RIGHTS OF THE HOLDER

Sec. 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.

might have
defenses.

had

although

subject

to

Sec. 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:

Classes of holders (in ascending order of

rights):

a. That it is complete and regular

upon its face;

1. Holders simply (Sec. 51. A holder is

not necessarily the owner thereof. He
can be a thief, a pledgee, or a holder
for collection only.)
2. Holders for value
3. Holders in due course.

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;

Definition of holder the payee or

indorsee of a bill or note, who is in
possession of it, or the bearer thereof.
Ordinary holder or mere holder (also
called assignee or transferee) one who
qualifies as a holder but does not meet all
the conditions to qualify as holder in due
course.
Effect of not being a holder in due
course:
1. Subject to any and every defense or
defect in the instrument, whether real
or personal
2. It does not mean that the instrument
becomes non-negotiable.
3. He who derives his title from a holder
in due course although he himself is
not a holder in due course is given the
rights of prior holder.
Rights of holder in general
1. May sue on the instrument in his
name;
2. May receive payment and if the
payment is in due course, the
instrument is discharged.
GR: Only holders may sue and receive
payment
EXPN: A transferee of an unindorsed
instrument is not a holder (because he is not
an indorsee of a bill or note) but he may do
so in respect of the legal rights the transferor

c. 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.
Conditions to qualify one holder in due
course
1. All the four conditions must concur
2. He must not be a mere assignee or
transferee
Rights of a holder
in due course
Right
to
the
instrument is free
from all defenses
except
real
defenses.
Possible to acquire
greater rights than
the
payee
or
indorser

Rights of a holder
NOT in due course
The instrument is
subject to every
available
defense,
as if it were nonnegotiable
Acquires only the
rights
as
the
transferor had

Payee as holder in due course

Contrary view
A payee is not a
holder in due course
because to be a
holder in due course
he
must
have
acquired
the
instrument through
NEGOTIATION.
A
payee does not, and
instead acquires it
through ISSUE. (Sec.
52, d)

Affirmative view
A payee is a holder
in due course since
a holder as defined
is
a
payee
or
indorsee
in
possession of the
instrument.
(Sec.
191)

its maturity
Can a drawee
course?

be

holder

in

due

GR: He does not by paying a bill become a

holder in due course
EXPN:
When
the
drawee
payee/indorsee is the same

and

the

Effect of negotiation of a dishonored or

overdue instrument
By indorsement
Holder cannot be a
holder in due course

Requirements to be a holder in due

course
1. Instrument
upon its face.

complete

and

maturity

regular

When incomplete:
a. Wanting in any material particular or
particular proper to be inserted without
which the same will not be complete.
b. Alteration apparent on face of instrument.
If it is not apparent, the matter is governed
solely by Section 124, which renders the
instrument void.

By delivery
Holder,
provided
that he is without
notice, can be
a
holder in due course

4. Holder in good faith

Definition of good faith Honesty in fact in
the transaction concerned. There is good
faith if there is no bad faith.
Definition of bad faith Bad faith means that
he must have knowledge of facts which
render it dishonest for him to take a
particular piece of negotiable paper.

2. Holder before instrument is overdue

Proof of bad faith. It is enough to show that

there was something wrong with the
transaction. It is not necessary to show
knowledge of the exact truth.

What constitutes date of maturity:

5. Holder for value

a. The time fixed therein

b. If payable on demand, date of
maturity is determined by the date of
presentment.
c. If the instrument is payable on the
occurrence of a specified to happen,
the date of maturity is fixed by the
happening of the event.
If acquired on the date of maturity
One taking an instrument on the date of
maturity it takes BEFORE maturity because
the principal debtor has the whole day to
pay.
3. Holder without notice of dishonor
Ways of dishonor
Non-acceptance
(Sec.149.)
Applies only to a bill
of exchange
May
take
place
before the date of

Non-payment
(Sec. 83)
Applies to both bill
of exchange and
promissory note
Can only take place
at
the
time
of

Definition of value any consideration

sufficient to support a simple contract. Love
and affection does not constitute value.
Note: Discount does not necessarily prevent
one from being a bona fide holder. Where the
discount is unusually large, this fact,
together with other facts, may be grounds to
question good faith.
6.
Holder
without
infirmity
instrument or defect of title

in

The holder must not have had notice or

knowledge of defect or dishonor or acted in
bad faith at the time he takes the
instrument. He is a holder in due course
even if he may later have knowledge of the
defect or dishonor after the instrument has
been acquired.
Bad faith of agent- The knowledge of the
agent acting within the scope of his authority
is a constructive knowledge of the principal.

Sec. 53. When a 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 constitutes a reasonable time
Regard is to be had to the nature of the
instrument, the usage of trade or business
with respect to such instruments, and the
facts of the particular case. (e.g. within 6
months from issue for checks)
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 title of the person
negotiating the same before he had
paid the full amount agreed to be paid
theretofor, he will be deemed a holder
in due course only to the extent
Effect of notice before full payment
No amount has
yet been paid

An amount
been paid

has

Not a holder in due

course.
He
is
relieved from the
obligation to pay.

Becomes a holder in
due
course
with
respect
to
the
amount already paid

Sec. 55. When title is 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 fraud.
The title of a person who negotiates an
instrument is defective in two ways:
1. in the acquisition Fraud, duress,
force and fear (includes all acts which
overcomes the signers will), or other
unlawful means, or for an illegal
consideration.

