SEC 52.

WHAT CONSTITUTES A HOLDER IN DUE COURSE: (1) That it is complete and regular upon its face; (2) That he became the holder of it before it was overdue, and without notice that it had been previously dishonoured, if such was the fact; (3) That he took it in good faith and for value; (4) That at the time it was negotiated to him, he had no notice of infirmity in the instrument or defect in the title of the person negotiating it. * These four (4) requisites must concur. * If one is absent, the holder cant be considered a holder in due course (HIDC) SEC 57. RIGHTS OF A HOLDER IN DUE COURSE HIDC holds the instrument free from any defect HIDC holds the instrument free from defences available to prior parties among themselves HIDC may enforce payment of the instrument for full amount against all parties liable SEC 58. WHEN SUBJECT TO ORIGINAL DEFENSES In the hands of any holder other the a HIDC, a negotiable instrument is subject to the same defences as if it were nonnegotiable...

* A holder NOT in due course, takes subject to all defences because he is treated as a transferee of a non-negotiable * REAL DEFENSES1, however, which attach to the instrument itself would be available even against HIDC. * The fact that a holder is not HIDC doesnt affect negotiability BUT it affects holders rights, AND doesnt prevent subsequent holders from acquiring status of HIDC * The question on whether a holder is HIDC or not is significant only when there is an existing defense between parties. When the instrument is valid, it doesnt matter whether the holder lacks one or more of the requisites in Sec 52 BPI v ALFRED BERWIN & CO (ABC), 1928 Facts: * BPI prayed to then CFI to summon Anselmo Diaz (Diaz) to testify re: credit of Alfred Berwin & Co (ABC) against him for the purpose of carrying out an execution of judgment rendered in this case * Diaz appeared and acknowledge that he was indebted to ABC for 20k * This debt is evidence by 2 PNs issued by Diaz ifo ABC (records dont show that PNs are still in the hands of ABC or whether they were negotiated) * As it doesnt appear on record that the PNs are still at the disposal of ABC, so that ABC may return to Diaz (Maker), Diaz cant be compelled to pay the amount of PNs to any person save the HIDC * To compel Diaz to pay ABC would expose Diaz to pay the PNs twice, one to ABC and eventually to HIDC. Held: Ruled ifo Diaz. SEC 24. PRESUMPTION OF CONSIDERATION
1

* A HIDC can acquire a better title than his predecessors bec he takes the instrument free from any defect of title of prior parties. he is also free from defences available to prior parties among themselves

Discussed in next Chapter

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Instrument is issued for value SEC 25. CONSIDERATION; WHAT CONSTITUTES Value is any consideration sufficient to support a simple contract. Antecedent and pre-existing debt constitutes value; and is deemed as for value whether the instrument is payable on demand of at a future time. * Value and consideration are generally convertible terms BUT they have different implications. Camposes said (without explaining why) that when a payee of a note sues the maker, or payee of a bill sues the drawer, or an indorsee sues his immediate indorser, CONSIDERATION is used on the other hand, when a holder sues any party to the instrument with whom he has not dealt with, VALUE is more proper to use. * Value need not be full and a holder will be one for value even if he gave less than the face value of the instrument provided that intention of the transferor is to transfer full amount of the instrument. ELGIN v GOECKE, 1920 Facts: * Sept 18, 1912, Goecke (maker), manager of Elgin Brewing, borrowed $3k from Elgin Bank on a note signed by him * Note bore guaranty of Schmidt (Pres of Elgin Brewing). * The proceeds of the note were used for the expenses of the Brewing Co.. * The last renewal of the note was Nov 1912 for 6 mos * Sept 30, 1912: Elgin Brewing executed 2 demand notes: (1) for $3k and (2) for $2,500 payable to the makers order and indorsed in black ink by it and Goecke, Mair, Rogers, Walther and Rathbun as accommodation indorsers

* Accommodation indorsers signed on the representation that the proceeds of the 2 notes were to be used to pay SIGHT DRAFTS with bills of lading * Both notes were diverted to Goecke who indorsed the $3k note to Elgin Bank as collateral security for the earlier Goecke-Schmidt note and the $2,500 demand note was indorsed also to Elgin Bank in payment of 5 other notes executed by Elgin Brewing as maker, 2 to Brammer Bros, 2 to Goecke and one to JC Eckerly.

