Elgin National Bank v. Goecke et. al. 295 Ill.

403, 129 NE 149

Dec. 21, 1920 Duncan, J.
TOPIC IN SYLLABUS: Holder in Due Course
SUMMARY: Goecke, manager of brewing company, borrowed $3000 from Elgin Nat’l Bank as maker. Schmidt, President
of brewing co. signed as guaranty (Goecke-Schmidt note). Brewing Co. executed two other notes payable to maker’s
order: $3000 and $2500, both signed by 5 accommodation indorsers for the maker-payee. Goecke diverted these notes
from its agreed purpose: $3000 as collateral security for the Goecke-Schmidt note and $2500 as payment of other notes.
Company defaulted. Court held that the accommodation parties were liable to the Bank, who was a holder for value.
DOCTRINE: An indorsee of a negotiable note, who has taken it before its maturity as collateral security for a pre-
existing debt and without any express agreement, is deemed a holder for a valuable cosideration, and he holds it free
from latent defenses on the part of the maker.
FACTS:
 Goecke, as manager of Elgin Nat’l Brewing Company (Brewing Co.), borrowed $3000 from Elgin Nat’l Bank (Bank) on a
note signed by him as maker. Schmidt, President of Brewing Co., signed as guaranty. Proceeds of the note were used to
pay operating expenses of the company. (G-S note). Last renewal of the note was on Nov. 22, 1912 for 6 months.
 Sept 30, 1912, Brewing Co. executed two demand notes: $3000 and $2500. Each note was payable to maker’s order and
indorsed by Goecke, Mair, Rogers, Walther and Rathbun as accommodation indorsers 1 for the maker-payee. Proceeds
were agreed to be for payment of sight drafts with bills of lading with carloads of supplies.
 Goecke diverted these notes from intended purpose. The $3000 note was indorsed to Bank as collateral security of the
Goecke-Schmidt note. The $2500 note was indorsed to Bank for payment of 5 other notes. 2 All 5 other notes were
purchsed by Bank.
 Bank did not know of the diversion of the notes from the purpose agreed to by the accommodation indorsers. Brewing Co
defaulted on both notes. Bank sued all accommodation indorsers - all defaulted excoet Mair and Rogers.

ISSUE: W/N the accommodation indorsers are liable to the note? YES

HELD:
 Accommodation parties and indorsers lent their names and credit to the Brewing Co. and as such they are liable. Although
Bank knew that the indorsers were only accommodation parties, Bank was a holder for value as notes were indorsed
before its maturity and without notice of its restricted use or purpose.
 Re: $2500 note – Bank is a holder for value. The consideration was the cancellation and surrender by it of several other
notes to other parties and and indorsed to the Bank.
 Re: $3000 note – there is no proof that at the time the G-S note was renewed, the brewery note would be put up as
collateral. Proof only shows that the brewery note was delivered to Bank and was accepted as collateral to G-S note,
which was renewed 18 days prior with no agreement whatsoever.
 Indorsers argue that the mere voluntary delivery by Brewing Co. of the brewery note as collateral security of the G-S note,
and the acceptance of the note does not make the Bank a bona fide holder for value.  WRONG because it is well-
established law that an indorsee of a negotiable note who has taken it, before its maturity, as collateral security for a pre-
existing debt and without any express agreement is deemed a holder for valuable consideration. He holds it free from
latent defenses on the part of the maker.
 Indorsers also argue that they were discharged from liability upon the renewal of the G-S note without their assent. 
WRONG because the notes were not renewed after they were accepted as collateral. Renewal of the debt for which an
accommodation paper has been deposted as collateral security does not release the liability of the accommodation
indorser.

1
Sec. 29 defines accommodation party as “one who 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 person is liable to a holder for value, notwithstanding such
holder at the time of taking the instrument knew him to be only an accommodation party.”
2
Two to Brammer Bros., two to Frank Goecke, one to J.C. Eckerly.

Lopez, Catherine Nicole CASE #19