SECTION 30.What Constitutes Negotiation. An instrument is negotiated when it is transferred Can an instrument be endorsed to two or more endorsees severally?
ore endorsees severally? No, such endorsement does not
from one person to another in such manner as to constitute the transferee the holder thereof. If
payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the
endorsement of the holder completed by delivery.
What is negotiation? Negotiation is such transfer of an instrument from one person to another as to
constitute the transferee the holder of the instrument.
How is an instrument negotiated? If payable to bearer, it is negotiated by delivery; if payable to order, it is
negotiated by the endorsement of the holder completed by delivery.
What are the methods of transfer? 1) by assignment; 2) by operation of law; 3) by negotiation (either
endorsement completed by delivery or by mere delivery)
What is assignment? It is a method of transferring a non-negotiable instrument whereby the assignee is
merely placed in the position of the assignor and acquires the instrument subject to all defenses that
might have been set up against the original payee.
What is the effect of assignment of non-negotiable instrument? The assignee is substituted in place of
the assignor subject to all defenses that might have been set up against the latter.
Can a negotiable instrument be assigned? Yes subject to the rules applying to assignment
What is meant by transfer by operation of law? It means full title to a bill or note may pass without
either assignment, endorsement or delivery and instead by operation of law: 1) by the death of the
holder where the title vests in his personal representative; 2) bankruptcy of the holder, where title vests
in his assignee or trustee or 3) upon the death of a joint payee or endorsee, where title vest in the
surviving payee or endorsee.
Is delivery to payee considered as negotiation? There are two views on this question. The first view is that
issuance or delivery of an instrument to the payee it no negotiation because negotiation refers to an existing
negotiable instrument and before delivery to payee, the instrument is not complete. The second view is that
under Section 30, an instrument is negotiated when it is delivered to the holder and under Section 191, a
holder is a payee or endorsee of a bill or note who is in possession of it. This is the better view.
SECTION 31.Endorsement; How Made. The endorsement must be written on the instrument itself
or upon a paper attached thereto. The signature of the endorser, without additional words, is a
sufficient endorsement.
How do you endorse an instrument? By affixing your signature on the at the back of the instrument.
Where do you write your endorsement? 1) at the back of the instrument itself or 2) upon a paper attached
thereto (allonge)
SIR: Allonge, it must be attached on the instrument itself so as to derive a conclusion that that additional paper
containing such signature are also part of the negotiable instrument.
SECTION 32.Endorsement Must Be of Entire Instrument. The endorsement must be an
endorsement of the entire instrument. An endorsement which purports to transfer to the endorsee
a part only of the amount payable, or which purports to transfer the instrument to two or more
endorsees severally, does not operate as a negotiation of the instrument. But where the instrument
has been paid in part, it may be endorsed as to the residue.
May endorsement be made partially? No, the endorsement must be an endorsement of the entire
instrument.
What is the effect of partial endorsement when unauthorized? It does not operate as an endorsement.
But it may constitute a valid assignment binding the parties and the assignee takes the note subject to defenses
available between the original parties.
Is there an exception? Yes, where the instrument has been paid in part, it may be endorsed as to the
residue.
Everything not saved will be lost. -Nintendo "Quit Screen" message
operate as a negotiation of the instrument.
Pay to X 500 and Y 500. (Sgd.) B. Is this a valid endorsement? No it does not does not operate as a
negotiation of the instrument as it purports to transfer the instrument to two or more endorsees severally.
Pay to X and Y. (Sgd.) B. Is this a valid endorsement? Yes, because the endorsement is made to a joint
person. It is not paid severally. It is made jointly.
SECTION 33.Kinds of Endorsement. An endorsement may be either special or in blank; and it
may also be either restrictive or qualified, or conditional.
What are the kinds of endorsement? An endorsement may be
1) special
2) conditional
3) restrictive
4) absolute
5) qualified
6) facultative
7) in blank
8) joint
9) irregular
10) successive
SECTION 34.Special Endorsement; Endorsement in Blank. A special endorsement specifies the
person to whom, or to whose order, the instrument is to be payable; and the endorsement of such
endorsee is necessary to the further negotiation of the instrument. An endorsement in blank
specifies no endorsee, and an instrument so endorsed is payable to bearer, and may be negotiated
by delivery.
