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Contracts: Bills and Notes: Precedent Debt as Consideration in the Law of Contracts and Negotiable Instruments

Author(s): Shubrick T. Kothe

Source: Michigan Law Review, Vol. 46, No. 2 (Dec., 1947), pp. 211-224 Published by: The Michigan Law Review Association

Stable URL: http://www.jstor.org/stable/1283804

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FACULTY ADVISORY BOARD

MARCUSL. PLANT, Chairman

MARY JANE PLUMER

All signed comments and notes (unless otherwise specifically indicated) are student contributions written with the advice of members of the faculty. S.Ed. after a signature

means present or past member of the Student Editorial Board. Initialed discussions are by members of the faculty.

COMMENTS

CONTRACTS-BILLS AND NOTES-PRECEDENT DEBT AS CONSIDER-

ATION IN THE LAW OF CONTRACTS AND NEGOTIABLE INSTRUMENTS

I

Today, it is establishedas a general rule in the law of contracts thata precedentdebtcannotbe considerationfor a subsequentpromise.1

2I4 MICHIGAN LAW REVIEW [ Vol. 46

Modern cases,such as those where a debt is barredby the Statuteof

cable,generallydo not rest upon that theory. As a practicalmatter,it makeslittle difference.These casesachievea just result,andhave been

confined to standardfact situations. The doctrineseems clearly at

no useful purposetoday.24Caseswherethis problemarisesin the gen- eral law of contractsare rareindeed,and causethe courtsno trouble.25

II

In the field of negotiableinstruments,however,we find a different situation. Section25 of the Negotiable InstrumentsLaw says, under the general heading,Consideration:"Valueis any considerationsufficient to supporta simple contract.An antecedentor pre-existingdebt constitutesvalue; and is deemed suchwhetherthe instrumentis pay-

able on demandor at a future time." It is probablethat the framers of the N.I.L. intendedto formulatethe samerule as wasestablishedin

The N.I.L. says specificallythat a precedentdebt shall be value. To

the act.27 But they are differentconcepts,certainly.28Section 25 of the N.I.L. can definitely be said to have settled the celebratedcontroversybetweenJusticeStory and ChancellorKent over the position of a personwho has takena negotiableinstrumentindorsedto him as securityfor a debt.29 There canbe little doubtnow that one who has

28 8 HOLDSWORTH,HISTORYOF ENGLISHLAW 13 et seq. (I926).

28Wickhem, id. at 330 et seq.

29Id. at 336-7. Chancellor Kent's decision in Bay v. Coddington, 5 Johns. Ch.

(N.Y.) 54 (I82I),

gotiable instrument as collateral security for an antecedent debt, he shall not be a holder for value. As a matter of fact, there were other factors in the particular case, and the Chancellor placed strong emphasis on the fact that this transaction was not in the normal course of business. In Swift v. Tyson, 16 Pet. (41 U.S.)

Justice Story, relying in a large measureon commercial practice, decided such a person was a holder for value.

I947 ] COMMENTS 215

takensuch an instrumentin paymentof or as collateralsecurityfor a precedentdebt is a holder for value, within the meaning of section 52.80 A remainingquestionis whether a precedentdebt can be con-

A. In the simplestsituation,wherea negotiableinstrumentis given in payment of the precedentdebt of the maker, it is held that the instrumentis foundedon good consideration.For example,A gives B his checkin paymentof a debt. An actionwill lie on the check,8lal-

the questionhas arisen. The reasongenerally assigned,where one is

This is satisfactorywhere a time instrumentis involved, for it may

instrumentgiven is payableon demand,this rationaletends to become a rationalization.With this sort of paper,courtshave said that there

that time.88 A simple answerto this, of course,is that one does not have to waita reasonabletime. Ames took the positionthat in the Law

Merchant,no considerationwas necessaryto supportany negotiable instrumentand there would never have been any troublein this con-

nectionif courtshad not sincedeviated from this rule." He derived this view, accordingto Williston,85from a statementfound in Black-

80 "A holder in due course is a holder who has taken the instrument under the

876 (I894). "It is frequently stated in the books that as between the immediate parties to a bill or note a consideration is

necessary to the validity of the obligation. This notion, it is submitted, is erroneous

upon principle, and also upon the authorities; for although it must be conceded that the courts have sanctioned the defense of absence of consideration in certain cases,

these decisions should be regarded as anomalous exceptions to the rule that a bill, being in the nature of a specialty, is obligatory without a consideration, rather than as

illustrations of the opposite doctrine, that a bill, being a simple contract, requires a consideration to support it."

