtained judgment
can have precedence over A even if B's debt is later than A's because A has been content to be a general creditor,
while B has obtained a lien. But if A gets a judgment before B files his lien or before B takes possession of the
property, A has a prior lien. But suppose that A instead of getting judgment joins in a petition in bankruptcy, or other
creditors file a petition, or X files the petition himself. A ought not in that event to have an inferior position than he
would have had. As the creditors rights are fixed by the filing of the petition as of the date thereof, the trustee ought in
all justice to be able to assert as of that date all rights which the creditors might have placed themselves in a position to
secure on that date. And by the amendment of 1910, such is now the law. The filing of the petition puts the trustee in
the position of a judgment creditor with the superior advantages of such, even though none of the creditors are
judgment creditors.
For example under the law of Kansas a contract of conditional sale is valid between the parties, whether filed for record
or not, but is void as against a creditor of the vendee who fastens a lien upon the property by execution, attachment or
like legal process before the contract is filed for record. If bankruptcy proceedings intervened prior to its being filed for
record, the conditional sale would thereby become void as to the trustee. If the conditional sale were filed prior to the
filing of the petition and prior to any creditor getting a judgment or other legal process, the rights of the conditional
vendor to re-assert his title upon breach of the condition would be made effective. And this even if the filing was
immediately prior to filing the petition. It would not be void as a preference because it would not be a preference. 111

The Trustee's Title. Part 2

Sec. 49. As To Nature Of Property

The trustee gets all the property of the bankrupt (except his exemptions) which has any value as an asset for the
payment of his debts.
After the enumeration of the specific kinds of property passing to the trustee, section 70 of the act concludes by the
general provision.
"Property which prior to the filing of the petition he could by any means have transferred or which might have been
levied upon and sold under judicial process against him."
Generally, we may say, by authority of this language, that a trustee takes title to all property, except his exemptions,
that would have been of any value to the creditors of the bankrupt had not bankruptcy intervened, and all property,
except the exemptions of the bankrupt, which is of a transferrable sort.
The trustee gets title not only to the property which the bankrupt has in his possession but all property in the hands of
others; and he is clothed by law with the right to sue as the representative of the bankrupt, to enforce the rights of the
bankrupt which existed at the time of filing the petition the enforcement of which results in assets for the creditors.
111. Bailey v. Baker Ice Mach. Co., 239 U. S. 268.

Sec. 50. Same Subject - Personal Privileges

The bankrupt's property which his creditors could not have reached by process, and which could not be transferred by
him does not pass to trustee.
If a bankrupt enjoys title to property which is in the nature of a personal privilege, and has no transferrable value, a
trustee takes no title thereto. Thus a saloon license if purely personal does not pass to the trustee.
If, however, there is a right of transfer, even though there may be restrictions upon it which may in fact defeat it, the
subject matter is property passing to the trustee. Thus it was generally held in liquor license cases, that the license
passed to the trustee if it could have been transferred by the bankrupt, although subject to the consent of the
authorities.112
This doctrine is forcibly exemplified by the facts in stock exchange membership cases. Such memberships are not
transferrable except with the consent of a certain percentage of the members. The transfer may therefore be impeded.
Nevertheless, such memberships are held to be assets passing to the trustee in bankruptcy for him to realize upon if
he can.113
These memberships frequently have a value of many thousands of dollars and are bought and sold. The
112. Matter of Doyle & Son, 31 A. B. R. 571.
113. Page v. Edmunds, 187 U. S. 596; Board of Trade v. Weston, 40 A. B. R. 263.
8o The Law of Bankruptcy.
possibility of the sale being defeated by an adverse vote, does not deprive the trustee of the asset.

Sec. 51. Interests In Patents, Patent Rights, Copyrights And Trade-Marks

These are specifically given by Section 70 of the Act.
The law provides that interests in patents, patent rights, copyrights and trade-marks pass to the trustee.

Sec. 52. Insurance Policies

Insurance policies which are assets to the bankrupt pass to the trustee, but the bankrupt can prevent this by paying the
cash value to the trustee.
Insurance policies (unless exempt by local law) if they have a cash value, pass to the trustee.
If they have no surrender value they do not pass.114 If they are exempt by the local law they do not pass.115 If the
bankrupt has named a beneficiary therein other than himself or his estate, the policy will nevertheless pass if the
bankrupt has reserved power to change the beneficiary.116 This is true although the policy provides for the consent of
the insurance company to such change.117
An insurance policy is a peculiar species of property from the fact that it may have a value which cannot possibly be
replaced. The insured may have become a bad risk, and rates increase with age. Hence the right of the bankrupt to
substitute the cash surrender value for the policy is expressly recognized by the act, which provides:
114. Burlingham v. Crouse, 228 U. S. 459.
115. Holden v. Stratton, 198 U. S. 202.
116. Cohen v. Samuels, 245 U. S. 50.
117. In re Greenberg, (C. C. A. 2nd Cir.) 271 Fed. 258; In re Jens, (D. C. la.) 273 Fed. 606.
"That whenever any bankrupt shall have any insurance policy which has a cash surrender value payable to himself, his
estate, or personal representatives, he may, within thirty days after the cash value has been ascertained * * * pay or
secure to the trustee the sum so ascertained, and continue to hold, own and carry such policy free from the claims of
creditors.
* * * " 118

The Trustee's Title. Part 3

Sec. 53. Property Held By Bankrupt In Trust Or Nature Of Trust

Property held by bankrupt in trust does not pass to the trustee.
(1) In general.
The property to which the bankrupt has title as trustee, does not pass to the trustee in bankruptcy. We are now
speaking, not of those cases of property held by the bankrupt but belonging to another, but to those cases in which the
bankrupt has legal title to property, but charged with a trust in favor of another. Such property so owned in trust does
not pass to the trustee in bankruptcy, for, though he owns the legal title, the beneficial, equitable or real ownership is in
another.
We may make a division of such cases into those which we may term express trusts, and those in which the trust is an
implication from the circumstances.
(2) Express trusts.
The trustee in bankruptcy gets no title to property held upon express trust. Thus where a bankrupt held
118. Bankr. Act 1898, SEC. 70, d, 5 under a will devising him property in trust for others, this does not become a part
of the bankrupt estate.119
(3) Implied trusts.
Property that by reason of the circumstances becomes impressed with the character of a trust, does not become a part
of the estate to become administered in bankruptcy, but may be reclaimed by the beneficial owners.
Thus it has been held that where a corporation declared a dividend, and set the fund aside for the payment of the
dividend, and thereafter went in bankruptcy before the dividend was paid, the fund was impressed with a trust, and was
payable in full to the stockholders entitled thereto.120
(4) Identification of trust fund.
It is necessary in such cases that the fund claimed be one that can be identified. If the identity becomes lost by its
intermixture generally with the bankrupt's other funds, there is no right to assert the trust against the general funds. The
trust property must be traced and identified.121
While this is the general rule, it has also been held that where the trust moneys have been deposited in a general
account, and this account does not fall below the amount held in trust, the trust money will be presumed to be a part of
this larger fund, and may be reclaimed in full by the beneficiaries.122
119. City National Bank v. Slocumb, (C. C. A. 6th Cir.) 272. Fed. 11.)
120. In re Interborough Consol. Corp. (D. C. N. Y.) 276 Fed. 914.
121. Schuyler v. Littlefield, 35 A. B. R. 209.
122. So. Cotton Oil Co. v. Elliotte, (C. C. A. 6th Cir.) 33 A. B. R. 375.
And it has been held that where a stockbroker who goes into bankruptcy has had stock on hand belonging to a
customer, and has upon his bankruptcy certificates for that stock, not belonging to someone else although not the
identical certificates delivered by or bought for the customer, they are reclaimable by the customer as his property and
do not constitute a part of the general estate. This is upon the theory that the property owned by the stockholder is
stock of the corporation and the certificates are but the evidence thereof.123

Sec. 54. Property Transferred Or Money Paid As A Preference

Where property is transferred or money paid by the bankrupt within four months preceding the filing of the petition in
bankruptcy, and the recipient knew or had reasonable cause to know that a preference was intended, the transaction
may be set aside by the trustee.
Inasmuch as a main object of the bankruptcy law is to secure an equal distribution of the bankrupt's estate among his
creditors, it follows that this object could be easily defeated if we should allow the bankrupt upon becoming insolvent to
make a payment or a transfer of property to one or several of his creditors which would stand against the trustee when
appointed. Consequently, the law provides that payments which amount to preferences within a period of four months
prior to the time the petition is filed shall be set aside upon suit by the trustee for that purpose, provided the creditor to
whom such preference was made knew or had reasonable cause to know that a preference was intended.124 He does
have reasonable cause to believe that
123. In re Solomon & Co. (C. C. A. 2nd Cir.) 268 Fed. 108.
124. Bankr. Act, 1898, SEC. 60b.; First National Bank v. Gal-braith, (C. C. A. 8th Cir.) 271 Fed. 687.
a preference was intended whenever he knows that the debtor is insolvent.125 We do not inquire as to preferences
made before the four months period because there being nothing illegal or immoral about a preference, it would tend to
unsettle business too much to allow payments to be inquired into except as made in reference to the bankrupt's
present financial condition and therefore the law limits the inquiry to the short period of four months prior to the time a
petition is filed.
Any conveyance made which would amount to giving the creditor a preference over the others, whether made in direct
satisfaction of the debt or to secure it is voidable, if the creditors know or should know that a preference is intended.
As we have seen there cannot be a preference unless there is a creditor to whom it is made. Cash transactions cannot
be disturbed. Thus D is insolvent, but not yet bankrupt. He buys property from A, paying A cash. A is never a creditor
and the payment is not a preference. From B he borrows money giving B at the time the loan is made, a mortgage as
security. The mortage cannot be disturbed. Had D bought the property from A on credit, and then paid for it the
payment would be a preference because it would be a payment to a creditor. Or if B had loaned the money without
security, and then had afterwards prevailed on D to secure him, that would be a preference.126 If a mortgage is given
to secure a past indebtedness and also a present indebtedness, it will be upheld to the extent of the present
consideration only, provided, of course, proceedings are begun within four months. As it has been stated before in this
text (in connection with Acts of Bankruptcy) there cannot be a preference unless there is a diminution in the value of
the estate.127 And within this rule there is no preference merely because the bankrupt in his exigency may sell at a
low price.
125. Coder v. Arts, (C. C. A. 8th Cir.) 152 Fed. 943 s. c. 213 U. S. 223; Benjamin v. Buell, (C. C. A. 7th Cir.) 268 Fed.
792; Lowell v. Ash ton (D. C. Mass.) 272 Fed. 536.
126. Feilbach v. Russell, (C. C. A. 6th Cir.) 233 Fed. 412.
And it has been held that there is no diminution of the estate to make the act a preference where there are payments
on running account, followed by new purchases, the net result of which is to increase the value of the estate. 128
The Trustee's Title. Part 4

Sec. 55. Fraudulent Conveyances

A conveyance made by a debtor in fraud of his creditors may be set aside by the trustee in bankruptcy.
We have seen that fraudulent conveyances may be grouped under two headings: Those without consideration, and
those for value. In the first case, the conveyance may be set aside because the transferee has giving nothing, when
the giver was at the time insolvent and therefore had no right to deprive his creditors of their debts, by giving away his
property; in the second case, we found that the transfer was avoidable whenever the transferee was a party to the
fraud. In both of these cases, the trustee may act for the creditors and set aside the fraudulent conveyance, as
property belonging to the estate.
In Globe Bank v. Martin,129 the court decides that when any creditor has a right to attach the transfer as fraudulent,
the trustee may do so, and the assets so recovered become assets for the benefit of all the creditors even though
some of them might not have had the right to set aside the conveyance under the state statute. In this case, the
Kentucky statute, which was relied upon by the trustee as giving him his right, as it was such statute through which the
creditors would have to have proceeded, gave the right to existing creditors for their benefit, and not to future creditors,
but the court decided that where such existing creditors had not perfected their lien by proceedings brought more than
four months prior to the bankruptcy, all creditors including creditors becoming such after the fraudulent transfer, would
share in the assets.
127. Root Mfg. Co. v. Johnson, (C. C. A. 7th Cir.) 219 Fed. 397.
128. In re Grocer's Baking Co. (D. C. Ala.) 266 Fed. 900; Jaquith v. Alden, 189 U. S. 78.
129. Globe Bank v. Martin, 236 U. S. 288; In re Kohler, (C. C. A. 6th Cir.) 159 Fed. 871.
The right to set aside a fraudulent transfer is not, however, limited (as in the case of avoidable preferences) to four
months. The question is, have the creditors when the petition is filed a right, under the state law, to set aside a
fraudulent transfer. If so, the right passes to the trustee in bankruptcy.130
A transfer may be fraudulent even when not so in fact, if under the rules of law it is to be deemed fraudulent by reason
of the facts. Thus under the "Bulk Sales Act" of some states a transfer of a stock in trade is made fraudulent as to
creditors and voidable by them unless the creditors of the seller are given notice before the consideration passes. Such
a transaction could therefore be attached by the trustee who would succeed to the rights of the creditors in that
respect. So where a seller sells personal property under absolute sale and retains possession, this is deemed
absolutely fraudulent in some states, and in others presumptively fraudulent, as to the creditors of the seller. The
trustee would succeed to the rights of the creditors of such seller in the event of his bankruptcy.131
130. Stillwegen v. Clum, 245 U. S. 60S.

Sec. 56. Property Held By Bankrupt Claimed By Third Person

131a Property held by bankrupt and claimed by third person does not pass to trustee if the third person could have
claimed it against the creditors.
Property held by the bankrupt which is owned by third persons must be delivered to them except where the creditors,
had there been no bankruptcy, could have, ignored the real ownership and levied upon it as the bankrupt's property.
The proceedings to recover such property are known as Reclamation Proceedings.
(1) Property held by bankrupt as bailee.
Property in the bankrupt's hands which he holds merely as a bailee, does not pass to the trustee but may be reclaimed
by the owner. It is everywhere the law that merely putting one's property in another's possession for lawful purposes
does not estop the owner from asserting his title to such property as against the creditors of the party who has the
possession. The exigencies of commerce require this to be the law. Property must be placed with others for various
purposes - it may be loaned to another; it may be left for safe keeping or on deposit; it may be placed with another for
repairs; it may be left with another as collateral; it may be to enable the other as a means to accomplish his agency (as
a sample case); it may be consigned to another for sale by him for the use of the consignor. In these and other
131. See In re Robinson Machine Co. (D. C. Mich.) 268 Fed. 165.
131a. For property held by bankrupt in trust see SEC. 53.
cases of bailment - i. e. where there is transfer of possession only and not of ownership - the bankruptcy of the bailee
(party in possession) does not operate to divest the bailor of his right to the property, for he is the owner thereof. He is
entitled to the specific goods.
(2) Consignments.
A consignment is a bailment and included under the general rule of the above paragraph, but may be specially
mentioned because it so frequently arises. A consignment exists where goods are sent to another to be sold by him,
for the consignor and in effect as the consignor's agent, all unsold goods to be returned to the consignor. It must be
distinguished from a sale on credit, in which case the title passes to the purchaser and the seller becomes a general
creditor. It must also be distinguished from a conditional sale in which the vendor retains title though giving possession
to the vendee, but retains it merely for purposes of security. A consignment exists whenever the vendor retains title
generally, making the vendee merely his agent for purposes of selling the goods, remitting the proceeds (less his
commission) and returning all goods that are unsold. The fact that the consignee pays the freight, rent, insurance and
other expenses, will not prevent the transaction from being on consignment.
If the goods are on consignment the consignor may reclaim them in bankruptcy.132
(3) Property acquired by bankrupt as conditional vendee.
Conditional sales in which the property is delivered to the buyer and title for purposes of security is retained in the
seller are transactions which are good in all their provisions when only buyer and seller are involved, but to be good in
most states against creditors must be recorded. Therefore if not recorded, the trustee takes title to property so
purchased by the bankrupt, although the seller has for purposes of security reserved title. In Illinois, recording such a
transaction will not keep creditors from levying on the property as assets of the buyer and the trustee gets title.
132. In re Columbus Buggy Co. 142 Fed. 159; Franklyn v. Stoughton Wagon Co. 168 Fed. 857.
Illustrating this section, A sells and delivers property to D, and to secure himself for all or part of the unpaid purchase
price makes it a part of the contract of purchase that he shall retain the title until D has paid as agreed upon. In this
case D has the apparent ownership and in most states, A cannot enforce his title where the rights of third persons
intervene unless he has recorded the transaction, just as he must record chattel mortgages. Unless recorded,
therefore, the trustee gets title.133
(4) Property owned by bankrupt subject to chattel mortgage.
A chattel mortgage must be properly executed and recorded, or possession taken thereunder in order to be good
against third persons. If the petition is filed before this is done, the property is not subject to the chattel mortgage in the
hands of the trustee; and also if judgment creditors procure liens prior to the recording of the chattel mortgage or the
taking of the possession, they have superior rights over the chattel mortgage which the filing of the bankruptcy petition
will not deprive them of even if it does dissolve their liens for the purpose of making them general creditors.
133. In re Nelson, (D. C. S. Dak.) 191 Fed. 233; In re Mina, (D. C Pa.) 270 Fed. 969.
(5) Property held in trust by bankrupt. (See SEC. 53.)

The Trustee's Title. Part 5

Sec. 57. Property Held By Third Person Belonging To Bankrupt

In general any property which the bankrupt could demand as his property from third persons, the trustee can demand
as the property to which he becomes entitled for purposes of administration.
(1) In general.
Whatever belongs to the bankrupt, except his exemptions, passes to the trustee, as we have seen (subject, of course,
to all valid liens held by third persons), no matter in whose possession it may be.
(2) Property of bankrupt on consignment with another.
This belongs to the bankrupt and the trustee can reclaim it.
(3) Property bailed for other purposes.
Wherever the property of the bankrupt is in other hands on any sort of bailment, it passes to the trustee subject to valid
liens of those who possess it.
(4) Recovery of property in other's possession.
Where property is adversely held and not given up upon demand, the necessity of a plenary suit to recover it has been
discussed in another connection.

Sec. 58. Rights To Sue

The trustee may sue upon any claim for damages to the bankrupt's property, or arising out of a contract, express or
implied.
Whenever, at the time of the filing of the petition, the bankrupt has a right to sue on account of injuries to his property,
or for breach of, or to enforce contracts, express or implied, the trustee may sue on such rights, or if suit is already
pending may become a party of the suit and prosecute it for the benefit of creditors.
Thus a trustee of a bankrupt corporation can enforce the stock liability of its stockholders.134
If the right to sue, or the pending suit is for personal injury, as distinguished from property injury or injury to the estate,
the trustee does not succeed to the rights of the bankrupt.
Thus in Sibley v. Mason,135 plaintiff was suing for personal injuries when he was made bankrupt. Objection was made
to his right to prosecute the suit. The court held that such a cause of action did not pass to the trustee.
If the judgment had been recovered prior to the institution of the bankruptcy proceedings, the right to its collection
would pass to the trustee.

Sec. 59. Burdensome Property: Trustee May Reject

A trustee may elect to reject property of a burdensome nature.
The trustee may reject title to property which is of no value to the estate. " It is well settled that assignees in bankruptcy
are not bound to accept property which, in their judgment, is of an onerous and unprofitable nature, and would burden
instead of benefitting the estate, and can elect whether they will accept or not, after due consideration and within a
reasonable time, while if their judgment is unwisely exercised, the bankruptcy court is open to compel a different
course."136 This was prior to the act of 1898, but is the accepted principle applied under the present act.137 For
instance, a lease having no value as a convertible asset, may be rejected by the trustee so that the title remains in or
reverts to the bankrupt.138
134. In re Eureka Furniture Co., (D. C. Pa.) 170 Fed. 485; Petition of Stuart, (C. C. A. 6th Cir.) 272 Fed. 938.
135. 196 Mass. 125.

The Trustee's Title. Part 6

Sec. 60. To What Liens Trustee's Title Is Subject

The trustee takes subject to all liens, except judicial liens acquired within four months prior to the filing of the petition in
bankruptcy, and except liens constituting preferences within such four months.
(1) In general.
It is not the intention of the bankruptcy to take from a lien creditor his advantage. A trustee takes subject to all valid
liens that general creditors or subsequent lien creditors would have to recognize if there were no bankruptcy
proceedings, with two general exceptions; first: judicial liens acquired within four months immediately prior to the filing
of the petition are dissolved; and secondly, liens acquired within such four months' period to secure existing debts, are
dissolved as constituting preferences.
Let us consider in more detail.
136. Dushane v. Beall, 161 U. S. 513.
137. In re Geo. F. Scruggs, (D. C. Ala.) 31 A. B. R. 94.
138. Watson v. Merrill, (C. C. A.) 136 Fed. 359.
(2) Liens secured through judicial proceedings within four months.
If a lien is acquired by obtaining a judgment or making an attachment or other judicial process, within four months
immediately prior to the filing of the petition, it is dissolved by the bankruptcy proceeding. That is, the judgment or
attaching creditor becomes in the bankruptcy court merely a general creditor, with no advantage over other general
creditors by reason of his lien. The reason for this provision in the law is very obvious. A main intention of the
bankruptcy law is to secure a division of a bankrupt's estate equally among general creditors. If a general creditor
merely by being more diligent in getting a judgment or levying an attachment, could thereby fix a lien on the insolvent
estate he would frequently take everything, leaving the other general creditors with no remedy. Therefore, the law
wisely provides that the lien of a judicial proceeding given by state law is dissolved by the bankruptcy proceeding, if it
was obtained within the preceding four months, that period being taken as the limit of the present time in the bankrupt's
life.
"Had Congress enacted other than it did in these plain words, or had courts by construction, given any supposed
limitation to those plain words, and thereby had intra four months liens been allowed to take away the assets which
passed to the bankruptcy court by the filing of the petition in bankruptcy, the power of the court to administer bankrupt
estates would have been absolutely defeated."140 In this latter case it was held that the dischargeability of the debt
under the bankruptcy proceedings was immaterial to the question whether the lien was dissolved.
139. Metcalf v. Barker, 187 U. S. 165.
140. Wagner v. Mt. Carmel Iron Works, (C. C. A. 3rd Cir.) 270 Fed. 80.
(3) Judicial liens secured prior to four months.
If the lien of an attachment, judgment or other judicial process, was acquired more than four months ago when the
petition is filed, it will not be affected by the bankruptcy proceeding and the creditor will have the advantage of his lien
over general creditors and over subsequent lien holders. This is for the reason that it is considered far enough back not
to have been acquired as any unjust advantage over the bankrupt's present general creditors.
Thus in the case of Metcalf v. Barker, the court said: "In our opinion the conclusion to be drawn from this language (of
the statute, section 67f, Bankr. Act 1898) is that it is the lien created by a levy, or a judgment, or an attachment, or
otherwise, that is invalidated, and that where the lien is obtained more than four months prior to the filing of the petition,
it is not only not to be deemed to be null and void on its adjudication, but its validity is recognized. When it is obtained
within the four months the property is discharged therefrom, but not otherwise."
(4) Liens arising out of contract at inception of indebtedness.
Such liens are good and will prevail against the trustee no matter when acquired. Thus D borrows money from C and
to secure him gives him a mortgage on his real estate, or pledges with him personal property, or gives him a chattel
mortgage which C properly records. This lien will stand even if the lien holder understood at the time that the debtor
was insolvent. As was stated n an early case141 "An insolvent person may properly make efforts to extricate himself
from his embarrassment, and therefore he may borrow money and give at the time security therefor, provided always
the transaction be free from fraud in fact, and upon the Bankrupt Act."
In such cases, there is no depletion of the estate. In return for the lien the bankrupt receives assets. This is a principle
we all proceed upon and it is a necessary rule of action, for if the creditor feared he could not assert his security, he
would lend no money except to those in unquestionably solvent circumstances.
Such liens, however, will not be good against the trustee, where when the bankruptcy proceedings were begun, they
would not have been good against creditors, because not properly recorded, or possession taken under them.142
(5) Liens arising out of contract after inception of indebtedness.
Liens so acquired by a creditor who knows or has reasonable cause to believe that a preference is intended would be
good only in case they were acquired more than four months prior to the filing of the petition, because otherwise they
would be preferences.143
(6) Liens given by law not arising out of contract or judicial proceedings.
Liens that are allowed by the local law as good against general creditors, are not dissolved in the event of
141. Daily v. Inst, 1 Dill. 144, Fed. Cas. 3571.
142. In re Buchner, (D. C. 111.) 202 Fed. 979.
143. Stedman v. Bank, 117 Fed. 937 (holding that a chattel mortgage given in part to secure a past, and in part to
secure a present indebtedness, is voidable pro tanto only.) bankruptcy, but by permission of the act are allowed to
stand.
Such are liens of bailee's, mechanic's liens, etc. The fact that they must (for instance, mechanic's liens) be enforced in
judicial proceedings, does not make them judicial liens and they are not to be so classed.
Thus A delivers lumber to B to be used by B in building a house on B's property. The local statute gives to a person
who furnishes material for the improvement of real estate a lien called a mechanic's lien. This lien is good in
bankruptcy.144
(7) Equitable liens.
In a proper case where it is equitable to fasten a lien upon a debtor's property in favor of a creditor who, although
having no legal lien, has a claim that ought to be fastened upon some particular property of the bankrupt, a court of
bankruptcy as a court of equity will allow and enforce such lien.145
(8) Right of court to order property sold free of liens not voidable.
The bankruptcy court has the implied power to sell property which is subject to liens sold free of the liens, the proceeds
to be held subject to the lien. Such a sale operates as a foreclosure and gives the purchaser good title free of the
lien.146
144. In re Bennett, (C. C. A. 6th Cir.) 153 Fed. 673. In re Laird, (C. C. A. 6th Cir.) 109 Fed, 550 (statutory labor lien) ;
Henderson v. Mayer, 225 U. S. 631.
145. In re Plantations Co., (D. C. Pa.) 270 Fed. 273; Boise v. Talcott, (C. C. A. 2nd Cir.) 264 Fed. 60.
146. Gantt v. Jones, (C. C. A. 4th Cir.) 272 Fed. 117.
(9) Preservation of voidable liens for benefit of estate.
If a lien is of the kind dissolved by the bankruptcy proceedings (liens operating as preference, liens secured by judicial
process within four months period) the court may order it to be preserved for the benefit of the estate.147 For instance,
suppose Debtor gives a chattel mortgage to M to secure a present loan, but M does not record it. J then gets a
judgment against Debtor. Afterwards M records the chattel mortgage, and Debtor then goes into bankruptcy, all
happening within four months. The bankruptcy deprives J of his judgment lien, but it will be preserved for the benefit of
the estate, to prevent M's lien from being good.
147. Bankr. Act, 1898, SEC. 67 (3) ; In re Martin, 236 U. S. 288.

Chapter 7. Claims Against Estate

Sec. 61. In General

The subject of claims against the bankrupt estate involves: A. What claims provable in bankruptcy; B. Proof and
allowance of claims; C. Secured and lien claims; D. Claims having priority; E. Claims of preferred creditors; F.
Dividends on claims; G. Compositions with creditors; H. Set offs.
The subject of Discharge of Claims is covered in a separate chapter.
If a claim is provable in bankruptcy, it will be discharged (unless one of the exceptions) whether actually proved or not
if the creditors have notice.

A. What Claims Provable In Bankruptcy

Sec. 62. In Respect To Whether Due Or Not

All claims which are of a provable kind are provable and allowable whether due or not.
In bankruptcy, it is not necessary that a claim be due in order to be proved. It need only be owing.148
148. Germania S. B. & T. Co. v. Loeb, (C. C. A. 6th Cir.) 188 Fed. 285; In re Percy Ford Co. (D. C. Mass.) 199 Fed.
334.

Sec. 63. In Respect To Whether Owing Before Or After The Petition Is Filed
A claim is not provable unless it is owing before the petition is filed.
A claim need not be mature but at least must be owing before the petition is filed. As the trustee takes the title to
property owned by the bankrupt prior to the filing of the petition and not property acquired after that time, so claims
arising before but not after the filing of the petition are provable. As stated, they need not be due, but they must be
owing. The line of cleavage between the old and the new life both in respect to property going to the trustee and debts
dischargeable is through the day the petition is filed. It is true of course that costs of administration, etc., arising after
the petition is filed are payable out of the assets in the hands of the trustee. This must be so in the nature of the case.

Sec. 64. Claims Based Upon Judgments

A claim consisting in a judgment secured prior to the filing of the petition is a claim provable in bankruptcy.
Considering now a judgment irrespective of its effect to give a lien (and the lien thereof is dissolved when the judgment
is entered within the four months' period) such judgment represents a claim that is provable as a debt of the estate.

Sec. 65. Fixed Liabilities As Evidenced By Written Instruments

Notes and debts due under written instruments are provable in bankruptcy.
This is the express provision of the law. These, with indebtedness for goods sold, for services rendered, and on open
account, make up the vast majority of commercial claims.