What is a special endorsement? A special endorsement specifies the person to whom, or to whose
order, the instrument is to be payable; and the endorsement of such endorsee is necessary to the
further negotiation of the instrument.
What about endorsement in blank? An endorsement in blank specifies no endorsee, and an instrument
so endorsed is payable to bearer, and may be negotiated by delivery.
In an order instrument: A (maker), B (payee), C (holder). B specially endorsed the instrument to C.
How should it be negotiated by C to D? Where the instrument is originally payable to order, it can be
further negotiated by endorsement completed by delivery. Therefore, C can either endorse it in blank or
specially endorse such instrument.
?? In the same order instrument, B endorsed the instrument to C in blank. How should it be
negotiated by C? It can be further negotiated by C: 1) by mere delivery because the effect of a blank
endorsement is to make the instrument payable to bearer; 2) by specially endorsing the instrument
?? May C endorsed the instrument to D by endorsing it in blank? Yes. C may also specially endorse the
instrument.
In a bearer instrument: A (maker), B (payee), C (holder). B specially endorsed the instrument to C.
How should it be negotiated by C to D? Where the instrument is originally payable to bearer, it can be
further negotiated by mere delivery, even if the original bearer negotiated it by special endorsement. C may
also endorse it in blank or specially endorse the note.
SIR: Once you go black, you can never go back. Once a bearer, always a bearer.
SECTION 35.Blank Endorsement; How Changed to Special Endorsement. The holder may convert
a blank endorsement into a special endorsement by writing over the signature of the endorser in
blank any contract consistent with the character of the endorsement.
Page 1
May a blank endorsement changed to a special endorsement? Yes by writing over the signature of
the endorser in blank any contract consistent with the character of the endorsement. (Endorsement in
blank) (Sgd.) B above the signature of B Pay to C. (Sgd.) B.
SECTION 36.When Endorsement Restrictive. An endorsement is restrictive which either
(a)Prohibits the further negotiation of the instrument; or
(b)Constitutes the endorsee the agent of the endorser; or
(c)Vests the title in the endorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an endorsement
restrictive.
When is the endorsement considered restrictive? An endorsement is restrictive which either
(a)Prohibits the further negotiation of the instrument; or
(b)Constitutes the endorsee the agent of the endorser; or
(c)Vests the title in the endorsee in trust for or to the use of some other persons.
Give an example of an instrument which prohibits the further negotiation of the instrument: Pay to
TJ and no other person. (Sgd.) B.
Give an example of an instrument which constitutes the endorsee the agent of the endorser: Pay to
C for collection. (Sgd.) B
Give an example of an instrument which vests the title in the endorsee in trust for or to the use of
some other persons: Pay to X in trust for C.
Is the indorsee subject to the defenses of the indorser? There are two views on the question: The first
view holds such indorsement restrictive under Section 47 of the NIL, making the indorsee subject to the
defenses of the endorser. The second view declares that such restrictive indorsement only gives notice of this
trust to subsequent purchasers, but it does not give notice of defenses obtaining between prior parties.
The second view is the better one.
Is there presumption of consideration in restrictive indorsement? It would depend on the kind of
indorsement, if the endorsement constitutes the endorsee the agent of the endorser, then there is no
presumption of consideration as they are not intended to pass the title but merely to enable the endorsee to
collect for the benefit of the endorser.
SIR: If you restrictively endorse the instrument to another person and purpose of such restrictive
endorsement is to make that person as your own agent (for collection or deposit) then there is no intent to pass
the title to such agent but merely to enable the endorsee to collect for the your benefit. In effect, we also cannot
presume consideration.
What about a restrictive endorsement which vests the title in the endorsee in trust for or to the use
of some other persons? Yes there is a presumption of consideration because here the endorser parts his
whole title to the bill and the presumption is that he does so for a consideration. The only effect such
endorsement, by way of restriction, is to give notice of the rights of the beneficiary named in the
endorsement and protect him against a misappropriation.
Suppose the endorser simply endorse to C by putting: Pay to C, without putting the words
order. Is there any effect? The mere absence of words implying power to negotiate does not make an
endorsement restrictive but such omission in the body will render the instrument non-negotiable.
SECTION 37.Effect of Restrictive Indorsement; Rights of Indorsee. A restrictive indorsement
confers upon the indorsee the right
(a)To receive payment of the instrument;
(b)To bring any action thereon that the indorser could bring;
(c)To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do
so.
