installment is overdue may be a holder
in due course as to the balance if he
Rights of Holders
Holder – means the payee or indorsee of the
bill or note who is in possession of it or the
bearer thereof.
-It is not necessary that the holder is a holder
in due course before he can enforce payment
especially if there are no defenses available to
the parties.
-If not a holder in due course, the negotiable
instrument is subject to defenses as if it were
non-negotiable
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.
Holder
The first requisite is that he be a holder, if he is
not a holder at all then he could not be
considered a holder in due course.
Complete and Regular
An instrument is not complete and regular in
its face if it contains material alteration. If the
amount on the check is altered by increasing
the same, the instrument is irregular. If the
alteration is not apparent, then
requirement that is be complete and regular is
still present.
Overdue
One day after the date specified on the period
is what is to be construed as overdue.
A person taking an overdue instrument should
certainly question why the instrument is still in
circulation even if it is overdue.
1. Installment insturments – a purchaser
of an installment note after an
has no notice of failure to pay the first
installment.
2. Overdue interest payments – The mere
fact that interest on a note was
overdue does not, in the absence of a
stipulation making the principal due
upon failure to pay interest, affect an
indorsee with notice of dishonore or
put him on inquiry.
3. Demand instruments.
a. Sec. 53. When person not
deemed holder in due
course. - Where an
instrument payable on
demand is negotiated on an
unreasonable length of
time after its issue, the
holder is not deemed a
holder in due course.
b. What can be considered
“unreasonable is relative.
Section 193 of the NIL
provides that “in
determining what is
‘reasonable time’ or an
‘unreasonable time’ regard
is to be had in the nature of
the instrument, the usage
of the trade or buisiness if
any with respect to such
instruments, and the facts
of the particular case.
Notice of infirmity or defect.
Notice of any infirmity in the instrument or
defect in the title of a prior party will destroy
the due course holding. Notice given to the
agent may bind the principal. Knowledge of the
agent of any infirmity on the instrument or
defect in the title of a prior party, received
while acting within the scope of this authority
is notice to the principal.
Infirmity in the instrument means any
irregularity in the instrument. Eg. Notice of
the alteration, notice of forgery,
Notice in the defect of the title of the person
negotiating “when 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, under such circumstances
as to amount to fraud.
Good Faith
Good faith is presumed, however, the
presumption is destroyed when the payee or
indorsee “acquired possession of the
instrument under circumstances that should
have put it into inquiry as to the title of the
holder who negotiated the instrument.”
“Crossed Check”
Check to be deposited only on the account of
the holder thereof, wherein the holder is
specified.
The act of crossing the check serves as a
warning to the hjoloder that the check has
been issued for a definite purpose so that he
must inquire if he has received the check
pursuant to that purpose. This rule does not
apply ito the payee himself who was the
one who deposited the check.
Holder for value
Value is a consideration sufficient to support a
simplec contract.
1. Partial performance – Value under
the NIL is different from value in NCC.
Love and affection considered as value
in NCC but in NIL it is not (contract of
donation). With respect to the holders,
the holder is a holder in value only to
the extent that the consideration
agreed upon has been paid, delivered
or performed. Non performance of the
obligation will give rise to partial or full
defense of failure or consideration.
2. Notice before full payment – 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 therfor, he
will be deemed a holder in due course
only to the extent of the instrument
paid therfor by him.
3. Negotiable instruments as to value
– value is deemed given by giving a
negotiable instrument or irrevocable
commitment as payment.
Accomodation Parties – Accomodation
parties are not considered as part of the
infirmities on the instrument or defect on the
title of person negotiating it.
Presumption
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.
Presumption cannot operate if the a demand
instrument is is negotiated for an unreasonable
length of time. (Sec 53. NIL)
Payee as holder in due course
A payee can be a holder in due course. It is
possible for a payee to be holder in due course
under any circumstance in which he meets the
requirements of Section 52 of the NIL. Since
Sec 191 defines holder as the payee or
indorsee of a bill or note, who is in possession
of it or the bearer therof.