Sec. 66. Rents To Accrue

Rents to accrue are not provable.
Rent which has accrued prior to the filing of the petition is provable against the estate, but rent to accrue thereafter is
not provable.149

Sec. 67. Claims Founded On Open Accounts

Such are provable.
The act recites that claims founded on "open account" are provable.

Sec. 68. Claims Arising Upon Any Contract Express Or Implied For The Payment Of Money
Under this provision a claim for damages arising out of the breach of a contract, has been sustained.150
See next section that claims arising out of tort, not reduced to judgment, are not provable, but if it is a case in which the
party damaged may elect to sue in tort or in contact, he may "waive the tort and sue in contract."151
Is the act of bankruptcy a breach of an executory contract where such bankruptcy makes it impossible for the bankrupt
to perform? And, if so, are the damages thereby sustained, provable in bankruptcy? This has been a mooted question,
but some late decisions seem to favor it. In Central Trust Co. v. Chicago Auditorium, 240 U. S. 581 (1916) the court
says: "it must be deemed an implied term of every contract that the promisor will not permit himself through insolvency
or acts of bankruptcy to be disabled from making performance." And the court held that the bankruptcy (although
involuntary) constituted a breach and damages were provable. See also Heyward v. Goldsmith, (C. C. A. 3rd Cir.) 269
Fed. 946.
149. In re Mullins Clothing Co. (D. C. Conn.) 230 Fed. 681.
150. In re Stern, (C. C. A. 2nd Cir.) 116 Fed. 604.
151. First Nat. Bk. v. Bamforth, 37 A. B. R. (Vt.) 315; 269 Fed. 123, 251 U. S. 239.

Sec. 69. Unliquidated Claims

(1) WHEN PROVABLE. If a claim is unliquidated at the time the petition in bankruptcy is filed, it may thereafter be
liquidated, proved, and allowed, provided it is in the class of provable claims.
SEC. 63 of the Act after reciting the sorts of claims that are provable provides: "Unliquidated claims against the
bankrupt may, pursuant to application to the court be liquidated in such manner as it shall direct, and may thereafter be
proved and allowed against his estate."
This has always been construed to mean merely that if claims of the kind mentioned above this provision (see SEC.
64-68 supra) are unliquidated, they are not for that reason not provable, but may be liquidated and proved; but this
paragraph does not mean to allow generally all unliquidated claims. It does not include a new class of claims, but
merely refers to the claims enumerated in the act.
Accordingly it has been held that there is no right to prove'against the estate for damages arising out of the commission
of a tort. See next section.
But damages arising out of breach of contract can be liquidated by the bankruptcy court and proved.

Sec. 70. Unliquidated Claims

(2) WHEN NOT PROVABLE. An unliquidated claim for damages for the commission of a tort, not yet reduced to
judgment, is not provable.
A claim arising out of the commission of a tort, not yet liquidated by agreement or judgment, is not provable,152 and
therefore not dischargeable. But if reduced to judgment it is provable153 and would in that event be dischargeable
unless the injury was wilful or malicious.

Sec. 71. Fines

Fines levied as a punishment by a court are not provable.
Bankruptcy proceedings in no way affect fines adjudged against a bankrupt.

B. Proof And Allowance Of Claims

Sec. 72. How Claims Proved

Claims in bankruptcy are proved by filing a sworn statement of the claim in the form as provided by the bankruptcy
rules of the United States Supreme Court. If objections are filed thereto, a trial is had.
If a claim is not objected to as invalid its proof consists in a statement sworn to by the claimant, made on a form as
prescribed by the Supreme Court of the United States, which by the Bankruptcy Act is given the power to provide rules
and prescribe forms for the regulation of bankruptcy proceedings. If a claim is objected to, it is then necessary to
support it by evidence upon a hearing, but the burden of proof is on the objecting party.
152. In re N. Y. Tunnel Co. 159 Fed. 688; Brown & Adams v. United Button Co., 149 Fed. 48; 8 L. R. A. N. S. 961;
Schall v. Camorrs, 251 U. S. 239; Stalick v. Slack, (C. C. A. 8th Cir.)
153. In re Wilson (D. C. Md.) 269 Fed. 845; ex parte Harrison, (D. C. Mass.) 272 Fed. 543.

Sec. 73. Allowance Of Claims

A claim being of a provable sort and being proved is allowed as a matter of course by an order of the court.
After a claim is proved it becomes necessary for the Court to allow it before the claimant is entitled to the rights of a
creditor. Allowance is made by an order of Court. Often this is a general order covering all claims filed in the case.
When a claim is allowed it is, of course, not for that reason payable to the claimant, but it simply stands as a claim
upon which a dividend is payable when declared.
Interest is allowable on claims.154

C. Secured And Lien Claims

Sec. 74. In General

In another connection it has been discussed (see last chapter, section 60(l)-(9) whether liens and the advantage of
security is lost in bankruptcy proceedings.

Sec. 75. The Standing Of A Secured Creditor

A secured creditor is not a creditor in bankruptcy in so far as his security covers his claim unless he surrenders the
security.
A creditor holding a security is not affected by the bankruptcy proceedings in so far as his security covers his claim;
that is to say, to that extent he does not have a provable claim and is not affected by the bankrupt's discharge.155
154. 267 Fed. 817.
He may waive his security, although this usually would not be the profitable thing for him to do.
If his claim is not fully secured he is to that extent to be treated as other creditors.

Sec. 76. Other Lien Claims

If one has a lien by the state law not dissolved by the bankruptcy proceeding, he is protected in the collection of his
claim to the extent of his lien.
All liens which are not dissolved by the bankruptcy proceedings are not affected by the proceedings.

D. Claims Having Priority

Sec. 77. How A Claim Having Priority Differs From A Secured Claim
A claim having priority differs from a secured claim in this, that it is the claim of an unsecured creditor to which the law
gives priority to the claims of other general creditors.
A secured claim is one by virtue of which a claimant has a right upon certain particular property on account of his
contract, as a mortgagee, pledgee, etc. A claim having priority is one which the bankruptcy law says shall be paid
before other claims are paid. Claims having priority do not have priority to secured claims or to claims which give a
valid lien on the bankrupt's property. The law sets up that certain claimants shall be paid in full before dividends shall
be paid on claims not having priority.
155. As to right of Bankruptcy Court to sell the secured prop-perty not subject to the lien, and to attach the lien to the
proceeds. see Sec 60 (8).

Sec. 78. What Claims Have Priority

The Act sets out the different classes of claims which have priority, as noticed below.
Keeping in mind the meaning of the word priority as used in the bankruptcy law, i.e., that it differs from the term
secured claim, or lien claim, the law provides that the following claims shall have priority in the order named, that is, the
claims in one class must be paid in full before claims of a later class are paid, or before dividends upon claims not
having priority are paid.
(1) "The actual and necessary cost of preserving the estate subsequent to filing the petition."
These are the claims that have the first priority and are to be paid in full before any other claims are paid.
(2) "The filing fees paid by creditors in involuntary cases, and, where property of the bankrupt, transferred or concealed
by him either before or after filing the petition, shall have been recovered for the benefit of the estate of the bankrupt by
the efforts and the expense of one or more creditors, the reasonable expenses of such recovery."
These are second in priority.
(3) "The costs of administration."
This to include the fees and mileage payable to witnesses, and one reasonable attorney's fee for professional services
rendered to petitioning creditors in involuntary cases, and to the bankrupt in voluntary cases.
These come next in order of priority and after the classes above are paid in full, are to be paid in full before the classes
following are paid.
(4) "Taxes legally due and owing by the bankrupt to the United States, state, county, district, or municipality."
The law before it enumerates the classes having priority states that the court shall order the trustee to pay taxes before
dividends to creditors are paid. Some doubt has arisen as to the place of taxes in the order of priority. They seem to fall
at this point, i. e. after expenses of administration and fees and costs paid out by creditors.156
(5) "Wages due workmen, clerks, traveling or city salesmen, or servants which have been earned within three months
before the date of the commencement of the proceeding not to exceed $300 to each claimant."
These constitute the next class and if any funds remain after satisfying the previous priorities, these are entitled to be
paid in full before general creditors can receive dividends, or share pro rata if the funds are insufficient to pay in full.
The word "wages" refers to compensation paid one who works for hire.
It would not include a manager of a business,157 as he could hardly be said to be working for wages. Travelling or City
Salesmen are entitled to priority, whether working on commission or not.158
156. In re Jacobson, (C. C. A. 7th Cir.) 263 Fed. 883. City v. Bird, 249 U. S. 174.
157. In re Bonk, (D. C. Mich.) 270 Fed. 657.
158. In re Dexter (C. C. A. 1st Cir.) 158 Fed. 788.
The fact that the claim has been reduced to judgment does not destroy its priority.159
(6) "Debts owing to any person who by the laws of the states or the United States, is entitled to priority."
Next and last of claims having priority are those which have priority by the law of the state, or of the United States. A
state priority however will not govern if priority is provided for the same class of claim by the laws of the United States.
Thus if a state law should give priority to wage earners for a period of six months, or for a greater amount, the
bankruptcy law would govern.160
If a debt is due the United States it has priority by virtue of this section, as for instance against a surety on a bond
given to secure performance of contracts with the United States.161
So a debt due the State which by the law of that state is entitled to priority, has priority under this provision.162 And
whether the state has such priority is determined by the decisions of that state, and such decisions will be accepted by
the federal courts.163

E. Claims Of Preferred Creditors

Sec. 79. Preferred Creditor Must Surrender Preference

A creditor who has received a voidable preference must surrender it, and may then prove his claim.
159. In re Haskell, (D. C. Mass.) 228 Fed. 819.
160. Matter of Slomka, 122 Fed. 630.
161. United States v. National Surety Co., U. S. Adv. Opinions, 1920-21 p. 21.
162. Marshall v. People of State of New York, U. S. Adv. Op. 1920-21 page 157.
163. Id.
We have heretofore noted what a voidable preference is. A creditor who has been preferred, knowing that a preference
was intended cannot prove any claim which may be yet unpaid until he surrenders his preference. If he is compelled to
surrender his preference, he may then prove the claim and receive a dividend on it even though he did not surrender
until the trustee compelled him by suit to do so.164
A creditor having received a preference in good faith may keep it, as we have seen. In such a case if any balance is
still owing him, he cannot prove up as to it. "As we have already said, if the preference exceed the share of the
bankrupt's estate which the creditor would be entitled to, he may keep the preference. If it be less he may surrender it
and share equally with the other creditors. If the purposes of the statute are to be considered this is certainly not
punishment, but benefit."165

F. Dividends On Claims

Sec. 80. How Payable

The Act sets out when and how dividends may be declared and paid.166
The general creditors receive dividends upon their claims where the assets are sufficient to pay dividends. The Court
declares dividends as provided by the Act.
The referee declares dividends and directs the payment thereof.
164. Keppel v. Bank, 197 U. S. 356; Page v. Rogers, 211 U. S. 575
165. Pirie v. C. T. & T. Co., 182 U. S. 438.
166. Bankr. Act 1898, SEC. 65.
The law provides for a first dividend to be paid within 30 days after the adjudication if the money of the estate in excess
of the amount necessary to pay the debts which have priority and such claims as have not been but probably will be,
allowed, equals five per centum or more of such allowed claims.
After the payment of the first dividend, the act directs the declaration of subsequent dividends "as often as the amount
shall equal ten per centum or more and upon closing the estate. Dividends may be declared oftener and in smaller
proportions if the judge shall so order."
A debtor is discharged of his debts by a discharge in bankruptcy even if his estate pays no dividends whatever.

G. Compositions With Creditors.167

Sec. 81. Composition May Be Offered By The Bankrupt

The Bankruptcy Act for the purpose of saving the expense of full administration permits the bankrupt to offer a
composition with his creditors.
A bankrupt may after the proceedings are begun offer to make a composition with his creditors. This is permitted in
order to facilitate the administration of the estate and to prevent the accrual of full costs of administration. A
composition with creditors is a familiar arrangement where there are no bankrupt proceedings. But such a composition
differs very much from the one we are now considering because it is not in any sense compulsory on any of the
creditors. A composition in bankruptcy may be put through against a dissenting minority of creditors.
no The Law of Bankruptcy.
167. Id. Secs. 12, 13.

Sec. 82. Conditions Of The Composition

Composition may be offered either before or after adjudication, after the bankrupt has been examined, has scheduled
his debts and a list of his creditors; and will be confirmed when so offered after it has been accepted in writing by a
majority of the claimants representing a majority in amount of allowed claims, and the bankrupt has deposited the
amount to be paid to the creditors and to cover in full claims having priority and the cost of the proceeding, and the
judge is satisfied such composition is to the best interest of creditors, and the bankrupt is not guilty of any act which
would prevent his discharge in bankruptcy and the composition appears to be good faith.
The composition must originate in the offer of the bankrupt; it must be accepted by the majority of the creditors;168 and
it must be confirmed by the judge.169
(1) Conditions of the offer, (a) The offer may be either before or after the Court has entered a formal order of
adjudication; (b) the bankrupt must have filed a schedule of his debt and a list of his creditors; (c) must also have been
examined in open Court concerning his assets; and (d) must have deposited the consideration to carry out the
composition and enough besides to pay all the prior claims and costs of the administration.
(2) Conditions of the Acceptance. The acceptance must be (a) by a majority of the creditors both in amount and
number whose claims are allowed, and (b) must be accepted by them in writing.
(3) Conditions of the Confirmation. (a) Confirmation must be by the judge (or referee), (b) when he finds all the
conditions complied with; (c) if the judge is satisfied that the composition offered is to the best interests of the creditors;
(d) if the bankrupt has not been guilty of anything that would prevent his discharge in bankruptcy, and (e) if the offer
and acceptance of the composition appears to be regular and in good faith.170
168. An assignee of several claims is one creditor, In re Mes-sengil, 113 Fed. 366.
169. An acceptance cannot be withdrawn, In re Levy, 110 Fed. 744.

Sec. 83. When Compositions Set Aside

A composition may be set aside any time within six months after being confirmed upon the application of any one in
interest where it appears that fraud was practiced in securing the composition and the applicant did not then know of
the fraud.
Compositions may be offered to secure a secret advantage to the bankrupt; or they may be the result of fraud between
the bankrupt and certain of the creditors. This might appear upon the proceedings for a confirmation. In that case of
course a confirmation would be refused. If, however, the confirmation goes through it may still be set aside as stated
above.

H. Set-Offs

Sec. 84. Right To Set-Off

Creditor may set off claim of bankrupt against his claim against the estate.
The law provides:
"SEC. 68. Set-offs and counterclaims. - (a) In all cases of mutual debts or mutual credits between the estate of a
bankrupt and a creditor the account shall be stated and one debt shall be set off against the other, and the balance
only shall be allowed or paid.
170. There must be good faith both on part of debtor and creditor.
"(b) A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable
against the estate; or (2) was purchased by or transferred to him after the filing of the petition, or within four months
before such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent, or had
committed an act of bankruptcy."
The set off of mutual debts and credits gives the creditor against whom a bankrupt has a claim an advantage. "A set-off
may be described as a sort of a lawful preference." 171
Held, under this section, a bank may set off deposit against notes due from depositor.172
Set-offs to be allowed must be mutual.
171. In re Pottier & Stymus Co., 262 Fed. 955.
172. In re Cross, 272 Fed. 39.

Chapter 8. Duties And Rights Of Bankrupt

Sec. 85. Duties Enumerated By Act

The bankrupt must perform the duties enumerated by the Act, looking to the result of getting in the assets of the estate,
securing proper and orderly administration, etc.
The Act provides :173
SEC. 7. Duties of bankrupts. - (a) The bankrupt shall
(1) Attend the first meeting of his creditors, if directed by the court or a judge thereof to do so, and the hearing upon his
application for a discharge, if filed;
(2) Comply with all lawful orders of the court;
(3) Examine the correctness of all proofs of claims filed against his estate;
(4) Execute and deliver such papers as shall be ordered by the court;
(5) Execute to his trustee transfers of all his property in foreign countries;
(6) Immediately inform his trustee of any attempt, by his creditors or other persons, to evade the provisions of this Act,
coming to his knowledge;
(7) In case of any person having to his knowledge proved a false claim against his estate, disclose that fact
immediately to his trustee;
(8) Prepare, make oath to, and file in court within ten days, unless further time is granted, after the adjudication, if an
involuntary bankrupt, and with the petition if a voluntary bankrupt, a schedule of his property, showing the amount and
kind of property, the location thereof, its money value in detail, and a list of his creditors, showing their residences, if
known, if unknown, that fact to be stated, the amounts due each of them, the consideration thereof, the security held by
them, if any, and a claim for such exemptions as he may be entitled to, all in triplicate, one copy of each for the clerk,
one for the referee, and one for the trustee; and
173. Bankr. Act 1898, SEC. 7.
(9) When present at the first meeting of his creditors, and at such other time as the court shall order, submit to an
examination concerning the conducting of his business, the cause of his bankruptcy, his dealings with his creditors and
other persons, the amount, kind, and whereabouts of his property, and, in addition, all matters which may affect the
administration and settlement of his estate; but no testimony given by him shall be offered in evidence against him in
any criminal proceeding.
Provided, however, That he shall not be required to attend a meeting of his creditors, or at or for an examination at a
place more than one hundred and fifty miles distant from his home or principal place of business, or to examine claims
except when presented to him, unless ordered by the court, or a judge thereof, for cause shown, and the bankrupt shall
be paid his actual expenses from the estate when examined or required to attend at any place other than the city,
town, or village of his residence.

Sec. 86. Duty To Submit To Examinations

The bankrupt must submit to examinations concerning his assets.
The bankrupt must "when present at the first meeting of his creditors, and at such other times as the
Court shall order, submit to an examination concerning the conducting of his business, the cause of his bankruptcy, his
dealings with his creditors and other persons, the amount, kind and whereabouts of his property, and in addition, all
matters which may affect the administration and settlement of his estate."
The right of examination under this section is very broad.174 " It is the duty of the bankruptcy court to see that such
examinations are not permitted to transcend the limit of a legitimate investigation for these purposes; but of necessity
this is a duty which involves the exercise of a wide discretion and which should not be interfered with by the appellate
court except where it has been manifestly abused."175
Witnesses may be called in these examinations of the bankrupt and the latitude allowed in their examination is as
broad as that allowed in examining the bankrupt.176 A refusal by such witnesses unless justifiable for some reason is
contumacious and makes them subject to fine for contempt of court.177
We have seen the latitude allowed in the examination of a bankrupt. But the bankrupt still has his privilege against self
incrimination.
To give a right to compel answers from him the act provided that "no testimony given by him shall be offered in
evidence against him in any criminal proceeding." This provision did not have the effect of accomplishing the purpose
meant for it because the Court held that though such evidence might not be used against him yet because of what it
might suggest or lead to it might tend to incriminate him.178 And therefore, a bankrupt may still refuse answers of this
6ort. Yet in an indirect way the result of compelling him to testify in answer to such questions has been accomplished,
that is, by refusing him his discharge, where he refuses to answer any material question approved by the Court. If he
refuses to answer questions on the ground that the answers might tend to incriminate him, he cannot be compelled to
answer, yet he may be refused his discharge in bankruptcy.
174. In re Horgan, 98 Fed. 414.
175. Id.
176. In re Lathrop, Haskins & Co. 184 Fed. 934; Ulmer v. U. S. 219 Fed. 641.
177. In re Lathrop, Haskins & Co. supra.

Sec. 87. Protection Of Bankrupt From Arrest In Civil Cases

The Bankruptcy Act protects a bankrupt from arrest or detention except upon claims which are not released by a
discharge, and even in such cases he shall not be arrested while in attendance upon the court of bankruptcy or
engaged in the duties imposed by the bankruptcy law.
While imprisonment for debt is generally abolished, yet civil arrest is still possible under the various state laws in tort
cases. Whenever any claim upon which arrest may be had is dischargeable in bankruptcy, bankruptcy proceedings
give one protection against arrest and detention.179
For offenses committed against the Court of Bankruptcy, the bankrupt may be arrested.
178. In re Kanter & Cohen, 117 Fed. 356. The court said: "In a case where it clearly appears to the court that a party
from whom evidence is sought contumaciously or mistakenly refuses to furnish that which cannot possibly injure him,
he will not be permitted to shield himself behind the privilege, but generally the party best knows what he cannot
furnish without accusing himself and where it is not perfectly evident and manifest that the evidence called for will not
be incriminating, the privilege must be allowed."
179. In re Dresser, 124 Fed. 915; In re Lewensohn, 99 Fed. 73.

Duties And Rights Of Bankrupt. Continued

Sec. 88. Detention Of The Bankrupt

Upon satisfactory proof, as provided in the bankruptcy law, that a bankrupt is about to leave the jurisdiction and
thereby hinder the proceedings in bankruptcy, the court may order the marshal to detain the bankrupt.
The law provides for the detention of the bankrupt where proof is offered, on the affidavit of at least two persons, that
he is about to leave the jurisdiction, and the Court finds that the allegations are true and that his going would hinder the
bankruptcy proceedings.

Sec. 89. Offenses Of Bankrupt Created By The Bankruptcy Law

The bankruptcy law creates offenses and provides for their punishment.
In order to more surely secure observance of the provisions of the bankruptcy act by the bankrupt and others, the law
creates offenses and provides for their punishment. They are as follows :180
(1) Concealment by the bankrupt of his assets - punishment, imprisonment not to exceed two years.
(2) Making of false oaths or accounts - punishment, same as above.
(3) Extorting money as a consideration for acting or refusing to act in bankruptcy - same punishment.
Besides these offenses, a bankrupt may be guilty of the offense of contempt of Court, for refusing to obey the lawful
orders of the Court.

Sec. 90. The Bankrupt's Exemptions

"This Act shall not affect the allowance to bankrupts of the exemptions which are prescribed by the state laws in force
at the time of the filing of the petition in the state wherein they have their domicile for the six months or the greater
portion thereof immediately preceding the filing of the petition." 181
180. Bankr. Act, 1898 SEC. 21.
(1) Bankrupt entitled to exemptions.
A bankrupt is entitled to the exemptions allowed by the law of the state in which he lives. This, of course, means that a
bankrupt in one state, in claiming the exemptions of that state, may have greater or less exemptions than a bankrupt
having his domicile in another state. That this does not prevent the law from being a "uniform" law, as required by the
Constitution, has been discussed elsewhere.182
(2) Must specifically claim exemptions.
The bankrupt, to entitle himself to his exemptions, must claim them. He must include the property claimed in his
schedules and then claim it with sufficient detail to identify it. He cannot omit it from his schedules merely because he
regards it as exempt.183
The Act provides :184
"The bankrupt shall * * * (8) prepare, make oath to, and file in court within ten days, unless further time is granted, after
the adjudication, if an involuntary bankrupt, and with the petition, if a voluntary bankrupt, * * * a claim for such
exemptions as he may be entitled to, all in triplicate * * *."
If he does not claim his exemptions as required by the law he loses his right to them.
181. Id. SEC. 6.
182. See SEC. 4, supra.
183. In re Royal 112 Fed. 135.
184.Sec. 7 (8)
(3) Right to exemptions depends on law of the state.
Whether the bankrupt is entitled to exemptions and to what exemptions is determined entirely by the law of the state at
the time of filing the petition.185
Exemptions are chiefly of three sorts: in personal property, in real property (homestead) and in earnings. Under some
laws specific sorts of property are exempt (as working tools, etc.) without regard to value, while in others the debtor
has a right to select a certain amount of property up to a certain value.
The bankrupt is not entitled to exemptions unless under the law of the state he would be so entitled when the petition
was filed. Thus in one case186 it was held that under the laws of the state of Colorado a debtor is not entitled to a
homestead as exempt unless he enters his claim on the margin of the record title to the property. If, therefore, prior to
the filing of the petition this had not been done, the bankrupt was not entitled to such exemption.
(4) Conversion of non-exempt property into exempt property prior to bankruptcy.
A debtor may convert non-exempt property into exempt property at any time and creditors although existing at that
time, cannot object. Thus if a debtor has $1,000 cash, and the law allows him a homestead as exempt, he may after
incurring debts and even when insolvent (but not yet bankrupt) put the non-exempt money into the exempt homestead
and thus deprive his creditors of resort thereto, and prevent the trustee in bankruptcy from taking title thereto.187 While
this is the general rule, the bankrupt cannot be guilty of actual fraud upon his creditors. Thus it was held188 that where
a debtor instead of depositing funds from his business from day to day as had been his prior practice, put same in vault
or retained same upon his person, until he accumulated $13,000, which he put into a homestead and moved his family
therein one month before filing his petition, this was a deliberate attempt to defraud, and the exemption would not be
allowed.
185. Libby v. Beverly, (C. C. A. 5th Cir.) 263 Fed. 63.
186. Edgerton v. Taylor, ( ) 270 Fed. 48.
187. Crawford v. Sternberg, 220 Fed. 73.
188. Kangas v. Robie, (C. C A. 8th Cir.) 264 Fed. 92.

Discharge. A. The Discharge Of The Bankrupt

Sec. 91. Importance Of Discharge

The bankrupt's discharge is granted him if applied for by him as required by the Act, and has the effect of releasing him
from his dischargeable debts. His discharge may be denied him for the causes specified in the Act.
It is the bankrupt's discharge in bankruptcy that releases him from his indebtedness. Merely filing a petition in
bankruptcy does not discharge him. He must apply for and get his discharge, and if he fails to get it, or is denied it, his
creditors may hold him notwithstanding the bankruptcy proceedings.

Sec. 92. Within What Time Discharge Must Be Applied For

A discharge must be applied for within twelve months from the time the adjudication is made. On good cause shown
the time may be extended six months.
The bankrupt should be careful to apply for his discharge within the time specified in the law. Otherwise the
proceedings will have accomplished him nothing.
Sec. 93. The Petition For Discharge
The application for a discharge is made by way of petition. Notice must be given to creditors.
The bankrupt applies for his discharge upon Official Form No. 57. Section 14 of the Act, governs the application for
discharge. Section 58 provides that there shall be 30 days notice to creditors.

Sec. 94. Filing Objections To Discharge

Any creditor may file objections to discharge.
A creditor who desires to object to the bankrupt's discharge must file objections. He must enter his appearance in
writing by the discharge day and specify the grounds of discharge within ten days thereafter. If not specified within that
time, the bankrupt is entitled to his discharge. If the objections are specified, they are heard and passed upon, and the
discharge allowed or denied according to the outcome.
A trustee, or any party in interest, may object to a discharge.