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive
indorsement.
What are the rights conferred on the endorsee of a restrictive endorsement?
Everything not saved will be lost. -Nintendo "Quit Screen" message
(a)To receive payment of the instrument;
(b)To bring any action thereon that the indorser could bring;
(c)To transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so.
What are the rights acquired by the subsequent endorsees? All subsequent indorsees acquire only the
title of the first indorsee under the restrictive indorsement.
SECTION 38.Qualified Indorsement. A qualified indorsement constitutes the indorser a mere
assignor of the title to the instrument. It may be made by adding to the indorser's signature the
words "without recourse" or any words of similar import. Such an indorsement does not impair the
negotiable character of the instrument. [you do not warrant their financial responsibility/solvency of the
parties]
What is the effect of qualified endorsement? It constitutes the indorser a mere assignor of the title to
the instrument.
How do you make a qualified endorsement? By adding to the endorsers signature the words without
recourse, sans recours; indorser not holden or with intent to transfer title only and not to incur liability
as endorser
A (maker), B (payee). B endorses the note thus: Sans recours, Pay to C, (Sgd.) B. It was found
out that As signature is forged. Is B liable to pay C? Yes, 1) as an endorser under Section 65, B warrants
the genuineness of the As signature and 2) the ground relied upon by C is not the insolvency of A. Furthermore
a qualified endorser is liable if the instrument is dishonored by non-acceptance or non-payment due to forgery.
A (maker), B (payee). B qualifiedly endorsed the instrument to C. It was found out later that A is
insolvent. May C collect the amount from B? It depends. If B did not know of that fact at the time of
negotiation, B cannot be held liable because his endorsement is merely qualified one such that he merely
guarantees that he holds title to it but he does not guarantee the financial responsibility of the prior
parties on that paper.
What is meant by absolute endorsement? One by which the endorser binds himself to pay upon no other
condition than the failure of prior parties to do so and upon due notice to him of such failure.
What is conditional endorsement? An endorsement subject to the happening of a contingent event, i.e., an
event that may or may not happen, or at least a past event unknown to the parties.
Suppose A issued a note for P1000 to B. B endorsed it to C as follows: Pay to C, if he passes the
bar examinations. (Sgd.) B May A disregard the condition and pay C? Yes, A can disregard the
condition and to C even if C has not passed the bar examinations.
Is A discharged from his liability if he pays C? Yes such a payment will discharge him from liability on the
instrument.
May A refuse to pay due to the non-fulfillment of the condition? Yes A may refuse to pay on such
ground.
What is the obligation of the C, the conditional indorsee if A disregards the condition and pays C
even before the result of the bar examinations? Y must hold it in trust for B while the condition is not
fulfilled.
What if C flunks on the bar exams? C must turn over the P1000 to B, the conditional indorser.
Does a conditional endorsement affect negotiability? No it does not render the instrument non-
negotiable.
SECTION 40.Indorsement of Instrument Payable to Bearer. Where an instrument, payable to
bearer, is indorsed specially, it may nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders as make title through his indorsement.
Page 2
Bearer instrument: A (maker), B (bearer). B specially endorsed it to C. C specially endorsed it to D.
How should D endorsed such instrument? As it is originally a bearer instrument, it may be further
negotiated by endorsement plus delivery or negotiate the instrument by delivery.
Can D endorsed it in blank? Yes.
Bearer instrument: A (maker), B (bearer). B delivered it to C. C specially endorsed it to D. D
specially endorsed it to E. E delivered it to F. Is C liable to F? No because F did not take title through
Ds endorsement but through delivery of E.
To whom is C liable? To D and E because they acquired their title over the instrument through Cs
endorsement as D and E can trace their title through a series of unbroken endorsement from D, special
endorser. Had E endorsed the note to F, instead of merely delivery it, C would be liable also to G for the same
reason.
Order instrument: A (maker) B (payee). B endorses it in blank to C. C specially endorsed it to D
specially endorsed it to E. Can E endorsed the said instrument to F by mere delivery? No because as
instrument is originally payable to order, E can negotiate it only by endorsement plus delivery.
SIR: Do not be confuse endorsement and delivery. You go back to negotiation. When you negotiate you, you
either:
1) endorse plus delivery (order instrument);
endorsement can be:
special endorsement
endorsement in blank
2) delivery (bearer instrument).
