CHAPTER FOURTH.

OF LETTERS OF CREDIT.

A letter of credit is an open letter of request, whereby one person requests some other person or persons to advance money, or to give credit to a third person, named therein, for a certain amount, and promises that he will repay the same to the person advancing the same, or accept bills drawn upon himself for the like amount. It is called a general letter of credit, when it is addressed to all merchants, or other persons in general, requesting such advance to a third person, and a special letter of credit, when it is addressed to a particular person by name, requesting him to make such advance to a third person.

If the letter of credit be of the latter sort, there does not seem to be any doubt that it is an available promise in favor of the person to whom it is addressed, and who makes the advance upon the faith thereof. But if the letter of credit be general, it is a matter of some doubt whether the writer is bound to the person making advances upon the strength of the letter. The question does not appear to have been ever decided in England, but it has several times been thoroughly discussed in the Supreme Court of the United States. (Lawrason vs. Mason, 3 Cranch, 492; Adams vs. Jones, 12 Peters, 207.) The doctrine was maintained in these cases, that the letter writer is bound positively and directly to any party making the advance upon the faith of the letter, not only where the letter purports, on its face, to be addressed generally to any person or persons whatsoever who should make the advance, but also in cases where the letter is addressed solely to the person to whom the advance is to be made, and merely states that the person signing the same will become his surety for a certain amount, without naming any person to whom he will become security, if it is obviously to be used to procure credit from some third person, and the advance is made upon the faith of the letter by such third person.

CHAPTER FIFTH.

OF BANK NOTES.

Bank notes are promissory notes made by a bank or banker. They are ordinarily put in circulation as currency, and accordingly they usually pass and are received as cash or ready money. "These notes,' said Lord Mansfield, in Miller vs. Race, (1 Burr, 457,) "are not like bills of exchange, mere securities for debts, nor are so esteemed, but are treated as money in the ordinary course and transactions of business by the general consent of mankind." It matters not how long bank notes have been issued, or how long they remain in circulation, or whether

they have been received back into the bank or by the banker and reissued or not, for they are always treated as negotiable paper not over due, or liable to any equities between the bank or banker, and any parties who have subsequently received them, or between any intermediate parties.

The bank or banker always remains liable to pay their bank notes to any person who becomes the holder or bearer thereof, at any distance of time from the original issue thereof; and if the holder or bearer acquire the same, in good faith, and for a valuable consideration, he can enforce their payment by the bank or banker, even although he received them from one who had stolen them or obtained them by fraud.

A hundred years ago, in the case of Miller vs. Race, (1 Burr, 452,) a banker was held liable, by Lord Mansfield, to pay a bank note stolen from him to a bona fide holder for a valuable consideration. In the case referred to, it appeared that the note was stolen from the mail in which it had been put, and that afterwards it came into the possession of the plaintiff for a full and valuable consideration, and in the usual course and way of his business, and without any knowledge of the theft. After an elaborate argument, the court were unanimously of opinion that the plaintiff was the owner of the note, and thereby in effect determined that as such he was entitled to maintain an action thereon against the Bank of England, if it refused payment of the note.

Afterwards, in the case of Lawson vs. Weston, (4 Esp. Rep. 56,) the same question arose. A bill for £500 had been lost, and the loser had advertised it in the newspapers, and it was discounted by the plaintiff, a banker, for a stranger, who, on being required, wrote a name upon it, whereupon no further questions were asked; and it was held by Lord Kenyon, upon the trial of the cause, that the plaintiff was entitled to recover. "I think the point in this case," said he, "has been settled by the case of Miller vs. Race. If there was any fraud in the transaction, or if a bona fide consideration had not been paid for the bill by the plaintiffs, to be sure they could not recover; but to adopt the principle of the defence to the full extent stated, (namely, that the bill being for so large a sum, further inquiries ought to be made,) would be at once to paralyze the circulation of all the paper in the country. The circumstance of the bill having been lost might have been material, if they could bring knowledge of that fact home to the plaintiff. The plaintiff might or might not have seen the advertisement. It would be going a great length to say, that a banker is bound to make inquiry concerning every bill brought to him to discount; it would apply as well to a bill for £10 as £10,000. The magnitude of the bill has been pressed as a ground of suspicion by the defendant's counsel; I do not feel it of such importance." These decisions have never since been sériously questioned. The only doubt that has been felt in relation to the subject has been, whether the holder could be considered as acting in good faith, if he took the bank note under circumstances which ought to have excited the suspicions of a prudent and careful man. After considerable fluctuation of opinion, however, it was finally established, that negligence is not alone enough to destroy the title of a holder for value, but

that a case of bad faith on the part of such holder must be made out in order to defeat his claim.

2. The law is well settled, that where the note of a third person is received in payment of an antecedent debt, the risk of his insolvency is upon the party from whom the note is received, unless there is an agreement or understanding between the parties, express or implied, that the party who receives the note is to take it at his own risk. The same. principle is applicable to the notes of an incorporated bank, except that, as to the latter, there is always an implied understanding between the parties, that if the bill at the time it is received is in fact what the party receiving it supposes it to be, he is to run the risk of any future failure of the bank. This implied agreement between the parties arises from the fact that bills of this description, so long as the bank which issued them continues to redeem them in specie at its counter, are by common consent treated as money, and are constantly passed from hand to hand as such. (Ontario Bank vs. Lightbody, 11 Wend. 1; 13 Wend. 104.)