Sec. 95. Grounds For Refusing Discharge

The bankruptcy law enumerates the causes that are ground for objections to discharge.
The grounds upon which a discharge may be refused are as follows:
(1) Commission of any offenses created by the bankruptcy law.
The offenses defined in the bankruptcy act have been set out in Section 89 of this book. The law (SEC. 14b) sets forth
that a bankrupt shall be entitled to a discharge unless he has "committeed an offense punishable by imprisonment as
herein provided" (or unless he has been guilty of the other conduct herein below considered).
(2) Concealment or destruction of books or failure to keep books of record with intent to conceal financial condition.
A bankrupt is not entitled to his discharge if he has "with intent to conceal his financial condition, destroyed, concealed,
or failed to keep books of account or records from which such condition might be ascertained."
Mere failure to keep books is not enough to prevent discharge. The law specifically requires that there shall be an
intention to conceal his financial condition. "The bankruptcy act of 1867, as does the English law, made the mere
failure to keep books a ground for refusing a discharge, but the Bankruptcy Act of 1898 explicitly states that the
omission must have been accompanied with the specific intent to conceal the true financial condition and hence the
burden of proving this intent is on the objecting creditors."189
Many merchants are careless about keeping books, never expecting to fail in business, although the slipshod methods
may be the reason for their financial downfall.190
But it has been held that if a man of experience refuses to keep books, the natural presumption is that he intended to
conceal his financial condition.191 But this presumption is rebuttable.'192 "The bookkeeping of the bankrupt (a country
butcher) was of that primitive character which sometimes is found in country stores and which is employed for little else
than to supplement the store keeper's memory as to which of his customers are his debtors and what are the amounts
of their debts.'
189. In re Brown, 199 Fed. 356.
190. In re Blalock, 118 Fed. 659.
191. In re Alvord, 135 Fed. 236; In re Javanitz, 219 Fed. 876; In re Schuner, 228 Fed. 794.
192. Thompson v. Lamb, (C. C. A. 3rd Cir.) 263 Fed. 61.
In the case of In re Shriner193 the court said: "The objecting creditor carries the burden of establishing the unlawful
intent. It is well settled both upon reason and authority, that when intent becomes an essential element in a judicial
investigation the quest for its existence, is to be made by resorting to the same methods of proof as for any other fact.
As it is a fact peculiarly, and so far as direct evidence goes exclusively within the knowledge and keeping of the party
charged with the wrongful conduct, of necessity the court may resort to interferences for conceded or established facts,
the probative value of which will depend largely upon the reason of the thing. It is customary for honest merchants,
having a regard for the success of their business and their commercial credit, to make and keep some record - entries
in books, or at least memoranda - showing the course of business. The form, manner, method of doing this depends
largely upon the character, volume, etc., of the business; the accuracy of such records will depend largely upon the
experience and intelligence of the person making them. So their absence or character may be accounted for by
reference to the same conditions. The only facts disclosed by the record are that the bankrupt was, for three years, in
one of the largest of our commercial centers, conducting the business of buying and selling merchandise: it does not
appear that he was ignorant or illiterate; his business involved carrying a stock of at least $4000 and contracting an
indebtedness of $7,500; he made deposits in bank and drew checks. * * There is a rule of reason - sound in morals as
in law - that a man is presumed to intend the logical and inevitable results of his conduct. * * * Here the only
explanation of the so-called 'failure' is the loss of 'several hundred dollars' in gambling. This is entirely insufficient to
rebut the natural and logical inference which should be drawn from the bankrupt's failure to keep books."
193. 228 Fed. 794.
(3) Obtaining money or property upon credit on false written statement.
A bankrupt will be denied his discharge if he has "obtained property on credit from any person upon a materially false
statement in writing made to such person for the purpose of obtaining such property on credit."
To constitute this objection there must have been both a false statement in writing and the procuring of goods on the
strength thereof, and the statement must be intentionally and materially false.194
Statements made to mercantile agencies are statements within the meaning of this provision, if relied upon by
creditors.195
Any creditor may avail himself of this objection although personally not misled thereby.196
(4) Making fraudulent conveyance within four months prior to bankruptcy.
A bankrupt will be denied his discharge if he has "at any time subsequent to the first day of the four months
immediately preceding the filing of the petition transferred, removed, destroyed, or concealed, or permitted to be
removed, destroyed or concealed any of his property, with intent to hinder or delay or defraud his creditors."
194. 268 Fed. 871; 262 Fed. 876.
195. In re Carton & Co. 148 Fed. 63.
196. Id., In re Harr, 143 Fed. 421.
This is another ground for refusing discharge. We have considered fraudulent conveyances elsewhere. A fraudulent
conveyance is an act of bankruptcy; it is a transfer avoidable by the trustee; it is a ground for refusing discharge.
(5) In voluntary cases, a prior discharge in bankruptcy with six years.
This ground of discharge is to prevent debtors from continually coming before the court with petitions in bankruptcy. It
is not a ground for refusing discharge in involuntary cases.
The time is counted as running from the date of the order allowing the discharge on the second application.197
(6) Refusing to obey any lawful order, or answer any material question approved by the court.
This ground of refusal has been elsewhere considered.198

B. Debts Not Dischargeable

Sec. 96. In General

Assuming that a discharge is granted to the bankrupt - what debts are discharged thereby? Are there any that are not
discharged?

Sec. 97. General Rule

The general rule is that a provable debt is a dischargeable debt.
If a debt is provable, it is usually discharged whether actually proved or not. But this general rule has its exceptions.
197. In re Little, 137 Fed. 521.
198. See SEC. 86, supra.

Sec. 98. Debts Not Affected By A Discharge

A discharge in bankruptcy releases the debtor from all provable debts, except (1) taxes, (2) liabilities for obtaining
money under false pretenses, or for wilful and malicious injuries to person or property, or for alimony, or for
maintenance or support of wife or child, or for seduction, or for criminal conversation, (3) those not duly scheduled
where no notice to debtor, (4) those created by fraud, embezzlement, misappropriation and defalcation.
SEC. 17 of the Bankruptcy Act enumerates the debts not dischargeable by a discharge in bankruptcy. Debts may be
not dischargeable (a) because not provable, and (b) because they are excepted whether provable or not. Let us
consider seriatim the different cases of debts not discharged.
(1) Debts not provable.
If a debt is not a provable debt, manifestly it ought not to be discharged by the bankruptcy proceeding. If a creditor
cannot prove his claim against the estate, he ought not to be deprived of that claim by bankruptcy proceedings.
We have seen that the great class of claims not provable are those that are for unliquidated damages growing out of
commission of tort not reduced to judgment when the petition is filed. If reduced to judgment prior to the petition it is
dischargeable, as it then becomes a fixed liability,199 unless the injury was wilful or malicious.200 But if the tort is
'waived' and claim made in contract it is then provable and hence dischargeable.201
199. Ex parte Harrison (D. C. Mass.) 272 Fed. 543; In re Wilson (D. C. Md.) 269 Fed. 845.
200. See paragraph (4), this section.
201. See SEC. 68, supra.
(2) Taxes not dischargeable.
A claim by the sovereign or subordinate governing body for taxes is provable, and has priority as a provable claim, but
if assets are insufficient to pay it, the discharge in bankruptcy does not discharge it.
The wording of the law is that debts that "are due as a tax levied by the United States, the State, county, district or
municipality in which he (the debtor) resides."
Local assessments levied by a taxing body are taxes within the meaning of this provision, and not dischargeable.202
(3) Debts not dischargeable if they are "liabilities for obtaining property by false pretenses or false representations."
These liabilities are not discharged. It is the purpose of the law to assist honest debtors. An act of this sort might
prevent the debtor from getting his discharge; but even if he obtains it, it will not bar this sort of liability. The fraud
referred to here is positive fraud, or fraud in fact involving intentional wrong, not constructive fraud or fraud in law which
may exist by reason of general rule of law without the imputation of bad faith or immorality.203
If the liability is reduced to judgment it does not change the rule that it is not dischargeable.204
Where a person obtains property by representing himself to be solvent, the liability thereby created is not
dischargeable in bankruptcy.205
202. In re Ott (D. C. la.) 95 Fed. 274.
203. Henneguin v. Clews, 111 U. S. 76 (former law).
204. In re Haskel, 228 Fed. 819.
205. In re Kalk, 270 Fed. 627.
(4) Debts not dischargeable if they are "liabilities for wilful and malicious injuries to the person or property of another."
To come within this provision the injury must have been intentional, otherwise it is a dischargeable liability.206 Thus it
was held that where a debtor built a fire in the street and after he had left it supposedly extinguished and a small boy's
clothes caught fire, and he was burned, there was no wilful or malicious injury and the liability (which had been reduced
to judgment) was dischargeable.207 And where a person illegally drove a car while intoxicated, and in so doing injured
another, the liability was discharged, unless he wilfully or intentionally committed the injury.208
But if the injury is wilful or malicious there is no discharge, as, for example, a judgment for assault and battery.209
(5) Debts not dischargeable if they are liabilities for alimony due or to become due, or for maintenance or support of
wife or child, or for seduction of an unmarried female, or for criminal conversation.
Public policy forbids that a debtor should obtain a discharge for liabilities of this sort.
Alimony is not in the nature of a debt and is neither provable or dischargeable. It is not affected by bankruptcy
proceedings.210
206. Tinker v. Colwel, 193 U. S. 473; McClellan v. Schmidt, 235 Fed. 986.
207. McClellan v. Schmidt, supra.
208. Ex parte Harrison, (D. C. Mass.) 272 Fed. 543.
209. McChristal v. Clisbee, 190 Mass. 120.
210. Welty v. Welty, 195 111. 335; Audobon v. Schifeldt, 181 U. S.
Money owing for maintenance of wife or child is of the same nature and not dischargeable.211
Liabilities for seduction and criminal conversation. The law on this point was in doubt until the amendment of 1903.
Liability arising out of breach of promise of marriage is dischargeable.212
If accompanied with seduction there is doubt.213
(6) Debts not dischargeable, if they have not been duly scheduled.
" Have not been duly scheduled in time for proof and allowance, with the name of the creditor if known to the bankrupt,
unless such creditor had notice or actual knowledge of the proceedings in bankruptcy."
A debt is not discharged if the debtor does not schedule it, unless the creditor has notice of the proceedings.
Precaution should be taken by the debtor to give correct name and address, although it has been held that the
absence of street number does not prevent the claim from being duly scheduled.214
(7) Debts not dischargeable if "they were created by his fraud, embezzlement, misappropriation or defalcation while
acting as an officer or in any fiduciary capacity."
This language refers to those who are acting as public officers, or who are acting as trustees by reason of their office,
and not to cases of implied trusts.215 Any officer, whether the office is public, or private, who defaults with funds held
by him in his official capacity thereby creates a debt that is not discharged.216
211. Blackstock v. Blackstock, 265 Fed. 549.
212. In re Fife, 109 Fed. 880; In re Komar, 234 Fed. 378.
213. In re Komar, supra,
214. Kreitlein v. Ferger, 238 U. S. 31.
215. Crawford v. Burke, 195 U. S. 176.
Crawford v. Burke, decided under the former law, held that the word 'fiduciary' was meant to refer to express trusts not
to trusts by implication and therefore would not refer to a misappropriation by a broker or other agent of money in his
possession belonging to his principal (although any defalcation by an officer, public or private, would not be
dischargeable whether the trust were express or implied.) But it has been held that such a misappropriation by a
person who is not an express trustee is not dischargeable because it is a wilful or malicious injury and our Suprene
Court has suggested that this clause as to wilful or malicious injury may have been put in to overcome Crawford v.
Burke.217

Sec. 99. New Promise To Pay

If the bankrupt after the petition in bankruptcy makes a new promise to pay the debt, this promise revives the debt.
A new promise to pay a debt discharged or dischargeable in bankruptcy raises a new obligation to pay it. In some but
not all the states such new promise must be in writing. In any case it must be a definite promise, not a mere admission
that the debt once existed.
216. Bloemecke v. Applegate, (C. C. A. 3rd Cir.) 271 Fed. 595.
217. Mclntyre v. Kavanaugh, 242 U. S. 138; see also Baker v. Bryant Fertilizer Co. (C. C. A. 4th Cir.) 271 Fed. 473.

General Law Of Debtor And Creditor

Sec. 100. Indebtedness Defined

An indebtedness exists where a person is under a present legal obligation to pay at a present or future time to another
person a sum of money. The first person we call a debtor; the second, a creditor.
We are concerned in this and the next chapter with the legal rights in general of debtors and creditors. A person is "in
debt" when he owes money, whether or not he is able to pay. One may have various sorts of legal obligations which in
course of time either through performance or breach may develop into debts or obligations to pay money. Until one is
under a present legal obligation to pay money, either at the present or some future time, he is not a debtor. Thus
suppose that A contracts to build a house for B, for which B agrees to pay $5000. Neither in common nor technical
parlance do we regard A as B's debtor or B as A's debtor. They are simply parties to an executory contract. A's
obligation is to perform work; B's is to pay money if that work is done. A may break his contract and a judgment for
damages be had against him. A is now B's debtor because now he owes B money.
218. Being one of two added chapters on the general subject of Debtor and Creditor. In these two chapters, subjects
are not discussed which more logically are elsewhere in this series unless obviously necessary to be noticed here for
purposes of continuity, etc.
So B becomes A's debtor if A instead of breaking his contract, performs it. B then owes A, $5000.

Sec. 101. Debts Mature And Immature

While a debt is a present obligation to pay money, that obligation may be either to pay now or at a future time.
We have already indicated that one is a debtor if he owes money whether due or yet to fall due. It is enough that the
money be owing. Thus when A builds B's house, B owes A $5000. But the terms of the contract may call for payment
one year after the house is done. During that year B is A's debtor. Or, again, A applies to the bank for a sixty day loan.
During this sixty days A is the bank's debtor. And so our National Bankruptcy Law speaks of debts owing but not due.
There must be a sum of money which is owing and due or bound to become due. If that is true we have what we call a
debt.

Sec. 102. Debts Liquidated And Unliquidated

A debt is liquidated when its amount is certain and not open to bona fide dispute. Otherwise it is called unliquidated.
If one may be said to owe money, yet it is impossible for either side to state the amount thereof correctly, and that
amount cannot be arrived at by mere computation or calculation, but must be arrived at by an agreement between the
parties, or the finding of a court, or the verdict of a jury, it is unliquidated. If it is a certain sum owing which cannot in
good faith be disputed, then the indebtedness is spoken of as being liquidated.

Sec. 103. Indebtedness Growing Out Of Breach Of Contract Or Commission Of Tort

Indebtedness may grow out of the commission of a tort or the breach of contract. In such case it is unliquidated, until it
has been rendered definite by agreement or judgment.
Indebtedness arises usually out of a contract which then or through its operation creates an indebtedness. But
indebtedness arises also out of breach of contract or the commission of a tort. For practical purposes, we must usually
eliminate these classes of indebtedness; certainly those growing out of tort, until they have been reduced to judgment
or some agreement has been entered into reducing them to certainty. Thus suppose that a person is injured through a
defective sidewalk; he may or may not sue the city. If he does so it is often problematical whether he will recover, and it
is certainly problematical what the amount of the verdict will be. But when a judgment is secured against the city, then
we must place this liability among its indebtedness just as much as an indebtedness upon one of its bonds. The same
is to an extent true in regard to the unliquidated liability for breach of contract. Thus the A house contracts to deliver
goods to the B house. It fails to do so whereby the B house loses a profit. Yet the B house may never sue.

Sec. 104. Secured And Unsecured Indebted-Ness

Indebtedness is said to be secured when some property of the debtor has been appropriated by agreement to the debt
so that the debtor's right to such property becomes subject to the payment of the debt.
A secured indebtedness is one in which the debtor and creditor have by agreement either at the inception of the debt
or some time thereafter, appropriated to it certain property, so that if the debtor fails, the creditor may realize his debt
out of the property. In order to accomplish this result, there must be such an appropriation of the property to the debt
that the debtor cannot sell it or encumber it, except subject to this debt, or affect its value as security by his bankruptcy.
There must be more than a mere agreement between debtor and creditor in respect to certain property; there must be
also the added element of notice to third persons. This notice may be accomplished in two well-known ways, either by
taking possession or by recording.
There are three principal sorts of secured indebtedness: pledges;219 chattel mortgages;220 and real estate
mortgages.221
These three forms of secured indebtedness we will notice more at length. We may here make a few general remarks
concerning secured indebtedness.
In the first place, the creditor is not confined to his security. He may sue and have judgment. Thus one owning a note
secured by real estate mortgage could either foreclose or sue on the note.
Again, the creditor is not limited to the worth of the security. If it fails to bring the amount of the debt he still has his right
to sue for the balance. In the same way if it brings more than the debt he must return the balance after reimbursing
himself for his necessary expenses.
Again, the security has no existence as such apart from the debt. When the debt fails the right to the security fails.
For another thing, future attempted sales, encum219. See SEC. 109, in this chapter.
220. See SEC. 107, in this chapter.
221. See Subject of Property in this series.
brances, etc., cannot affect the creditor provided he has taken the proper possession of the property or had the
transaction duly recorded.
Again, bankruptcy cannot affect the creditor's right to his security. Perhaps the chief purpose of taking security is to
guard against the possible insolvency or bankruptcy of the debtor.
An unsecured debt is one in which the creditor has not taken the precaution of requiring the protection described. The
great majority of mercantile accounts are unsecured. It is not practicable in such cases to take security. In the sale of a
$5000 printing press, a security may be required - probably a mortgage of the press itself; so, in the sale of a soda
water fountain, chairs for a hall, or any equipment. But in open accounts between merchants in the regular way of
trade, the buyer's general reputation is relied upon. Upon his standing in the community depends his ability to get
credit.

Sec. 105. General Creditors And Judgment, Attachment And Execution Creditors
A general creditor is one who has not made use of any process of the law whereby he may seize the property of his
debtor in satisfaction of his debt. If one secures a judgment, brings attachment proceedings or takes out execution
upon judgment he is known as a judgment, attachment or execution creditor.
The term "general creditor" is variously employed. It is most frequently used to indicate that the creditor has no
judgment or lien or other legal process. But it is used at times to distinguish creditors who have no security from those
who have security. It is also used to distinguish creditors from those who have priority.
After a debt arises it may of course be collected by legal process provided there are assets out of which its amount
may be made. If suit is brought and is successfully prosecuted it culminates in a judgment. The holder of the judgment
is a judgment creditor. He now has a much higher grade of evidence than he ever had before, first, because it
represents a trial, and therefore stands as an expression of the law upon the merits of his case, and secondly, because
it is the basis for legal process. Appeal from the trial court to reverse the judgment may be taken provided it is taken
within a certain time. Except upon such an appeal the judgment cannot be questioned, for the time for discussing the
merits of the case has gone by with the trial.
A judgment usually gives a certain lien upon the judgment debtor's property. The extent and duration of that lien
depends upon local statutes. As an example a judgment of the Circuit Court of the State of Illinois constitutes a lien
upon the real estate of the debtor for one year. If execution is taken out the lien is extended.
A judgment in itself, though it may give a lien, will not otherwise result in bringing about a collection except it is
voluntarily paid by the debtor. The creditor must now go about to enforce his judgment. He sues out the writ of
execution upon his judgment. He is then known as an execution creditor. This gives him larger rights and more
extensive liens. The sheriff may proceed by virtue of such execution to seize the property of the debtor. This is called a
levy.
An attaching creditor is one who before judgment sues out the writ of attachment whereby, pending judgment, he holds
the goods of the debtor.

Sec. 106. Liens

A lien is a "hold" which a creditor has upon the property of his debtor.
One is said to have a lien when he has upon all, or certain items of the debtor's property a charge, so that he may take
or hold that property for his debt or subject to the payment of his debt. Liens are usually good against purchasers from
the debtor, or future encumbrances and subsequent lienholders, but there may be liens which are merely good
between the parties, and which because of lack of record, or change of possession would not be good against third
parties. Liens may be classified as follows:
1. Those arising by common law independent of contract (and statutory liens in the nature of common law liens). (Liens
of bailees generally.)
2. Those arising out of contract (pledges, mortgage liens, etc.).
3. Statutory liens.
(a) Those existing independent of judicial proceedings (mechanic's liens, etc.).
(b) Those arising out of judicial proceedings (judgments liens, execution liens, attachment liens.).
A creditor has no lien from the mere fact that he is a creditor. He must have take none by contract, or be the type of
creditor to whom the general law gives a lien, or have acquired the lien that arises out of legal process.

A. Liens Arising Out Of Contract

Sec. 107. Chattel Mortgages

A chattel mortgage is a lien upon specified personal property in the form of a conveyance of property with a condition
or proviso that it shall be void if the debt is paid for which it is given as security.
(1) Form of chattel mortgage.
A chattel mortgage is in form a conveyance of the legal title to the property subject to a condition subsequent the
performance of which renders the title defeasible. But in effect and for practical purposes the mortgagor remains the
owner and the mortgagee has a lien which he may enforce according to the contract and the statute governing it.
(2) Subject matter of chattel mortgage.
The subject matter may be tangible, or intangible, although it is generally personal property of a tangible nature.222
Crops may be mortgaged as chattels - whether mature or immature, severed or unsevered.223
Fixtures may be mortgaged as chattels.224 Thus A sells a machine to B, which B affixes in a permanent way to the
realty. A takes back a chattel mortgage on his machine and properly preserves his rights by due recordation. B then
mortgages the land to C. Ordinarily this would operate to give C a lien on the machine as part of the real estate. He
must in this case, however, take subject to the prior chattel mortgage to A.225 There is a difference of opinion whether
one can attach chattels after the real estate mortgage, and by a chattel mortgage, keep them exempt from the
operation of the real estate mortgage. The prevailing rule is that this can be done, unless the prior mortgage has in its
terms included all fixtures and improvements to be placed thereupon.
If by annexation with the land the chattels are incorporated therein so as to lose their identity, as bricks or lumber in a
house, they cannot be the subject of a chattel mortgage.
222. Metro. Nat. Bk. v. St. L. D. Co. 36 Fed. 722 (good will of a business if in connection with the business).
223. Demers v. Graham, 36 Mont. 402.
224. Hughes v. Edisto Cypress Shingle Co., 51 S. C. I, 28 S. E. 2.
225. Campbell v. Roddy, 44 N. J. Eq. 244, 14 Atl. 279.
In many states one cannot make a valid mortgage of a stock in trade which is to remain in the possession of the
mortgagor with power to sell the same and deal with it as his own, at least unless he does it merely as the agent of the
mortgagee, applying the proceeds to the payment of the debt or setting them aside as the proceeds of the
mortgagee.226
(3) The debt secured.
One whose debt is unsecured or insufficiently secured may prevail upon the debtor to execute a chattel mortgage to
secure, or more adequately secure the debt. But this may amount to a preference or an act of bankruptcy.227
The usual case in which a mortgage is given is one which is made to secure an indebtedness which arises at the time
the mortgage is made as a part of the same transaction. It may be to secure a loan of money, or to secure a portion of
a purchase price of an article bought and partially paid for.
One may make a mortgage to cover future advances. If the amount of the advances to be made appear in the
mortgage, the party advancing such money may have priority over subsequent mortgages.
(4) Provisions of the mortgage.
Allusion to the usual form of a chattel mortgage shows that it is customary to name the parties, as mortgagor and
mortgagee, at the beginning of the instrument. If a party to a mortgage is a corporation, the name of the corporation
should be stated and not the name or names of any of its members or officers. If a party is a partnership, there are two
ways of describing it in a chattel mortgage, thus "A., B., C. D. and E. F., copartners, trading as the General
Manufacturing Company," or "The General Manufacturing Co." If the partnership is composed of only two or three
members, perhaps all the partners should be named, as in the first case, but if it is composed of numerous members
the second description would be of less trouble. (In a real estate mortgage, the only proper description would be the
first one, that is, it should appear as executed by all the partners, as partners, trading as, etc.)
226. Hangen v. Hachemeister, 5 L. R. A. (N. Y.) 137; Zart-man v. Bank, 189 N. Y. 267.
227. See SEC. - , supra.
Real estate may be so described that the description, as made, can not pertain to any other land than the land in
question; but the description of property in a chattel mortgage is more difficult. Suppose a number of chairs, for
instance, are to be mortgaged. As between the parties it would not be difficult to tell what chairs are meant. But
suppose the rights of third parties enter. The purpose of a mortgage is, as we know, to give notice to third persons. It
follows that the description must be such that third persons may be notified from it, that the property against which thay
are now seeking to establish rights, was the property mortgaged. If there are any identification marks, these should be
given, as, for instance, the peculiar marking on an animal or serial numbers on machinery. And it may be noted that
animals are comparatively easy of identification, as weight, size, name and peculiar markings can be given. In
inanimate chattels, the make thereof, and principally, their location, serves to identify them.
It is customary to make notes in connection with a mortgage which secures a loan. The debt should be described and
the notes should be referred to. Reference to the ordinary form of mortgage will show how this reference and
description should be made.
The "security clause" or "danger clause" is set out in the ordinary form of printed mortgage. It is almost always
included. The extent of the rights thereunder is discussed later.
Just as in a deed, the grantor signs a chattel mortgage. Some states require attestation. This is not required in other
states. Local statutes must be consulted.
The notes given to evidence the debt which the mortgage secures should state on their face that they are chattel
mortgage notes. To omit this in many states is very serious and renders the mortgage of no effect.

Liens Arising Out Of Contract. Part 2

(5) Perfecting the lien in respect to third persons.
A chattel mortgage is good as between the parties, whenever the contract has been made, though informal, and the
court will enforce it; but the mortgagee is concerned that it shall also be good as against every one else who may claim
a subsequent title or subsequent liens. He desires to feel secure against A, who may get a judgment against the
mortgagor and claim a lien thereby on the mortgagor's goods; and against B to whom the mortgagor, violating his trust,
may execute another mortgage upon the same property; and against C, to whom the mortgagor in violation of his trust
may sell the mortgaged property.
How may he know when he has taken a mortgage that he is really secure, not only against the mortgagor, but against
everyone else who has not already acquired rights? There may be said to be two ways of bringing this about - by
giving actual notice, and by doing those things which in the law may be said to amount to notice or as it is said, to
constitute constructive notice. Actual notice exists in cases in which the third party in question had actual knowledge of
the mortgage; constructive notice exists when the third party in question is from the circumstances deemed to know
(whether he does or not), that is, the circumstances are such that he should have made inquiry and should have
learned by proper investigation. We will consider the two chief cases in which constructive notice is given; first, where
the proper record is made upon the public books; and, second, where possession is taken by the mortgagor.
Attestation, acknowledgment, recording, are not necessary as between the parties; neither are they necessary as
against a third party where the third party in question had actual knowledge; neither are they necessary where notice is
constructively given by some other fact, as by the taking or retaining of possession by the mortgagee. But otherwise
the mortgagor must go before some proper officer and acknowledge the mortgage.
Also the mortgage must be recorded with the officer who is recorder of deeds in the jurisdiction where the mortgagor
resides, or else in the jurisdiction where the goods are located.
Attestation is not so common a provision. In a few states it is provided for, but not in most.
Affidavits of good faith are also required by the laws of some states.
It is impossible to attempt here a statement of the requirements of the various jurisdictions.
In the majority of cases, the mortgagor retains his possession of the goods and uses them, and the mortgagee relies
upon his compliance with the law as to acknowledgement, recording, etc., to give him protection. If, however, the
mortgagee takes possession, parties claiming rights, accruing thereafter, must claim them subject to the mortgage, for
by the mortgagee's possession they are put on notice of the rights he has therein. Possession, then, constitutes a
constructive notice in most, if not all, of the states, which is equivalent to the notice imparted by the record.
(6) Rights of possession under the mortgage.
Almost all mortgages provide that possession may remain with the mortgagor. Even where the mortgage did not so
provide, and yet it was so understood, the mortgagor would be entitled to possession. But in the absence of any
agreement the mortgagee would have the right to possession.
The insecurity of danger clause in a mortgage is a provision that the mortgagee in a mortgage which gives the
mortgagor the right of possession shall have the right to enter and take possession if he deems himself insecure. In
most states, he must proceed upon reasonable grounds. It is not necessary that he be actually in danger, but he must
have reasonable grounds to fear that he is; 228 but in other states the rule is laid down that the reasonableness of his
fear is not subject to inquiry.
(7) Foreclosure.
Foreclosure of a chattel mortgage may be accomplished in two ways: first, by filing a bill for foreclosure in the courts,
and, second, by proceeding under a power of sale in the mortgage. Most mortgages provide that in case of default the
mortgagee shall have the right to take possession of the mortgaged goods and sell them at public or private sale for
the realization of the debt. This constitutes the "power of sale." In such a case the mortgagee may either proceed
under the power or file his bill in the Court of Equity.
228. Hogan v. Aikin, 181 111. 448; See collection of authorities 19 L. R. A. (N. S.) 915.
The sale may be public or private if the mortgage so provide, yet it should be made publicly upon public notice in order
that the mortgagee may be fully protected against any claim that he has not used good faith or secured as much as the
property would bring.
The mortgagee cannot purchase at his own sale, without the full and free consent of the mortgagor.
When the property upon sale does not bring the full amount of the debt with the proper costs of conducting it, the
mortgagor is still indebted for the balance. Where the sale results in more than the debt, the surplus belongs to the
mortgagor.
The mortgagor is not restricted to foreclosure; he may sue upon the indebtedness, and have judgment, and he may
pursue his various methods concurrently. He cannot, however, have more than complete satisfaction of his debt.
Liens Arising Out Of Contract. Part 3

Sec. 108. Conditional Sales

The term "conditional sale," is used to describe a transaction in which a seller of goods parts with their possession to
the buyer, but in his contract reserves title for purposes of security.
A conditional sale is not technically a lien but a reservation of title. But it is for practical purposes a lien, the buyer being
in a position of an owner, subject to the risk of loss, etc.
We are not here concerned with the conditional sale except to notice its operation as a lien or in the nature of a lien. As
between the parties the contract governs. If the title is not to pass until a condition is performed, e.g., the payment of
the purchase price, it will not pass and the property can be recovered by replevin or in the manner provided by the
contract.
Where one has a right to regain the goods by reason of his reservation of title, his conduct may show that he waived
his rights, as by bringing suit for the price, etc.
It was announced in most of the earlier cases that a conditional sale was a transaction whose provisions were good
against third parties, and a seller could assert his title against those who had dealt with the purchaser under the belief
that he was the owner of the goods, either becoming purchasers or creditors. But because this rule operated very
harshly on purchasers and creditors legislatures have passed recording laws in most states in which it is provided that
the reservation of title will not be effective against purchasers of such goods from the purchaser in the conditional sale,
or effective against creditors of such conditional purchaser, unless certain formalities are complied with, as having
them in writing, executing them in a certain way and recording them, or unless the party involved had actual notice of
the sale.
Statutes of this sort do not apply to the rights of the parties themselves and the seller may assert his reserved title
against the conditional purchaser, though he may not have taken the precautions of proper registration. Neither does it
apply where a third party concerned had actual notice, nor where the seller has not parted with possession to the
purchaser.