In our example, when B endorsed the instrument in blank to C. Did it convert the instrument into a
bearer instrument? Yes such endorsement in blank converted the order instrument into a bearer
instrument.
How may C endorse the instrument to D? At this point, C has two options, he can either negotiate:
1) by endorsement completed by delivery;
C can either endorse by:
a. special endorsement
b. endorsement in blank
2) by mere delivery.
SECTION 41.Indorsement Where Payable to Two or More Persons. Where an instrument is
payable to the order of two or more payees or indorsees who are not partners, all must indorse,
unless the one indorsing has authority to indorse for the others.
How should endorsement be made when the instrument is made to two or more payees or
indorsees? All payees must each sign or endorse in order to negotiate the instrument.
Are there exceptions? 1) where the payee or indorsee indorsing has authority to indorse of the others, and
2) where the payees or indorsees are partners.
SECTION 42.Effect of Instrument Drawn or Indorsed to a Person as Cashier. Where an
instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or
corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such
officer; and may be negotiated by either the indorsement of the bank or corporation, or the
indorsement of the officer.
What is the effect if the instrument is drawn or endorsed to a person as cashier or other fiscal
officer of a bank or corporation? It is deemed prima facie to be payable to the bank or corporation of
which he is such officer;
Who may negotiate in such instant? It may be negotiated by either the indorsement of the bank or
corporation, or the indorsement of the officer.
Everything not saved will be lost. -Nintendo "Quit Screen" message
What if the payment is made to the City Treasurer of Cebu. May the City Treasurer of Cebu endorse
the said instrument? No because corporation in Section 42 does not include cities and towns.
Are municipalities and cities corporation? Yes they are public corporations.
SECTION 43.Indorsement Where Name is Misspelled, and So Forth. Where the name of a payee
or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein
described, adding, if he thinks fit, his proper signature.
How should the instrument be endorse if the designated name of a payee or indorsee is
misspelled? He may indorse the instrument as therein described, adding, if he thinks fit, his proper
signature.
SECTION 44.Indorsement in Representative Capacity. Where any person is under obligation to
indorse in a representative capacity, he may indorse in such terms as to negative personal liability.
How should an agent of an endorsee endorse such instrument? He must endorse in such terms as to
escape personal liability.
What are the requisites in order for him to escape liability as an endorse?
1) he must add words describing himself as an agent;
2) he must disclose his principal
3) he must be duly authorized.
SECTION 45.Time of Indorsement; Presumption. Except where an indorsement bears date after
the maturity of the instrument, every negotiation is deemed prima facie to have been effected
before the instrument was overdue.
If the indorsement does not bear a date, what is the presumption? Every negotiation is deemed prima
facie to have been effected before the instrument was overdue.
SECTION 46.Place of Indorsement; Presumption. Except where the contrary appears, every
indorsement is presumed prima facie to have been made at the place where the instrument is
dated.
Is there a presumption of place of endorsement if in such endorsement the place is not disclosed?
Every indorsement is presumed prima facie to have been made at the place where the instrument is dated.
SECTION 47.Continuation of Negotiable Character. An instrument negotiable in its origin
continues to be negotiable until it has been restrictively indorsed or discharged by payment or
otherwise.
When is a negotiable instrument rendered non-negotiable? When it has been restrictively indorsed or
discharged by payment or otherwise. Restrictive endorsement
Does it apply to all to types of restrictive endorsement? No, only to restrictive endorsement which
prohibits the further negotiation of the instrument.
What if the instrument is negotiated after the date of maturity? There are two views on this
question.
1) The first view is that negotiability ceases in the full commercial sense after maturity or after the default of
the maker in his payment.
2) The second view that negotiability continues even after maturity.
How can they be reconciled? Yes, The mercantile character of the instrument as a negotiable paper and of
the contracts of the parties to it, continues after its maturity and until it is paid except that and indorsee or
transferre after maturity takes the instrument subject to defenses between original parties because such
indorsee or transferee are not holder in due course.
What is the effect if the person took the instrument after its maturity? Such person is no longer
considered a holder in due course because there is already a notice on his part.
Page 3
May a holder not in due course recover the said amount of the instrument from a maker or drawer?
Yes if such maker or drawer has no valid excuse for refusing payment, then such holder may collect said
amount, notwithstanding the fact that is not a holder in due course.
