Eigin National Bank v. Goecke et. al.
o $3000 demand note indorsed to Elgin Bank as collateral security
295 Ill. 403, 129 N.E. 149 | 1920| Duncan, J.
Nature of Case:
Digest maker: Claudine Dungo
SUMMARY: Goecke, manager of a brewing company borrowed $3k from
Eigin Bank on a note signed by him as maker (Goecke-Schmidt note). The
next year, the brewing company executed a $3k and $2.5 note each payable
to the maker’s order indorsed by the plaintiffs. They signed on the
representation that the proceeds of the notes were to be used for brewing
supplies. Goecke endorsed the $3k Brewery note as collateral security for the
Goecke-Schmidt note, and the $2.5k indorsed to the bank for the payment of
5 other notes executed by the brewing company as maker to other people.
The brewing Compnay defaulted on both notes, and Elgin Bank sued all of the
.five accommodation indorsers. The lower court found them liable. The SC
affirmed this, ruling that they are liable since the bank is a holder for value and
it had no knowledge of the restricted purpose of the notes and the notes were
indorsed to it before maturity. The bank was a holder for value for the $2.5k
note because the consideration paid by the bank was the surrender of the 5
other notes. As for the $3k, the bank had accepted the brewery note as
collateral by the Goecke-Schmidt note which has already been extended
before and with no further agreement
DOCTRINE: An indorsee of a negotiable note who has taken it, before its
maturity as collateral security for a pre-existing debt and without express
agreement, is deemed a holder for valuable consideration, and that he holds it
free from latent defenses on the part of the maker.
FACTS:
 Sept. 11, 1911 Goecke, the manager of Elgin National Brewing Co.
borrowed $3000 from Elgin Natl. Bank on a note signed by him as maker
(Goecke-Schmidt note)
o Bore guaranty of Schmidt, president of Elgin Brewing
o Proceeds of note used to pay operating expenses
o Last renewal made on Nov. 22, 1912 for 6 months
 Sept. 30, 1912 Elgin Natl. Brewing Company executed two demand
notes:
o $3000 dated Sept. 30, 1912 (Brewery note)
o $2500, Oct. 30, 1912
o Each payable to the maker’s order and indorsed in black ink by
it and also by Goecke, Mair, Rogers, Walther, Rathburn as
accommodation indorsers for the maker-payee
 Signed on the representation that the proceeds of the
notes were to be used to pay sight drafts with bills of
lading attached for two carloads of supplies for the
brewery
 Notes diverted to Goecke from their intended purpose without Elgin
Bank’s knowledge
for the Goecke-Shmidt note of $3000
o $2500 demand note indorsed to bank for payment of five other
notes executed by the brewing company as maker to other
people
 Purchased by Elgin Natl. bank
 Brewing Company defaulted on both notes, and Elgin sued all five
accommodation indorsers. All defaulted except Mair and Rogers.
o Court judged for plaintiff bank for the amount of two notes plus
interest, and was affirmed by the CA
ISSUE/S & RATIO:
1. Whether or not the accommodation indorsers are liable to the bank
notwithstanding the diversion of the proceeds of the notes? – YES
 The Plaintiffs, as accommodation parties and indorsers of the notes
indorsed them for the purpose of lending their names and credit to the
brewing company.
 They are liable bank on the notes if the bank is a holder for value since
at the time of taking the instruments:
o Bank had no knowledge of their restricted use and purpose
o Notes were indorsed to it before maturity
 For the $2500 note, the bank is a holder for value
o Consideration paid by the bank was the cancellation and
surrender by it of 5 other notes by the brewing company
 The $3000 Goecke-Schmidt note has been extended for six months by
the giving of a new note on Nov. 22, 1912.
o $3000 brewery note indorsed by plaintiffs was not delivered to
defendant at its bank and accepted as security until Dec. 10,
1912, 18 days after giving of the extension note to which it was
collateral security
o No proof that at the time the Goecke-Schmidt note was renewed
the last time there was an agreement that the brewery note was
to be put up as collateral and in part consideration for the
Goecke-Schmidt note or debt
 Brewery note was accepted by the bank as collateral for the Goecke-
Shmidt note, which has already been extended or renewed 18 days prior
thereto and with no further agreement
 An indorsee of a negotiable note who has taken it, before its
maturity as collateral security for a pre-existing debt and without
express agreement, is deemed a holder for valuable consideration,
and that he holds it free from latent defenses on the part of the
maker.
 The renewal of the Goecke-Schmidt note without the plaintiffs’ assent
does not discharge them from liability.
o The notes were not renewed after the brewery note was
accepted at the bank as collateral
 o The renewal of a debt for which an accommodation paper
has been deposited as collateral security does not release
the liability of the accommodation indorser
RULING:

Judgment affirmed.