negotiable but assignable, and perhaps some nonassignable. The discussion herein will be predicated on the assumption that the evidence of indebtedness is a negotiable instrument.

As to the rights of a "holder in due course," the following discussion assumes (a) the debt is evidenced by a negotiable instrument, and that the Government would not be liable if the instrument were nonnegotiable, and (b) that under the negotiable instruments law of the jurisdiction whose laws govern the transfer the claimant is in the technical legal sense "a holder in due course for value." It is impracticable to discuss here the construction of the quoted expression, or its applicability to various factual situations in the several States. The conflict in the authorities emphasizes the undesirability of here making an assumption, or statement, on the question of whether, and when, the original payee can, or does, occupy such position. Many cases on this point are summarized in the notes in 15 A. L. R. 437; 21 A. L. R. 1365; 26 A. L. R. 769; 32 A. L. R. 289; and 68 A. L. R. 962. See also comments beginning on page 487 of "Brannan's Negotiable Instruments Law" (5th Ed. 1932).

As is true of a private guarantor, or other contractor, the extent of the Government's liability is limited by the scope of its offer to become guarantor, subject to any applicable rules of law. Congress clearly intended that legal relationships thereby should be created; and, it is to be assumed, with their usual incidents. As in any other contract case, it is essential to ascertain the true intent and purpose of the contract, and if possible to so construe the words as to accomplish that purpose.

As to the rights of assignees of negotiable and nonnegotiable instruments to recover on guaranties thereof, see Stearns on the Law of Suretyship, 4th Ed. p. 63; Bassett v. Perkins (Supreme Court of New York, Trial Term, Erie County), 119 N. Y. S. 354 (Improper assignment of a stock certificate). Unless restricted by its terms a guaranty of payment of a negotiable instrument passes with the instrument. Commercial Bank v. Cheshire Provident Inst., Kansas 1898, 53 Pac. 131; Everson v. Gere, N. Y. 1890, 25 N. E. 492; Louisville, N. A. and C. R. Co. v. Louisville Trust Company, 1898, 174 U. S. 552, 43 L. Ed. 1081.

The last cited case well illustrates and emphasizes the characteristics of negotiability attributed to a contract of guaranty of a negotiable instrument. Plaintiff railroad company, by action of its officers pursuant to resolution of its board of directors, guaranteed the negotiable bonds of another railroad company. An applicable statute required that before the directors could do this they must receive a petition executed by a majority of the stockholders. No such petition was

presented. The trust company, a banking company, and others, bought some of the bonds without knowing of the absence of the stockholders' petition. Later, after learning of that defect, the banking company nevertheless bought some additional bonds. The details of the litigation are unimportant here. Essentially, it involved the enforceability of the railroad company's liability as guarantor of the payment of said bonds. The Supreme Court held that as to those bonds purchased for value without notice of the absence of the stockholders' petition, the guaranty was to remain in effect, but that the guaranty of the bonds bought by the banking company after learning of the defect was to be canceled. The situation of the Administrator as guarantor of the payment of certain obligations of certain veterans is somewhat similar to that of the guarantor railroad company. Further, it will be noted that the statute expressly recognizes this situation. Section 500 (c) provides:

*

* Nothing herein shall be deemed to preclude the assignment of any guaranteed loan, nor the assignment of the security therefor.

*

*

Part of the security is the guaranty. In some cases it is the sole security.

It must not be understood that a contract of guaranty is itself a negotiable instrument. If recovery be sought on such a contract, the usual rules pertaining to nonnegotiable instruments prevail. National Security and Trust Company v. Niles Company (Michigan 1923), 193 N. W. 199.

When the creditor complies with the standing offer of the United States (pursuant to statute), to become guarantor, it seems clear that the Administrator (on behalf of the United States) in substance and effect becomes a party to the negotiable instrument evidencing the veteran's debt.

By virtue of the statute the offer is limited in its application to a specified general class of debtors, to wit, veterans of World War II. The offer also calls for certain "personal qualifications," which are in a category differing not only in degree, but in kind from the general requirement that he be a World War II veteran.

The particular personal qualifications involved in the present submission, namely, whether the disability was in line of duty, is a qualification that in fact no one but the Government could determine. If the guarantor were any party except the Government, well settled rules of estoppel would obviate the necessity for pursuing the subject further. Common honesty precludes the Government from shifting the loss, if any, to the lender unless there is some compelling principle of law which will not permit any other result. Opinion is that there is no such principle applicable to the circumstances stated in sub

mission. Presumably when Congress authorized the Administrator, in effect, to become a party to negotiable instruments it was intended that this be done without impeding the normal, legitimate, commercial practices, or altering the principles of the law merchant on this subject. They have been recognized for centuries, and in the States of the United States have been crystallized, in substance, in the Uniform Negotiable Instruments Act.

The question then comes to this: What is the position of the Administrator (acting for the United States) as a party to negotiable paper? The Supreme Court held in Clearfield Trust Company v. United States, 318 U. S. 363, 87 Law Ed. 838 (1942) that:

(1) State law as such would not govern the liability of the United States as a party to negotiable paper, notwithstanding the holding in Erie Railroad Company v. Tompkins, 304 U. S. 64, which overruled the doctrine followed for about a century after the decision in Swift v. Tyson, 16 Pet. 1, 10 Law Ed. 865, on the question of federal courts being required to conform to the common law within the State, as declared by the State courts.