SECTION 48.Striking Out Indorsement. The holder may at any time strike out any indorsement
which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the instrument.
May a holder strike out any indorsement? Yes, the holder may at any time strike out any indorsement
which is not necessary to his title.
What is the effect of striking out an indorsement? The indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved from liability on the instrument.
?? Bearer instrument: A (maker) B (bearer). B delivered it to C. C specially endorsed it to D. D
specially endorsed it to E. E delivered it to F. Whose indorsement may F strike out? F may strike out C
and D because F did not acquire his title from C and Ds endorsement but through delivery of E.
SECTION 49.Transfer Without Indorsement; Effect of . Where the holder of an instrument
payable to his order transfers it for value without indorsing it, the transfer vests in the transferee
such title as the transferor had therein, and the transferee acquires, in addition, the right to have
the indorsement of the transferor. But for the purpose of determining whether the transferee is a
holder in due course, the negotiation takes effect as of the time when the indorsement is actually
made.
What is the effect if the holder of the instrument transfers such instrument payable to his order
transfers it for value without indorsing it? The transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires, in addition, the right to have the indorsement of
the transferor.
B fraudulently induced A to issue a note. Thereafter, B got the note. B transferred the note to C.
May C claim from A? No because C, as transferee, acquires only Bs right and B cannot collect from A as Bs
title is defective due to the fraudulent inducement.
May C be considered as a holder in due course? Yes, C may be considered a holder in due course if at the
time of B indorsed the instrument to C, C had no notice of any defects or infirmities.
What is the first step that C must do in order for him to be considered as a holder in due course? C
must enforce his right to require B to indorse the instrument.
SECTION 50.When Prior Party May Negotiate Instrument. Where an instrument is negotiated
back to a prior party, such party may, subject to the provisions of this Act, reissue and further
negotiate the same. But he is not entitled to enforce payment thereof against any intervening party
to whom he was personally liable.
Bearer instrument: A (maker) B (bearer). B delivered it to C. C specially endorsed it to D. D
specially endorsed it to E. E delivered it to F. May F endorse the said instrument back to C? Yes. F
may do so.
?? May C enforce the said instrument against F or D? No C cannot enforce the note against intervening
parties such as D and F, to whom he is liable. This is to avoid circuitry of suits.
SECTION 51.Right of Holder to Sue; Payment. The holder of a negotiable instrument may sue
thereon in his own name; and payment to him in due course discharges the instrument.
What are the rights of the holder?
1) he may sue on the instrument in his own name
2) he may receive payment and if the payment is in due course, the instrument is discharged.
May a simple transferee of an unendorsed instrument sue in his own name? It depends on whether
or not the person whom he derive his title could have done so.
Everything not saved will be lost. -Nintendo "Quit Screen" message
SECTION 52.What Constitutes a Holder in Due Course. A holder in due course is a holder who has
taken the instrument under the following conditions:
(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.
What is meant by payment in due course? Payment made at or after the maturity of the instrument to
the holder thereof in good faith and without notice that his title is defective.
What constitutes a holder in due course? A holder in due course is a holder who has taken the instrument
under the following conditions:
(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.
Is the holder considered a holder in due course if the instrument is altered on its face? It depends
whether or not the alteration is apparent or not.
SIR: A note which says Pay to X or order, PHP 50 USD 50 Million. (Sgd.) B: If you took an instrument
under some circumstances wherein you must have to make inquiry as to an infirmity in a negotiable instrument
and defect in the holders title, you have to do that.
What if the alteration is not apparent on the instrument? The instrument may be held as complete and
regular.
When an instrument is considered overdue? After the date of maturity.
What if the instrument is negotiated on the day of its maturity? It can still be negotiated because on the
date of maturity, the instrument is not due and the principal debtor has the whole day to pay.
What if the instrument contains an acceleration clause and the holder knew that one installment or
interest is unpaid. Is he considered as a holder in due course? No because such holder had notice that
the instrument is due and demandable already.
What if the interest is overdue? He may still be considered a holder in due course as long as he purchased it
in good faith. However, where by terms of the instrument, the principal was to become due upon default of the
payment of interest, such person is not a holder in due course.
What is meant by good faith? It means the holder does not take it in bad faith.
What is bad faith? Actual knowledge of infirmities in the instrument or defects in the title.