Sec. 109. Pledges

A pledge is a deposit by a borrower of personal property with the lender in security for the debt.
One pledges property when he deposits it with another to secure the payment of a debt or the performance of any
obligation. The term pawn is also used to signify the transaction especially where tangible property is subject of the
transfer and the lender is in the business of loaning money on chattels which he takes in his possession. Such a lender
is known as a pawnbroker.
The term pledge is thus used to describe both highly important and petty transactions in the commercial world. If one
deposits a trust deed or certificate of stock with a banker in security for a loan, the transaction is a pledge; if he
borrows money from a friend and gives his watch as security, the transaction is a pledge; if he deposits the watch with
a pawnbroker to secure a loan, the transaction is a pledge.
The term pledge is also used to describe the thing pledged.
The phrase "collateral security" is also used to indicate a pledge, especially where the thing pledged is intangible
property.
A pledge differs from a chattel mortgage very materially. The form of transfer is entirely different; title does not pass
even in form and in a pledge, the property is always with the lender, while in a chattel mortgage, as we have seen, the
title is with either, according to the contract. Pledges are not placed of record as are chattel mortgages, for the lender's
possession of the thing pledged protects him.
The party who owns the property and who deposits it with the other is called the pledgor. The party to whom the pledge
is made is called the pledgee.
Any form or sort of personal property may be pledged. Thus one may pledge his watch, his bonds, his mortgages, his
certificates of stock. Where intangible property is pledged, it is accomplished by means of an assignment, to which we
will devote a separate chapter.
A pledge need not be in writing and the contract may be very informal. Thus A asks his friend to loan him $10 and
hands him his watch as security. This is a pledge. The transaction in such a case is very simple.
In the case of a pledge of property which is represented by a document of title the pledge may be by transfer of the
document.
We know from the law of sales of personal property that a sale may be accomplished by transferring the document of
title, where there is one, that is, the bill of lading, the warehouse receipt, etc., the possession of which is necessary to
obtain the goods or at least is evidence of the title to the goods. In the same way property may be pledged by
transferring the document of title. Such document when transferred would not necessarily indicate whether the holder
was pledgee or purchaser. Thus, the pledge of a warehouse receipt would probably simply hold the receipt endorsed in
blank. As between the parties the nature of the transaction would be provable.
Delivery of possession either of the article itself, or of the document which represents the article (the article being with
some third person, as a carrier, warehouseman, etc.) is absolutely necessary to constitute a pledge. Thus I cannot
pledge my corn unless I deliver the corn to the pledgee; unless the corn is held by some third person and my title to it
is evidenced by a bill of lading or receipt, in which case I can pledge by transferring the document of title.
Where a pledge is accomplished by a transfer of a document of title, or where the thing pledged is intangible property,
like a note, bond, certificate of stock, etc., the question arises whether indorsement or written assignment is necessary.
Provided possession is given, endorsement or assignment to the pledgee is not strictly necessary though it is
customary and is also highly convenient to the pledgee in enforcing his pledge. If for instance I hold an unendorsed
note as pledgee I may have a right to realize upon it as pledgee if the pledgor defaults, but I might be greatly
embarrassed without the endorsement and require the assistance of a court to protect me in my rights.
A pledgee is not confined to his remedy upon the pledge. He may bring suit upon the debt and in this way satisfy his
claim. There is no obligation on his part to sell the property pledged. He may, however, and this perhaps is the usual
case, find his recourse by a sale of the pledge. His express or implied contract is that he shall have the right to sell the
pledge if the debt is unpaid at its maturity and apply the proceeds upon his debt. If the sale does not bring the amount
of the debt the pledgor still owes the deficiency. If the sale brings more than the amount of the debt the pledgor is
entitled to the surplus after the reasonable expenses incident to the sale are subtracted.
Where notes are pledged, the question arises whether the pledgee may sell the notes, or whether he only has the right
to hold them until maturity and collect them. By the weight of authority he cannot sell them. Thus, if A makes a note to
B, and B pledges this note with C for a loan, C's right is to collect the note and apply the amount collected on his debt.
By special contract however he could sell the note. The same rule applies to bonds, and similar choses in action.229
The contract of the pledge may set forth the circumstances under which the sale is to take place. It
229. Peacock v. Phillips, 247 111. 468.
may, for instance, provide that the sale may be either public or private or that it may be with or without notice. But
whatever the terms of the contract, the general law provides that the sale must be conducted in. the utmost good faith.
Therefore, a pledgee who has a right of private sale might nevertheless find it to his advantage to sell at public sale for
the would thereby protect himself against an allegation of bad faith. The pledgee should give full notice of the sale so
as to attract purchasers and obtain the highest price possible. The pledgee can not purchase at his own sale, unless
the pledge specifically gives him that right.

Liens Arising Out Of Contract. Part 4

Sec. 110. Assignments Of Contractual Rights By Way Of Security

Contractual rights may be assigned by way of security.
(1) Power to assign.
We have already considered the pledge of property by use of the Document of Title representing the same. Now, we
consider the assignment of rights under a contract not including those documents.
Assignment of contractual rights may be by way of sale, gift, or security. We think of it here as for the purpose of
security.
A person has power to assign a contractual right without or even against the consent of the other party to the contract
in cases where the assignment does not involve any transfer of credit, skill or other personal attribute, i. e., merely
results in entitling the assignee to receive money or goods. Thus an employee, may, without his employer's consent,
assign his salary in security for a loan and the employer must recognize such assignment.
(2) Assignment of expectancies and future interests.
It is decided that if one expects to inherit property he may assign his right to that property and usually where an
expectancy may be said to be coupled with an interest it is assignable. With reference to contractual rights it is settled
that rights of this sort cannot be assigned unless the contract has already been entered into. It is, however,
unnecessary that the contract be definite as to its duration. Thus one may assign all his future wages which he is to
earn under a present contract of employment even though that employment might without breach be terminated at any
time.230
(3) Title of assignee.
One who acquires a right by assignment takes it in the same condition in which it exists in the hands of the assignor.
Thus if B assigns to C his salary, alleged to be due from A and A has already paid the salary or does not owe it he can
set up the defense as well against C as he could against B although C may have supposed he was getting a valid
claim and may have given full value for it.
This, as we know, is not true in the case of that sort of transfer which we term negotiation. Rights are not negotiable
unless drawn up in a particular way and contain certain essential elements; and they are then negotiable because the
parties by putting them in that form thereby signify their intentions to make them negotiable. In such a case, transfer
may cut off defenses and the transferee takes a better title than his transferor, but this is not true in respect to rights
and instruments merely assignable.
230. Mallin v. Wenham, 209 111. 292.
(4) Notice to debtor.
Using our same illustration of an assignment by B to C of his right or claim against A we must notice that C cannot
acquire full protection of his rights until he has notified A of the assignment. Thus if A owes B a salary and B in order to
secure C for a loan made by C to B assigns C his salary, C must give A notice of the assignment, otherwise C runs the
risk that A may pay the salary to B not knowing of the assignment. In the case of that sort of transfer termed
negotiation, this is not true for from the fact that it is made to be negotiated, the debtor must take notice that it may
have been negotiated and hence must not pay any money except to the party holding the instrument properly
endorsed.

B. Liens Independent Of Contract

Sec. 111. The Common Law Liens

The common law gave certain liens to a creditor independent of contract. Possession by the creditor was requisite.
There may be also liens by statute which are of the same nature as common law liens and a mere extension thereof.
(1) In general.
In this division we will consider those liens which a creditor has upon the property of his debtor by the principles of the
common law and which do not arise out of any contract, but exist under the general law. Statutes have also given liens
of this sort which are in their nature similar to common law liens, and we will consider these liens as they exist under
the common law and under the statutes. There are also certain statutory liens independent of contract which we will
consider later because they are essentially different from common law liens.
In the common law lien possession is an essential element and if the creditor parts with possession he loses his lien
unless he reserves it by contract.
We should notice in the first place that unless a creditor acquires a lien by contract or by some judicial procedure he
does not have, as a usual rule, any lien upon his debtor's property. Thus, if A loans money to B, taking no security, he
does not by virtue of the loan have any lien on B's property. Or, if A sells goods to B and does not retain the goods until
paid or enter into any contract for a lien, he has taken B's general credit and has no lien. Yet there are a few cases
where the law for reasons of public policy gives a lien though none has been preserved by contract.
The cases where this is true are considered in the subsequent paragraphs.
(2) Liens of common carriers.
The common law gave a common carrier of goods a lien for his charges. This lien attaches only to the goods shipped
under that contract and is lost by delivery of the goods to the consignee.
(3) Liens of warehousemen.
The common law gave a lien upon the goods stored for the proper warehouse charges. This lien extends only to the
goods stored under the contract for which the charge is made and is lost by delivery of the goods.
(4) Liens of inn keeper.
An innkeeper, being obliged to receive whoever comes for entertainment, is given a lien by the common law upon the
property of the guest for all charges properly made for board and lodging and this lien has been extended in some
respects by the statute.
(5) Lien of agister.
An agister is one who pastures cattle. By the common law he had no lien but some statutes give him a lien.
(6) Lien of livery stable keeper.
A livery stable keeper had no lien by the common law unless he cured or trained the animals within his keep, but
statutes have given him a lien in some states.
(7) Lien of bailee spending money or services on goods.
An ordinary bailee usually had no lien for his charges but if under his contract he spent money or rendered services he
acquired a lien.
(8) Lien of vendor.
One who sells goods upon a general credit has no lien upon them unless he has retained it by contract. He may, of
course, take back a mortgage and protect himself by his contract. But if the sale was for cash, he is not obliged to part
with the goods until they are paid for and has a lien which he may enforce. He loses this lien by delivery of the goods to
the vendee. A vendor has more extensive rights than other lienors. See subject "Sales" in this series.
(9) Lien of landlord.
A landlord did not have any lien upon the goods of his tenant, that is to say, the tenant could sell and dispose of those
goods at pleasure until the landlord acquired some lien by judicial proceedings. In most of our states the landlord has
no lien, but he may acquire one at any time by a judicial proceeding called distress proceedings.
(10) Common law lien is good against third persons.
Just as a chattel mortgage properly recorded or real estate mortgage and a pledge protect the creditor against all the
world (as well as the debtor) so a common law lien enables one to hold the goods not only against the debtor but
against all the rest of the world, that is to say against parties who may have purchased the goods or taken a mortgage
or secured a judgment. The possession of the goods by the creditor is a notice to the world of the rights which he
claims therein.
(11) Loss of lien.
Possession is an essential element in a common law lien; by voluntarily parting with the possession the lien is lost.
(12) Enforcement of lien.
By the common law the lien holder had no right of sale. He might sell if the goods were perishable, but not otherwise
unless that was his special contract. But statutes have given right of sale, especially to warehousemen, innkeepers and
the like.
(13) Lien is special, not general.
The lien attaches only to the property held under the bailment. It cannot be applied to property subsequently delivered
to the bailee unless delivered under the same contract.

Sec. 112. The Statutory Mechanic's Lien

A mechanic's lien is a lien, arising independent of contract, by virtue of local statute giving materialmen, laborers and
contractors a lien on real estate to whose permanent improvement they have contributed labor or material.
A mechanic's lien is a lien arising independently of contract and is given by the general laws of most of the states to
those who furnish material or services for the improvement of real estate. In such a case there is of course no holding
of possession by the claimant as is necessary in the case of common law liens which arise independently of contract.
This lien arises when the material or services are furnished and is enforceable against the owner for a certain period
and also against third persons for a period provided the claim is recorded or the suit started within a certain prescribed
time.
While the statute of each state must be strictly construed in reference to the right to claim a mechanic's lien we may
say that such laws usually provide for a lien by (1) materialman, and (2) by those who render services; provided the
material is furnished and the services rendered for the improvement of real estate. Thus the contractor who builds the
house, the lumberman who delivers the lumber, the mason who lays the brick, may all claim their lien.
Those who furnish material or services may be classified into contractors and subcontractors. A subcontractor has a
shorter time, usually, in which to claim his mechanic's lien than a general contractor has. The law provides that before
a general contractor may claim his lien he shall, if demanded, furnish affidavits as provided by statute, showing who all
subcontractors are.
A mechanic's lien has precedence over all mortgages, judgments or other liens arising subsequently provided the
steps required by the statute are taken in apt time to perfect the lien.
It will be noticed that a person has a lien up to a certain time good against the world even though there is no public
record of his claim for a lien. This is allowed to exist upon the theory that the doing of the work or the supplying of the
material is in itself an act constituting notice to third parties in the same way that possession of property is held to
constitute notice of the rights of the possessor which is equivalent to notice given by record.
The lien dates as of the time the contract was made.
We have noticed that one may perfect his lien by recording a claim for it, within a certain time. In order to perfect the
lien he must file his claim within a certain time or start a suit within that time. Having perfected the lien within the proper
time he may then enforce it by suit within a much longer period. Enforcement of the lien is accomplished by a suit
which proceeds to trial and in which, if the issues be found in favor of the claimant, a decree is entered for the sale of
the land, much in the same manner that land is sold to foreclose a mortgage.
Redemption of the land sold may be made by the owner within the same period that redemption under other judicial
sales may be made.

C. Liens Acquired Through Judicial Proceedings

Sec. 113. General Statement - Judicial Liens

Liens may be acquired by a debtor by obtaining a judgment, or pursuing other legal process.
The judicial liens, i.e., liens arising through judgment on other judicial process are entirely statutory. Usually the mere
obtaining of a judgment operates to give a lien upon the property of the debtor.

Chapter 11. Remedies Of Creditors. A. Remedies To Enforce Payment Of Debt

Sec. 114. The Remedy Of A Suit At Law

A creditor may enforce his claim through the means of an ordinary suit at law pursued to judgment.
Where one has a claim against another it may or may not be such a claim as the law will allow to constitute a legal
obligation, or it may be justly or unjustly made. In order to establish the legality and justness of a claim, courts are
established in which the evidence on both sides is taken and a judgment entered accordingly. It is not until such
judgment is obtained that one's claim becomes a matter of legal certainty or of record. When it has once been so
obtained, then a judgment is on its face of legal value, the evidence upon which it is supported cannot, except upon
appeal or in a few cases we need not notice at present, be again inquired into. By virtue of such a judgment the law
provides machinery whereby under it a debtor's property may be taken to satisfy the debt.
The suit is first to be put at issue by the written pleadings, i.e., the plaintiff's statement of the case and the defendant's
defense, if any.
If the defendant makes no defense he is defaulted.
After the issue is determined by the pleadings, the case proceeds to trial. It may be before the court with or without a
jury. Either party is entitled to jury trial upon the questions of fact, but frequently both sides waive jury and submit the
issues of fact to the judge. The jury's return is called a verdict; a judges finding of fact is called a finding. The judgment
is based upon the verdict or finding and becomes the unimpeachable record of the rights of the parties, except that the
defeated party may appeal to the upper court which passes merely upon the record to determine if the error was
committed in the lower court.
231. Being the second of two added chapters on the general subject of Debtor & Creditor.

Sec. 115. Remedy Of Bill To Set Aside A Fraudulent Conveyance

A conveyance by a debtor whereby he hinders, delays or defeats his creditors in the collection of his indebtedness to
them is called "fraudulent" and may be set aside by the creditors through the medium of a bill in equity.
(1) General statement.
We have seen that a creditor has no lien upon the property belonging to his debtor, unless he has secured the lien by
contract, except in a few cases, until he has obtained such lien through legal proceedings. Consequently a debtor may
freely sell his property, even though insolvent, provided he acts in good faith and gets value, and if not insolvent may
dispose of his property by gift.
But it is a well settled principle of law that a debtor cannot dispose of his property if his purpose and the effect of the
disposition is to "hinder, delay and defraud" his creditors.
It is at once apparent that in a conveyance alleged to be fraudulent, a complication arises in the fact that a third party,
namely, the purchaser or taker is involved. It is, therefore, not enough to prove the debtor's purpose; it must also be
shown that the third party is chargeable with a knowledge of that purpose, or that he has parted with nothing in return
for the property.
We will find that fraudulent conveyances may be grouped under two general heads: (1) Conveyances for value (or
apparent value), and (2) voluntary conveyances. In a conveyance for value, the taker must be a party to or chargeable
with notice of the fraudulent purpose or else he gets a perfect title. A voluntary conveyance is deemed to be fraudulent
under circumstances we may note later; and in that case it may be set aside no matter how innocent the taker is, for,
having given nothing, he may not complain against those who have been defrauded. We will find, therefore, that a
fraudulent conveyance may be set aside unless the taker both gives value and has no notice. And one is deemed to
have notice not only when he has actual notice, but also when the circumstances are such that it is the policy of the
law to charge him with notice. We will find that a conveyance may be fraudulent in the eyes of the law though in fact
the particular case has no taint of moral turpitude. For there are circumstances which would tend to encourage fraud if
we allowed conveyances to be made under them, and therefore the courts will set these aside as fraudulent as a
matter of law.
(2) History of law of fraudulent conveyances.
By the principles of the common law and by many statutes passed declaratory thereof, conveyances in fraud of
creditors could be set aside.
An early English statute was passed on this subject known as the Statute of 13th Elizabeth, Chapter 5; and it declared
for the punishment of parties who should justify fraudulent conveyances as made in good faith and upon good
consideration. This statute is one of the famous and important statutes in the history of English jurisprudence. It has in
effect been copied in the American commonwealths.
Shortly after this statute was passed, a famous case was decided known as Twyne's Case,232 in which it was held
that a certain conveyance had signs or badges of fraud, in that the conveyance was general in its terms, and because
the seller remained in possession of the goods and treated them as his own.
(3) Gifts as fraudulent conveyances.
232. Twyne's Case, 3 Coke, 80.
It will be noticed that the language of the statute of fraudulent conveyances declares all conveyances fraudulent except
such as are made bona fide and upon good consideration. It has been decided in innumerable cases that a gift, though
in fact honestly made and innocently taken, may be set aside by creditors and its subject reached for satisfaction of
debts, whenever it was made by one whose circumstances made such gift an improvident thing to do; in other words,
when his creditors were thereby deprived of, or hindered and delayed in, the collection of their debts. A maxim, uttered
by one of the judges, has become famous: "A man must be just before he is generous." Consequently the law
classifies a gift as a fraudulent conveyance, though in the particular case, innocently made and taken, provided the
giver was in such straits, financially, that he was or thereupon became practically insolvent. Thus suppose that A owes
$10,000, now due. His assets are practically $5,000. He buys a lot of land and gives it to his son. The gift may be set
aside by A's creditors. On the other hand if the gift is made by one while he is solvent, it cannot be attacked by his
creditors. A while unquestionably solvent deeds his wife his property. Afterwards he contracts debts which he cannot
pay. A's creditors cannot reach the property conveyed to Mrs. A. Yet one may make a voluntary conveyance fraudulent
as to future creditors, as well as to existing creditors, as shown in the following paragraph.
Different rules have been formulated in reference to the rights of future creditors to set aside a gift. We have just seen
that a person who is perfectly solvent may make gifts which are irrevocable by his creditors, though he have existing
creditors, for by our hypothesis enough assets remain to pay all his debts. We have also seen that if he is insolvent his
creditors can object. Must these creditors be creditors at that time? In some jurisdictions the future creditors need only
show that there were existing creditors; but in other states the future creditors must show that ;the gift was made with
actual intent to defraud them.
If one makes a conveyance as a gift or as a sale to another in order to defeat his creditors, he is perhaps more likely to
make the conveyance to a member of his family. Most of the Courts will therefore look upon such conveyances with
some suspicion when made by a debtor in failing circumstances, to see whether the conveyance, though expressed to
be upon considerations, is voluntary; or to see if it is actually fraudulent though for value. Such circumstance then is a
proper one with other circumstances to make out a case of fraud.
A gift is a conveyance, as we know, for which no value is promised or given. When a conveyance is for value, it may
still be set aside if the taker have actual knowledge, or constructive notice. We must now consider what is value.

Remedies To Enforce Payment Of Debt. Part 2

(4) Conveyance for value as fraudulent.
(a) In general.
We have noted how a debtor even though he be insolvent may transfer a good title to his property to one who has
given value and taken in good faith, and creditors of such a party cannot complain. Of course if such creditors have
acquired liens on such property before it is transferred, the property will remain subject to such liens no matter through
how many hands it passes. It shall be our purpose in this subdivision to inquire what constitutes value, and what
constitutes good faith, or stated in another way, what constitutes notice to the purchaser of the fraud that is being
practiced by the debtor. We may assume that the debtor by such conveyance is hindering, delaying or defeating his
creditors, for otherwise they would have no right to complain. We shall notice that it is not necessary to charge the
purchaser with actual knowledge, as there are many circumstances which constitute notice in the law, regardless of the
actual good faith in the particular case. A purchaser is bound to know that if he purchases under circumstances that
should arouse his suspicion, he is bound to investigate the seller's real intent and the effect of the conveyance. If a
purchaser should have notice, he is taken to have notice, though in the particular case he purchased innocently and
has given value. There are certain circumstances which in the law constitute fraud and there are other circumstances
that constitute evidences of fraud, and a purchaser must know the law and be governed accordingly.
As a purchaser to be protected in a fraudulent conveyance must (1) give value and (2) take in good faith or without
notice, we shall inquire, first, what constitutes value and, second, what constitutes notice.
(b) What constitutes value.
We shall under the next subdivision in reference to notice, see that the inadequacy of the consideration may be so
great as to show fraud and that the purchaser is a party thereto or chargeable therewith. Here we may simply notice
that the inadequacy of the value does not keep it from being value. In other words, a purchaser may be protected as a
purchaser for value even though he has not given the full market value of the thing purchased. Thus D, a debtor, in a
scheme to defraud his creditors, sells to P, a piece of real estate. P by the price agreed upon gets an exceptionally
good bargain; this in itself is not material. He is a purchaser for value and as such his purchase cannot be disturbed.
Clearly the purchase of property for money paid by the purchaser, or for tangible property parted with by him, is a
purchase for value.
A sale may still be for value though the consideration consists in a promise in the shape of promissory notes, etc. If,
however, the sale is to one on credit who is not fully financially responsible or the debt is not secured, the sale will not
be upheld. And if unusual terms are given they will be considered as evidences of fraud between seller and purchaser.
While as between the parties themselves a conveyance of property in return for a promise to render future services or
support, may be upheld, yet clearly it would open the door to fraud to hold that conveyances of this sort will be upheld
against creditors. Thus A, having certain property and being indebted, conveys all his property to B, in return for B's
promise to support him the rest of his life. A's creditors can have this conveyance set aside. If B is no party to any
fraud, and has actually furnished support, the conveyance will be upheld to the amount of the support he has thus
actually given.
To pay or to secure an already existing indebtedness, one may make a conveyance and it will be upheld as a valid
conveyance for the purpose of paying or securing the debt. Thus D is indebted to A, B and C. To C he conveys certain
property to secure or to pay the debt. Although this amounts to preferring C over the other creditors yet it will stand, as
a conveyance for value. Under the Federal Bankruptcy Law, however, it might be set aside, provided proceedings in
bankruptcy were begun by the other creditors within four months from the time the conveyance was made, and
provided also C knew or had reasonable cause to know that a preference was intended.
(c) The participation in, or notice of the fraud, by the purchaser.
Having now considered what may constitute value, and assuming that the property in question has not been conveyed
as a gift, but that the purchaser has really or apparently given value, let us inquire what conduct or notice makes him a
party to the fraud so that he will be prevented from setting up his title against the creditors who seek to set aside the
conveyance. If he is an active party to the fraud in the sense that he agrees to receive the property in order to defeat
creditors and afterwards convey it back again, then our subject presents little difficulty. Such a purchaser is an actively
guilty party and cannot crave the law's protection. If we want simply to charge him with knowledge or notice, we may
consider that he may be charged with knowledge because he has (1) actual notice; or (2) constructive notice. Let us
consider these two heads.
If the creditor knows that actual fraud is being attempted by the conveyance to him, then he is a party to a transaction
which will not stand if attacked on that ground by the creditors. The difficulty in such a case would be to prove his
knowledge. The presence of some of the "badges of fraud" we will consider hereafter might help in that respect.
A purchaser cannot be blind to the obvious meaning and effect of a conveyance. If the circumstances are such that he
should be put on inquiry he must pursue the inquiry that a reasonably prudent man under the same circumstances
would have made. Besides this, there are circumstances which in law constitute fraud, and in that case the purchaser
would as a matter of law be a party to the fraudulent conveyance.
We may consider the following circumstances as to whether they will put a purchaser on inquiry.
(1) Inadequate Consideration. Inadequate consideration does not in itself put a purchaser on notice unless it is "gross,"
that is, a very substantial inadequacy, there being nothing to explain why it is so inadequate. But inadequacy of
consideration, especially if very great, may be material as evidence in connection with other evidence of actual notice
or connivance. Aside from these considerations, we have found that inadequate consideration is a sufficient
consideration to support a purchase even against creditors.
(2) Bulk Sale of All of Stock in Trade. One can buy an entire stock in trade without danger of thereby becoming
charged with notice of the seller's fraudulent intent (if any). But if the sale is made secretly, or hastily, and without
proper inventories, or if there are any facts to arouse a prudent man's suspicion, the purchaser will be charged with
notice. Besides, there are now in many states "Bulk Sales Acts" which make a bulk sale fraudulent as to creditors
unless they are notified as the law directs.
(3) Knowledge of Grantor's Insolvency. This in itself is insufficient to constitute notice of fraud, for we know that an
insolvent person may still sell his property, but we can readily see how this, as an element, might make a stronger
case.
(4) In General. We see from these illustrations that it simply becomes a question in any case of applying the general
rule that a purchaser is chargable with notice when the circumstances would constitute notice to a reasonably prudent
man, the average buyer.

Remedies To Enforce Payment Of Debt. Part 3

(d) Badges of fraud.
General statement. We have noted that the greatest difficulty in cases to set aside fraudulent conveyances, is to prove
the case. The creditors might be able to prove circumstances that would put a purchaser on notice and thereby charge
him with knowledge but it might be that the purchaser is believed to have had actual knowledge, and even to have
been in connivance with the debtor. In such a case there may be what the law calls "badges of fraud," signs or labels
which indicate the irregular and fraudulent nature of the transaction. Ever since Statute 13th Elizabeth, Ch. 5, and
Twyne's Case, there have been certain well known "badges of fraud," which we will now consider. These badges of
fraud do not necessarily prove that there has been fraud; but they are evidences of fraud, or, constitute a prima facie
case of fraud. In some cases, however, and in some jurisdictions, they constitute fraud itself, or, as it is said, "legal
fraud", and there can be no rebuttal of the fraud so constituted or presumed.
Retention of possession by seller. It has long been the law that where personal property is sold under an absolute bill
of sale, there must be an immediate and notorious change of possession. Retention by the vendor makes out a case of
fraud. In some states, the case thus made out is only a prima facie one, subject to rebuttal by evidence that the sale
was in fact honest. But in other Courts, the actual good faith in the transaction is immaterial.234
Change of possession need not consist in change of location. It is enough if the purchaser goes in charge, and
assumes control in such a manner that any one interested could find that a change had taken place.
234. In the following states retention is considered as prima facie evidence of fraud, rebuttable by evidence that the
sale was actually for value and in good faith; Alabama, Arizona, Arkansas, Delaware, Florida, Georgia, Indiana,
Kansas, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, New Jersey, New York, North Carolina, North Dakota,
Ohio, Oregon, Rhode Island, South Carolina, Tennessee, Texas, Virginia, West Virginia, and Wisconsin. In the
following states retention of possession is conclusively presumed to be fraud: California, Colorado, Connecticut, Idaho,
Illinois, Iowa (unless recorded), Kentucky, Maine, Maryland (unless recorded), Masachusetts, Missouri, Montana,
Nevada, Oklahoma, Pennsylvania, South Dakota, Utah, Vermont, Washington (unless recorded). In Mexico and
Wyoming not clearly established.
Thus, if a store is sold, and the new owner goes into possession, assuming control, so that any one concerned would
be put to inquire whether a change had not taken place, this would be a sufficient change of possession and the sale
would be good against the seller's creditors.
A reasonable time is allowed for the change of possession.
If goods are ponderous or scattered and therefore immediate possession is difficult, these circumstances enter into the
case and govern the reasonableness of the time for removal.
Inadequate consideration. Gross inadequacy of price is usually taken in connection with other circumstances to make
out a badge of fraud. In itself it is not an evidence of fraud unless great enough to "shock the conscience." Even then it
is not final proof of fraud. It may be shown that notwithstanding the gross inadequacy, the transaction was in fact
honest.
Consideration fictitious in part. If all of a consideration expressed is fictitious the conveyance is void where a voluntary
conveyance would be void, for it is voluntary. If part of the consideration is fictitious, this is a badge of fraud. Thus if
one should convey property for a valid consideration, and another consideration wholly fictitious is recited, as a debt
which never existed, this shows a fraudulent arrangement between the parties. The parties by such recital, that is, by
their attempt to give the conveyance an appearance of fairness, are really creating evidence against themselves.
Sales of entire stock in trade in bulk are not improper and the fact that there is such a sale shows no fraud. Yet it is
also true that fraud may easily be accomplished by such sales and if there is anything irregular in the sale, as where
made hurriedly, or for a bulk price without inventory, etc., all goes to show that the transaction was fraudulent.
In some states laws have been passed known as bulk sales laws requiring that one who sells his entire stock in trade
in bulk, shall notify his creditors, or make a certain specified public notice, or both.

