Notes on Negotiable Instruments.

Who is a holder in due course?

Section 52, of the Negotiable Instruments Law, provides that, a holder in due
course is one who has taken the instrument, under the following conditions:

1. That the instrument is complete, and regular upon its face;

2. That he became the holder of the instrument, before it was overdue,
and without notice, that it has been previously dishonored, if such was
the fact;
3. That he took the instrument in good faith, and for value; and;
4. That he had no notice of any infirmity, in the instrument, or defect in
the title, of the person negotiating it.

Under Section 59, the law presumes that every holder of a negotiable instrument,
is a holder in due course. However, the same presumption may be refuted, and in such
event, it becomes incumbent upon the holder, to prove that he or some person under
whom he claims, acquired the title as a holder in due course.

May a payee be considered a holder in due course, considering that the instrument
was simply issued to him, and not endorsed?

Yes, the payee is presumed, a holder in due course. This is based on Section 59, in
relation to Section 191 of the Negotiable Instruments Law. Section 191 provides that a
holder, is the payee or the endorsee, of a bill or noted, who is in possession of the
instrument, or one who is a bearer of the instrument.

The holder, under Section 52, must be read in the light of the definition, provided
under Section 191. Thus, a payee may be a holder, and since a holder of a negotiable
instrument may become a holder in due course, a payee may logically become, a holder
in due course. This is the ruling of the Supreme Court in Prudencio v. Court of Appeals.

What are the rights of the holder in due course?

According to Section 57, the rights of the holder in due course are:
 1. To take the instrument, free from personal defense, between prior
parties;
2. To enforce payment, for the full amount, against all the parties.

What is the shelter rule?

The shelter rule is a doctrine, which allows 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, to have all the rights of the holder in due course, in respect of
all parties, prior to the holder claiming such benefit. This is provided for under Section
58, of the Negotiable Instruments Law.

The law contemplates a situation, where an innocent holder, derives his title from
a holder in due course, but such negotiation has been tainted by fraud, or some other
illegality, before it came to the hands of the innocent holder. The rule provides that the
innocent holder, becomes a holder in due course, because his title is based on the title of
a prior holder in due course.

Is there an exception to the shelter rule?

A prior party, who is not a holder in due course, may not purchase the
instrument from a sheltered holder. He will not become a holder in due course. The
shelter rule will not apply to him.

To allow the coverage of the shelter rule, is to allow the circumvention of the law.
The exception to the shelter rule also applies to agents.

Suppose the instrument was defective, but the defect was not apparent. Does this
destroy due course holding?

No, under Section 52 of the Negotiable Instruments Law, the instrument must be
complete and regular upon its face. If the defect is not apparent, the holder may still be
deemed a holder in due course.

What are the circumstances that destroy due course holding?

The following circumstances destroy due course holding:

1. Irregular and defective instruments;

2. Taking the instrument when it was overdue;
3. The holder has notice of the infirmity, or the defect in the instrument;
4. The holder did not take the instrument in good faith;
5. The holder did not take the instrument for value;
6. The holder ignored circumstances which should have put him on
inquiry i.e. when the check is crossed;
7. The hold is not a holder in due course, and was a party to an illegality
during negotiation, and he tried to reacquire the instrument from a
subsequent holder in due course.