CHAPTER IV

RIGHTS OF THE HOLDER

(Sec. 51-Sec. 59, NIL)

IN GENERAL
-

The holder of a negotiable instrument may sue thereunder in his own

name and payment to him in due course discharges the instrument (Sec.
51)

If a promissory note is non-negotiable, subsequent holders can never be

holders in due course, but are mere assignees against whom defenses
may be raised by prior parties (Consolidated vs, IFC, 149 SCRA 448)

CLASSES OF HOLDERS
HOLDER IN DUE COURSE

1. Requisites (Sec. 52)

a. That it is complete and regular upon its face;
b. That he became the holder of it before it was overdue, and
without notice that it had been previously dishonored, if such
was the fact;
c. That he took it in good faith and for value;
d. That at the time it was negotiated to him he had no notice of
any infirmity in the instrument or defect in the title of the person
negotiating it.

Every holder is deemed prima facie to be a holder in due

course (Sec. 59)

However, when it is shown that the title of any person who

has negotiated the instrument was defective, the burden is
on the holder to prove that he or some person under whom
he claims acquired the title as a holder in due course (Bataan
vs. CA, 230 SCRA 647)

What constitute a notice of defect?

To constitute notice of defect in the title of the person

negotiating the same, the person to whom it is negotiated
must have actual knowledge of the defect, or knowledge of
such facts that his action in taking the instrument amounts
to bad faith.

2. Rights of Holder in Due Course

Like any holder, a holder in due course may enforce the

instrument and sue thereon in his own name

He also holds the instrument free from any defect of title

prior parties, free from defenses of prior parties among
themselves and he may enforce payment of the instrument
for full amount thereof against all parties liable thereon
1. He may sue on the instrument in his own name (Sec. 51);
2. He may receive payment and if the payment is in due
course, the instrument is discharged;
3. He holds the instrument free from any defect of title of
prior parties;
4. He holds the instrument free from defenses available to
prior parties among themselves;
5. He may enforce payment of the instrument for full
amount thereof against all parties liable thereon.

Can a payee be a holder in due course?

a. Negative view
o

The holder in due course must have acquired

the instrument through negotiation and an
instrument is issued and not negotiated to a
payee.

A payee in a promissory note cannot be a

holder in due course within the meaning of NIL
because a payee is an immediate party in
relation to the maker. The payee is subject to
whatever defenses, real or personal, available to
the maker of the promissory note.

b. Affirmative view
o

Payee may be a holder in due course under any

circumstances
in which
he meets the
requirements of Sec. 52. A holder is defined as
the payee or indorsee of the instrument who is
in possession of it. Every holder is presumed to
be a holder in due course. (Sec. 59)

HOLDER NOT IN DUE COURSE

Is one who became a holder of an instrument without any,

some, or all of the requisites under Sec. 52 of the NIL

Holder for value is one who has all the requisites for a holder
in due course except notice of want of consideration. He is
not necessarily a holder in due course, hence, prior parties
may avail of defenses against said holder (Prudencio vs. CA,
143 SCRA 7)

The only disadvantage of a holder who is not a holder in due

course is that the instrument is subject to defenses as if it
were non-negotiable (Bataan vs. CA, 230 SCRA 647)

Rights of Holder Not in Due Course

A holder not in due course can enforce the instrument and

sue under it in his own name

Prior parties, however, even though remote, can avail against

him any defense among these prior parties and prevent the
said holder from collecting in whole or in part the amount
stated in said instrument

That a holder is not a holder in due course does not mean

that he cannot recover under the instrument
1. He may sue on the instrument in his own name (Sec. 51).
2. He may receive payment and if the payment is in due
course, the instrument is discharge.
3. He is entitled to the instrument but holds it subject to the
same defenses as if it were non-negotiable (Sec. 58).
4. He has all the rights of a holder in due course from whom
he derives his title in respect of all parties prior to such
holder, provided he is not himself a party to any fraud or
illegality affecting the instrument (Sec. 58).

DEFENSES OF PRIOR PARTIES AGAINST THE HOLDER

CLASSES OF DEFENSES

1. Real or Absolute Defenses

Defenses which attaches to the instrument irrespective of the

parties and is perfected on the principle that the right sought
to be enforced has never existed or has ceased to exist

Those that are available against all parties, both immediate

and remote including holders in due course.

Example:
a. Forgery or unauthorized signature (Sec. 23)

A forged signature is a real or absolute

defense, and a person whose signature
on a negotiable instrument is forged is
deemed to have never become a party
thereto and to have never consented to
the contract that allegedly gave rise to it.
The counterfeiting of any writing,
consisting in the signing of anothers
name with intent to defraud, is forgery
(BPI vs, Casa, 430 SCRA 261)

b. Void contract (Civil Code)

c. Material alteration (Sec. 124)
d. Incomplete and undelivered instrument (Sec. 15)

Real defense is available against all holders whether due

course of not

2. Personal or Equitable Defenses

Defenses growing out of an agreement or conduct of a

particular person in regard to an instrument which renders it
inequitable for him, although owner of it, to enforce it against
the defendant

Available to prior parties among themselves but which are

not good against a holder in due course. Available only
against that person or subsequent holder who stands in
privity with the party seeking to enforce it.

Examples:
a.
b.
c.
d.
e.

Complete but undelivered instrument (Sec. 16)

Delivered but incomplete instrument (Sec. 14)
Absence or failure of consideration (sec. 28)
Defect of title
Simple fraud or fraud in inducement (Sec. 55)

The defenses are available against all holders not in due

course, except those who derive their rights from holders in
due course and who are not parties to any fraud or illegality
affecting the instrument (Sec. 58)

2 Requisites:
1. That he derives his title through a holder in due course;
2. That he was not himself a party to any fraud or illegality
affecting the instrument.
Note:

A payee or indorsee whose title is defective cannot better it

by selling the instrument to a holder in due course and
buying it again.

Example:
M induced to issue promissory note in favor of P. Here, P is a
party to the fraud. P indorsed the note to A. A has notice of the fraud
but did not take part in it. By A, the note is indorsed to B, a holder in
due course. B, in turn, indorses the note to C who knows how the note
was obtained but without being a party to the fraud.

M -(fraud) P (party to fraud) ---(indorsed)-> A

(notice but not

part)

(holder in due course) ---

party)

(knows of fraud not a

C is not a holder in due course, but has all the rights of such
holder with respect to M, P and A having derived his title from
B a holder in due course (fraud cannot be set up against him)

If B indorsed it to P, the latter cannot become a holder in due

course, (original position)

If indorsed it to D who has also notice of the defect but not a

party to the fraud, D cannot recover from M because D did
not acquire his title from holder in due course