B. Payment And Tender

Sec. 116. Payment Of Liquidated Debt

Payment of a debt may be in any medium the parties agree, and may be absolute or conditional.
The parties may agree upon any medium - gold, silver, certificates, bank notes, etc., or check of the payer. When a
debt is expressed to be payable in any medium, as, for instance "gold, of the present standard of weight and fineness"
often found in mortgages and mortgage notes, the payment as a matter of fact is not usually in the medium expressed,
the creditor having the right, of course, to waive his privileges in that respect.
235. Under a Bulk Sale Act, this sale would be void as to creditors. See further herein and note 236.
236. Bulk sales laws are in force in Alabama, Arizona, California, Colorado, Connecticut, Delaware, District of
Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts,
Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee,
Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
Where payment is by bank check or other commercial paper, such payment is in most states considered only a
conditional payment and does not in itself discharge the original debt.
If D owes C $100 and gives him his check in payment upon the bank in which he thereby represents he has or will
have a deposit, the check is only conditional payment. It is accepted upon the theory that it will be paid. If not paid,
there may be a suit either upon the check or upon the original indebtedness. The same is true of any negotiable paper,
whether it be the paper of the debtor or of some third person. It is true that such paper might be accepted as an
absolute payment, but there is no presumption that it is so accepted. There would have to be a special agreement to
that effect.237

Sec. 117. Tender Of Payment

A tender of payment of the correct amount when the debt is due, will not discharge the debt, for tender "must be kept
good," but it will stop accruing interest, costs, damages, etc. But tender to have this effect must be in legal tender and
in the right amount at the right place.
Where and when tender may be made in contracts so that it will operate as a discharge of such contracts is a subject
for discussion under the general law of contracts. Usually, we may say, that where tender may be made, a tender will
discharge the contract and such tender need not be kept good. But in a money obligation tender must be kept good,
that is, a tender once made does not discharge the indebtedness. But a tender properly made at the proper time and
place and in the proper amount will discharge accruing interest, costs, damages, etc.
237. This is the rule in all states except, it seems, four: Indiana, Maine, Massachusetts and Vermont, in which states
the presumption is that such paper is taken in absolute payment, subject to rebutting evidence. Combination, etc. Co.
v. St. Paul City Railway, 47 Minn. 207.
Tender must be in "legal tender," but if the creditor objects on some other ground, then the tender is good though not in
legal tender. But if the creditor keeps silent the tender is not good unless in "legal tender," notwithstanding the lack of
specific objection. Legal tender is tender in any medium which the law states must be accepted in payment of debts.
There is no tender unless there is an actual handing out of the amount so that the creditor can take it if he desires,
accompanied by a statement of the amount, but the money need not be counted unless that is called for. The actual
amount must be tendered. There is no legal tender where there is a larger amount tendered with a request for change.
But if the change is waived, the tender is good as the greater includes the lesser.

Sec. 118. Rights Of Parties In Regard To Overpayment Or Underpayment Through Mistake

If through a mutual mistake of the facts a wrong amount is paid, the party against whom the mistake operates may
recover it by suit.
Where through miscalculation or in some other way there is a mutual mistake concerning the facts and an over
payment or an under payment thus made, the party thus prejudiced may recover the amount he has lost through the
mistake.

Sec. 119. Interest Upon The Debt Usury

The debt bears the rate of interest agreed upon, provided the rate is not usurious. If no rate is stated, debts of certain
kinds bear a rate established by the law, but all debts do not bear interest. The law sets a limit in the rate of interest
that can be charged. Charging more than that amount is usury, and subjects the creditor to a penalty.
It is deemed good public policy to prevent a creditor from charging more than a certain amount for the use of money.
Therefore the laws of nearly all the states provide a maximum amount that may be charged. When more than the
maximum rate is agreed upon the transaction is said to be usurious. The penalty for charging usury differs according to
the state laws. A table in the Appendix shows the rate which can be charged and the penalty for charging a greater
rate. In some states the entire interest is forfeited; in some there is a subtraction from the principal, but only a very few
states deprive the lender of his principal. In very few states is usury a criminal wrong and in many, if usury is paid it
cannot be recovered by the debtor. In such states the debtor must refuse to pay the usury and being sued, plead his
defense. Charging the highest rate and subtracting if from the principal in advance is not usury though mathematically
it may amount to a fraction more than the legal contract rate.
Where there is no agreement for interest all debts do not bear interest. The law provides for a rate where none is
specifically agreed upon, but this does not apply to all forms of indebtedness. Usually it merely applies to money
borrowed, debts vexatiously withheld, etc. To mere overdue accounts, etc., it does not always apply.

Sec. 120. The Debt Barred By Lapse Of Time - Statutes Of Limitation

Mere lapse of time will bar a debt. The statutes of the various states provide periods within which suit must be brought.
But this bar may be waived by the debtor; as where he does not plead it, or makes new promises to pay, or keeps the
debt alive by payments of principal or interest.
After a debt has existed for a long period of time, it will be presumed to have been paid and the states have passed
statutes naming certain periods in which suit must be brought. These statutes are called ' 'statutes of limitation." It is
deemed wise not to encourage the enforcement of stale claims in which the evidence may have been lost or have
become hard to find. The periods provided differ in different states and as to different classes of claims. A note, for
instance, will not be barred as soon as an oral indebtedness. This bar provided by the statute is for the benefit of the
debtor; he may waive its provisions either by not relying upon it when suit is brought, or by making new promises to
pay the debt. If after the period has partially, or wholly run he makes a new promise to pay, the period will begin again
from the date of the new promise. In many states this promise must be in writing. Also where payments are made, the
payments arrest the running of the statutes. These payments may be either of principal or interest. Thus a note of very
ancient date would be perfectly valid if the interest had been kept up upon it, or any interest paid within the period fixed
by the law.

C. Settlement And Compromise Between Debtor And Creditor

Sec. 121. Claims - Liquidated Or Unliquidated And Doubtful

In discussing this subject, it is necessary to regard the condition of the claim in respect to whether it is liquidated,
unliquidated or doubtful.
We have already considered claims in respect to their condition whether they are liquidated or unliquidated. In this
chapter we will have to keep that distinction in mind.

Sec. 122. Settlement Of Liquidated Claims

If a debt is liquidated in amount, it is settled by the rules of the common law that a payment of a smaller amount than
the amount due cannot discharge the debt unless there be some new consideration.
Consideration is essential to every simple contract. It consists in parting with or promising to part with something to
which one is legally entitled. One does nothing which he ought not already to do when he pays his debt. On this
reasoning the common law laid down a rule that the payment of the part of a debt admitted to be true could not
possibly discharge the entire debt even though that was the agreement. Thus A owes B $100, he pays $50 on B's
agreement that he will discharge him for the entire debt. B can still sue for the other fifty notwithstanding his promise
because A parted with nothing to which he was entitled in return for B's promise.
If however, there was any new element which could be construed into a consideration, the agreement would stand, as
where the debtor paid the debt before it was due, or gave additional security. So if instead of money he gave
something whose value is not fixed but depends on the agreement of the parties, the agreement will stand. As where A
owes B $100 and a typewriter worth about $50 is taken in satisfaction. This agreement will stand, because the Courts
allow parties to set their own values and do not consider the adequacy of the consideration.
This rule has been departed from in some states and a payment of a smaller amount will discharge the greater
provided that is the agreement.
What we have said, applies only to cases in which the amount claimed on one side is conceded to be due on the other.

Sec. 123. Compromise Of Unliquidated Claims - Accord And Satisfaction

If the amount of a claim is disputed in good faith, any settlement of it will stand. But if the compromise is not carried out
as agreed upon, a suit may be brought on the original demand.
If any compromise of an unliquidated demand is made, the compromise will stand as made. Thus A claims B owes him
$100. B in good faith claims the amount is only $75. They finally agree on $80. If B pays this there is "accord and
satisfaction." A cannot claim the other twenty for by agreement $80 was agreed in settlement. If B does not pay as
agreed, A can sue him on the compromise, or ignoring the compromise he can sue for the original demand.241
241. Snow v. Greisheimer, 220 111. 106. If a check is sent in "full satisfaction" and retained by the recipient, whether it
will so operate depends on the question whether the debt was liquidated or unliquidated.

Sec. 124. Compromise Of Claims Whose Entire Validity Is Doubtful

If the validity of a claim is in doubt but the claim is made in good faith, a compromise of it is good and suit may be
brought upon the compromise.
Suppose that A has had an accident befall him which he alleges arose out of B's negligence. B denies any liability yet
he agrees with A to pay him $200. A can sue on this agreement.

D. Compositions With Creditors

Sec. 125. Composition Defined

A composition by a debtor with his creditors is an arrangement whereby the debtor pays or agrees to pay a certain
percentage of the claims to the creditors upon their agreement with him and with each other to accept such amount in
satisfaction of the entire debt. Such an arrangement will stand as made.
A debtor in failing circumstances often finds it advisable and possible to come through his financial difficulty by an
agreement with his creditors whereby they agree with him and each other that they will accept a certain percentage in
satisfaction. This may be upon a cash basis, or part cash and part time, or all upon time payments. This transaction is
everywhere upheld and the old debt is wiped out in the new agreement. This is true whether the indebtedness is
liquidated or unliquidated.
A composition may be a strictly cash transaction or, as is perhaps more usual, on time at least in part. It may be made
with all the creditors or with only a part of them. If the debtor makes fraudulent misrepresentations the creditors are not
bound upon the composition. Of course, a composition of creditors, as the definition shows, must be upon full consent
of every one involved. No creditor could be made a party to a composition which he did not agree to.
A composition by a debtor with his creditors differs from a compromise or settlement by a debtor with one of his
creditors or with all of them in separate agreements. In a composition the debtor and at least two of his creditors are
involved and they are all parties to the same agreement. One creditor foregoes a portion of his claim in consideration
of the other creditor foregoing a portion of his. The transaction is everywhere upheld, and is frequently met with in
commercial life.
In bankruptcy, a bankrupt debtor may offer terms of composition, as discussed in our treatment of bankruptcy.

E. Exemptions

Sec. 126. General Statement

By the various state laws, certain property is exempt from seizure for debt. These laws differ in the various states. They
are based upon the theory that it is a sound public policy to prevent the debtor from being absolutely stripped of all his
possessions and therefore becoming a charge upon the state. The National Bankruptcy Act gives a debtor the
exemptions he is allowed by the law of his state.
The law deems it advisable to assure to a person a certain amount of property which cannot be taken from him by his
creditors. This protects the debtor from being utterly deprived of his property and therefore tends to prevent him and
his family from becoming paupers242 and also enables him the better to get a new start, and is supposed to beget
within him a spirit of independence making him a better citizen.
242. Wright v. Piatt, 31 Wis. 99; Hughes v. Hodges, 102 N. C. 236.
The exemption laws of the different states vary quite widely. In all the states, a homestead is allowed, but the value or
amount thereof differs. Thus in Texas a homestead of 200 acres is allowed to a farmer regardless of its value, or the
value of buildings on it, while in Illinois a homestead of the value of $1000 is allowed, regardless of its physical extent.
The exemption laws of some states are reasonable but in others they seem to go beyond the point of a reasonable
protection to debtors. While it is a salutary provision to protect debtors and their families from complete divestment, it is
nevertheless also true that creditors should be paid. A law which allows a debtor to enjoy wealth in complete immunity
from creditors is unjust.
Exemptions may usually be divided into three well known classes:
(1) Exemptions in Personal Property. The exemptions in personal property differ very widely in the different states.
(2) Homestead. A homestead is allowed to debtors who are householders or heads of families.
(3) Exemption in Salary or Wages. This varies in different states.
Besides these exemptions there may be others provided, as, for instance, insurance policies to a certain extent. We
will consider these exemptions in detail.
(A) Certain Exemptions Considered.
(a) Homestead.

Sec. 127. Homestead Defined

A homestead is an estate in real property made exempt from seizure for debts that the debtor may use the same for
residence purpose. It usually exists only in favor of one who is a head of a family and who is actually occupying the
estate for home purposes.
The term homestead may be used in a broad sense to signify that place upon which the home is situated including the
land around it, the various outbuildings used in connection with it, etc. In the law of exemptions it has much this same
meaning except that the law usually confines the homestead to a certain value or physical extent, and grants it only
upon certain conditions, that is, for instance, that the homesteader shall be the head of a family and that he and his
family shall be actually residing upon the homestead. Some homestead laws are more liberal than others and do not
require so much. We will consider a few particulars in the law.243

Sec. 128. Text Of Illinois Homestead Law As Illustration

It is impossible to set forth all of the state laws on homestead, though we may note how they differ upon some points.
The Illinois Homestead Exemption Law reads in part as follows:
"SEC. 1. That every householder having a family, shall be entitled to an estate of homestead, to the extent in value of
$1000, in the farm or lot of land, and buildings thereon, owned or rightly possessed, by lease or otherwise, and
occupied by him or her as a residence; and such homestead, and all right and title therein, shall be exempt from
attachment, judgment, levy or execution sale for the payment of his debts, or other purposes, and from the laws of
conveyance, descent and devise, except as hereinafter provided."
243. Barney v. Leeds, 51 N. H. 293 (history of homestead law).
"(To Continue After Death of Householder.) SEC. 2. Such exemption shall continue after the death of such
householder, for the benefit of the husband or wife surviving, so long as he or she continues to occupy such
homestead, and of the children until the youngest becomes twenty-one years of age; and in case the husband or wife
shall desert his or her family, the exemption shall continue in favor of the one occupying the premises as a resident."
"(Proceeds Exempt.) SEC. 6. When a homestead is conveyed by the owner thereof, such conveyance shall not subject
the premises to any lien or incumbrance to which it would not have been subject in the hands of such owner; and the
proceeds thereof, to the extent of the amount of $1000, shall be exempt from execution or other process, for one year
after the receipt thereof, by the person entitled to the exemption, and if reinvested in a homestead the same shall be
entitled to the same exemption as the original homestead.
"SEC. 7. Whenever a building, exempted as a homestead, is insured in favor of the person entitled to the exemption,
and a loss occurs, entitling such person to the insurance, such insurance money shall be exempt to the same extent as
the building would have been had it not been destroyed."

Sec. 129. Homesteader As Head Of Family

It is usually required that a debtor who claims a homestead be the head of a family.
The laws differ to some extent in this respect. It is commonly provided, however, that the homesteader must be the
head of a family and residing with the same. A "head of a family" is usually a married man. But under this description it
has been held that any one who is maintaining a household in which there are relatives dependent upon him to some
extent for support, or who constitute a family, may be entitled to a homestead. A widower living at home with his
children; a young man supporting his unmarried sisters in a home maintained by them; a man supporting his mother in
his home, have been held to be entitled to the exemption of homestead as "heads of families." An unmarried man
maintaining a retinue of servants would not be a homesteader.

Sec. 130. How Homestead Waived

Those entitled to a homestead may usually waive it by complying with the law which sets forth how it shall be waived.
We shall find in studying the law of exemptions in personal property that the exemptions may be lost by failure to claim
them; but in the law of homestead, the homestead is not lost or waived except by actual waiver in the manner
prescribed by law. In some states, the constitution provides that a homestead may not be waived, though of course
everywhere it may be sold. Usually however, it may be waived. Thus in Illinois it is waived by a statement in the deed
to that effect, together with an acknowledgment of the waiver before a notary public or other officer. The owner of the
land and also the spouse would have to join in such waiver.
(b) Exemptions in personal property.

Sec. 131. What Personal Property Is Exempt

The various state laws define that certain kinds of personal property to a certain amount shall be exempt from seizure
for debt.
It is the policy of the law to prevent creditors from seizing all of the debtor's personal property. The law, therefore,
provides that certain of a debtor's property shall be exempt from seizure for debt. What one is entitled to may depend
on whether he is the head of a family. Thus in Illinois a debtor has $100 worth of exempt personal property (besides his
wearing apparel, etc.) while one who is head of a family has $400 in exempt personal property. In some states, as in
Illinois, the law provides for a certain amount (as above stated) to be selected by the debtor. In other certain kinds of
property are specified, as follows:
1. Necessary wearing apparel. A debtor is entitled to necessary wearing apparel in every state.
2. Tools of trade. A debtor needs his tools of trade to rebuild his fortunes and make a living. Consequently they are
frequently exempted under the law. Tools of trade do not include machinery of an expensive sort.
3. Work animals. The debtor is often allowed a work horse or mule as exempt property.
4. Household furniture. Some statutes provide that the furniture used in the house for household purposes shall not be
seized.

Sec. 132. Waiver And Loss Of Personal Property Exemptions

In some states a debtor cannot waive his exemptions by executory agreement though in others he may, and a
distinction is made in some states between those exemptions which are merely for his own benefit and those for the
benefit of his family. But usually a debtor when property is seized or about to be seized must claim and assert his right
to his exemptions.
We have seen that a homestead is not waived or lost unless waived in some affirmative way as provided by the
statute. But in respect to personal property the law is not so strict. While it is true that some decisions deny that a
debtor may waive his exemptions in his personal property by mere executory contract, as where the waiver is included
in a note, yet he may unquestionably by chattel mortgage, pledge and the like forego his exceptions. So where his
property is about to be seized for debt the debtor must assert his exemptions, and in some states it is provided he must
do it in a particular way, as in Illinois, where he must within 10 days after the writ of execution is served upon him file a
schedule with the officer, therein claiming his exemptions.
(c) Exemptions in income.

Sec. 133. Wages Or Salary Exempt

In almost all the states wages or salary is exempt up to a certain amount or covering a certain period.
In some states a debtor may claim so much a week in exemptions, as, for instance, $15. In others he may claim
whatever he has earned within a certain period, as say, 90 days. In some states he has no exemptions in income
unless he is the head of a family.

Appendix A. The Federal Bankruptcy Law. Chapter I. Definitions

Secs.
1. Meaning of words and phrases.

Chapter 2. Creation And Jurisdiction Of Courts Of Bankruptcy

Secs.
2. Courts of Bankruptcy.

Chapter 3. Bankrupts

Secs.
3. Acts of bankruptcy.
4. Who may become bankrupts.
5. Partners.
6. Exemptions of bankrupts.
7. Duties of bankrupts.
8. Death or insanity of bankrupts.
9. Protection and detention of bankrupts.
10. Extradition of bankrupts.
11. Suits by and against bankrupts.
12. Compositions, when confirmed.
13. Compositions, when set aside.
14. Discharges, when granted.
15. Discharges, when revoked.
16. Co-debtors of bankrupts.
17. Debts not affected by a discharge.
Chapter 4. Courts And Procedure Therein

Secs.
18. Process, pleadings and adjudications.
19. Jury trials.
20. Oaths, affirmations. 21. Evidence.
22. References of cases after adjudications.
23. Jurisdiction of United States and State Courts.
24. Jurisdiction of Appellate Courts.
25. Appeals and writs of error.
26. Arbitration of controversies.
27. Compromises.
28. Designation of newspapers.
29. Offenses.
30. Rules, forms and orders.
31. Computation of time.
32. Transfer of cases.

Chapter 5. Officers, Their Duties And Compensation

Secs.
33. Creation of two offices.
34. Appointment, removal and districts of referees.
35. Qualifications of referees.
36. Oath of office of referees.
37. Number of referees.
38. Jurisdiction of referees.
39. Duties of referees.
40. Compensation of referees.
41. Contempts before referees.
42. Records of referees.
43. Referee's absence or disability.
44. Appointment of trustees.
45. Qualifications of trustees.
46. Death or removal of trustees.
47. Duties of trustees.
48. Compensation of trustees, receivers and marshals.
49. Accounts and papers of trustees.
50. Bonds of referees and trustees.
51. Duties of clerks.
52. Compensation of clerks and marshals.
53. Duties of attorney general.
54. Statistics of bankruptcy proceedings.

Chapter 6. Creditors

Secs.
55. Meetings of creditors.
56. Voters at meetings of creditors.
57. Proof and allowance of claims.
58. Notice to creditors.
59. Who may file and dismiss petitions.
60. Preferred creditors.

Chapter 7. Estates

Secs.
61. Depositories for money.
62. Expenses of administering estates.
63. Debts which may be proved.
64. Debts which have priority.
65. Declaration and payment of dividends.
66. Unclaimed dividends.
67. Liens.
68. Setoffs and counterclaims.
69. Possession of property.
70. Title to property.
71. When act shall take effect.
72. Indexes, etc, by clerks.
73. Express limitation on fees.
An Act to establish a uniform system of bankruptcy throughout the United States.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled.
Chapter 1. The Federal Bankruptcy Law Definitions
Section 1. Meaning of Words and Phrases. - a. The words and phrases used in this Act and in proceedings pursuant
hereto shall, unless the same be inconsistent with the context, be construed as follows:
(1) "A person against whom a petition has been filed" shall include a person who has filed a voluntary petition;
(2) "Adjudication" shall mean the date of the entry of a decree that the defendant, in a bankruptcy proceeding, is a
bankrupt, or if such decree is appealed from, then the date when such decree is finally confirmed;
(3) "Appellate courts" shall include the circuit courts of appeals of the United States, the supreme courts of the
Territories, and the Supreme Court of the United States;
(4) "Bankrupt" shall include a person against whom an involuntary petition or an application to set a composition aside
or to revoke a discharge has been filed, or who has filed a voluntary petition, or who has been adjudged a bankrupt;
(5) "Clerk" shall mean the clerk of a court of bankruptcy;
(6) "Corporations" shall mean all bodies having any of the powers and privileges of private corporations not possessed
by individuals or partnerships, and shall include limited or other partnership associations organized under laws making
the capital subscribed alone responsible for the debts of the association;
(7) "Court" shall mean the court of bankruptcy in which the proceedings are pending, and may include the referee;
(8) "Courts of bankruptcy" shall include the district courts of the United States and of the Territories, the supreme court
of the District of Columbia, and the United States court of the Indian Territory, and of Alaska;
(9) "Creditor" shall include any one who owns a demand or claim provable in bankruptcy, and may include his duly
authorized agent, attorney, or proxy;
(10) "Date of bankruptcy," or "time of bankruptcy," or "commencement of proceedings," or "bankruptcy," with reference
to time, shall mean the date when the petition was filed;
(11) "Debt" shall include any debt, demand, or claim provable in bankruptcy;
(12) "Discharge" shall mean the release of a bankrupt from all of his debts which are provable in bankruptcy, except
such as are excepted by this Act;
(13) "Document" shall include any book, deed, or instrument in writing;
(14) "Holiday" shall include Christmas, the Fourth of July, the Twenty-second of February, and any day appointed by
the President of the United States or the Congress of the United States as a holiday or as a day of public fasting or
thanksgiving;
(15) A person shall be deemed insolvent within the provisions of this Act whenever the aggregate of his property,
exclusive of any property which he may have conveyed, transferred, concealed, or removed, or permitted to be
concealed or removed, with intent to defraud, hinder or delay his creditors, shall not, at a fair valuation, be sufficient in
amount to pay his debts;
(16) "Judge" shall mean a judge of a court of bankruptcy, not including the referee;
(17) "Oath" shall include affirmation;
(18) "Officer" shall include clerk, marshal, receiver, referee, and trustee, and the imposing of a duty upon or the
forbidding of an act by any officer shall include his successor and by any person authorized by law to perform the
duties of such officer;
(19) "Persons" shall include corporations, except where otherwise specified, and officers, partnerships, and women,
and when used with reference to the commission of acts which are herein forbidden shall include persons who are
participants in the forbidden acts, and the agents, officers, and members of the board of directors or trustees, or other
similar controlling bodies or corporations;
(20) "Petition" shall mean a paper filed in a court of bankruptcy or with a clerk or deputy clerk by a debtor praying for
the benefits of this Act, or by creditors alleging the commission of an act of bankruptcy by a debtor therein named;
(21) "Referee" shall mean the referee who has jurisdiction of the case or to whom the case has been referred, or
anyone acting in his stead;
(22) "Conceal" shall include secrete, falsify, and mutilate;
(23) "Secured creditor" shall include a creditor who has security for his debt upon the property of the bankrupt of a
nature to be assignable under this Act, or who owns such a debt for which some indorser, surety, or other persons
secondarily liable for the bankrupt has such security upon the bankrupt's assets;
(24) "States" shall include the Territories, the Indian Territory, Alaska, and the District of Columbia;
(25) "Transfer" shall include the sale and every other and different mode of disposing of or parting with property, or the
possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security;
(26) "Trustee" shall include all of the trustees of an estate;
(27) "Wage-earner" shall mean an individual who works for wages, salary, or hire, at a rate of compensation not
exceeding one thousand five hundred dollars per year;
(28) Words importing the masculine gender may be applied to and include corporations, partnerships, and women;
(29) Words importing the plural number may be applied to and mean only a single person or thing;
(30) Words importing the singular number may be applied to and mean several persons or things.