* Elgin Bank did not know of the diversion of the 2 demand notes for the purpose agreed to

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* Elgin Brewing defaulted on both notes * Elgin Bank sued all 5 accommodation indorsers Lower Ct: Ruled ifo Bank CA; Affirmed Lower Ct SC: * Accommodation indorsers are liable to bank, who is a holder in due course * Accommodation indorser is one who has signed an instrument as maker, drawer, acceptor or indorser, without receiving value therefore, and for the purpose of lending his name to some other person. * the consideration paid by the bank for this note was the cancellation and surrender by it of several other notes executed by Elgin Brewing to other parties and indorsed to Elgin Bank. Therefore, Elgin Bank is HDC of the $2,500 note * Likewise, Bank accepted the $3k note as collateral for the previous loan of Goecke. Being a collateral for a pre-existing debt, Bank is HDC Held: CA Affirmed Accommodation indorsers are not released from liability Ruled ifo Bank Held: Affirmed, ifo Bank * When the holder of a check deposits it with his bank (who is not drawee), the bank becomes HIDC only when the depositor

withdraws the amount of the deposited instrument. Where such withdrawal takes place before maturity and before the bank receives notice of any defense on the instrument, the bank is a holder in due course against whom such defense would be unavailable. MERCHANTS v STA MARIA Facts: * Sta Maria Sugar (Sugar) gave its negotiable note payable to the order of American Hoist (American) * American deposited the note in Merchants Bank before it was due. * Merchants credited to the account of American the amount on the note + interest. * American already had in Merchants a deposit of about $20k and then the note added value and another deposit of about $100 k was made. Withdrawals were also made leaving a balance of about $6k * Merchants had no knowledge of any claimed defense of Sugar * Merchants sued Sugar Sugars Contention: claimed defense against payee American and that bank is not a holder in due course. * The bank had always on account a sum in excess of the amount on the note Merchants: The rule is FIFO that the first items on the debit side are charged against the items on the credit side. Lower Ct: Dismissed Merchants complaint Ruled ifo Sugar

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Issue: WON by discounting the note and by subsequent transactions on the account, it can be considered that value passed, that entitles the Merchants to recover from the note SC: Merchants is a holder for value * First debits are to be charged against first credits. Therefore the $2k note was already debited from the account in the bank. * Since the value was already debited, Bank should be paid such amount by Sugar. Held: Lower Ct REVERSED Ruled ifo Merchants NATIONAL BANK V MORGAN Facts: * National Hay deposited with National Bank a draft on Flour and Grain Co and a bill of lading. * National Bank credited National Hay the full amount of deposits * The draft with the bill was forwarded by National Bank to First National Bank for collection and remittance. * Attachment proceedings was filed by Morgan vs National Hay and garnishment was directed to First National. * First National admitted that it had the proceeds but said that the claimant was National Bank Lower Ct: Ruled ifo Morgan Banks Contention: It is a holder in due course despite the fact that there exists balance in excess of amount claimed. ISSUE: Won National Bank received the draft as a purchaser for value

SC: * National Bank is not holder for value, it is merely a collecting agent unless it showed that the amount so credited was absorbed by existing debts or checked out. * Upheld the ruling in the Sta Maria Sugar re: FIFO * National Hay had a standing balance to its credit with Bank in excess of the draft. * the bank can easily debit the value it credited, anyway. Held: Lower Ct Affirmed Ifo Morgan SEC 26. WHAT CONSTITTUES A HOLDER FOR VALUE Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who became such prior to that time.