(2) The Federal law merchant, developed under the regime of Swift v. Tyson, represented general commercial law rather than a choice of a federal rule designed to protect a federal right, but it nevertheless stands as a convenient source of reference for fashioning federal rules applicable to these federal questions. Accordingly, when the liability of the United States is involved in litigation on negotiable paper the supposed federal rule as distinguished from the State rule (which may or may not be identical), will be applied. "The United States as drawee of commercial paper stands in no different light than any other drawee. As stated in United States v. National Exch. Bank, 270 U. S. 527, 534, * *

The doctrine is well illustrated in United States v. National Exchange Bank, 270 U. S. 527, 70 L. Ed. 717. In the court's opinion by Justice Holmes it was observed that certain language in earlier opinions should not be understood to mean

That great business houses are held to less responsibility than small ones. The United States does business on business terms * when the United

States issues an order upon itself, it has notice of the amount and when it comes to pay to an innocent holder making a claim as of right it is at arm's length and takes the risk. We are of opinion that the United States is not excepted from the general rule by the largeness of its dealings and its having to employ agents

The authorities discussed, and others that could be cited, justify, and perhaps compel the conclusion that as to negotiable instruments the United States (as guarantor) is a party thereto, and is bound to the same extent as, but no further than, is a private corporation, which, like the United States, must act through agents.

Applying these principles to the facts of the case stated in 1 (a) above, there would not be available a defense as to a claim on the guaranty as a result of the fact that the veteran served less than 90 days, was discharged on disability certificate, but it was later held by proper adjudication authority that said disability existed prior to enlistment and was not aggravated by service (i.e., not "service-con

nected"). This would be so regardless of who holds the obligation— lender or purchaser.

(b) The same conclusion cannot be reached as to question 1 (b). While the question as to the “clear ineligibility" of the loan in many instances will be factual, on the stated facts of the present submission the lender as well as the loan guarantee officer knew-or in the exercise of reasonable care should have known that the loan or a part thereof was ineligible. The application recited the facts. Knowledge of the law must be presumed, irrespective of actual knowledge. This is not limited to transactions to which the Government is a party (see Ferguson v. Union National Bank, 126 F. (2d) 753). To the extent the loan was ineligible the guaranty fails (ibid.).

It follows that the lender is not entitled to collect on the guaranty so far as it relates to a loan (or part thereof) for an ineligible purpose of which fact the lender has knowledge, or notice. This includes knowledge or notice of facts that would put a reasonably prudent man on inquiry.

On a different factual basis, e.g., if, under the current administrative interpretation of the law, the purpose of the loan was considered eligible the result would be entirely different-i.e., the guaranty would be valid.

2. If the Government is liable to the original lender, it necessarily would be liable to a "holder in due course" in the case stated in 1 (a) above. On the facts stated in case 1 (b) above, nothing passed to the "holder in due course" to put him on notice of an ineligible purpose of the loan. The quoted expression is used here in its strictly technical legal sense. This means, among other things, that the "holder" must be without notice or knowledge of any fact that would warn him of existing defects, or which would cause a "reasonably prudent man" to make inquiries, which if made would lead to a sufficient knowledge of the true situation.

HELD: The United States is liable on a loan guaranty certificate regularly issued, without any fraud or misrepresentation by anyone, but in fact erroneously issued because the veteran borrower was honorably discharged after serving less than 90 days in the military forces of the United States during World War II, where the veteran borrower and the original lender were informed by the Veterans' Administration, through honest error and prior to the conclusion of the loan and delivery of a negotiable instrument evidencing the debt, that the veteran was eligible, and such lender honestly misapprehended the matter of eligibility, whether the claimant on such loan guaranty certificate is the original lender, or is a "holder in due

course" for value and the parties intended that the benefits of the guaranty would pass with the instrument.

HELD FURTHER: If a loan guaranty certificate is regularly issued on account of an eligible veteran, without any fraud or misrepresentation by anyone, but in fact erroneously issued because one of the purposes of the loan was for a purpose not permitted by the act, and the amount of the loan, evidenced by negotiable instrument, was paid out by the original lender after being informed by the Veterans' Administration that the transaction was approved, the liability of the United States to the claimant on such loan guaranty certificate is as follows:

(I) If such claimant is the original lender, the United States is excused from liability to the extent that the money borrowed was for an ineligible purpose (i. e. one not within the purview of the statute), unless the original lender is in a jurisdiction (if any) the governing law of which at the time of claim is that the original lender is a "holder in due course."

(II) If such claimant is a "holder in due course" for value and the parties intended that the benefits of the guaranty would pass with the instrument, the United States is liable to the same extent as though all the money borrowed was used for eligible purposes; such claimant, among other things, must be without notice or knowledge of any fact that would warn him of existing defects, or which would cause a "reasonably prudent man" to make inquiries, which if made would lead to a sufficient knowledge of the true situation. (Opinion of the Solicitor, Aug. 5, 1946, approved Nov. 25, 1946.)

NOTE. The foregoing discussions and conclusions illustrate the principles basic to section 36.4325, loan guaranty regulations, and their application to the specific facts stated. They do not purport to establish a general rule applicable to materially different factual circumstances.

ADMINISTRATOR'S DECISION, VETERANS' ADMINISTRATION, NO. 734

DECEMBER 24, 1946.

Subject: Agricultural accessories to be utilized by disabled veterans for occupational purposes as constituting “equipment" to be included in tractor purchase price under Public Law 663, Seventy-ninth Congress.

QUESTION PRESENTED: Whether a tool bar lister, planting attachment, row cultivator, and two-way mounted plow may be included as "equipment" in the purchase price of a tractor under the provisions of Public Law 663, Seventy-ninth Congress?

COMMENT: Public Law 663, Seventy-ninth Congress, reads in part:

To enable the Administrator of Veterans' Affairs to provide an automobile or other conveyance, at a cost per vehicle or conveyance of not to exceed $1,600 371633°-56-Vol. 2- -5