Chapter II. Creation Of Courts Of Bankruptcy And Their Jurisdiction

Section 2. That the courts of bankruptcy as hereinbefore defined, viz., The district courts of the United States in the
several states, The supreme court of the District of Columbia, The district courts of the several Territories, and The
United States courts in the Indian Territory and the District of Alaska, are hereby made courts of bankruptcy, and are
hereby invested, within their respective territorial limits as now established, or as they may be hereafter changed, with
such jurisdiction at law and in equity as will enable them to exercise original jurisdiction in bankruptcy proceedings, in
vacation in chambers and during their respective terms, as they are now or may be hereafter held, to
(1) Adjudge persons bankrupt who have had their principal place of business, resided, or had their domicile within their
respective territorial jurisdictions for the preceding six months or the greater portion thereof, or who do not have their
principal place of business, reside, or have their domicile within the United States, but have property within their
jurisdictions, or who have been adjudged bankrupts by courts of competent jurisdiction without the United States and
have property within their jurisdictions;
(2) Allow claims, disallow claims, reconsider allowed or disallowed claims, and allow or disallow them against bankrupt
estates;
(3) Appoint receivers or the marshals, upon application of parties in interest, in case the courts shall find it absolutely
necessary for the preservation of estates, to take charge of the property of bankrupts after the filing of the petition and
until it is dismissed or the trustee is qualified;
(4) Arraign, try, and punish bankrupts, officers, and other persons, and the agents, officers, members of the board of
directors or trustees, or other similar controlling bodies, of corporations for violations of this Act, in accordance with the
laws of procedure of the United States now in force, or such as may be hereafter enacted, regulating trials for the
alleged violation of laws of the United States;
(5) Authorize the business of bankrupts to be conducted for limited periods by receivers, the marshals, or trustees, if
necessary in the best interests of the estates, and allow such officers additional compensation for such services, as
provided by section 48 of this Act;
(6) Bring in and substitute additional persons or parties in proceedings in bankruptcy when necessary for the complete
determination of a matter in controversy;
(7) Cause the estates of bankrupts to be collected, reduced to money and distributed, and determine controversies in
relation thereto, except as herein otherwise provided;
(8) Close estates whenever it appears that they have been fully administered, by approving the final accounts and
discharging the trustees, and reopen them whenever it appears they were closed before being fully administered;
(9) Confirm or reject compositions between debtors and their creditors, and set aside compositions and reinstate the
cases;
(10) Consider and confirm, modify or overrule, or return, with instructions for further proceedings, records and findings
certified to them by referees;
(11) Determine all claims of bankrupts to their exemptions;
(12) Discharge or refuse to discharge bankrupts and set aside discharges and reinstate the cases;
(13) Enforce obedience by bankrupts, officers, and other persons to all lawful orders, by fine or imprisonment or fine
and imprisonment;
(14) Extradite bankrupts from their respective districts to other districts;
(15) Make such orders, issue such process, and enter such judgments in addition to those specifically provided for as
may be necessary for the enforcement of the provisions of this Act;
(16) Punish persons for contempts committed before referees;
(17) Pursuant to the recommendation of creditors, or when they neglect to recommend the appointment of trustees,
appoint trustees, and upon complaints of creditors, remove trustees for cause upon hearings and after notices to them;
(18) Tax costs, whenever they are allowed by law, and render judgments therefor against the unsuccessful party, or
the successful party for cause, or in part against each of the parties, and against estates, in proceedings in bankruptcy;
(19) Transfer cases to other courts of bankruptcy; and
(20) Exercise ancillary jurisdiction over persons or property within their respective territorial limits in aid of a receiver or
trustee appointed in any bankruptcy proceedings pending in any other court of bankruptcy.
Nothing in this section contained shall be construed to deprive a court of bankruptcy of any power it would possess
were certain specific powers not herein enumerated.
Chapter III. Bankrupts
Section 3. Acts of Bankruptcy. - a. Acts of bankruptcy by a person shall consist of his having
(1) Conveyed, transferred, concealed, or removed, or permitted to be concealed or removed, any part of his property
with intent to hinder, delay, or defraud his creditors, or any of them; or
(2) Transferred, while insolvent, any portion of his property to one or more of his creditors with intent to prefer such
creditors over his other creditors; or
(3) Suffered or permitted, while insolvent, any creditor to obtain a preference through legal proceedings, and not having
at least five days before a sale or final disposition of any property affected by such preference vacated or discharged
such preference; or
(4) Made a general assignment for the benefit of his creditors, or, being insolvent, applied for a receiver or trustee for
his property or because of insolvency a receiver or trustee has been put in charge of his property under the laws of a
State, of a Territory, or of the United States; or
(5) Admitted in writing his inability to pay his debts and his willingness to be adjudged a bankrupt on that ground.
b. A petition may be filed against a person who is insolvent and who has committed an act of bankruptcy within four
months after the commission of such act. Such time shall not expire until four months after (1) the date of the recording
or registering of the transfer or assignment when the act consists in having made a transfer of any of his property with
intent to hinder, delay, or defraud his creditors or for the purpose of giving a preference as hereinbefore provided, or a
general assignment for the benefit of his creditors, if by law such recording or registering is required or permitted, or, if
it is not, from the date when the beneficiary takes notorious, exclusive, or continuous possession of the property unless
the petitioning creditors have received actual notice of such transfer or assignment.
c. It shall be a complete defense to any proceedings in bankruptcy instituted under the first subdivision of this section
to allege and prove that the party proceeded against was not insolvent as defined in this Act at the time of the filing the
petition against him, and if solvency at such date is proved by the alleged bankrupt the proceedings shall be dismissed,
and under said subdivision one the burden of proving solvency shall be on the alleged bankrupt.
d. Whenever a person against whom a petition has been filed as hereinbefore provided under the second and third
subdivisions of this section takes issue with and denies the allegation of his insolvency, it shall be his duty to appear in
court on the hearing, with his books, papers, and accounts, and submit to an examination, and give testimony as to all
matters tending to establish solvency or insolvency, and in case of his failure to so attend and submit to examination
the burden of proving his solvency shall rest upon him.
e. Whenever a petition is filed by any person for the purpose of having another adjudged a bankrupt, and an
application is made to take charge of and hold the property of the alleged bankrupt, or any part of the same, prior to the
adjudication and pending a hearing on the petition, the petitioner or applicant shall file in the same court a bond with at
least two good and sufficient sureties who shall reside within the jurisdiction of said court, to be approved by the court
or a judge thereof, in such sum as the court shall direct, conditioned for the payment, in case such petition is
dismissed, to the respondent, his or her personal representatives, all costs, expenses, and damages occasioned by
such seizure, taking, and detention of the property of the alleged bankrupt.
If such petition be dismissed by the court or withdrawn by the petitioner, the respondent or respondents shall be
allowed all costs, counsel fees, expenses, and damages occasioned by such seizure, taking, or detention of such
property. Counsel fees, costs, expenses, and damages shall be fixed and allowed by the court, and paid by the
obligors in such bond.
SEC. 4. Who May Become Bankrupts. - a. Any person except a municipal, railroad, insurance or banking corporation,
shall be entitled to the benefits of this Act as a voluntary bankrupt.
b. Any natural person, except a wage-earner or a person engaged chiefly in farming or the tillage of the soil, any
unincorporated company, and any moneyed, business, or commercial corporation, except a municipal, railroad,
insurance, or banking corporation, owing debts to the amount of one thousand dollars or over, may be adjudged an
involuntary bankrupt upon default or an impartial trial, and shall be subject to the provisions and entitled to the benefits
of this Act.
The bankruptcy of a corporation shall not release its officers, directors, or stockholders, as such, from any liability
under the laws of a State or Territory or of the United States.
SEC. 5. Partners. - a. A partnership, during the continuation of the partnership business, or after its dissolution and
before the final settlement thereof, may be adjudged a bankrupt.
b. The creditors of the partnership shall appoint the trustee; in other respects so far as possible the estate shall be
administered as herein provided for other estates.
c. The court of bankruptcy which has jurisdiction of one of the partners may have jurisdiction of all the partners and of
the administration of the partnership and individual property.
d. The trustees shall keep separate accounts of the partnership property and of the property belonging to the individual
partners.
e. The expenses shall be paid from the partnership property and the individual property in such proportions as the
court shall determine.
f. The net proceeds of the partnership property shall be appropriated to the payment of the partnership debts, and the
net proceeds of the individual estate of each partner to the payment of his individual debts. Should any surplus remain
of the property of any partner after paying his individual debts, such surplus shall be added to the partnership assets
and be applied to the payment of the partnership debts. Should any surplus of the partnership property remain after
paying the partnership debts, such surplus shall be added to the assets of the individual partners in the proportion of
their respective interests in the partnership.
g. The court may permit the proof of the claim of the partnership estate against the individual estates, and vice versa,
and may marshal the assets of the partnership estate and individual estates so as to prevent preferences and secure
the equitable distribution of the property of the several estates.
h. In the event of one or more but not all of the members of a partnership being adjudged bankrupt, the partnership
property shall not be administered in bankruptcy, unless by consent of the partner or partners not adjudged bankrupt;
but such partner or partners adjudged bankrupt shall settle the partnership business as expeditiously as its nature will
permit, and account for the interest of the partner or partners adjudged bankrupt.

Bankrupts. Part 2
SEC. 6. Exemptions of Bankrupts. - a. This Act shall not affect the allowance to bankrupts of the exemptions which are
prescribed by the State laws in force at the time of the filing of the petition in the State wherein they have had their
domicile for the six months or the greater portion thereof immediately preceding the filing of the petition.
SEC. 7. Duties of Bankrupts. - a. The bankrupt shall
(1) Attend the first meeting of his creditors, if directed by the court or a judge thereof to do so, and the hearing upon his
application for a discharge, if filed;
(2) Comply with all lawful orders of the court;
(3) Examine the correctness of all proofs of claims filed against his estate;
(4) Execute and deliver such papers as shall be ordered by the court;
(5) Execute to his trustee transfers of all his property in foreign countries;
(6) Immediately inform his trustee of any attempt, by his creditors or other persons, to evade the provisions of this Act,
coming to his knowledge;
(7) In case of any person having to his knowledge proved a false claim against his estate, disclose that fact
immediately to his trustee;
(8) Prepare, make oath to, and file in court within ten days, unless further time is granted, after the adjudication, if an
involuntary bankrupt, and with the petition if a voluntary bankrupt, a schedule of his property, showing the amount and
kind of property, the location thereof, its money value in detail, and a list of his creditors, showing their residences, if
known; if unknown, that fact to be stated; the amounts due each of them, the consideration thereof, the security held by
them, if any, and a claim for such exemptions as he may be entitled to, all in triplicate, one copy of each for the clerk,
one for the referee, and one for the trustee; and
(9) When present at the first meeting of his creditors, and at such other time as the court shall order, submit to an
examination concerning the conducting of his business, the cause of his bankruptcy, his dealings with his creditors and
other persons, the amount, kind, and whereabouts of his property, and, in addition, all matters which may affect the
administration and settlement of his estate; but no testimony given by him shall be offered in evidence against him in
any criminal proceeding.
Provided, however, That he shall not be required to attend a meeting of his creditors, or at or for an examination at a
place more than one hundred and fifty miles distant from his home or principal place of business, or to examine claims
except when presented to him, unless ordered by the court, or a judge thereof, for cause shown, and the bankrupt shall
be paid his actual expenses from the estate when examined or required to attend at any place other than the city,
town, or village of his residence.
SEC. 8. Death or Insanity of Banrupts. - a. The death or insanity of a bankrupt shall not abate the proceedings, but the
same shall be conducted and concluded in the same manner, so far as possible, as though he had not died or become
insane: Provided, That in case of death the widow and children shall be entitled to all rights of dower and allowance
fixed by the laws of the State of the bankrupt's residence.
SEC. 9. Protection and Detention of Bankrupts. - a. A bankrupt shall be exempt from arrest upon civil process except in
the following cases: (1) When issued from a court of bankruptcy for contempt or disobedience of its lawful orders; (2)
when issued from a State court having jurisdiction, and served within such State, upon a debt or claim from which his
discharge in bankruptcy would not be a release, and in such case he shall be exempt from such arrest when in
attendance upon a court of bankruptcy or engaged in the performance of a duty imposed by this Act.
b. The judge may, at any time after the filing of a petition by or against a person, and before the expiration of one
month after the qualification of the trustee, upon satisfactory proof by the affidavits of at least two persons that such
bankrupt is about to leave the district in which he resides or has his principal place of business to avoid examination,
and that his departure will defeat the proceedings in bankruptcy, issue a warrant to the marshal, directing him to bring
such bankrupt forthwith before the court for examination. If upon hearing the evidence of the parties it shall appear to
the court or a judge thereof that the allegations are true and that it is necessary, he shall order such marshal to keep
such bankrupt in custody not exceeding ten days, but not imprison him, until he shall be examined and released or give
bail conditioned for his appearance for examination, from time to time, not exceeding in all ten days, as required by the
court, and for his obedience to all lawful orders made in reference thereto.
SEC. 10. Extradition of Bankrupts. - a. Whenever a warrant for the apprehension of a bankrupt shall have been issued,
and he shall have been found within the jurisdiction of a court other than the one issuing the warrant, he may be
extradited in the same manner in which persons under indictment are now extradited from one district within which a
district court has jurisdiction to another.

Bankrupts. Part 3
SEC. 11. Suits by and Against Bankrupts. - a. A suit which is founded upon a claim from which a discharge would be a
release, and which is pending against a person at the time of the filing of a petition against him, shall be stayed until
after an adjudication or the dismissal of the petition; if such person is adjudged a bankrupt, such action may be further
stayed until twelve months after the date of such adjudication, or, if within that time such person applies for a
discharge, then until the question of such discharge is determined.
b. The court may order the trustee to enter his appearance and defend any pending suit against the bankrupt.
c. A trustee may, with the approval of the court, be permitted to prosecute as trustee any suit commenced by the
bankrupt prior to the adjudication, with like force and effect as though it had been commenced by him.
d. Suits shall not be brought by or against a trustee of a bankrupt estate subsequent to two years after the estate has
been closed.
Ses. 12. Compositions, When Confirmed. - a. A bankrupt may offer, either before or after adjudication, terms of
composition to his creditors after, but not before, he has been examined in open court or at a meeting of his creditors,
and has filed in court the schedule of his property and the list of his creditors required to be filed by bankrupts. In
compositions before adjudication the bankrupt shall file the required schedules, and thereupon the court shall call a
meeting of creditors for the allowance of claims, examination of the bankrupt, and preservation or conduct of estates,
at which meeting the judge or referee shall preside; and action upon the petition for adjudication shall be delayed until
it shall be determined whether such composition shall be confirmed.
b. An application for the confirmation of a composition may be filed in the court of bankruptcy after, but not before, it
has been accepted in writing by a majority in number of all creditors whose claims have been allowed, which number
must represent a majority in amount of such claims, and the consideration to be paid by the bankrupt to his creditors,
and the money necessary to pay all debts which have priority and the cost of the proceedings, have been deposited in
such place as shall be designated by and subject to the order of the judge.
c. A date and place, with reference to the convenience of the parties in interest, shall be fixed for the hearing upon
each application for the confirmation of a composition, and such objections as may be made to its confirmation.
d. The judge shall confirm a composition if satisfied that (1) it is for the best interests of the creditors: (2) the bankrupt
has not been guilty of any of the acts or failed to perform any of the duties which would be a bar to his discharge; and
(3) the offer and its acceptance are in good faith and have not been made or procured except as herein provided, or by
any means, promises, or acts herein forbidden.
e. Upon the confirmation of a composition, the consideration shall be distributed as the judge shall direct, and the case
dismissed. Whenever a composition is not confirmed, the estate shall be administered in bankruptcy as herein
provided.
SEC. 13. Compositions, When Set Aside. - a. The judge may, upon the application of parties in interest filed at any
time within six months after a composition has been confirmed, set the same aside and reinstate the case if it shall be
made to appear upon a trial that fraud was practiced in the procuring of such compensation, and that the knowledge
thereof has come to the petitioners since the confirmation of such composition.
SEC. 14. Discharges, When Granted. - a. Any person may, after the expiration of one month and within the next twelve
months subsequent to being adjudged a bankrupt, file an application for discharge in the court of bankruptcy in which
the proceedings are pending; if it shall be made to appear to the judge that the bankrupt was unavoidably prevented
from filing it within such time, it may be filed within but not after the expiration of the next six months.
b. The judge shall hear the application for a discharge, and such proofs and pleas as may be made in opposition
thereto by the trustees or other parties in interest, at such time as will give the trustees or parties in interest a
reasonable opportunity to be fully heard, and investigate the merits of the application and discharge the applicant
unless he has (1) committed an offense punishable by imprisonment as herein provided; or (2) with intent to conceal
his financial condition, destroyed concealed or failed to keep books of account or records from such condition might be
ascertained; or (3) obtained money or property on credit from any person upon a materially false statement in writing
made by him to such person or his representative for the purpose of obtaining credit from such person; or (4) at any
time subsequent to the first day of the four months immediately preceding the filing of the petition transferred, removed,
destroyed, or concealed, or permitted to be removed, destroyed, or concealed any of his property with intent to hinder,
delay, or defraud his creditors; or (5) in voluntary proceedings been granted a discharge in bankruptcy within six years;
or (6) in the course of the proceedings in bankruptcy refused to obey any lawful order of or to answer any material
question approved by the court. Provided; that a trustee shall not interpose objections to a bankrupt's discharge until
he shall be authorized so to do at a meeting of creditors called for that purpose.
c. The confirmation of a composition shall discharge the bankrupt from his debts, other than those agreed to be paid by
the terms of the composition and those not affected by a discharge.
SEC. 15. Discharges, When Revoked. - a. The judge may, upon the application of parties in interest who have not
been guilty of undue laches, filed at any time within one year after a discharge shall have been granted, revoke it upon
a trial if it shall be made to appear that it was obtained through the fraud of the bankrupt, and that the knowledge of the
fraud has come to the petitioners since the granting of the discharge, and that the actual facts did not warrant the
discharge.
SEC. 16. Co-debtors of Bankrupts. - a. The liabiliy of a person who is a co-debtor with, or guarantor or in manner
surety for, a bankrupt shall not be altered by the discharge of such bankrupt
SEC. 17. Debts not Affected by a Discharge. - a. A discharge in bankruptcy shall release a bankrupt from all of his
provable debts, except such as
(1) Are due as a tax levied by the United States, the State, county, district, or municipality in which he resides;
(2) Are liabilities for obtaining property by false pretenses or false representations, or for willful and malicious injuries to
the person or property of another, or for alimony due or to become due, or for maintenance or support of wife or child,
or for seduction of an unmarried female, or for criminal conversation;
(3) Have not been duly scheduled in time for proof and allowance, with the name of the creditor if known to the
bankrupt, unless such creditor had notice or actual knowledge of the proceedings in bankruptcy; or
(4) Were created by his fraud, embezzlement, misappropriation, or defalcation while acting as an officer or in any
fiduciary capacity.
Chapter IV. Courts And Procedure Therein
SEC. 18. Process, Pleadings, and Adjudications. - a. Upon the filing of a petition for involuntary bankruptcy, service
thereof, with a writ of subpoena, shall be made upon the person therein named as defendant in the same manner that
service of such process is now had upon the commencement of a suit in equity in the courts of the United States,
except that it shall be returnable within fifteen days, unless the judge shall for cause fix a longer time; but in case
personal service cannot be made, then notice shall be given by publication in the same manner and for the same time
as provided by law for notice by publication in suits to enforce a legal or equitable lien in courts of the United States,
except that, unless the judge shall otherwise direct, the order shall be published not more than once a week for two
consecutive weeks, and the return day shall be ten days after the last publication unless the judge shall for cause fix a
longer time.
b. The bankrupt, or any creditor, may appear and plead to the petition within five days after the return day, or within
such further time as the court may allow.
c. All pleadings setting up matters of fact shall be verified under oath.
d. If the bankrupt, or any of his creditors, shall appear, within the time limited, and controvert the facts alleged in the
petition, the judge shall determine, as soon as may be, the issues presented by the pleadings, without the intervention
of a jury, except in cases where a jury trial is given by this Act, and make the adjudication or dismiss the petition.
e. If on the last day within which pleadings may be filed none are filed by the bankrupt or any of his creditors, the judge
shall on the next day, if present, or as soon thereafter as practicable, make the adjudication or dismiss the petition.
f. If the judge is absent from the district, or the division of the district in which the petition is pending, on the next day
after the last day on which pleadings may be filed, and none have been filed by the bankrupt or any of his creditors, the
clerk shall forthwith refer the case to the referee.
g. Upon the filing of a voluntary petition the judge shall hear the petition and make the adjudication or dismiss the
petition. If the judge is absent from the district, or the division of the district in which the petition is filed, at the time of
the filing, the clerk shall forthwith refer the case to the referee.
SEC. 19. Jury Trials. - a. A person against whom an involuntary petition has been filed shall be entitled to have a trial
by jury, in respect to the question of his insolvency, except as herein otherwise provided, and any act of bankruptcy
alleged in such petition to have been committed, upon filing a written application therefor at or before the time within
which an answer may be filed. If such application is not filed within such time, a trial by jury shall be deemed to have
been waived.
b. If a jury is not in attendance upon the court, one may be specially summoned for the trial, or the case may be
postponed, or, if the case is pending in one of the district courts within the jurisdiction of a circuit court of the United
States, it may be certified for trial to the circuit court sitting at the same place, or by consent of parties when sitting at
any other place in the same district, if such circuit court has or is to have a jury first in attendance.
c. The right to submit matters in controversy, or an alleged offense under this Act, to a jury shall be determined and
enjoyed, except as provided by this Act, according to the United States laws now in force or such as may be hereafter
enacted in relation to trials by jury.
SEC. 20. Oaths, Affirmations. - a. Oaths required by this Act, except upon hearings in court, may be administered by
(1) referees; (2) officers authorized to administer oaths in proceedings before the courts of the United States, or under
the laws of the State where the same are to be taken; and (3) diplomatic or consular officers of the United States in any
foreign country.
b. Any person conscientiously opposed to taking an oath may, in lieu thereof, affirm. Any person who shall affirm
falsely shall be punished as for the making of a false oath.
SEC. 21. Evidence. - a. A court of bankruptcy may, upon application of any officer, bankrupt, or creditor, by order
require any designated person, including the bankrupt and his wife, to appear in court or before a referee or the judge
of any State court, to be examined concerning the acts, conduct, or property of a bankrupt whose estate is in process
of administration under this Act: Provided, That the wife may be examined only touching business transacted by her or
to which she is a party, and to determine the fact whether she has transacted or been a party to any business of the
bankrupt.
b. The right to take depositions in proceedings under this Act shall be determined and enjoyed according to the United
States laws now in force, or such as may be hereafter enacted relating to the taking of depositions, except as herein
provided.
c. Notice of the taking of depositions shall be filed with the referee in every case. When depositions are to be taken in
opposition to the allowance of a claim notice shall also be served upon the claimant, and when in opposition to a
discharge notice shall also be served upon the bankrupt.
d. Certified copies of proceedings before a referee, or of papers, when issued by the clerk or referee, shall be admitted
as evidence with like force and effect as certified copies of the records of district courts of the United States are now or
may hereafter be admitted as evidence.
e. A certified copy of the order approving the bond of a trustee shall constitute conclusive evidence of the vesting in
him of the title to the property of the bankrupt, and if recorded shall impart the same notice that a deed from the
bankrupt to the trustee if recorded would have imparted had not bankruptcy proceedings intervened.
f. A certified copy of an order confirming or setting aside a composition, or granting or setting aside a discharge, not
revoked, shall be evidence of the jurisdiction of the court, the regularity of the proceedings, and of the fact that the
order was made.
g. A certified copy of an order confirming a composition shall constitute evidence of the revesting of the title of his
property in the bankrupt, and if recorded shall impart the same notice that a deed from the trustee to the bankrupt if
recorded would impart.

Courts And Procedure Therein. Continued

SEC. 22. Reference of Cases After Adjudication. - a. After a person has been adjudged a bankrupt the judge may
cause the trustee to proceed with the administration of the estate, or refer it (1) generally to the referee or specially with
only limited authority to act in the premises or to consider and report upon specified issues; or (2) to any referee within
territorial jurisdiction of the court, if the convenience of parties in interest will be served thereby, or for cause, or if the
bankrupt does not do business, reside, or have his domicile in the district.
b. The judge may, at any time, for the convenience of parties or for cause, transfer a case from one referee to another.
SEC. 23. Jurisdiction of United States and State Courts. - a. The United States circuit courts shall have jurisdiction of
all controversies at law and in equity, as distinguished from proceedings in bankruptcy, between trustees as such and
adverse claimants concerning the property acquired or claimed by the trustees, in the same manner and to the same
extent only as though bankruptcy proceedings had not been instituted and such controversies had been between the
bankrupts and such adverse claimants.
b. Suits by the trustee shall only be brought or prosecuted in the courts where the bankrupt, whose estate is being
administered by such trustee, might have brought or prosecuted them if proceedings in bankruptcy had not been
instituted, unless by consent of the proposed defendant, except suits for the recovery of property under section sixty,
subdivision b; section sixty-seven, subdivision e; and section seventy, subdivision e.
c. The United States circuit courts shall have concurrent jurisdiction with the courts of bankruptcy, within their
respective territorial limits, of the offenses enumerated in this Act.
SEC. 24. Jurisdiction of Appellate Courts. - a. The Supreme Court of the United States, the circuit court of appeals of
the United States, and the supreme courts of the Territories, in vacation in chambers and during their respective terms,
as now or as they may be hereafter held, are hereby invested with appellate jurisdiction of controversies arising in
bankruptcy proceedings from the courts of bankruptcy from which they have appellate jurisdiction in other cases. The
Supreme Court of the United States shall exercise a like jurisdiction from courts of bankruptcy not within any organized
circuit of the United States and from the supreme court of the District of Columbia.
b. The several circuit courts of appeal shall have jurisdiction in equity, either interlocutory or final, to superintend and
revise in matter of law the proceedings of the several inferior courts of bankruptcy within their jurisdiction. Such power
shall be exercised on due notice and petition by any party aggrieved.
SEC. 25. Appeals and Writs of Error. - a. That appeals, as in equity cases, may be taken in bankruptcy proceedings
from the courts of bankruptcy to the circuit court of appeals of the United States, and to the supreme court of the
Territories, in the following cases, to wit,
(1) From a judgment adjudging or refusing to adjudge the defendant a bankrupt;
(2) From a judgment granting or denying a discharge; and
(3) From a judgment allowing or rejecting a debt or claim of five hundred dollars or over.
Such appeal shall be taken within ten days after the judgment appealed from has been rendered, and may be heard
and determined by the appellate court in term or vacation, as the case may be.
b. From any final decision of a court of appeals, allowing or rejecting a claim under this Act, an appeal may be had
under such rules and within such time as may be prescribed by the Supreme Court of the United States, in the
following cases and no other:
1. Where the amount in controversy exceeds the sum of two thousand dollars, and the question involved is one which
might have been taken on appeal or writ of error from the highest court of a State to the Supreme Court of the United
States; or
2. Where some Justice of the Supreme Court of the United States shall certify that in his opinion the determination of
the question or questions involved in the allowance or rejection of such claim is essential to a uniform construction of
this Act throughout the United States.
c. Trustees shall not be required to give bond when they take appeals or sue out writs of error.
d. Controversies may be certified to the Supreme Court of the United States from other courts of the United States, and
the former court may exercise jurisdiction thereof and issue writs of certiorari pursuant to the provisions of the United
States laws now in force or such as may be hereafter enacted.
SEC. 26. Arbitration of Controversies. - a. The trustee may, pursuant to the direction of the court, submit to arbitration
any controversy arising in the settlement of the estate.
b. Three arbitrators shall be chosen by mutual consent, or one by the trustee, one by the other party to the controversy,
and the third by the two so chosen, or if they fail to agree in five days after their appointment the court shall appoint the
third arbitrator.
c. The written finding of the arbitrators, or a majority of them, as to the issues presented, may be filed in court and shall
have like force and effect as the verdict of a jury.
SEC. 27. Compromises. - a. The trustee may, with the approval of the court, compromise any controversy arising in the
administration of the estate upon such terms as he may deem for the best interests of the estate.
SEC. 28. Designation of Newspapers. - a. Courts of bankruptcy shall by order designate a newspaper published within
their respective territorial districts, and in the county in which the bankrupt resides or the major part of his property is
situated, in which notices required to be published by this Act and orders which the court may direct to be published
shall be inserted. Any court may in a particular case, for the convenience of parties in interest, designate some
additional newspapers in which notices and orders in such case shall be published.
Sec 29. Offenses. - a. A person shall be punished, by imprisonment for a period not to exceed five years, upon
conviction of the offense of having knowingly and fraudulently appropriated to his own use, embezzled, spent, or
unlawfully transferred any property or secreted or destroyed any document belonging to a bankrupt estate which came
into his charge as trustee.
b. A person shall be punished, by imprisonment for a period not to exceed two years, upon conviction of the offense of
having knowingly and fraudulently
(1) Concealed while a bankrupt, or after his discharge, from his trustee any of the property belonging to his estate in
bankruptcy; or
(2) Made a false oath or account in, or in relation to, any proceeding in bankruptcy;
(3) Presented under oath any false claim for proof against the estate of a bankrupt, or used any such claim in
composition personally or by agent, proxy, or attorney, or as agent, proxy, or attorney; or
(4) Received any material amount of property from a bankrupt after the filing of the petition, with intent to defeat this
Act; or
(5) Extorted or attempted to extort any money or property from any person as a consideration for acting or forbearing to
act in bankruptcy proceedings.
c. A person shall be punished by fine, not to exceed five hundred dollars, and forfeit his office, and the same shall
thereupon become vacant, upon conviction of the offense of having knowingly
(1) Acted as a referee in a case in which he is directly or indirectly interested; or
(2) Purchased, while a referee, directly or indirectly, any property of the estate in bankruptcy of which he is referee; or
(3) Refused, while a referee or trustee, to permit a reason able opportunity for the inspection of the accounts relating to
the affairs of, and the papers and records of, estates in his charge by parties in interest when directed by the court so
to do.
d. A person shall not be prosecuted for any offense arising under this Act unless the indictment is found or the
information is filed in court within one year after the commission of the offense.
SEC. 30. Rules, Forms, and Orders. - a. All necessary rules, forms, and orders as to procedure and for carrying this
Act into force and effect shall be prescribed, and may be amended from time to time, by the Supreme Court of the
United States.
SEC. 31. Computation of Time. - a. Whenever time is enumerated by days in this Act, or in any proceeding in
bankruptcy, the number of days shall be computed by excluding the first and including the last, unless the last fall on a
Sunday or holiday.
in which event the day last included shall be the next day thereafter which is not a Sunday or a legal holiday.
SEC. 32. Transfer of Cases. - a. In the event petitions are filed against the same person, or against different members
of a partnership, in different courts of bankruptcy each of which has jurisdiction, the cases shall be transferred, by order
of the courts relinquishing jurisdiction, to and be consolidated by the one of such courts which can proceed with the
same for the greatest convenience of parties in interest.