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In the diagram above, D who gives value to C, is a holder for value not only as against C but also as regards A and B.

thereon to have become a party thereto for value * Presumption is prima facie and may e rebutted by proof to the contrary. 3. HOLDER IN GOOD FAITH SEC 53. WHEN TITLE DEFECTIVE Defective when instrument is obtained through fraud, duress, or force and fear or other unlawful means or for illegal consideration, or when negotiated in breach of faith. SEC. 56. WHAT CONSTITUTES NOTICE OF DEFECT The person to whom instrument is negotiated must have actual knowledge of the infirmity or defect, or knowledge of such facts that amounts to bad faith

In the diagram above, D is a holder for value as against A and B but not against C. * The mere fact that the present holder paid nothing for a note or is not a holder for value doesnt preclude recovery, but only lets in all defences, if any. SEC 27. WHEN LIEN ON INSTRUMENT CONSTITUTES HOLDER FOR VALUE Where holder has a lien on the instrument, arising from contract or by implication of law, he is deemed holder for value * If a negotiable instrument is given as a collateral for a debt, the holder has a lien on the instrument SEC 24. PRESUMPTION OF CONSIDERATION Every instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears

* Sec 56 Notice must be actual not merely constructive or that act constitutes bad faith * Gross Negligence in itself would NOT CONSTITUTE NOTICE * Where a suspicious circumstance is so cogent and obvious that to remain passive would amount to bad faith, the holder will be subject to defences. * It is enough that the purchaser knows that the instrument is somehow tainted and he need not know the particulars of the wrong committed UNAKA NATIONAL BANK v BUTLER Facts: Harris (drawer) drew a check with Unaka Bank as Drawee to the order of Butler (payee) for value. * Butler indorsed the check in blank and negotiated it to Davis who on the next day lost the instrument

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* At the request of Davis, Harris ordered a stop payment. * Stop order was overlooked and check was paid to Ward and Fryberg (merchants) who got the instrument from a customer who was unknown. * Harris sued Unaka Bank. Lower Ct: Ruled ifo Bulter * Ward and Fryberg were not holders in due course. Butlers Contention: While Ward had no knowledge of the fraudulent negotiation, the circumstances attending their purchase should excite suspicion.. Issue: Won Ward is holder in due course YES Won there was notice None SC: * To constitute an infirmity in an instrument, or defect of title of the person negotiating the same, the person to whom it is negotiated must have ACTUAL knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith. * Purchaser of negotiable instrument owes no duty to the former holders to actively inquire into the title of the party in possession, and that circumstances of suspicion and gross negligence are not of themselves bad faith, but only evidence to establish it. * Ward purchased the check for Value, in due course of trade and without actual knowledge of infirmity. * There was no bad faith * Davis lost his title

Held: Lower Ct REVERSED Ruled ifo Bank DE OCAMPO v GATCHALIAN Facts: * This action is for the recovery of the value of check worth P600 payable to plaintiff and drawn by defendant Gatchalian. * De Ocampo received the check in payment of the indebtedness of one Matilde Gonzales; that De Ocampo gave Matilde P158.25, the difference between the face value of the check and the debt. * Gatchalian admits the execution of the check but that it was issued for a condition (purchase of car) and that De Ocampo was guilty of gross negligence in not taking steps to protect itself. * What happened was, Gatchalian was looking for a car. Manuel Gonzales pretended to be authorized by Ocampo Clinic to sell the latters car. Gatchalian was interested so Manuel advised her to give the owner the check as proof of her interest. Manuel will keep the check and return the same after the car was delivered. Truth is Ocampo Clinic did not authorize Manuel. So, Gatchalian drew the check and gave it to Manuel. Manuel failed to appear and bring the car as agreed. Gatchalian ordered a stop payment. Turns out, Manuel gave the check to Ocampo Clinic as payment for hospitalization of his wife. Ocampo did not inquire about the check Gatchalians Contention: She had no intention to transfer the property bec it was only for the safekeeping of Manuel. Assuming there was delivery, it was conditional and the condition was not fulfilled * There was no negotiation. De Ocampo is not holder in due course. It took possession of the instrument which was suspicious. the check was not personal check of Manuel but of Gatchalian.