If, however, the party receiving the notes refuses to take them as an absolute payment, and thus throws the risk upon the transferrer of the notes, he must present them to the bank for redemption within a reasonable time, otherwise, if the bank becomes insolvent while he retains the notes, the loss will fall upon him. (Story, Prom. Notes, § 389.)

But there is some différence of opinion upon the question, whether if a bank note be transferred after the bank or banker issuing it has stopped payment, the transferrer or the transferree shall bear the loss, both being ignorant at the time of the transfer of the stoppage. In Pennsylvania, Tennessee, Alabama, and perhaps in Massachusetts, it has been held that *the transferree must bear the loss. But in South Carolina, New Hampshire and in New York, the opposite doctrine, which certainly seems the more reasonable, has been maintained. In the last named State, the question arose in the case of Lightbody vs. Ontario Bank, (11 Wend. 1,) affirmed in the Court of Errors, (13 Wend. 101.) Here A., on the thirtieth day of May, 1828, presented his check to the Ontario Bank, in Utica, and received in part payment thereof a bank note of the. Franklin Bank of the city of New York. The latter bank stopped payment on the twenty-ninth of May, at ten o'clock, A. M., although the bills of the bank were current in Utica until the thirty-first of May. The bill was paid by the Ontario Bank in good faith and in ignorance of the failure of the Franklin Bank. Upon an action brought by A. against the Ontario Bank, to recover the amount of the bank note received by him, it was held that the bank must bear the loss. "The receiving bank notes as money," said Chancellor Walworth in the Court of Errors, "is not a legal but only a conventional regulation, adopted by the common consent of the community. The principle of considering bank bills as money, which the receiver is to take at his own risk, cannot, therefore, be carried any further than the conventional regulation extends that is, to consider and treat them as money so long as the bank by which they are issued continues to redeem them in specie, and no longer. When, therefore, a bank stops payment, its bills cease to be a conventional representative of the legal currency, whether the holder

is aware of that fact or not; from that moment the bills of such bank lose their natural and legal character of promissory notes, or mere securities for the payment of money, and if they are afterwards passed off to an individual who is equally ignorant of the failure of the bank, there is no agreement on his part, either express or implied, that he shall sustain the loss, which has already occurred, to the original holder of the bills. Upon the principles applicable to cases of mutual mistake, as those principles are administered in courts of equity, it is now settled, that if an individual passes to another a counterfeit bill or an adulterated coin, both parties supposing it genuine at the time it was received, the one who passes it is bound to take it back and give him to whom it was passed a genuine bill, or an unadulterated coin in lieu thereof, or in other words, to make good the loss. That principle of natural justice is equally applicable to the case under consideration."

Although the better opinion would thus seem to be that the transferrer of a bank note of a bank insolvent at the time of transfer is bound to redeem it, the doctrine must be understood with this limitation, that the transferree does not make the note his own by failing to give notice of the failure of the bank, and to offer to return the notes to the person from whom he received them. Two or three cases, decided in England within a few years, will serve to illustrate this doctrine. In an action for the price of goods, it appeared that the same were sold on Saturday, and on the same day, at three o'clock in the afternoon, the vendee delivered to the vendor, as and for the payment of the price, certain promissory notes of the bank of D. & Co., payable on demand to bearer. D. & Co. stopped payment on the same day, at eleven o'clock in the morning, and never afterwards resumed their payments, but neither of the parties knew of the stoppage or of the insolvency of D. & Co. The vendor never circulated the notes or presented them to the bankers for payment; but on Saturday, one week after the failure of the bank, he required the vendee to take back the notes and to pay him the amount, which the latter refused. The court held that, under the circumstances, the vendor of the goods was guilty of negligence, and had thereby made the notes his own, and, consequently, that they operated as a satisfaction of the debt. (Camidge vs. Allenby, 6 Barn. & Cres. 373; 9 Dowl. & Ryl. 391.)

In Henderson vs. Appleton, cited in Chitty, Bills, ch. 9, p. 384, 9 Ev., the case was, that A. sold goods to B. on the twelfth of December, and it was agreed between them that the payment should not be made until the nineteenth, when B. paid A. in the notes of a country bank. By the course of the post the notes could not have been presented at the bank till the twenty-first of December. The bank paid all day on Saturday, the seventeenth of December, but no later. On the twenty-first, A. met B. and offered to return or exchange the notes with the defendant, but B. refused, saying, that the bank was going on the twentieth. The court, by Bayley J., said he believed the ground of the decision in Camidge vs. Allenby was that the notes should be deemed a payment, unless returned in a reasonable time, and that the plaintiff in that case, by keeping the notes a week after he heard of the stoppage, without notice to the defendant, had precluded himself from recovery; but that here A.

had offered to return, and the defendant had refused to take back the notes, and therefore the former was entitled to recover.

And again, in Rogers vs. Langford, (1 Cromp. & Mees. 637,) it appeared that, on the twenty-third of November, A. bought goods from B., which he paid for in country bank notes. On Monday, the twentyeighth, B. requested A.'s servant, as a favor, to exchange the notes for money, which he accordingly did. On the same day the bank stopped payment. A. heard of it on Tuesday, and on Wednesday wrote to B. informing him of the failure of the bank, and desiring him to exchange the notes; but the notes were not produced or tendered to B. until long afterwards, nor were they ever presented at the bank. In an action brought by A. against B. to recover the value of the notes, it was held that A. was not entitled to recover. The court, by Bayley J., said, "I think the notes ought to have been either presented by the holder to the bank for payment, or else to have been returned without delay to the defendant, so as to give him an opportunity of getting payment for them, or of making the best of them."