Chapter V. Officers, Their Duties And Compensation

SEC. 33. Creation of Two Offices. - a. The offices of referee and trustee are hereby created.
SEC. 34. Appointment, Removal, and Districts of Referees. - a. Courts of bankruptcy shall, within the territorial limits of
which they respectively have jurisdiction, (1) appoint referees, each for a term of two years, and may, in their
discretion, remove them because their services are not needed or for other cause; and (2) designate, and from time to
time change, the limits of the districts of referees, so that each county, where the services of a referee are needed,
may constitute at least one district.
SEC. 35. Qualifications of Referees. - a. Individuals shall not be eligible to appointment as referees unless they are
respectively
(1) Competent to perform the duties of that office; (2) not holding any office of profit or emolument under the laws of the
United States or of any State other than commissioners of deeds, justices of the peace, masters in chancery, or
notaries public;
(3) Not related by consanguinity or affinity, within the third degree as determined by the common law, to any of the
judges of the courts of bankruptcy or circuit courts of the United States, or of the justices or judges of the appellate
courts of the districts wherein they may be appointed; and
(4) Residents of, or have their offices in, the territorial districts for which they are to be appointed.
SEC. 36. Oaths of Office of Referees. - a. Referees shall take the same oath of office as that prescribed for judges of
United States courts.
SEC. 37. Number of Referees. - a. Such number of referees shall be appointed as may be necessary to assist in
expeditiously transacting the bankruptcy business pending in the various courts of bankruptcy.
SEC. 38. Jurisdiction of Referees. - a. Referees respectively are hereby invested, subject always to a review by the
judge, within the limits of their districts as established from time to time, with jurisdiction to
(1) Consider all petitions referred to them by the clerks and make adjudications or dismiss the petitions;
(2) Exercise the powers vested in courts of bankruptcy for the administering of oaths to and the examination of persons
as witnesses and for requiring the production of documents in proceedings before them, except the power of
commitments;
(3) Exercise the powers of the judge for the taking possession and releasing of the property of the bankrupt in the
event of the issuance by the clerk of a certificate showing the absence of a judge from the judicial district, or the
division of the district, or his sickness, or inability to act;
(4) Perform such part of the duties, except as to questions arising out of the applications of bankrupts for compositions
or discharges, as are by this Act conferred on courts of bankruptcy and as shall be prescribed by rules or orders of the
courts of bankruptcy of their respective districts, except as herein otherwise provided; and
(5) Upon the application of the trustee during the examination of the bankrupt, or other proceedings, authorize the
employment of stenographers at the expense of the estates at a compensation not to exceed ten cents per folio for
reporting and transcribing the proceedings.
SEC. 39. Duties of Referees. - a. Referees shall
(1) Declare dividends and prepare and deliver to trustees dividend sheets showing the dividends declared and to
whom payable;
(2) Examine all schedules of property and lists of creditors filed by bankrupts and cause such as are incomplete or
defective to be amended;
(3) Furnish such information concerning the estate in process of administration before them as may be requested by
the parties in interest;
(4) Give notices to creditors as herein provided;
(5) Make up records embodying the evidence, or the substance thereof, as agreed upon by the parties in all contested
matters arising before them, whenever requested to do so by either of the parties thereto, together with their findings
therein, and transmit them to the judges;
(6) Prepare and file the schedules of property and lists of creditors required to be filed by the bankrupts, or cause the
same to be done, when the bankrupts fail, refuse, or neglect to do so;
(7) Safely keep, perfect, and transmit to the clerks the records, herein required to be kept by them, when the cases are
concluded;
(8) Transmit to the clerks such papers as may be on file before them whenever the same are needed in any
proceedings in courts, and in like manner secure the return of such papers after they have been used, or, if it be
impracticable to transmit the original papers, transmit certified copies thereof by mail;
(9) Upon application of any party in interest, preserve the evidence taken or the substance thereof as agreed upon by
the parties before them when a stenographer is not in attendance; and
(10) Whenever their respective offices are in the same cities or towns where the courts of bankruptcy convene, call
upon and receive from the clerks all papers filed in courts of bankruptcy which have been referred to them.
b. Referees shall not (1) act in cases in which they are directly or indirectly interested; (2) practice as attorneys and
counselors at law in any bankruptcy proceedings; or (3) purchase, directly or indirectly, any property of an estate in
bankruptcy.

Officers, Their Duties And Compensation. Part 2

SEC. 40. Compensation of Referees. - a. Referees shall received as full compensation for their services, payable after
they are rendered, a fee of fifteen dollars deposited with the clerk at the time the petition is filed in each case, except
when a fee is not required from a voluntary bankrupt, and twenty-five cents for every proof of claim filed for allowance
to be paid from the estate, if any, as a part of the cost of administration, and from estates which have been
administered before them one per centum commissions on all moneys disbursed to creditors by the trustee,-or one-half
of one per centum on the amount to be paid to creditors upon the confirmation of a composition.
b. Whenever a case is transferred from one referee to another the judge shall determine the proportion in which the fee
and commissions therefor shall be divided between the referees.
c In the event of the reference of a case being revoked before it is concluded, and when the case is specially referred,
the judge shall determine what part of the fee and commissions shall be paid to the referee.
SEC. 41. Contempts Before Referees. - a. A person shall not, in proceedings before a referee, (1) disobey or resist any
lawful order, process, or writ; (2) misbehave during a hearing or so near the place thereof as to obstruct the same; (3)
neglect to produce, after having been ordered to do so, any pertinent document; or (4) refuse to appear after having
been subpoenaed, or, upon appearing, refuse to take the oath as a witness, or, after having taken the oath, refuse to
be examined according to law;
Provided, That no person shall be required to attend as a witness before a referee at a place outside of the State of his
residence, and more than one hundred miles from such place of residence, and only in case his lawful mileage and fee
for one day's attendance shall be first paid or tendered to him.
b. The referee shall certify the facts to the judge, if any person shall do any of the things forbidden in this section. The
judge shall thereupon, in a summary manner, hear the evidence as to the acts complained of, and, if it is such as to
warrant him in so doing, punish such person in the same manner and to the same extent as for a contempt committed
before the court of bankruptcy, or commit such person upon the same conditions as if the doing of the forbidden act
had occurred with reference to the process of, or in the presence of, the court.
SEC. 42. Records of Referees. - a. The records of all proceedings in each case before a referee shall be kept as
nearly as may be in the same manner as records are now kept in equity cases in circuit courts of the United States.
b. A record of the proceedings in each case shall be kept in a separate book or books, and shall, together with the
papers on file, constitute the records of the case.
c. The book or books containing a record of the proceedings shall, when the case is concluded before the referee, be
certified to by him, and, together with such papers as are on file before him, be transmitted to the court of bankruptcy
and shall there remain as a part of the records of the court.
SEC. 43. Referee's Absence or Disability. - a. Whenever the office of a referee is vacant, or its occupant is absent or
disqualified to act, the judge may act, or may appoint another referee, or another referee holding an appointment under
the same court may, by order of the judge, temporarily fill the vacancy.
SEC. 44. Appointment of Trustees. - a. The creditors of a bankrupt estate shall, at their first meeting after the
adjudication or after a vacancy has occurred in the office of trustee, or after an estate has been reopened, or after a
composition has been set aside or a discharge revoked, or if there is a vacancy in the office of trustee, appoint one
trustee or three trustees of such estate. If the creditors do not appoint a trustee or trustees as herein provided, the
court shall do so.
SEC. 45. Qualifications of Trustees. - a. Trustees may be (1) individuals who are respectively competent to perform the
duties of that office, and reside or have an office in the judicial district within which they are appointed, or (2)
corporations authorized by their charters or by law to act in such capacity and having an office in the judicial district
within which they are appointed.
SEC. 46. Death or Removal of Trustees. - a. The death or removal of a trustee shall not abate any suit or proceedings
which he is prosecuting or defending at the time of his death or removal, but the same may be proceeded with or
defended by his joint trustee or successor in the same manner as though the same had been commenced or was
being defended by such joint trustee alone or by such successor.
SEC. 47. Duties of Trustees. - a. Trustees shall respectively
(1) Account for and pay over to the estates under their control all interest received by them upon property of such
estates;
(2) Collect and reduce to money the property of the estates for which they are trustees, under the direction of the court,
and close up the estate as expeditiously as is compatible with the best interests of the parties in interest; and such
trustees, as to all property in the custody or coming into the custody of the bankruptcy court, shall be deemed vested
with all the rights, remedies, and powers of a creditor holding a lien by legal or equitable proceedings thereof; and also,
as to all property not in the custody of the bankruptcy court, shall be deemed vested with all the rights, remedies, and
powers of a judgment creditor holding an execution duly returned unsatisfied.
(3) Deposit all money received by them in one of the designated depositories;
(4) Disburse money only by check or draft on the depositories in which it has been deposited;
(5) Furnish such information concerning the estates of which they are trustees and their administration as may be
requested by parties in interest;
(6) Keep regular accounts showing all amounts received and from what sources and all amounts expended and on
what accounts;
(7) Lay before the final meeting of the creditors detailed statements of the administration of the estates;
(8) Make final reports and file final accounts with the courts fifteen days before the days fixed for the final meetings of
the creditors;
(9) Pay dividends within ten days after they are declared by the referees;
(10) Report to the courts, in writing, the condition of the estates and the amounts of money on hand, and such other
details as may be required by the courts, within the first month after their appointment and every two months thereafter,
unless otherwise ordered by the courts; and
(11) Set apart the bankrupt's exemptions and report the items and estimated value thereof to the court as soon as
practicable after their appointment.
b. Whenever three trustees have been appointed for an estate, the concurrence of at least two of them shall be
necessary to the validity of their every act concerning the administration of the estate.
c. The trustee shall, within thirty days after the adjudication, file a certified copy of the decree of adjudication in the
office where conveyances of real estate are recorded in every county where the bankrupt owns real estate not exempt
from execution, and pay the fee for such filing, and he shall receive a compensation of fifty cents for each copy so filed,
which, together with the filing fee, shall be paid out of the estate of the bankrupt as a part of the cost and
disbursements of the proceedings.

Officers, Their Duties And Compensation. Part 3

SEC. 48. Compensation of Trustees, Receivers and Marshals. (a) Trustees shall receive for their services, payable
after they are rendered, a fee of five dollars deposited with the clerk at the time the petition is filed in each case, except
when a fee is not required from a voluntary bankrupt, and such commissions on all moneys disbursed or turned over to
any person, including lien holders, by them, as may be allowed by the courts, not to exceed six per centum on the first
five hundred dollars or less, four per centum on moneys in excess of five hundred dollars and less than fifteen hundred
dollars, two per centum on moneys in excess of fifteen hundred dollars and less than ten thousand dollars, and one per
centum on moneys in excess of ten thousand dollars. And in case of the confirmation of a composition after the trustee
has qualified the court may allow him as compensation, not to exceed one-half of one per centum of the amount to be
paid the creditors on such compensation.
(b) In the event of an estate being administered by three trustees instead of one trustee or by successive trustees, the
court shall apportion the fees and commissions between them according to the services actually rendered, so that
there shall not be paid to trustees for the administering of any estate a greater amount than one trustee would be
entitled to.
(c) The court may, in its discretion, withhold all compensation from any trustee who has been removed for cause.
(d) Receivers or marshals appointed pursuant to section two, subdivision three, of this Act shall receive for their
services, payable after they are rendered, compensation by way of commission upon the moneys disbursed or turned
over to any person, including lien holders, by them, and also upon the moneys turned over by them or afterwards
realized by the trustees from property turned over in kind by them to the trustees, as the court may allow, not to exceed
six per centum on the first five hundred dollars or less, four per centum on moneys in excess of five hundred dollars
and less than one thousand five hundred dollars, two per centum on moneys in excess of one thousand five hundred
dollars and less than ten thousand dollars, and one per centum on moneys in excess of ten thousand dollars:
Provided, That in case of the confirmation of a composition such commissions shall not exceed one-half of one per
centum of the amount to be paid creditors on such compositions: Provided further, That when the receiver or marshal
acts as a mere custodian and does not carry on the business of the bankrupt as provided in clause five of section two
of this Act, he shall not receive nor be allowed in any form or guise more than two per centum on the first thousand
dollars or less, and one-half of one per centum on all above one thousand dollars on moneys disbursed by him or
turned over by him to the trustee and on moneys subsequently realized from property turned over by him in kind to the
trustee: Provided further, That before the allowance of compensation notice of application therefor, specifying the
amount asked, shall be given to creditors in the manner indicated in section fifty-eight of this Act.
(e) Where the business is conducted by trustees, marshals, or receivers, as provided in clause five of section two of
this Act, the court may allow such officers additional compensation for such services by way of commissions upon the
moneys disbursed or turned over to any person, including lien holders, by them, and, in cases of receivers or marshals,
also upon the moneys turned over by them or afterwards realized by the trustees from property turned over in kind by
them to the trustees; such commissions not to exceed six per centum on the first five hundred dollars or less, four per
centum on moneys in excess of five hundred dollars and less than one thousand five hundred dollars, two per centum
on moneys in excess of one thousand five hundred dollars and less than ten thousand dollars, and one per centum on
moneys in excess of ten thousand dollars: Provided, That in case of the confirmation of a composition such
commission shall not exceed one-half of one per centum of the amount to be paid creditors on such composition:
Provided further, That before the allowance of compensation notice of application therefor, specifying the amount
asked, shall be given to creditors in the manner indicated in section fifty-eight of this Act.
SEC. 49. Accounts and Papers of Trustees. - a. The accounts and papers of trustees shall be open to the inspection of
officers and all parties in interest.
SEC. 50. Bonds of Referees and Trustees. - a. Referees, before assuming the duties of their offices, and within such
time as the district courts of the United States having jurisdiction shall prescribe, shall respectively qualify by entering
into bond to the United States in such sum as shall be fixed by such courts, not to exceed five thousand dollars, with
such sureties as shall be approved by such courts, conditioned for the faithful performance of their official duties.
b. Trustees, before entering upon the performance of their official duties, and within ten days after their appointment, or
within such further time, not to exceed five days, as the court may permit, shall respectively qualify by entering into
bond to the United States, with such sureties as shall be approved by the courts, conditioned for the faithful
performance of their official duties.
c. The creditors of a bankrupt estate, at their first meeting after the adjudication, or after a vacancy has occurred in the
office of trustee, or after an estate has been reopened, or after a composition has been set aside or a discharge
revoked, if there is a vacancy in the office of trustee, shall fix the amount of the bond of the trustee; they may at any
time increase the amount of the bond. If the creditors do not fix the amount of the bond of the trustee as herein
provided the court shall do so.
d. The court shall require evidence as to the actual value of the property of sureties.
e. There shall be at least two sureties upon each bond.
f. The actual value of the property of the sureties, over and above their liabilities and exemptions, on each bond shall
equal at least the amount of such bond.
g. Corporations organized for the purpose of becoming sureties upon bonds, or authorized by law to do so, may be
accepted as sureties upon the bonds of referees and trustees whenever the courts are satisfied that the rights of all
parties in interest will be thereby amply protected.
h. Bonds of referees, trustees, and designated depositories shall be filed of record in the office of the clerk of the court
and may be sued upon in the name of the United States for the use of any person injured by a breach of their
conditions.
i. Trustees shall not be liable, personally or on their bonds, to the United States, for any penalties or forfeitures incurred
by the bankrupts under this Act, of whose estates they are respectively trustees.
j. Joint trustees may give joint or several bonds.
k. If any referee or trustee shall fail to give bond, as herein provided and within the time limited, he shall be deemed to
have declined his appointment, and such failure shall create a vacancy in his office.
1. Suits upon referees' bonds shall not be brought subsequent to two years after the alleged breach of the bond.
m. Suits upon trustees bonds shall not be brought subsequent to two years after the estate has been closed.
Sec 51. Duties of Clerks. - a. Clerks shall respectively
(1) Account for, as for other fees received by them, the clerk's fee paid in each case and such other fees as may be
received for certified copies of records which may be prepared for persons other than officers;
(2) Collect the fees of the clerk, referee, and trustee in each case instituted before filing the petition, except the petition
of a proposed voluntary bankrupt which is accompannied by an affidavit stating that the petitioner is without, and can
not obtain, the money with which to pay such fees;
(3) Deliver to the referee upon application all papers which may be referred to them, or if the offices of such referees
are not in the same cities or towns as the offices of such clerks, transmit such papers by mail, and in like manner return
papers which were received from such referees after they have been used;
(4) And within ten days after each case has been closed pay to the referee, if the case was referred, the fee collected
for him, and to the trustee the fee collected for him at the time of filing the petition.
SEC. 52. Compensation of Clerks and Marshals. - a. Clerks shall respectively receive as full compensation for their
services to each estate, a filing fee of ten dollars, except when a fee is not required from a voluntary bankrupt.
b. Marshals shall respectively receive from the estate where an adjudication in bankruptcy is made, except as herein
otherwise provided, for the performance of their services in proceedings in bankruptcy, the same fees, and account for
them in the same way, as they are entitled to receive for the performance of the same or similar services in other cases
in accordance with laws now in force, or such as may be hereafter enacted fixing the compensation of marshals.
SEC. 53. Duties of Attorney-General. - a. The Attorney-General shall annually lay before Congress statistical tables
showing for the whole country, and by States, the number of cases during the year of voluntary and involuntary
bankruptcy; the amount of the property of the estates; the dividends paid and the expenses of administering such
estates; and such other like information as he may deem important.
SEC. 54. Statistics of Bankruptcy Proceedings. - a. Officers shall furnish in writing and transmit by mail such
information as is within their knowledge, and as may be shown by the records and papers in their possession, to the
Attorney-General, for statistical purposes, within ten days after being requested by him to do so.

Chapter VI. Creditors

SEC. 55. Meetings of Creditors. - a. The court shall cause the first meeting of the creditors of a bankrupt to be held, not
less than ten nor more than thirty days after the adjudication, at the county seat of the county in which the bankrupt has
had his principal place of business, resided, or had his domicile; or if that place would be manifestly inconvenient as a
place of meeting for the parties in interest, or if the bankrupt is one who does not do business, reside, or have his
domicile within the United States, the court shall fix a place for the meeting which is the most convenient for parties in
interest. If such meeting should by any mischance not be held within such time, the court shall fix the date, as soon as
may be thereafter, when it shall be held.
b. At the first meeting of creditors the judge or referee shall preside, and, before proceeding with the other business,
may allow or disallow the claims of creditors there presented, and may publicly examine the bankrupt or cause him to
be examined at the instance of any creditor.
c. The creditors shall at each meeting take such steps as may be pertinent and necessary for the promotion of the best
interests of the estate and the enforcement of this Act.
d. A meeting of creditors, subsequent to the first one, may be held at any time and place when all of the creditors who
have secured the allowance of their claims sign a written consent to hold a meeting at such time and place.
e. The court shall call a meeting of creditors whenever one-fourth or more in number of those who have proven their
claims shall file a written request to that effect; if such request is signed by a majority of claims, and contains a request
for such meeting to be held at a designated place, the court shall call such meeting at such place within thirty days
after the date of the filing of the request.
f. Whenever the affairs of the estate are ready to be closed a final meeting of creditors shall be ordered.
SEC. 56. Voters at Meetings of Creditors. - a. Creditors shall pass upon matters submitted to them at their mettings by
a majority vote in number and amount of claims of all creditors whose claims have been allowed and are present,
except as herein otherwise provided.
b. Creditors holding claims which are secured or have priority shall not, in respect to such claims, be entitled to vote at
creditor's meetings, nor shall such claims be counted in computing either the number of creditors or the amount of their
claims, unless the amounts of such claims exceed the values of such securities or priorities, and then only for such
excess.
SEC. 57. Proof and Allowance of Claims. - a. Proof of claims shall consist of a statement under oath, in writing, signed
by a creditor setting forth the claim, the consideration therefor, and whether any, and, if so what, securities are held
therefor, and whether any, and, if so what, payments have been made thereon, and that the sum claimed is justly
owing from the bankrupt to the creditor.
b. Whenever a claim is founded upon an instrument of writing, such instrument, unless lost or destroyed, shall be filed
with the proof of claim. If such instrument is lost or destroyed, a statement of such fact and of the circumstances of
such loss or destruction shall be filed under oath with the claim. After the claim is allowed or disallowed, such
instrument may be withdrawn by permission of the court, upon leaving a copy thereof on file with the claim.
c. Claims after being proved may, for the purpose of allowance, be filed by the claimants in the court where the
proceedings are pending or before the referee if the case has been referred.
d. Claims which have been duly proved shall be allowed, upon receipt by or upon presentation to the court, unless
objection to their allowance shall be made by parties in interest, or their consideration be continued for cause by the
court upon its own motion.
e. Claims of secured creditors and those who have priority may be allowed to enable such creditors to participate in the
proceedings at creditors' meetings held prior to the determination of the value of their securities or priorities, but shall
be allowed for such sums only as to the court seem to be owing over and above the value of their securities or
priorities.
f. Objections to claims shall be heard and determined as soon as the convenience of the court and the best interests of
the estates and the claimants will permit.
g. The claims of creditors who have received preferences, voidable under section sixty, subdivision b, or to whom
conveyances, transfers, assignments, or incumbrances, void or voidable under section sixty-seven, subdivision e, have
been made or given, shall not be allowed unless such creditors shall surrender such preferences, conveyances,
transfers, assignments, or incumbrances.
h. The value of securities held by secured creditors shall be determined by converting the same into money according
to the terms of the agreement pursuant to which such securities were delivered to such creditors or by such creditors
and the trustee, by agreement, arbitration, compromise, or litigation, as the court may direct, and the amount of such
value shall be credited upon such claims, and a dividend shall be paid only on the unpaid balance.
i. Whenever a creditor, whose claim against a bankrupt estate is secured by the individual undertaking of any person,
fails to prove such claim, such person may do so in the creditor's name, and if he discharge such undertaking in whole
or in part he shall be subrogated to that extent to the rights of the creditor.
j. Debts owing to the United States, a state, a county, a district, or a municipality as a penalty or forfeiture shall not be
allowed, except for the amount of the pecuniary loss sustained by the act, transaction, or proceeding out of which the
penalty or forfeiture arose, with reasonable and actual costs occasioned thereby and such interest as may have
accrued thereon according to law.
k. Claims which have been allowed may be reconsidered for cause and reallowed or rejected in whole or in part,
according to the equities of the case, before but not after the estate has been closed.
1. Whenever a claim shall have been reconsidered and rejected, in whole or in part, upon which a dividend has been
paid, the trustee may recover from the creditor the amount of the dividend received upon the claim if rejected in whole,
or the proportional part thereof if rejected only in part.
m. The claim of any estate which is being administered in bankruptcy against any like estate may be proved by the
trustee and allowed by the court in the same manner and upon like terms as the claims of other creditors.
n. Claims shall not be proved against a bankrupt estate subsequent to one year after the adjudication; or if they are
liquidated by litigation and the final judgment therein is rendered within thirty days before or after the expiration of such
time, then within sixty days after the rendition of such judgment: Provided, That the right of infants and insane persons
without guardians, without notice of the proceedings, may continue six months longer.

Creditors. Continued
SEC. 58. Notices to Creditors, (a) Creditors shall have at least ten days' notice by mail, to their respective addresses
as they appear in the list of creditors of the bankrupt, or as afterwards filed with the papers in the case by the creditors,
unless they waive notice in writing, of (1) all examinations of the bankrupt; (2) all hearings upon applications for the
confirmation of compositions; (3) all meetings of creditors; (4) all proposed sales of property; (5) the declaration and
time of payment of dividends; (6) the filing of the final accounts of the trustee, and the time when and the place where
they will be examined and passed upon; (7) the proposed compromise of any controversy; (8) the proposed dismissal
of the proceedings, and (9) there shall be thirty days' notice of all applications for the discharge of bankrupts.
b. Notice to creditors of the first meeting shall be published at least once and may be published such number of
additional times as the court may direct; the last publication shall be at least one week prior to the date fixed for the
meeting. Other notices may be published as the court shall direct.
c All notices shall be given by the referee, unless otherwise ordered by the judge.
SEC. 59. Who May File and Dismiss Petition. - a. Any qualified person may file a petition to be adjudged a voluntary
bankrupt.
b. Three or more creditors who have provable claims against any person which amount in the aggregate, in excess of
the value of securities held by them, if any, to five hundred dollars or over; or if all of the creditors of such person are
less than twelve in number, then one of such creditors whose claim equals such amount may file a petition to have him
adjudged a bankrupt.
c. Petitions shall be filed in duplicate, one copy for the clerk and one for service on the bankrupt.
d. If it be averred in the petition that the creditors of the bankrupt are less than twelve in number, and less than three
creditors have joined as petitioners therein, and the answer avers the existence of a larger number of creditors, there
shall be filed with the answers a list under oath of all the creditors, with their addresses, and thereupon the court shall
cause all such creditors to be notified of the pendency of such petition and shall delay the hearing upon such petition
for a reasonable time, to the end that parties in interest shall have an opportunity to be heard; if upon such hearing it
shall appear that a sufficient number have joined in such petition, or if prior to or during such hearing a sufficient
number shall join therein, the case may be proceeded with, but otherwise it shall be dismissed.
e. In computing the number of creditors of a bankrupt for the purpose of determining how many creditors must join in
the petition, such creditors as were employed by him at the time of the filing of the petition or are related to him by
consanguinity or affinity within the third degree, as determined by the common law, and have not joined in the petition,
shall not be counted.
f. Creditors other than original petitioners may at any time enter their appearance and join in the petition, or file an
answer and be heard in opposition to the prayer of the petition.
g. A voluntary or involuntary petition shall not be dismissed by the petitioner or petitioners or for want of prosecution or
by consent of parties until after notice to the creditors, and to that end the court shall, before entertaining an application
for dismissal, require the bankrupt to file a list, under oath, of all his creditors, with their addresses, and shall cause
notice, to be sent to all such creditors of the pendency of such application, and shall delay the hearing thereon for a
reasonable time to allow all creditors and parties in interest opportunity to be heard.
SEC. 60. Preferred Creditors. - a. A person shall be deemed to have given a preference if, being insolvent, he has,
within four months before the filing of the petition, or after the filing of the petition and before the adjudication, procured
or suffered a judgment to be entered against himself in favor of any person, or made a transfer of any of his property,
and the effect of the enforcement of such judgment or transfer will be to enable any one of his creditors to obtain a
greater percentage of his debt than any other of such creditors of the same class. Where the preference consists in a
transfer, such period of four months shall not expire until four months after the date of the recording or registering of
the transfer, if by law such recording or registering is required.
b. If a bankrupt shall have procured or suffered a judgment to be entered against him in favor of any person or have
made a transfer of any of his property, and if, at the time of the transfer, or of the entry of the judgment, or of the
recording or registering of the transfer if by law recording or registering thereof is required, and being within four
months before the filing of the petition in bankruptcy or after the filing thereof and before the adjudication, the bankrupt
be insolvent and the judgment or transfer then operate as a preference, and the person receiving it or to be benefited
thereby, or his agent acting therein shall then have reasonable cause to believe that the enforcement of such judgment
or transfer would effect a preference, it shall be voidable by the trustee and he may recover the property or its value
from such person. And for the purpose of such recovery any court of bankruptcy, as hereinbefore defined, and any
state court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction.
c. If a creditor has been preferred, and afterwards in good faith gives the debtor further credit without security of any
kind for property which becomes a part of the debtor's estates, the amount of such new credit remaining unpaid at the
time of the adjudication in bankruptcy may be set off against the amount which would otherwise be recoverable from
him.
d. If a debtor shall, directly or indirectly, in contemplation of the filing of a petition by or against him, pay money or
transfer property to an attorney and counselor at law, solicitor in equity, or proctor in admiralty for services to be
rendered, the transaction shall be re-examined by the court on petition of the trustee or any creditor and shall only be
held valid to the extent of a reasonable amount to be determined by the court, and the excess may be recovered by the
trustee for the benefit of the estate.