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Gatchalian as maker is not obliged to Ocampo Clinic nor Manuel. The check was for P600 and the bill was only for P441.75. * De Ocampo shouldve been more cautious. * Check was payable to BEARER. Banks normally subject bearer to inquiries. De Ocampos Contentions: It is a holder in due course. It doesnt matter that it was the payee (ano ba talaga? bearer or order) * Manuel was the agent of drawer Gatchalian Issue: Won De Ocampo is holder in due course. SC: * agrees with Gatchalian that the circumstances indicate that Gatchalian had no obligation to the Clinic and the value of the check did not correspond to the bill, that the check had 2 parallel lines which means that the checks could only be deposited (ngayon naman crossed check!!) and may not be converted to cash * These circumstances should have put De Ocampo on guard. It was payees duty to ascertain from holder Manuel. * De Ocampo was guilty of gross neglect in not finding out the nature of the title and possession of Manuel, amounting to bad faith. * De Ocampo not holder in good faith * Bad faith means bad faith in commercial sense. Although gross negligence does not in itself constitute bad faith, it may be inferred by such. * De Ocampo could not be allowed to recover * Sec 52(c) HDC is one who takes the instrument in good faith and for value. * Sec 59 every holder is deemed prima facie to be holder in due course

* Sec 52(d) to be HDC it is necessary that at the time the instrument is negotiated to him, he had no notice of any defect in the title of the person negotiating it. * Prima Facie evidence may be rebutted. Here, there was defect in title because the instrument was not payable to holder (Manuel) or to bearer. Manuels title is suspicious. * Payee is not holder in due course. It did not exercise prudence and caution (test of reasonably prudent man) Held: Ruled ifo Gatchalian

STATE INVESTMENT HOUSE (SIHI) v IAC Facts: *New Sikatuna requested for loan from Chua. * Harris Chua agreed to grant the loan but New Sikatuna had to wait until Dec. New Sikatuna agreed so Anita Chua issued 3 checks payable to New Sikatuna, all post dated totallilng P299,450. * New Sikatuna entered into an agreement with SIHI whereby New SIkatuna would assign to SIHI eleven checks including the 3 checks by Chua. * When SIHI deposited the checks, they were dishonoured bec of insufficient funds, stop payment and account closed. * SIHI demands the sum of the checks fr Chua. SIHI filed action for collection. * Sps Chua filed a 3rd party complaint vs Sikatuna. for reimbursement in the event that they be held liable. Lower Ct: Ruled ifo SIHI CA:

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Ruled ifo Chuas Issue: Won SIHI is HDC to entitle it to then proceeds of the checks SC: * Sec 52(c) defines HDC is one who takes the instrument in good faith and for value. * Sec 52(d) to be HDC it is necessary that at the time the instrument is negotiated to him, he had no notice of any defect in the title of the person negotiating it. * Sec 59 every holder is deemed prima facie to be holder in due course * NIL doesnt mention crossed checks but SC has taken cognizance of the practice. * Crossed check should put the payee on inquiry and upon him devolves the duty to ascertain the holders title. failing in this respect, the payee is guilty of negligence amounting to legal absence of good faith. * Effects of crossing checks: (a) the check may not be encashed but may be deposited; (b) check may be negotiated only once to one who has account with bank (c) the act of crossing check serves as a warning to the holder that the check has been issued for a definite purpose. * SIHI discounted the check knowing that it was not the intention of the check. It failed to inquire the purpose of the 3 checks. * New Sikatuna negotiated the 3 checks in breach of Sec 55 (Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an illegal

consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.) * The effect of crossing a check relates to the mode or presentment for payment. Under Sec 72, presentment for payment to be sufficient must be made by the holder, or by some person authorize to receive payment; depending on the instructions stated in the face of the check. * In this case, the checks were intended to be deposited to the account of New Sikatuna (payee). It was not the payee but SIHI who made the presentment. * Since SIHI wasnt HDC, it cant recover from Chuas but it may recover from New Sikatuna. * The only disadvantage of a holder who is not in due course is that the negotiable instrument is subject to defences as if it were nonnegotiable. Held: CA Affirmed Ifo Chuas

