"The law governing such paper is the outgrowth of the usages of commerce. In determining disputed questions in its application it is often useful to recur to the objects and purposes of the law and to observe how far they may be promoted or defeated by the acceptance of any proposed construction of it. The reason of any law is its life, and a correct conception of its reason is oftentimes essential to a proper understanding of the meaning and tendency of the law itself."

The real question, therefore, is not whether a formal requisite is violated in theory, but whether it is violated in such a way as to raise serious objections; whether the acceleration provisions render the instrument more or less suitable for circulation among business men as a substitute for money.

Uncertainty of Amount. If the holder is authorized to sell the collateral before maturity, he must properly apply the proceeds of the sale toward the debt. Only the balance is then recoverable, and it is uncertain what that balance will be. The amount payable by the maker, either under a judgment or otherwise, is therefore said to be uncertain.130 A further uncertainty is created by words authorizing the holder to pay all expenses of the sale out of its proceeds.131

A similar uncertainty as to the size of the deficiency is caused by a power to sell collateral at maturity, yet this is clearly valid.132 A distinction has been suggested in that the power to sell after maturity operates when the instrument has become "an ordinary contract for the payment of money" subject to equities, while the power to sell before maturity operates while the bill has negotiable privilege and value.133 This distinction overlooks the point, that the acceleration does cause maturity and render the note overdue as to persons with notice that it has occurred. Also, if the note mentions the collateral, all purchasers are put on notice that the collateral should accompany the note,134 and, if it is missing, that it has been sold. A prior holder could have sold it anyway without express power to do so-a wrongful act, of course, but affecting a later purchaser with notice of the existence of the collateral and not 180 Lincoln National Bank v. Perry, 66 Fed. 887, 892 (1895); Continental National Bank v. McGeoch, 73 Wis. 332, 337, 41 N. W. 409 (1889).

131 Continental National Bank v. McGeoch, 73 Wis. 332, 338, 41 N. W. 409 (1889). 132 Arnold v. Rock River, etc. R. R. Co., 5 Duer (N. Y.) 207 (1856); N. I. L. § 5 (1). 133 Commercial National Bank v. Consumers' Brewing Co., 16 App. D. C. 186, 203 (1900).

134 Holmes v. Kidd, 3 H. & N. 891 (1858).

impairing negotiability. There is no reason why the expression of the power should alter the result. In other words, sale before maturity has the same practical effect upon later purchasers as sale after maturity.

If the note provides that the collateral also secures other obligations,135 then it may be that the absence of any collateral attached to the instrument would not be suspicious and would not throw a duty upon the purchaser to find out what had become of the collateral. Consequently, even though a prior holder had sold the collateral and applied the proceeds upon this very note, a subsequent purchaser ignorant of the rule would be able to recover in full. This is hard upon the maker, but ought not to prove fatal to negotiability. The same hardship might result in notes which give the maker or the holder an option for payment of the principal in parts before maturity. Such part payments would not affect a subsequent bonâ fide purchaser. Yet, as we have seen, such instruments are negotiable.1

136

The obligation of the maker to pay the expenses of sale does not create objectionable uncertainty in amount. The sum which the holder of the note at the time of the sale receives is not rendered uncertain, for he obtains only the face of the note. Indeed, the clause makes the value of the note more certain, for it is not liable to diminution by unforeseen expenses. It is indeed true that the maker will pay more than the face of the note, but this also happens if he agrees to pay exchange or attorney's fees, yet such agreements do not impair commercial certainty."

137

135 Held fatal to negotiability, as an order to do an act in addition to the payment of money; and as showing an intention not to have the note transferable, since this promise runs to the payee alone. Hibernia Bank v. Dresser, 132 La. 532, 543, 61 So. 561 (1913). Contra, Commercial Bank of Selma v. Crenshaw, 103 Ala. 497, 15 So. 741 (1893); Empire Nat. Bank v. High Grade Oil Refining Co., 260 Pa. 255, 103 Atl. 602 (1918). Difficult questions might arise about priority as to the collateral, should the payee hold several notes, and transfer them to different persons; but these might also arise if the agreement were oral and not on the instrument. This particular provision should not defeat negotiability, if the acceleration provisions do not. It does not per se put a purchaser on inquiry. For recent cases on such provisions see Torrance v. Third National Bank, 210 Fed. 806 (C. C. A. 3d, 1914); Mulert v. National Bank of Tarentum, 210 Fed. 857 (C. C. A. 3d, 1913).

136 This analogy is pointed out in Commercial National Bank v. Consumers' Brewing Co., 16 App. D. C. 186, 203 (1900). See pages 759 and 761, note 47, supra.

137 N. I. L. § 2; Cudahy v. Bank, 134 Fed. 538 (C. C. A. 8th, 1904), quoted on page 751, supra.

In short, the provisions for a speedy sale of collateral do not create uncertainty in amount, but make it more certain that the holder will receive the full face value of the instrument, without reduction by either the insolvency of the maker, or the depreciation of the collateral, or the cost of collection.

Uncertainty in Time. The acceleration provisions in these collateral notes do undoubtedly render the time of payment uncertain, but not more so than the other types of provisions already considered. It is objected that a note "which carries with it the probability, or even the possibility, that it may be partially or wholly extinguished before maturity" is not suitable for negotiation.138 Every "on or before" note, every installment note which falls due at once upon default, every note which gives the holder or maker an option to make part payments is open to just the same objection. This argument would wipe out acceleration provisions altogether.

