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ought to be the same as those which release or protect the surety. Courts have therefore avoided the necessity of creating a new terminology, by placing the limited class within the general class which it most strongly resembles, and referring to the accommodation party as a surety. Indeed, this interchange of terms is probably the only basis for the impression that they have attempted to create a blend of “legal systems,” or to ingraft upon the law of negotiable instruments all the legal theories of suretyship. That impression, while perhaps natural, is erroneous. To yield to it would be to make the whole law of accommodation paper depend upon questions of terminology.
Moreover, a closer scrutiny of judicial decisions will dissipate it. As we have noted, the enforcement, with respect to accommodation paper, of the equities of suretyship, is justified by the obvious resemblances between the respective situations of the accommodation party and the surety. The effect of denying to the former these equities must then be to make him absolutely liable to a holder with full knowledge of his accommodation character, regardless of the relations between the holder and the party who received value, or of the situation with respect to the last-named party in which the negligent or wrongful act of the holder may have left him. The repugnance to every equitable principle of such absolute and unprotected liability needs no exposition; and courts construing the “law merchant” have not hesitated to apply the equities suggested by the surety's analogous situation, and protect the lender of credit accordingly. Nor, in view of the peculiarities of the latter's contract, can such application be considered as ill-reasoned as the criticism of it would indicate. In fact, it must in all seriousness and with due respect to both critic and criticised be said that these judicial decisions, declaring the equities of concrete facts rather than conclusions from abstract premises, endure examination much better than do most of the strictures laid upon them. As the oldfashioned dominie said of Holy Writ, they “shed great light upon the things which commentators have written about them.”
The foregoing conclusions do not overlook the fact that in a proper case at "law merchant" the anomalous or accommodation party may be held otherwise than as a surety, or that the peculiarities of commercial paper may disentitle such party to some of the privileges of suretyship. That the “law merchant” so far recog
nized the resemblances between the contract of a surety and that of an accommodation party as to adopt from equity for the latter's benefit the same doctrines of which the former might take advantage — this, at least, we are justified in saying. The succeeding question is, What effect has the Uniform Negotiable Instruments Act, now the law of forty-seven American jurisdictions, upon this phase of the credit-lender's liability?
If we accept literally the suggestion that the Uniform Act "codified the 'Law Merchant,'” 18 obviously under the act the accommodation party is as much entitled to the equities of suretyship as ever he was. The fact that courts construing the Act have, rightly or wrongly, withheld some of these equities suggests at the start that there must be some error in, or at least some judicial misunderstanding of, that suggestion.
Section 29 of the Uniform Act defines an accommodation party and his liability as follows:
"An accommodation party is one who has signed the instrument as maker, drawer, acceptor or indorser, without receiving value therefor, and 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."19
As to irregular indorsements, the Act provides (Section 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 bearer, 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."20
Section 192 defines "primary” and “secondary” liability as follows:
18 See the quotations embodied in the conference report, 1 Am. Bar Ass'n. J. 26–36.
19 AMERICAN UNIFORM COMMERCIAL Acts, p. 145. (The official edition, prepared and recommended by the Conference of Commissioners on Uniform State Laws.)
20 Id., 152–53.
“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."21
And following are the provisions (sections 119 and 120 of the Act) for discharge of negotiable instruments:
“A negotiable instrument is discharged: “(1) By payment in due course by or in 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;
“(5) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.
“A person secondarily liable on the instrument is discharged: “(1) By any 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;
“(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.” 22
The first effect of these provisions, without going into the reasons for it, has been to make the accommodation maker or acceptor liable to pay at maturity without notice of dishonor and protest, or any other formality necessary to charge an indorser in due course; and the accommodation indorser liable in all cases as an indorser "at 'law merchant,'" entitled to the benefit of all these same formalities.24 In other words, one has become “primarily” and the other “secondarily” liable, in the Uniform Act sense of those terms.
Using this holding as one premise, and the fact that extension of time of payment is included in Section 120 of the Act and omitted from Section 119 as the other, many courts have held that an accommodation maker is not released under the Uniform Act, as he was at "law merchant," by an extension of time by the holder to the real maker.25 Probably the most conspicuous of these cases is Union Trust Co. v. McGinty,26 one of the mainstays of the conference's argument aforesaid, 27 and cited by Mr. Sicherman as the “best expression” of the purpose and effect of the Uniform Act.28 Mr. Chief Justice Rugg's remark in that case as to the Uniform Act's failure to mention suretyship 29 is likewise the most conspicuous of the similar judicial utterances which have formed the basis of the conference's conclusion that the Act has removed suretyship from the law of negotiable instruments, whether the "law merchant” recognized suretyship or not.
21 AMERICAN UNIFORM COMMERCIAL Acts, p. 183. 22 Id., 165.
23 Hunter v. Harris, 63 Ore. 505, 127 Pac. 786 (1912); Lumbermen's Nat. Bank o. Campbell, 61 Ore. 123, 121 Pac. 427 (1912); Cellers v. Meachem, 49 Ore. 186, 89 Pac. 426 (1907).