Chapter VII. Estates

SEC. 61. Depositories for Money. - a. Courts of bankruptcy shall designate, by order, banking institutions as
depositories for the money of bankrupt estates, as convenient as may be to the residences of trustees, and shall
require bonds to the United States, subject to their approval, to be given by such banking institutions, and may from
time to time as occasion may require, by like order increase the number of depositories or the amount of any bond or
change such depositories.
SEC. 62. Expenses of Administering Estates. - a. The actual and necessary expenses incurred by officers in the
administration of estates shall, except where other provisions are made for their payment, be reported in detail, under
oath, and examined and approved or disapproved by the court. If approved, they shall be paid or allowed out of the
estates in which they were incurred.
SEC. 63. Debts Which May Be Proved. - a. Debts of the bankrupt may be proved and allowed against his estate which
are
(1) A fixed liability, as evidenced by a judgment or an instrument in writing, absolutely owing at the time of the filing of
the petition against him, whether then payable or not, with any interest thereon which would have been recoverable at
that date or with a rebate of interest upon such as were not then payable and did not bear interest;
(2) Due as costs taxable against an involuntary bankrupt who was at the time of the filing of the petition against him
plaintiff in a cause of action which would pass to the trustee and which the trustee declines to prosecute after notice;
(3) Founded upon a claim for taxable costs incurred in good faith by a creditor before the filing of the petition in an
action to recover a provable debt;
(4) Founded upon an open account, or upon a contract express or implied; and
(5) Founded upon provable debts reduced to judgments after the filing of the petition and before the consideration of
the bankrupt's application for a discharge, less costs incurred and interests accrued after the filing of the petition and
up to the time of the entry of such judgments.
b. Unliquidated claims against the bankrupt may, pursuant to application to the court, be liquidated in such manner as it
shall direct, and may thereafter be proved and allowed against his estate.
SEC. 64. Debts Which Have Priority. - a. The court shall order the trustee to pay all taxes legally due and owing by the
bankrupt to the United States, state, county, district, or municipality in advance of the payment of dividends to
creditors, and upon filing the receipts of the proper public officers for such payment he shall be credited with the
amount thereof, and in case any question arises as to the amount or legality of any such tax the same shall be heard
and determined by the court.
b. The debts to have priority, except as herein provided, and to be paid in full out of bankrupt estates, and the order of
payment shall be
(1) The actual and necessary cost of preserving the estate subsequent to filing the petition;
(2) The filing fees paid by creditors in involuntary cases, and, where property of the bankrupt, transferred or concealed
by him either before or after the filing of the petition, shall have been recovered for the benefit of the estate of the
bankrupt by the efforts and at the expense of one or more creditors, the reasonable expenses of such recovery.
(3) The cost of administration, including the fees and mileage payable to witnesses as now or hereafter provided by the
laws of the United States, and one reasonable attorney's fee, for the professional services actually rendered,
irrespective of the number of attorneys employed, to the petitioning creditors in involuntary cases, to the bankrupt in
involuntary cases while performing the duties herein prescribed, and to the bankrupt in voluntary cases, as the court
may allow;
(4) Wages due to workmen, clerks, traveling or city salesmen, or servants which have been earned within three months
before the date of commencement of proceedings, not to exceed three hundred dollars to each claimant.
(5) Debts owing to any person who by the laws of the States or the United States is entitled to priority.
c. In the event of the confirmation of a composition being set aside, or a discharge revoked, the property acquired by
the bankrupt in addition to his estate at the time the composition was confirmed or the adjudication was made shall be
applied to the payment in full of the claims of creditors for property sold to him on credit, in good faith, while such
composition or discharge was in force, and the residue, if any, shall be applied to the payment of the debts which were
owing at the time of the adjudication.
SEC. 65. Declaration and Payment of Dividends. - a. Dividends of an equal per centum shall be declared and paid on
all allowed claims, except such as have priority or are secured.
b. The first dividend shall be declared within thirty days after the adjudication, if the money of the estate in excess of
the amount necessary to pay the debts which have priority and such claims as have not been, but probably will be,
allowed equals five per centum or more of such allowed claims. Dividends subsequent to the first shall be declared
upon like terms as the first and as often as the amount shall equal ten per centum or more and upon closing the estate.
Dividends may be declared oftener and in smaller proportions if the judge shall so order: Provided, That the first
dividend shall not include more than fifty per centum of the money of the estate in excess of the amount necessary to
pay the debts which have priority and such claims as probably will be allowed: And provided further, That the final
dividend shall not be declared within three months after the first dividend shall be declared.
c The rights of creditors who have received dividends, or in whose favor final dividends have been declared, shall not
be affected by the proof and allowance of claims subsequent to the date of such payment or declarations of dividends;
but the creditors proving and securing the allowance of such claims shall be paid dividends equal in amount to those
already received by the other creditors if the estate equals so much before such other creditors are paid any further
dividends.
d. Whenever a person shall have been adjudged a bankrupt by a court without the United States and also by a court of
bankruptcy, creditors residing within the United States shall first be paid a dividend equal to that received in the court
without the United States by other creditors before creditors who have received a dividend in such courts shall be paid
any amount.
e. A claimant shall not be entitled to collect from a bankrupt estate any greater amount than shall accrue pursuant to
the provisions of this Act.

Estates. Continued
SEC. 66. Unclaimed Dividends. - a. Dividends which remain unclaimed for six months after the final dividend has been
declared shall be paid by the trustee into court.
b. Dividends remaining unclaimed for one year shall, under the direction of the court, be distributed to the creditors
whose claims have been allowed but not paid in full, and after such claims have been paid in full the balance shall be
paid to the bankrupt: Provided, That in case unclaimed dividends belong to minors such minors may have one year
after arriving at majority to claim such dividends.
SEC. 67. Liens. - a. Claims which for want of record or for other reasons would not have been valid liens as against the
claims of the creditors of the bankrupt shall not be liens against his estate.
b. Whenever a creditor is prevented from enforcing his rights as against a lien created, or attempted to be created, by
his debtor, who afterwards becomes a bankrupt, the trustee of the estate of such bankrupt shall be subrogated to and
may enforce such rights of such creditor for the benefit of the estate.
c. A lien created by or obtained in or pursuant to any suit or proceeding at law or in equity, including an attachment
upon mesne process or a judgment by confession, which was begun against a person within four months before the
filing of a petition in bankruptcy by or against such person shall be dissolved by the adjudication of such person to be a
bankrupt if
(1) It appears that said lien was obtained and permitted while the defendant was insolvent and that its existence and
enforcement will work a preference, or
(2) The party or parties to be benefited thereby had reasonable cause to believe the defendant was insolvent and in
contemplation of bankruptcy, or
(3) That such lien was sought and permitted in fraud of the provisions of this Act;
Or if the dissolution of such lien would militate against the best interests of the estate of such person the same shall not
be dissolved, but the trustee of the estate of such person, for the benefit of the estate, shall be subrogated to the rights
of the holder of such lien and empowered to perfect and enforce the same in his name as trustee with like force and
effect as such holder might have done had not bankruptcy proceedings intervened.
d. Liens given or accepted in good faith and not in contemplation of or in fraud upon this Act, and for a present
consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice,
shall, to the extent of such present consideration only, not be affected by this Act.
e. That all conveyances, transfers, assignments, or incumbrances of his property, or any part thereof, made or given by
a person adjudged a bankrupt under the provisions of this Act subsequent to the passage of this Act and within four
months prior to the filing of the petition, with the intent and purpose on his part to hinder, delay, or defraud his creditors,
or any of them, shall be null and void as against the creditors of such debtor, except as to purchasers in good faith and
for a present fair consideration; and all property of the debtor conveyed, transferred, assigned, or encumbered as
aforesiad shall, if he be adjudged a bankrupt, and the same is not exempt from execution and liability for debts by the
law of his domicile, be and remain a part of the assets and estate of the bankrupt and shall pass to his said trustee,
whose duty it shall be to recover and reclaim the same by legal proceedings or otherwise for the benefit of the
creditors. And all conveyances, transfers, or incumbrances of his property made by a debtor at any time within four
months prior to the filing of the petition against him, and while insolvent, which are held null and void as against the
creditors of such debtor by the laws of the State, Territory, or District in which such property is situated, shall be
deemed null and void under this Act against the creditors of such debtor if he be adjudged a bankrupt, and such
property shall pass to the assignee and be by him reclaimed and recovered for the benefit of the creditors of the
bankrupt. For the purpose of such recovery any court of bankruptcy as hereinbefore defined, and any State court which
would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction.
f. That all levies, judgments, attachments, or other liens, obtained through legal proceedings against a person who is
insolvent, at any time within four months prior to the filing of a petition in bankruptcy against him, shall be deemed null
and void in case he is adjudged a bankrupt, and the property affected by the levy, judgment, attachment, or other lien
shall be deemed wholly discharged and released from the same, and shall pass to the trustee as a part of the estate of
the bankrupt, unless the court shall, on due notice, order that the right under such levy, judgment, attachment, or other
lien shall be preserved for the benefit of the estate; and thereupon the same may pass to and shall be preserved by the
trustee for the benefit of the estate as aforesaid. And the court may order such conveyance as shall be necessary to
carry the purposes of this section into effect: Provided, That nothing herein contained shall have the effect to destroy or
impair the title obtained by such levy, judgment, attachment, or other lien, of a bona fide purchaser for value who shall
have acquired the same without notice or reasonable cause for inquiry.
SEC. 68. Set-offs and Counterclaims. - a. In all cases of mutual debts or mutual credits between the estate of a
bankrupt and a creditor the account shall be stated and one debt be set off against the other, and the balance only
shall be allowed or paid.
b. A set-off or counterclaim shall not be allowed in favor of any debtor of the bankrupt which (1) is not provable against
the estate; or (2) was purchased by or transferred to him after the filing of the petition, or within four months before
such filing, with a view to such use and with knowledge or notice that such bankrupt was insolvent, or had committed
an act of bankruptcy.
SEC. 69. Possession of Property. - a. A judge may, upon satisfactory proof, by affidavit, that a bankrupt against whom
an involuntary petition has been filed and is pending has committed an act of bankruptcy, or has neglected or is
neglecting, or is about to so neglect his property that is has thereby deteriorated or is thereby deteriorating or is about
thereby to deteriorate in value, issue a warrant to the marshal to seize and hold it subject to further orders. Before such
warrant is issued the petitioners applying therefor shall enter into a bond in such an amount as the judge shall fix, with
such sureties as he shall approve, conditioned to indemnify such bankrupt for such damages as he shall sustain in the
event such seizure shall prove to have been wrongfully obtained. Such property shall be released, if such bankrupt
shall give bond in a sum which shall be fixed by the judge, with such sureties as he shall approve, conditioned to turn
over such property, or pay the value thereof in money to the trustee, in the event he is adjudged a bankrupt pursuant to
such petition.
SEC. 70. Title to Property. - a. The trustee of the estate of a bankrupt, upon his appointment and qualification, and his
successor or successors, if he shall have one or more, upon his or their appointment and qualification, shall in turn be
vested by operation of law with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as
it is to property which is exempt, to all
(1) Documents relating to his property;
(2) Interests in patents, patent rights, copyrights, and trademarks ;
(3) Powers which might have exercised for his own benefit, but not those which he might have exercised from some
other person;
(4) Property transferred by him in fraud of his creditors;
(5) Property which prior to the filing of the petition he could by any means have transferred or which might have been
levied upon and sold under judicial process against him:
Provided, That when any bankrupt shall have any insurance policy which has a cash surrender value payable to
himself, his estate, or personal representatives, he may, within thirty days after the cash surrender value has been
ascertained and stated to the trustee by the company issuing the same, pay or secure to the trustee the sum
ascertained and stated, and continue to hold, own, and carry such policy free from the claims of the creditors
participating in the distribution of his estate under the bankruptcy proceedings, otherwise the policy shall pass to the
trustee as assets; and
(6) Rights of action arising upon contracts or from the unlawful taking or detention of, or injury to, his property.
b. All real and personal property belonging to bankrupt estates shall be appraised by three disinterested appraisers;
they shall be appointed by, and report to, the court. Real and personal property shall, when practicable, be sold subject
to the approval of the court; it shall not be sold otherwise than subject to the approval of the court for less than seventy-
five per centum of its appraised value.
c. The title to property of a bankrupt estate which has been sold, as herein provided, shall be conveyed to the
purchaser by the trustee.
d. Whenever a composition shall be set aside, or discharge revoked, the trustee shall, upon his appointment and
qualification, be vested as herein provided with the title to all of the property of the bankrupt as of the date of the final
decree setting aside the composition or revoking the discharge.
e. The trustee may avoid any transfer by the bankrupt of his property which any creditor of such bankrupt might have
avoided, and may recover the property so transferred, or its value, from the person to whom it was transferred, unless
he was a bona fide holder for value prior to the date of the adjudication. Such property may be recovered or its value
collected from whoever may have received it, except a bona fide holder for value. For the purpose of such recovery
any court of bankruptcy as hereinbefore defined, and any State court which would have had jurisdiction if bankruptcy
had not intervened, shall have concurrent jurisdiction.
f. Upon the confirmation of a composition offered by a bankrupt, the title to his property shall thereupon revest in him.

The Time When This Act Shall Go Into Effect

[71] a. This Act shall go into full force and effect upon its passage:
Provided, however, That no petition for voluntary bankruptcy shall be filed within one month of the passage thereof,
and no petition for involuntary bankruptcy shall be filed within four months of the passage thereof.
b. Proceedings commenced under State insolvency laws before the passage of this Act shall not be affected by it.
SEC. 71. That the clerks of the several district courts of the United States shall prepare and keep in their respective
offices complete and convenient indexes of all petitions and discharges in bankruptcy heretofore or hereafter filed in
the said courts, and shall, when requested so to do, issue certificates of search certifying as to whether or not any such
petitions or discharges have been filed; and said clerks shall be entitled to receive for such certificates the same fees
as now allowed by law for certificates as to judgments in said courts: Provided, That said bankruptcy indexes and
dockets shall at all times be open to inspection and examination by all persons or corporations without any fee or
charge therefor.
SEC. 72. That neither the referee, receiver, marshal, nor trustee shall in any form or guise receive, nor shall the court
allow him, any other or further compensation for his services than that expressly authorized and prescribed in this Act

Appendix B. Interest Table

(Note: This table is necessarily too brief for anything except general reference. Accuracy is attempted but not
guaranteed; and details and distinctions between large and small loans, etc., are omitted.)
Appendix C. Table Of Exemption Laws

Table Of Exemption Laws. 1 (Property or income exempt from seizure for debt.)

State Homestead Exempt Personal Property Exempt Wages Exempt

Alabama $2000 $1000 $25 mo.

Arizona 4000 1/2 30 d's. wg.

Arkansas 2500 500 60 d's. wg.

California 5000 30 d's. wg.

Colorado 2000 60%

Connecticut 1000 $50

Delaware 200 50%

District of Coulmbia 300

Florida................... 160 acres2 1000 All.

Georgia................... 1600

Idaho 5000

Illinois 1000 400 $15 per wk.

Indiana 600 600

Iowa 40 acres2 All; 3 mo.

Kansas 160 acres2 All; 3 mo.

Kentuky 1000

Louisiana 2000

Maine 500

Maryland................. 100 $100

Massachusetts 800

Michigan 1500

Minnesota 80 acres2 $25 last 30 ds.

Mississippi................ 3000 $50 per mo.

Missouri 1500 All;30ds.

Montana 2500

Nebraska 2000 500 90%

Nevada 5000

New Hampshire........... 500 $20

1Accuracy, on account of brevity, is not possible in a table of this sort. General accuracy has been attempted, but is
not for the reason stated guaranteed. 2Farm land; smaller amount in towns. ♦Specific articles exempt without regard to
value.

State Homestead Exempt Personal Property Exempt Wages Exempt

New Jersey 1000 200

New Mexico 1000

New York 1000 250 60 ds.

North Carolina 1000 500

North Dakota 5000

Ohio..................... 1000 500 All; 3 mo.

Oklahoma 5000 75%;90ds.

Oregon 3000 $75

Pennsylvania 300

Rhode Island $10 per wk.

South Carolina 1000 500

South Dakota 5000 750

Tennessee 1000 $30

Texas 5000 All.

Utah..................... 2000 $30

Vermont 500 200

Virginia 2000 $50 per mo.

Washington 2000 1500 All; 60 ds.

West Virginia 1000 200

Wisconsin 5000

Wyoming................. 2500 1/2 60 ds. wg.

*See footnote page 255.

Appendix D2. Questions And Problems

Chapter One

1. Define the term bankruptcy.

2. Whence is the term derived?
3. Distinguish bankruptcy from insolvency.
4. What was the earliest bankruptcy law? What was object of early bankruptcy laws?
5. What is the power of our Federal Government to pass bankruptcy laws?
6. Has the present act been attacked as unconstitutional? On what grounds?
7. How many laws have been enacted by the Federal Government on the subject of bankruptcy? What is the date of
the present act?
8. What are the two main purposes of the present act?
9. State the steps ordinarily taken during a bankruptcy proceeding.

Chapter Two

10. What courts are given jurisdiction under present bank-rupty law?
11. How is United States divided for purpose of territorial jurisdiction of bankruptcy courts?
12. What must be shown of a debtor to authorize a proceeding against him in any particular court of bankruptcy with
reference to its particular jurisdiction over him?
13. May a corporation have a principal place of business outside of the state incorporating it?
14. If several petitions are filed in different jurisdiction against same debtor, what course will be taken?
15. What is meant by ancillary jurisdiction?
16. What suits to recover property can trustee bring in federal courts? What in state courts?
17. What is a summary proceeding to recover assets? When is it not allowable?
18. What is the jurisdiction of a referee?

Chapter Three
19. A petition in bankruptcy was filed against an insurance company. It consented to the jurisdiction. Will this confer
jurisdiction ?
20. Who is a "wage earner" within the meaning of the law? Can he file a voluntary petition in bankruptcy?
21. A was a teamster hauling for various persons who would employ him from time to time using his own outfit. He
made $1400 a year. Can he be proceeded against in bankruptcy?
22. Can a farmer file a voluntary petition in bankruptcy?
23. A owned and worked a farm. He also conducted a country store. He also bought and sold hogs, keeping them
upon his farm and feeding them with the products thereof. Is he a farmer within the meaning of the law? Indicate what
would determine.
24. What is the period in which one's occupation is considered in order to determine whether the bankruptcy court has
jurisdiction? Suppose one is not in an exempt occupation at the time the alleged act of bankruptcy was committed, but
now defends that he was in an exempt occupation when the petition was filed. What will govern?
25. What corporations may become voluntary bankrupts?
26. Is an incorporated society or club, not for profit, entitled to file a petition in bankruptcy? Can it be made an
involuntary bankrupt?
27. A railroad company becomes insolvent. May it be made a voluntary or involuntary bankrupt?
28. Same question concerning a street car company? An electric light company?
29. A city becomes insolvent. Is it subject to bankruptcy proceedings?
30. Has the bankruptcy court jurisdiction of banks?
31. Is an unincorporated lodge subject to bankruptcy jurisdiction?
32. May a partnership be adjudicated a bankrupt? Is it an entity under the bankruptcy law?
33. Is a person under age subject to bankruptcy proceedings? An insane person? Estates of decedents? Aliens?
34. How much must a person owe to be adjudicated bankrupt?

Chapter Four

35. What is meant by the phrase "an act of bankruptcy"?

36. Define insolvency.
37. A has a business which as a going concern is worth $20,000.
A's debts are $21,000. He is entitled to a homestead of $1,000, and is living in a house whose "equity" is worth that
sum. Is A insolvent?
38. What is the rule about determining assets as their fair value?
39. A is worth $20,000. He owes $10,000. He transfers $15,-000 to B with the understanding B is to retransfer it to him
after he gets out of financial difficulty. Is A insolvent under the meaning of the present act?
40. What was the test of insolvency under former acts or bankruptcy ?
41. Is a bankrupt entitled to jury trial on the question of insolvency?
42. If an involuntary petition is filed alleging (as it must) an act of bankruptcy, within what time must it allege that the act
of bankruptcy was committed?
43. Suppose a petition does not allege an act of bankruptcy? May it be amended? Suppose the amendment shows an
act of bankruptcy within the required time previous to the filing of the original petition, but not within that time from the
filing of the amendment. Is the amendment sufficient?
44. What is the first act of bankruptcy?
45. Is insolvency an element in this act?
46. What is the next act of bankruptcy? Is it necessary that it be avoidable in order to constitute an act of bankruptcy?
47. Can there be a preference in fact by an insolvent debtor that does not amount to a preference that constitutes an
act of bankruptcy?
48. A, while insolvent, borrows money from B and gives him a mortgage on his property. Is this a preference?
49. A, while insolvent, has a judgment entered against him. Is this in itself an act of bankruptcy?
50. A makes an assignment of his property to B as trustee to enable B to divide the same among his creditors in
proportion to their claims. Can any of these creditors take the estate into bankruptcy?
51. Is an application for a receivership in a state court always an act of bankruptcy? What part does insolvency play in
this act of bankruptcy?
52. What is the last of the acts of bankruptcy as enumerated?

Chapter Five

53. What schedules are attached to a voluntary petition in bankruptcy ?

54. How many creditors are required to file an involuntary petition?
55. Can a creditor who has been preferred by a bankrupt be a petitioning creditor? Can a secured creditor be counted?

Appendix D2. Questions And Problems. Part 2

56. What must the petition allege?
57. What is "adjudication" in bankruptcy?
58. When is the first meeting of creditors held? Its purpose? Business done thereat?
59. How, when and by whom is the trustee elected?
60. State in a general way the duty of a trustee with respect to administration of estate.

Chapter Six
61. A files a petition in bankruptcy on Aug. 15. Thereafter and prior to the time he is adjudicated a bankrupt, his father
dies leaving him a large legacy. Is the trustee when elected entitled to this fund for the benefit of the creditors?
62. A's father dies leaving him certain real estate subject to a life interest in the property of A's sister. A thereafter files
a petition in bankruptcy. Does this real estate pass to the trustee?
63. A sells property on installments of $100 a month. While $5,000 is still owing A, to be paid in the following 50
months, A goes into bankruptcy. Does the trustee get title to A's interest in the payments ?
64. Who has title to a bankrupt's property between the date of filing the petition and the election of the trustee?
65. Suppose all creditors of A are general creditors. A borrows money from B and gives as security a chattel mortgage
on certain of A's property. Under the local law, B's rights in this chattel mortgage are superior to those of other general
creditors provided B takes possession or records the mortgage prior to any lien being obtained by the other creditors.
B, however, does neither, in this state of affairs A goes in bankruptcy. B contends that he has a valid lien even though
he did not record or take possession, as the trustee represents only general creditors. How should the court decide?
66. A has a membership in a stock exchange not transferable except with consent of a majority of the other members.
It is worth $5,000 if a transfer is made. A goes into bankruptcy. Does this membership pass to the trustee?
67. Do patents pass to trustee? Coyprights? Trademarks?
68. A goes into bankruptcy. He has an insurance policy on his life the cash value of which is $5,000. A's wife is
beneficiary under the policy. Does it pass to the trustee? How can a debtor prevent a trustee from getting title to
insurance policies?
69. A holds property in trust and goes into bankruptcy. Does the trustee in bankruptcy get title to the trust property?
70. A collects a fund for B and then goes into bankruptcy. The fund was paid by A into his general bank account, which
was never lower than B's fund. Can B claim the entire fund?
71. A stock broker buys stock in M Co. on B's account and with B's funds. B orders them resold by the broker when
prices reaching a certain point. Before selling for B, A goes into bankruptcy. Certificates of stock in the M Co. are in his
possession but not the identical ones bought for B. If there are no other claimants for these particular certificates, can
B reclaim them, or are they assets of the estate?
72. In case an insolvent person prefers one creditor over another, can the trustee set aside such preference? Provided
what?
73. A borrows money from B. Afterwards desiring to borrow more, A requires a mortgage to cover the entire
indebtedness. This second loan and the mortgage are made within the four months immediately preceding the time A's
creditors file a petition in bankruptcy. Under what circumstances will the entire security stand? Under what will part be
divided and which part?
74. Is the setting aside of fraudulent conveyances by the trustee confined to those conveyances made within four
months prior to the proceedings in bankruptcy?
75. If the bankrupt has in his possession property belonging to another when the petition is filed, are the real owners
entitled to claim the same or does it become a part of the estate?
76. A manufacturer of automobiles appoints B his agent to sell same and sends B a quantity of cars. B goes into
bankruptcy. Can A reclaim the cars or is he a general creditor?
77. If the bankrupt has property which has been sold to him under conditional sale, that is, with reservation of title in
the vendor until the purchaser pays the entire purchase price, can such conditional vendor reclaim the property from
the trustee?
78. What is the rule as to rights of holder of mortgage on debtor's personal property when debtor goes into bankruptcy?
79. Can the trustee claim title to property of the bankrupt In possession of another?
80. B was driving a truck containing goods for use in his business. M negligently drove his truck against B's truck and
damaged B's truck, ruined the contents and injured B. B shortly afterwards goes into bankruptcy. Has B's trustee a
right to enforce B's claims against M for benefit of creditors?
81. Suppose B, a debtor, owns property which is of no value to the trustee. Does he take title thereto?
82. A obtains a judgment against B. Under the statute of the state, a judgment creditor has a lien upon his debtor's
property. This lien gives A an advantage over C, D, E, and F, general creditors of B. B commits an act of bankruptcy
within four months after this judgment and still within said four months a petition is filed against him. Is the title of the
trustee to B's property subject to this lien?
83. In the above case suppose the judgment lien is more than four months old. Is the trustee's title subject thereto?
84. B, who is insolvent, borrows money and gives a chattel mortgage on his automobile to secure the loan. This chattel
mortgage is duly recorded as required by law. The lender knows when he makes the loan that B is insolvent. Will his
lien stand against the title of the trustee in bankruptcy?
85. Is a "mechanic's lien" acquired at any time dissolved by bankruptcy proceedings ? Why ?

Chapter Seven

86. Is a claim not due when the petition is filed provable in bankruptcy ?
87. After B files a petition in bankruptcy, and while the proceedings are in progress he borrows from A. Is A's claim
provable in the case?

Appendix D2. Questions And Problems. Part 3

88. Is a judgment against a debtor provable in the event of his bankruptcy ?
89. B having a lease from A with monthly rental payments goes into bankruptcy. Can B prove the subsequently
accruing installments ?
90. A and B enter into a contract whereby B agrees to sell goods to A. B fails to perform and A claims damages. B
disputes A's claim and argues that even if A has a claim, it is not as great as A has estimated. B goes into bankruptcy.
Has A got a provable claim? Has the bankruptcy court power to determine the validity and amount of B's claim.
91. B negligently operates his automobile whereby he injures A.
B then goes into bankruptcy. Has A a provable claim against B's estate ?
92. How are claims proved in bankruptcy?
93. What is meant by allowance of claims?
94. Can a secured creditor prove his claim? Does he lose his claim by not proving it?
95. What is meant by saying a claim has "priority"?
96. What are the first class of claims having priority?
97. What is the next class?
98. The third class?
99. Suppose there is only enough in the estate to pay costs of administration. Would such costs come ahead of taxes?
100. B goes into bankruptcy owing $5,000 as wages to his employees. There is enough in his estate to pay all costs of
administration, etc., and enough to pay his help, but nothing will then be left for general creditors. Do the employees
take all the estate? Under what conditions. (If the general creditors got nothing at all would these debts be
discharged?)
101. What is the next class of priorities?
102. Who is a preferred creditor? How does he differ from a priority creditor? If a preferred creditor is compelled to give
up his preference can he prove his claim? If he can not be made to give up his preference, can he prove up on the
balance of his claims?
103. When should dividends be paid on a bankrupt estate?
104. What is a composition in bankruptcy? Its purpose? Conditions of its offer? Of its acceptance?
105. B goes into bankruptcy owing A $1,000. A owes B $1,000. Can A keep the $1,000?

Chapter Eight

106. State in a summary way chief duties of bankrupt in respect to the administration of his estate.
107. What is bankrupt's duty to submit to examinations?
108. Has he a right to refuse to answer any question? What result may follow his refusal?
109. What are the offenses created by the bankruptcy act?
110. To what exemptions is the bankrupt entitled?
111. What must he do to get his exemptions?
112. What right has a debtor to convert his non-exempt into exempt property?

Chapter Nine

113. What is the importance of obtaining a discharge in bankruptcy?

114. Within what time must bankrupt apply for his discharge'?
115. How is application for discharge made?
116. How are objections to discharge made?
117. B, a debtor, keeps no books of account. He is thrown into bankruptcy. Will his failure to keep books prevent him
from getting a discharge? Explain fully.
118. B, desiring to purchase goods from A, is requested by A to furnish a statement of his assets and liabilities. B does
so and the same is false. B goes into bankruptcy. Can C oppose discharge on the basis of the statement made by B to
A?
119. Enumerate the other grounds of discharge.
120. What is the general rule as to debts that are dischargeable?
121. If a debt is not provable, does bankruptcy affect it?
122. B goes through bankruptcy. His estate has no assets. Are B's taxes discharged by the proceedings?
123. B obtains property from A on credit by representing he is solvent when in fact he knows he is insolvent. Is B's debt
to A discharged by B's discharge in bankruptcy?
124. B so carelessly drives his car that he runs over and seriously injures A. A gets a judgment against B. B then files
his petition in bankruptcy and gets his discharge. B proved his claim and got 15 per cent in dividends. Is A's judgment
discharged by B's discharge ?
125. B assaulted A. A gets a judgment and B goes through bankruptcy. Is A's claim barred by B's discharge?
126. B collects money for A and misappropriates it. Is B's liability to A discharged by his subsequent discharge in
bankruptcy?
127. Is alimony dischargeable?
128. B goes into bankruptcy and forgets to schedule A as his creditor. Under what circumstances would A's debt be not
discharged ?
129. B was discharged in bankruptcy. He wrote a letter to A after his discharge saying "You will be paid in full." Can A
hold B on the claim?

Chapter Ten

130. Define Indebtedness; mature indebtedness; immature indebtedness ; secured; unsecured; general indebtedness.
131. Define a lien. What various kinds?
132. What are the usual provisions of a chattel mortgage?
133. How does a chattel mortgagee protect his lien?
134. What is a conditional sale and how are rights of the vendor protected?
135. What is a pledge? What property may be pledged?
136. What are the "common law liens"? What is meant by saying they are possessory liens?
137. What is a mechanic's lien?
138. What are judicial liens?

Chapter Eleven

139. What is a fraudulent conveyance? What two kinds? May future creditors object?
140. What are badges of fraud? Enumerate.