* Financing Co, Holder in good faith? CONSOLIDATED v IFC LEASING Facts: * Consolidated is a logging Co. * Atlantic through Industrial (seller-assignor), offered to sell 2 tractors * Industrial assured Consolidated that the used tractors were in good working condition and that there was a warranty of 90 days * Consolidated purchased on instalment. It paid down of P210,000. * Industrial issued sales invoice and deed of sale with chattel mortgage with PN

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* Industrial delivered the tractors and then assigned by means of deed of assignment its rights and interests in the chattel mortgage ifo IFC * 14 days after delivery, one tractor broke down and the other after 9 days. Consolidated informed Industrial about this. Mechanic was sent but it appeared that the tractors were not serviceable. * Consolidated informed Industrial that the remaining balance will not be paid yet until Industrial fulfills its obligation under the warranty. * Consolidated then wrote to Industrial to have the tractors reconditioned an resold. * Industrial did not respond and instead, IFC filed a case against Consolidated. RTC: Ruled ifo IFC Ordered Consolidated to pay IFC CA: Affirmed RTC * The warranty doesnt lie against IFC it lies between Consolidated and Industrial. * The breach of warranty is not a defense available to Consolidated * IFC is a leasing Co engaged in the financing and extending credit to customers * The PN is a negotiable instrument which was discounted or sold to IFC, IFC accepted the PN free from defect Issues: (1)Won the PN is a negotiable instrument so as to bar completely all available defences of Condolidated against IFC. NO (2)Won IFC is holder in due course. NO

IFCs contention: It is a holder in due course and its not liable for the breach of warranty SC: (1) The PN is not a negotiable instrument, IFC therefore, can never be a holder in due course but remains an assignee of the note. Consolidated may raise all defences available to it. * The instrument doesnt have the words of negotiability (or order) * (2) IFC is not holder in due course bec it had actual knowledge of the fact that Industrial doesnt have unconditional right to collect (it was subject to the condition that the tractors were not defective). * In instalment sales, the buyer usually issues a note payable to the seller to cover the purchase price. Many times, a finance co. pays the full price and the note is indorsed to it. When the goods turn out to be defective, finance co. will be subject to the defense of failure of consideration and cannot recover from the buyer. Mr and Mrs General Public must have some protection. Finance co. is better able to bear the risk of dealers insolvency. * A ruling ifo of Industrial and IFc is unjust enrichment Held: IFO Consolidated SALAS v CA and FILINVEST FINANCE Facts: * Salas bought a car fr Violago for P58,138.20 as evidence by a PN * This note was indorsed to COMMERCIAL v ORANGE COUNTY

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* The purchase of an instrument at a discount doesnt, of itself, constitute bad faith HAM v MERRITT SEC 54. NOTICE BEFORE FULL AMOUNT PAID Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount theretofore paid by him. * Notice of defences to a purchaser before he has acquired title and before he has paid any portion of the purchase price is fully operative to prevent him from being holder in due course. * But where he receives such notice after he has partially paid the instrument, he is holder in due course as to the amount paid by him. Should he pay the remainder despite notice, he cannot recover to such extent.

cases... SEC 29. LIABILITY OF ACCOMMODATION PARTY An accommodation party is one who has signed the instrument as maker, drawer, acceptor , or indorser, without receiving value therefor, for the purpose of lending his name to some other person. * An accommodation party is actually a surety for the principal debtor, the accommodated party to whom the name is lent

When As note falls due, A refuses to pay X on the ground that B was guilty of fraud. ...

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