Another objection advanced to these collateral notes is that the acceleration is not caused by the maker, but "there is an uncertainty in the time of payment within the determination of the

payee or his assignee." 139 This attempted distinction between

140

holder's option and maker's option has already been considered," and found to be baseless. Also, the instrument in question "is no more uncertain for practical purposes than a bill drawn, for example, 'at sight,' or 'on demand,' neither of which phrases has ever been held to diminish negotiability. Yet, with regard to bills so drawn, the holder exercises the unquestioned option of fixing the time when the direction to pay becomes absolute." 141 And, finally, the maker does participate in the acceleration in these collateral notes by his refusal to furnish more collateral, so that they would seem analogous to installment notes which are accelerated at the option of the holder after default by the maker. It may be argued, however, that the analogy is not sound, because the holder has unlimited discretion to determine when the security has depreciated, so that for all practical purposes maturity is within his sole

138 Thayer, J., in Lincoln National Bank v. Perry, 66 Fed. 887, 893 (C. C. A. 8th, 1895).

139 Benny v. Dunn, 26 Pitts. Leg. J. 382, 384 (1896).

140 See page 774, supra.

141 Barclay, J., in First National Bank v. Skeen, 101 Mo. 683, 688, 14 S. W. 732 (1890).

control.142 The general law as to drastic pledge agreements, however, requires the pledgee to act in good faith for the pledgor's benefit as well as his own,143 so that a dishonest or wholly unreasonable determination that the security is depreciating or that the additional security is not satisfactory would not seem to bring about an acceleration which would have any legal consequences. Therefore, it seems incorrect 144 to say that the holder has arbitrary power to cause acceleration. The power is given him for the purpose of making payment as certain as possible, and not for oppressing the maker.

There are difficulties about certainty of time which are not raised by the cases to which we will return later.

Furnishing More Collateral as an Additional Promise. — A third formal requisite which is said in several decisions 145 to be violated by these collateral notes is the rule that a negotiable instrument must not contain an order or promise to do an act in addition to the payment of money. This is said to be the most serious objection to these collateral notes. One decision which was disposed to regard such a note as sufficiently certain in time and amount held it not negotiable, because of this power to demand more collateral and sell upon default.

"The power here conferred is so uncontrolled and uncertain, and its exercise so completely subject to the contingencies of every passing hour from and after the very moment of execution and delivery, that . . . it .. ought not to be sanctioned.” 146

Another court says of this acceleration provision,

142 Benny v. Dunn, supra.

143 See the article on "Drastic Pledge Agreements," Murray Seasorgood, 29 HARV. L. REV. 277 (1916), which discusses many problems about these collateral notes outside the scope of my article.

144 As in Holliday Bank v. Hoffman, 85 Kan. 71, 77, 116 Pac. 239 (1911, N. I. L.). 145 See Commercial National Bank v. Consumers' Brewing Co., 16 App. D. C. 186, 204 (1900); Holliday Bank v. Hoffman, 85 Kan. 71 (1911, N. I. L.); Strickland v. National Salt Co., 79 N. J. Eq. 182, 188, 81 Atl. 828 (1911); and the chattel note cases. 146 Commercial National Bank v. Consumers' Brewing Co., supra, 204, 206. A special feature of the note in that case was that a third person was made the depositary of the collateral, and was given the power to decide when there was depreciation in its value, and what additional security or payments on account in lieu thereof were required. It would seem that it is fairer to the maker to give the power to a disinterested bank than to the holder of the note. The trustee of a corporate mortgage occupies an analogous position.

"It would hardly be different if the note recited that it was secured by a chattel mortgage upon certain live stock and contained an agreement that in case their value should depreciate and the holder should deem the security insufficient the maker would on demand execute and deliver to the holder a mortgage upon certain real estate for such amount as would satisfy the holder, and that otherwise the note should mature at

The installment notes are distinguished because there the acceleration is by the maker's failure to pay money, here to do something else.148 Negotiable instruments are intended as a substitute for money, but here is a contract to deliver things, which is therefore considered to be a very different affair.

Nevertheless, it is well to remember that negotiable instruments do sometimes contain promises to do something else besides pay money. For instance, the maker may agree to let the holder sell the collateral, or to authorize any attorney of a court of record to enter judgment against him, or to deliver certificates of stock in exchange for the instrument.149 In many jurisdictions he may agree to allow the legal title of a chattel to remain in the holder until payment of the instrument.150 Some of these allowable promises are enforceable only at maturity, but not all. It is just the same sort of act, for instance, to deliver stock in exchange for a note as to deliver more stock to secure it. If one can be done before maturity, why not the other? The question in every case is not whether the act is technically "additional" to the payment of money, but whether it is substantially so. If its real purpose is to aid the holder to secure the payment of money and protect him from the risks of insolvency, if it steadies the value of the note, and makes it circulate more readily, then it should not be fatal to negotiability.

The promise to furnish more collateral is, it seems to me, such an incidental promise. The holder does not receive this collateral to keep after the instrument is paid. He gets it so as to be more certain that the instrument will be paid, to make assurance doubly Both the old and the new collateral must be surrendered

sure.

149 N. I. L., § 5. The well-known common-law cases have already been discussed. They will be found in 1 AMES, CASES ON BILLS AND NOTES, Chap. I, Sec. V.

150 See note 3, supra.