24 Deahy v. Choquet, 28 R. I. 338, 67 Atl. 421 (1907).
If the Chief Justice's statement were more than dictum, unnecessary to the judgment the court reached, perhaps we might concede that he hints at such conclusion. As the facts stand, however, his language has received an interpretation altogether too broad. To say
that the effect of the Uniform Act is on the one hand to make every party to a negotiable instrument liable in accordance with its terms, regardless of the equities existing between the parties, and
25 Cowan o. Ramsey, 15 Ariz. 533, 536, 140 Pac. 501 (1914); Vanderford v. Bank, 105 Md. 164, 66 Atl. 47, 10 L. R. A. (N. s.) 129 (1907); Cellers v. Meachem, 49 Ore. 186, 89 Pac. 426; Wolstenholme o. Smith, 34 Utah 300, 97 Pac. 329 (1908); Bradley Engineering, etc. Co. o. Heyburn, 56 Wash. 628, 106 Pac. 170 (1910); National Citizens' Bank o. Toplitz, 81 N. Y. App. Div. 593, 81 N. Y. Supp. 422; Richards v. Market Exchange Bank Co., 81 Ohio St. 348, 90 N. E. 1000, 26 L. R. A. (N. s.) 99 (1910); Fritts v. Kirchdorfer, 136 Ky. 643, 650, 124 S. W. 882 (1910); Lane v. Hyder, 163 Mo. App. 688, 147 S. W. 514 (1912); Night & Day Bank v. Rosenbaum, 191 Mo. App. 559, 177 S. W. 693 (1915). Cf. Fullerton Lumber Co. v. Snouffer, 139 Ia. 176, 117 N. W. 50 (1908); Goldberg & Louis v. Stone, 10 Ala. App. 485, 65 So. 454 (1914).
212 Mass. 205, 98 N. E. 679 (1912).
Approaching the act from this point of view, it is apparent that no relation of principal and surety is established or contemplated by any of its sections. It determines the liability of the various parties to the negotiable instrument on the basis of that which is written on the paper. The obligation of all makers, whether for accommodation or otherwise, is to pay to the holder for value according to the terms of the bill or note. Their obligation is primary and absolute.” 212 Mass. 207, 98 N. E. 680. The foregoing, with other portions of the opinion, is quoted with approval in Cowan o. Ramsey, 15 Ariz. 533, 536, 140 Pac. 501. See also the dissenting opinion of Sturgis, J., in Long 0. Shafer, 185 Mo. App. 641, 650, 171 S. W. 690, 694 (1914).
on the other to exclude evidence as to what those equities are, is to ignore the essential characteristics not only of suretyship, but also of the credit-lender's contract. It is to confuse the two meanings of those abused terms "primary” and “secondary.” In one, the strict “law merchant" sense, primary liability is that of a party not entitled to the formalities necessary to charge an indorser; secondary liability is that of a party so entitled. This special meaning of the terms is of course due to the peculiarities of mercantile custom, a party secondarily liable being in a sense entitled, before he can be held, to have ordinary commercial methods of collection exhausted against parties primarily liable.30 In another, the equitable sense, primary liability is that of the beneficiary of the contract — in a negotiable instrument contract the party who has received value; secondary liability that of the party who, as between himself and the party primarily liable, is entitled to reimbursement if he be compelled to pay. In other words, primary and secondary liability in the “law merchant" sense depend upon and are part of the contract expressed in the instrument itself; in the equitable sense they arise collaterally out of the accommodated party's implied liability to reimburse his credit lender. So far as the instrument itself is concerned the holder need not regard this collateral matter; it is his knowledge of it, and his disregard of or interference with it notwithstanding knowledge, which bring the accommodation party's equities, like the surety's, into play.
This being true, it is fallacious to base upon the Uniform Act's definition of the liabilities arising out of the signatures to the instrument itself, or upon the Act's mere failure to mention suretyship, a statement that no incident of suretyship can attach to a negotiable instrument. This distinction between the rights defined by the terms of the instrument and the equities which may nevertheless attach is discussed with especial clarity in one or two of the decisions establishing the “law merchant” as to this proposition. We have already referred to Duncan v. Bank.31 An earlier and not less conspicuous case is equally explicit:
30 “The terms ‘primary' and 'secondary,' when they apply to the parties to an obligation, 'refer to the remedy provided by law for enforcing the obligation, rather than to the character and limits of the obligation itself.' Kilton o. Prov. Tool Co., 22 R. I. 605, 48 Atl. 1039.” Ellsworth, J., in Northern State Bank v. Bellamy, 19 N. D. 509, 514, 125 N. W. 888 (1910).
31 6 App. Cas. 1 (1880).