When is a holder considered a holder in good faith? When he is without knowledge or notice of equities of
any sort which could be set up against a prior holder of the instrument.
What if the holder fails to inquire on the circumstances, is he barred from becoming a holder in
due course? Ordinarily such failure will not bar him from becoming a holder in due course. However, when
circumstances strongly indicate defect, such failure to make inquiry renders him the holder not a holder in
due course.
DE OCAMPO vs GATCHALIAN Exception
FACTS: Matilde Gonzales was a patient of the De Ocampo Clinic. She incurred a debt amounting to P441.75. Her
husband, Manuel Gonzales designed a scheme in order to pay off this debt: In 1953, Manuel went to a certain
Anita Gatchalian. Manuel purported himself to be selling the car of De Ocampo. Gatchalian was interested in
buying said car but Manuel told her that De Ocampo will only sell the car if Gatchalian shows her willingness to
pay for it. Manuel advised Gatchalian to draw a check of P600.00 payable to De Ocampo so that Manuel may
Page 4
show it to De Ocampo and that Manuel in the meantime will hold it for safekeeping. Gatchalian agreed and gave
Manuel the check. After that, Manuel never showed himself to Gatchalian. Meanwhile, Manuel gave the check to
his wife who in turn gave the check to De Ocampo as payment of her bills with the clinic. De Ocampo received
the check and even gave Matilde her change (sukli). On the other hand, since Gatchalian never saw Manuel
again, she placed a stop-payment on the P600.00 check so De Ocampo was not able to cash on the check.
Eventually, the issue reached the courts and the trial court ordered Gatchalian to pay de Ocampo the amount of
the check.
Gatchalian argued that De Ocampo is not entitled to payment because there was no valid indorsement. De
Ocampo argued tha he is a holder in due course because he is the named payee.
ISSUE: Whether or not De Ocampo is a holder in due course.
HELD: De Ocampo is not a holder in due course for his lack of good faith. De Ocampo should have inquired as
to the legal title of Manuel to the said check. The fact that Gatchalian has no obligation to De Ocampo and yet
hes named as the payee in the check hould have apprised De Ocampo; that the check did not correspond to
Matilde Gonzales obligation with the clinic because of the fact that it was for P600.00 more than the
indebtedness; that why was Manuel in possession of the check; that the check had two parallel lines (cross
check) in the upper left hand corner, which practice means that the check could only be deposited but may not
be converted into cash all these gave De Ocampo the duty to ascertain from the holder Manuel Gonzales what
the nature of the latters title to the check was or the nature of his possession.
Is the check a cross check? Yes.
What is the effect of inadequacy of consideration? Under the Civil Code, inadequacy of consideration shall
note invalidate a contract unless there has been fraud, mistake or undue influence.
A offered B a promissory note worth P1 million for an amount of P100,000. B purchased the said
instrument. Is B considered as a holder in due course? No, an amount paid for an instrument if a trifling
sum, may of itself establish notice and if taken without any inquiries, such holder is not a holder in due
course.
Differentiate between defenses, infirmities and defects of title:
Defenses include common law defenses and matters outside the scope of Section 55 such as:
1) mistake
2) lack of consideration
3) minority and other forms of incapacity to contract
4) lack of authority of an agent.
Infirmities include things that are inherently wrong with the instrument itself such as:
1) wrong date inserted where the instrument is payable at a fixed period after sight is undated.
2) lack of delivery
3) forgery
4) material alteration
Defects of title are equitable defenses discussed under Section 55. The defect of title of a person over
an instrument may result from the following acquisition of the instrument :
1) by fraud
2) by force, duress, fear
3) by unlawful means
4) for an illegal consideration
May a payee be considered a holder in due course? A payee may be a holder in due course under any
circumstances in which he meets all the requirements of Section 52.
May a drawee be considered a holder in due course? The drawee can never be considred a not a holder
in due course because principally he is not a holder and therefore cannot be a holder in due course.
