National Bank of North America v. Kirby , 108 Mass. 497 ( 1871 )

Colt, J.

It must be assumed, upon the case stated, that the note in suit was originally obtained from the defendant by fraud and without consideration; because, upon the proof offered, it would have been competent, if the case had been submitted to them, for the jury so to have foúnd. The burden was thus placed upon the plaintiffs, of showing that they took the note for a valuable consideration, in the usual course of business,' before maturity, and in good faith. It would be sufficient to meet this burden, for the plaintiffs to show that they took it as collateral security; and then, if there was nothing in the transaction itself, and no proof produced from other sources, to show want of good faith, or actual or constructive notice of existing defences between the original parties, the plaintiffs must prevail. Blanchard v. Stevens, 3 Cush. 162. Wheeler v. Guild, 20 Pick. 545, 553.

This note was due at the end of forty-eight months, and the interest was made payable annually. It was taken by the plaintiffs before maturity; but, upon its appearing that no interest had been paid for two years or more, the court was asked to rule that this alone amounted to a dishonor, and would subject the note to all defences. It is to be noticed, that the fact relied on is only that the interest had not been paid; not that any knowledge of it was ever brought home to the plaintiffs beyond the fact that no payments were indorsed. The court declined to rule as requested; and we are of opinion that the mere fact that there appears to be no indorsement of one or more instalments of interest mil not justify the ruling asked for.

If, as it is argued, it be true that the failure to pay interest ever as matter of law amounts to a dishonor of a note, it can only affect one who has knowledge of the fact. Payment of interest is not always indorsed, and other evidence is often relied on to prove it. Want of indorsement does not apprise the party, to whom such note is transferred, that there has been no payment; and when the note is only taken as collateral, and accuracy is not required in ascertaining the amount due for interest, the fact that overdue interest is not indorsed might have slight influence in putting the purchaser upon his inquiry. It has indeed been held by this court, that a note, the principal of which is payable by instalments, is overdue when the first instalment is overdue and unpaid, and is thereby subject to all equities between the original parties. Vinton v. King, 4 Allen, 562. Such a note is a single contract, and the party to whom it is transferred must take it with notice that, as to the overdue instalment, the maker may have a justifiable cause for withholding payment, which may affect the whole contract. But in its effect upon the credit of a note, it is manifest that a failure to pay interest is not to be ranked with a failure to pay principal. Interest is an incident of the debt, and differs from it in many respects. It is not subject to protest and notice to indorsers, or days of grace according to the law merchant; Interest is not recovered on overdue interest; and the statute of limitations does not run against it until the principal is due. The holder of a note with interest payable annually loses no rights against the parties to it, whether makers or indorsers, by neglecting to demand it; and he has the election to do so, or wait and collect it all with the principal. In Brooks v. Mitchell, 9 M. & W. 15, it was held that a promissory note payable on demand cannot be treated as overdue so as to affect an indorser with equities, merely because it is indorsed a number of years after its date, and no interest has been paid on it for several years before such transfer; and the same was held in Boss v. Hewitt, 15 Wisc. 260. We are referred to no case in which it has been held that failure to pay interest, standing alone, is to be regarded sufficient in law to throw such discredit upon the principal security upon which it is due, as to subject the holder, to 'the full extent of the security, to antecedent equities.

There is a large class of negotiable securities, the principal of which is payable only at the end of many years, but with interest payable either annually or semi-annually; and many of the notes given in the purchase of real estate and secured by mortgage, especially in the country, are of this class, as are most of the obligations for debts contracted by public and many of those incurred by private corporations, and it is important that the value due to their negotiable character should not be impaired by new rules, tending to lessen their currency and credit. Henry v. Flagg, 13 Met. 64. Ferry v. Ferry, 2 Cush. 92. Sparhawk v. Wills, 6 Gray, 163. The City v. Lamson, 9 Wallace, 477.

But while nonpayment of interest is not to be allowed the effect here claimed for it, it is still a fact proper to be considered by the jury, in connection with other circumstances, on the question whether the holder is entitled to the position of one who has taken in good faith and without actual or constructive notice of existing defences. And in the opinion of the court, the defendant should have been permitted to go to the jury, with proper instructions from the court, upon the evidence- reported in this case.

Verdict set aside.