85 1 WILLISTON, CONTRACTS 372 (1936).

stone." Lord Mansfieldwasof the sameopinion.3 However, it seems likely historicallythat considerationwas necessaryfor negotiablein- strumentsas well as other contracts.38The true answerprobablyis that the point was not presentedto the courtsoften enough prior to the nineteenthcenturyto evolve a definiterule.39However this may be, at the time the N.I.L. was drafted,some considerationwas necessary to supporta negotiableinstrumentbetween the original parties thereto.40This rule was codifiedin the N.I.L.41

The two lines of authorityin this countryrelativeto what is nec- essary to constitute one a holder for value have been mentioned earlier.42Certainlya majorityof casesheld that one who took a negotiableinstrumentii paymentof or as collateralsecurityfor a prece-

Swift v. Tyson,"4the English precedentsupon whichJutice Story re- lied in the latter casewere reviewedand the courtconcludedthat the

New Yorkrule wascorrecthistorically.But in Curriev. Misa,47Swift v. Tyson 8 was citedwith approval,and the English courtrejectedthe New York decisions.These cases,it must be remembered,were cases

86 2 BL. COMM. 446. "For if a man . . . gives a promissorynote, he shall not be allowed to aver the want of consideration in order to evade the payment . . . and every note from the subscriptionof the drawer carries with it an internal evidence of a good consideration." This statement is called inaccurate in a note appended by a reporter. Wendell's ed. (I854).

87 Pillans v. Van Mierop, 3 Burr. 1663, 97 Eng. Rep. I035 (1765). "A nudum pactum does not exist in the usage and law of merchants." He reconciled this view with the common law, which he took to be the same as the law merchant, on the theory that consideration was of evidentiary value only. This doctrine was speedily overruled, at least so far as contract law was concerned. Rann v. Hughes, 7 T.R. 350

I947 ] COMMENTS 217

in which the questionwas whetherone could be a holder for value if the only value were a precedentdebt. If value were coterminouswith

considerationfor a negotiableinstrumentprior to the N.I.L., in the majorityof jurisdictions.But this is certainlynot true. 9 Consideration andvalue areseparateanddistinctproblems,0 even as in otherfields.5 Ames, in illustratinghis thesisthat no considerationwas necessaryfor a negotiableinstrument,assertedthat a bill given in paymentof a debt was valid: "A personwho executesor indorsesto his creditorsa bill or note payableat a future day, in paymentof his own debt or the debt of a third party may be sued upon the new security . . . the rule is the same when the new securityis payableon demand."52 The case where a time bill or note is given may well be resolved on a theory

of 53 the firstcasecited Ames54does not reveal forbearance, although by

whetheror not it wasa timenote. The threecasesdealingwith demand

the decisionrelied stronglyon the fact that the executor'snotes called

againstthe estate. Curriev. Misa56is a caseof a holderfor value. Sison

actionof debt. Poplewell v. Wilson58seems more in point. This was

by C to B. The report reveals little more. The court held that the plaintiff could recoverover the objectionof the defendant that the

debt of anotheris no considerationto raise a promise. The authority of this casewith referenceto the problemat handis doubtful,however. Previously,Lord Holt had said in a suit on a note madeby defendant

to pay so muchon the accountof another:"The consideration implied

in the Statute59is, that when the partypromisesuponhis own account, it must be presumedhe is indebted,or else he would not promiseto

6 (1702), Lord Holt had held that promissorynotes were not within the Law Merchant. This statute was passed to overrule that decision.

218 MICHIGAN LAW REVIEW r Vol. 46

pay it; aliter wherethe promiseis to pay upon accountof a third person."6 The actualdecisionin the Poplewell caseappearsto be that a note given in paymentof the debt of anotheris within the statute,61 andthereforeto be treatedas a negotiableinstrument.This, of course, overruledHolt's earlierdecisionon this point.

Whatever may have been the old law, it seems clear that by the time the N.I.L. was drafted, a negotiableinstrumentpayableon de- mand, signed by the debtorand given to the creditorin paymentof the debt was deemed to be founded on good consideration.62A ne-

gotiableinstrumentgiven in absolutepaymentof a debt owing to the payee by one not the principaldebtorwas also regardedas supported by good consideration.68But the precedentdebt of a third personwas

with the rule last stated,a notegiven as collateralsecurityfor a debt of a thirdpersonwasheld not to be foundedon good consideration.65The law probablywas the same where a negotiableinstrumentwas given as collateralsecurityfor the debt of the maker.66The effect of the Bills of ExchangeAct in England seemsclear.67It is expresslystated that a precedentdebt is consideration.In the United States,however, the codificationis not so explicit.Again,it wouldnot beunreasonableto assumefromthe similarityof languageemployedthatthe N.I.L. meant to establishthe samerule as thatset up in the English Statute.68

B. Since the enactmentof the N.I.L., there have been a great numberof casesstatingin one way or anotherthat a precedentdebt is good considerationfor a negotiableinstrument69.A good exampleof

Morgan, 67 Mont. 455, 216 P. 347 (I923). In the following cases, that section of