MESINA vs IAC
FACTS: Jose Go maintains an account with Associated Bank. He needed to transfer P800,000.00 from
Associated Bank to another bank but he realized that he does not want to be carrying that cash so he bought a
cashiers check from Associated Bank worth P800,000.00. Associated Bank then issued the check but Jose Go
Everything not saved will be lost. -Nintendo "Quit Screen" message
forgot to get the check so it was left on top of the desk of the bank manager. The bank manager, when he
found the check, entrusted it to Albert Uy for the later to safe keep it. The check was however stolen from Uy by
a certain Alexander Lim. Jose Go learned that the check was stolen son he made a stop payment order against
the check. Meanwhile, Associated Bank received the subject check from Prudential Bank for clearing. Apparently,
the check was presented by a certain Marcelo Mesina for payment. Associated Bank dishonored the check.When
asked how Mesina got hold of the check, he merely stated that Alfredo Lim, whos already at large, paid the
check to him for a certain transaction.
ISSUE: Whether or not Mesina is a holder in due course.
HELD: No. Admittedly, Mesina became the holder of the cashiers check as endorsed by Alexander Lim who stole
the check. Mesina however refused to say how and why it was passed to him. Mesina had therefore notice of the
defect of his title over the check from the start. The holder of a cashiers check who is not a holder in due course
cannot enforce such check against the issuing bank which dishonors the same. The check in question suffers
from the infirmity of not having been properly negotiated and for value by Jose Go who is the real owner of said
instrument.
SECTION 53.When Person Not Deemed Holder in Due Course. Where an instrument payable on
demand is negotiated an unreasonable length of time after its issue, the holder is not deemed a
holder in due course.
What is the effect is an instrument payable on demand is negotiated an unreasonable length of
time after its issue? The holder is not deemed a holder in due course.
Why not? Because it is provided for by law.
When do you consider time to be unreasonable length of time? It depends upon circumstances of the
case.
SECTION 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.
What is effect if the holder receives a notice of any infirmity in the instrument prior to the full
payment of the instrument? He will be deemed a holder in due course only to the extent of the
amount theretofore paid by him.
SECTION 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.
equitable defenses
When is the title of the person who negotiates an instrument considered defective? 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.
SECTION 56.What Constitutes Notice of Defect. To constitute notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts
that his action in taking the instrument amounted to bad faith.
When is there a notice of defect? When the person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument
amounted to bad faith.
What if its the agent who has actual knowledge? It would bind the principal because knowledge of the
agent is knowledge by principal.
Page 5
SECTION 57.Rights of Holder in Due Course. A holder in due course holds the instrument free
from any defect of title of prior parties, and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount thereof against all
parties liable thereon.

What are the rights of a holder in due course?

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

INSERT REAL DEFENSE AND PERSONAL DEFENSE, ETC. HERE

SECTION 58.When Subject to Original Defenses. In the hands of any holder other than a holder
in due course, a negotiable instrument is subject to the same defenses as if it were non-negotiable.
But a holder who derives his title through a holder in due course, and who is not himself a party to
any fraud or illegality affecting the instrument, has all the rights of such former holder in respect of
all parties prior to the latter.

What are the rights of a holder not due course?

1) he may sue on the instrument in his own name
2) he may receive payment and if the payment is in due course, the instrument is discharged
3) he holds the instrument subject to the same defenses as if it were non-negotiable. GR: real and personal
defense can be interposed against a holder not in due course
4) A holder not in due course who derives his title through a holder in due course and who is not himself a
party to any fraud or illegality affecting the instrument, has all the rights of such former holder in
respect of all parties prior to the latter.

A B C D E F. E is a holder in due course. F is not a holder in due course. F took this title from E who
is a holder in due course. May some acts of F be considered as a holder in due course? Yes, for as
long as F is not himself a party to any fraud or illegality affecting the instrument and he derives his title from a
holder in due course.

SIR: Same example from above: When the instrument was transferred from A to B, there was fraud. The
instrument is then negotiated until it reached the hands of F, who is not a holder in due course. However, E is
not holder in due course because he has notice of fraud or lack of consideration. Nevertheless, for as long as he
derives his title from a holder in due course and he is not a party to the fraud or illegalities, E may still hold B C
D liable. While equitable defense cannot be interposed against by prior parties to the holder in due course, real
defenses can be interposed against him.

SECTION 59.Who is Deemed Holder in Due Course. Every holder is deemed prima facie to be a
holder in due course; but 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 holder in due course. But the last-mentioned rule does not apply in
favor of a party who became bound on the instrument prior to the acquisition of such defective
title.

Is there a presumption of being a holder in due course? Yes, every holder is deemed prima facie to be a
holder in due course.

Everything not saved will be lost. -Nintendo "Quit Screen" message Page 6