2. in the negotiation In breach of faith,

or under such circumstances as
amount to a fraud.
Sec. 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.
What constitutes notice of infirmity or
defect:
Actual knowledge of the infirmity or defect,
or knowledge of bad faith.
Note: Actual knowledge is usually shown by
the instrument itself.
The question of bad faith or good faith
is mostly a question of fact
1. Mere negligence to make inquiries not
sufficient
2. Mere suspicious circumstances are not
enough e.g. consulting an attorney
before taking a note, or indorsing
without recourse
However, if the holder had actual knowledge
of suspicious circumstances, and he has the
means of informing himself but he willfully
abstained from making inquiries, his
intentional ignorance may amount to bad
faith. E.g. Inadequacy of price so gross as to
justify a finding of bad faith.
Effect of notice of defect at the time of
taking
Destroys the status of a holder as a holder in
due course, opens all defenses otherwise cut
off from him i.e. if one has knowledge of ONE
defect, he may be subject to OTHER
defenses not merely to that defect which he
had notice. E.g. when the holder has
knowledge of failure of consideration, he
may be subject to the defense that the note
was obtained through fraud
Sec. 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.
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. 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 (or so called
personal
defenses
to
be
differentiated from real defenses
which attach to the instrument itself);
and
5. He may enforce payment of the
instrument for the full amount thereof
against all parties liable thereon.
Sec. 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 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.
Immediate, remote, and prior parties.
1. Immediate parties in direct
contractual relation w/ each other; ex.
M to P, P to A, A to B.
2. Remote parties not in direct
contractual relation w/ each other. Ex.
M & B, M & A, P & B.
3. Prior parties Ex. M, P & A are prior
parties w/ respect to B.

why the plaintiff, as a matter of law or fact,

should not be given the relief he seeks
2 kinds of defenses:
1. Real defenses absolute, universal;
assertable
against
all
parties,
both
immediate & remote, including holders in
due course or holders through the latter.
-

2. Personal defenses those available to

prior parties among themselves but w/c are
not good against a holder in due course
-

Defenses in general
Defenses grounds or reasons pleader or
offered by the defendant in a case, showing

there are cases when a holder in due

course is not legally entitled to
payment from the primary party
real they attach to the res, that is,
the instrument itself regardless of the
merits or demerits of the holder
they challenge the validity of the
instrument itself but does not imply
that the instrument is valueless & can
never be enforced
only unenforceable against party
entitled to set up defense (makers
defense that he was infant when he
executed & delivered instrument that
his signature is a forgery) but not
against those to whom such a defense
is not available (ex. Forgery, persons
precluded from setting it up.)
See p. 155 for examples

include every defense available in

actions under ordinary contract law
can be asserted only against ordinary
holders, but not against holders in due
course or holders w/ all the rights of
holder in due course
available against that person or
subsequent holder who stands in
privity w/ the party seeking to enforce
it
can only be used between original
parties or immediate parties or against
one who is not a holder in due course
In contrast, real defenses question the
legal validity of the instrument itself
but a personal defense affects only the
validity of the agreement for w/c the
instrument was issued.
Validity of instrument is recognized,
underlying agreement is in question
See p. 157 for examples

Fraud in factum & fraud in inducement

distinguished

Fraud
in
the
execution or fraud in
factum
Exists where person
w/o
negligence
signed
instrument
w/c was in fact a
negotiable
instrument but was
deceived as to the
character
of
the
instrument & w/o
knowledge of it, was
where a note was
signed by one under
the belief that he
was signing as a
witness to a deed,
or
where
the
signature
was
procured
by
fraudulent use of
carbon paper
A
real
defense
because there is no
contract
Person did not know
he what he was
signing

Fraud in inducement
or simple fraud
It Is that which
relates
to
the
quality,
quantity,
value or character
of the consideration
of the instrument
Ex.
Person
is
induced to sign a
note for the price of
a worthless stock
w/c was fraudulently
represented by the
payee as to its value

Only
a
personal
defense because it
does not prevent a
contract
Person knew what
he was signing but
that he was induced
by fraud to sign

Rights of holder not in due course

1. May sue on the instrument in his own
name
2. May receive payment & if the payment
is in due course, instrument is
discharged
3. Entitled to the instrument but holds it
subject to the same defenses as if it
were non-negotiable
4. Has all the rights of the 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

Rights of purchaser from a holder in

due course
1. Rights of a mere transferee
person is not a holder in due course,
his rights are those of a transferee of a
non-negotiable instrument so that he
is not free from personal defenses
2. Rights of transferee from a holder
in due course a holder who derives
his title from a holder in due course
can still enjoy the special rights of the
latter even though he himself is a
mere transferee. Such holder is called
a holder through a holder in due
course.
2 requisites of a holder through a
holder in due course:
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. But a payee or indorsee
whose title is defective cannot better
it by selling the instrument to a holder
in due course & buying it again.
See p. 159-160 for examples.
Sec. 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.
When holder presumed a holder in due
course.
Presumption expressed in this section arises
only in favor of a person who is a holder in
due course as defined in Sec. 191 (payee or
indorsee who is in possession of the
instrument or the bearer thereof)

1. Proof of being a holder he does

not have to prove that he satisfies the
requirements of a holder in due course
under section 52.
2. Burden of proof on holder where
indorsers title is defective
burden of proof shifts to the holder
who must show that he is a holder in
due course or that he acquired his title

from a holder in due course although

he is not himself a holder in due
course.
3. EXPN:
the
law
establishes
an
exception to the second mentioned
rule. We revert to the presumption
that the holder is a holder in due
course.
See example p. 161-162