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Lesson No.

5
Negotiation and Holders

Endorsement, Special cases

Q: What would happen if an instrument payable to bearer is


indorsed before delivered?

Ans: -As to the negotiability of the instrument, none. The


instrument remains negotiable.

AS for its bearer qualities. It will not lose its bearer qualities.
AS for the indorser , Sec. 40 provides:
Sec. 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.
-As such any person who indorsed a bearer instrument is liable to
any party who obtained title through his indorsement.

What happens when an instrument is indorsed to two


or more persons who are not partners?
Ans: All of them must endorse to further negotiate
the instrument. However if one of them is
authorized, then he could indorse alone.
Sec. 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.

What is the effect if an instrument is endorsed to a


cashier/ treasurer?
Ans: It is deemed to be prima facie an endorsement in
favor of the corporation/ business for which the cashier
or treasurer works for.
-To further negotiate the instrument, the responsible
officer of the corporation must endorse.
Sec. 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 if the name of the indorsee is mis-spelled?


What is the effect?
A: Generally none. The indorsee should place the true
spelling of his name when it is his turn to endorse, or
when encashing the instrument.
Sec. 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.
Q: What if the name is totally wrong.
A: Then sec. 43 does not apply, and the instrument
is considered as improperly negotiated.

Q: How should an agent indorse?


A: He should add words below his name that would
properly identify him as an agent.
e.g. Lindsay Custodio- Agent for Champagne Morales
Sec. 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. Robles
What presumption does the law provide as to the date of
endorsement?
A: The law presumes that the instrument was endorsed
before its date of maturityunless the instrument is
dated.
Sec. 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.

What presumption does the law provide as to


the place of endorsement.
A: When an indorsement states a place where it
was made, then the law will presume that the
endorsement was made at such place.
Sec. 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

Q: May a holder strike out endorsements to an


instrument?
A: He could strike out any indorsement which is
not necessary to his title?
The law provides:
Sec. 48. Striking out indorsement. - The
holder may at any time strike dz
Q: What do we been by indorsement which are
not necessary to ones title?
A: They are superfluous indorsement, e.g.
indorsement in a bearer instrument

Q: What happens when an order instrument is


negotiated without an indorsement?
A: The instruments validity is not affected, and title is
transfered. However,the holder will now acquire the
right to compel the previous holder to endorse the
instrument. The law provides:
Sec. 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

Q: May an instrument be negotiated back to a


prior party? What is the effect?
A: An instrument may be negotiated to a prior
party/holder. However, if an instrument is
negotiated as such, all intervening parties are
discharged.
Sec. 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 negotiable the same.
But he is not entitled to enforce payment
thereof against any intervening party to
whom he was personally liable.

Q: NAme the four kinds of holder under the NIL?


A: They are 1. Holder (simple holder) 2. Holder for
value 3. Holder in due course 4. Holder not in due
course
What is a simple holder? What rights does he have?
A: A simple holder holds an instrument for another
person or an instrument which is imperfectly
negotiated. He may sue in his name and payment will
generally discharge the instrument.
Sec. 51. Right of holder to sue; payment. - The
holder of a negotiable instrument may to sue
thereon in his own name; and payment to him
in due course discharges the instrument.

Who

is a holder for value?


- A holder for value is one who has
exchanged valuable consideration in
exchange for the NI.

What is a holder in due course?


A: Sec. 52 provides:
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:
(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 has 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 a holder not in due course (HNIDC)?


A: A holder not in due course is a holder that does
not fully satisfy the requirement in Sec. 52. In
addition when the instrument is negotiated to any
person after an unreasonably length of time after the
issuance of the instrument, then he is also deemed to
be a HNIDC.
What are the rights of a HIDC?
A: Sec 57 provides:
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.

-A

HIDC holds the instrument free


from personal defenses but not
against real defenses.

Q: Between a HIDC and a HNIDC, which one is presumed by law?


Ans: A HIDC. The law provides:
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.
What are the rights of a HNIDC?
A: A HNIDC holds an instrument holds the instrument as subject to
personal defenses. The law provides:
Sec. 58. When subject to original defense. - 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 nonnegotiable.

Q: Is it possible for a HNIDC to have


rights akin to a HIDC?
A: Yes, the last sentence of Sec. 58
provides:
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.

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