Rights of Holders in Due Course
Personal Defenses
A holder in due course holds the instrument
free from any defect of title of prior parties,
and free from defense available to prior parties
among themselves, and may enforce payment
of the instrument for the full amount therof
against all parties liable theron.
A holder in due course if free from personal
defenses.
Real Defenses
A holder in due course is not free from real
defenses. The real defense of FORGERY may be
raised against the holder even if he is a holder
in due course.
When not a holder in due course
When a holder is not a holder in due course, he
is not free from all types of defenses whether
real or personal. He is subject to all defenses
as if the instrument is non-negotiable.
SHELTER RULE
When a person is not a holder in due course
and he derives his title from a holder in due
course.
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 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.
(Shelter rule)
PROTECTION UNDER THE CONSUMER ACT
Art. 146. Sale of Consumer Products On
Installment Payment. - In a consumer credit
sale other than one pursuant to an open-end
credit plan, the obligation of the consumer to
whom credit is being extended shall be
evidenced by a single instrument which shall
include, in addition to the disclosures required
by this act, the signature of the seller and the
person to whom credit is extended, the date it
was signed, a description of the property sold
and a description of any property transferred
as a trade-in. The instrument evidencing the
credit shall contain a clear and conspicuous
typewritten notice to the person to whom
credit is being extended that:
(a) he should not sign the instrument if
it contains any blank space;
(b) he is entitled to a reasonable return
of the precomputed finance charge if
the balance is prepaid; and
(c) he is entitled to an exact, true copy
of the agreement.
In cases where the instrument will be sold
at a discount to a bank, financing
company or other lender, the said
transferee shall be subject to all claims
and defenses which the debtor could
assert against the seller of consumer
products obtained hereto or with the
proceeds thereof.
EG. X bought TV from Y store for credit. Y
negotiates PN to Z. TV not delivered. Defense
of lack of consideration exists on the part of X,
even if Z is a holder in due course.
-Excludes transactions pursuant to an open
credit.
Holders in bill in set
Bills in set – actually involve one bill although
drawn on set
Sec. 178. Bills in set constitute one bill. -
Where a bill is drawn in a set, each part
of the set being numbered and containing
a reference to the other parts, the whole
of the parts constitutes one bill.
Sec. 179. Right of holders where different
parts are negotiated. - Where two or
more parts of a set are negotiated to
different holders in due course, the
holder whose title first accrues is, as
between such holders, the true owner of
the bill. But nothing in this section
affects the right of a person who, in due
course, accepts or pays the parts first
presented to him.
Sec. 180. Liability of holder who indorses
two or more parts of a set to different
persons. - Where the holder of a set
indorses two or more parts to different
persons he is liable on every such part,
and every indorser subsequent to him is
liable on the part he has himself
indorsed, as if such parts were separate
bills.
Sec. 181. Acceptance of bill drawn in
sets. - The acceptance may be written on
any part and it must be written on one
part only. If the drawee accepts more
than one part and such accepted parts
negotiated to different holders in due
course, he is liable on every such part as
if it were a separate bill.
Parties Who Are Liable
Active subject in Negotiable instrument is the
holder.
Holder is the person or entity given the right to
demand the performance of the obligation
reflected in the negotiable instrument, that is,
the obligation to pay a sum certain in monay.
Holder is therefore the owner of the intangible
personal property evidenced by the
instrument.
Section 192 NIL – Persons primarily liable “the
person, who, by the terms of the
instrument, is absolutely required to pay
the same.” Secondarily liable if “he
engages, that, on due presentment, the
instrument shall be accepted or paid, or
both, as the case may be, according to its
tenor, and that if it be dishonored and the
necessary proceedings on dishonor be
duly taken, he will pay the amount therof
to the hjolder, or to any subsequent
indorser who may be compelled to pay
it.”
Sec. 192. Persons primarily liable on
instrument. - The person "primarily" liable
on an instrument is the person who, by
the terms of the instrument, is absolutely
required to pay the same. All other
parties are "secondarily" liable.
PN – Primarily liable is the maker.
BoE- Primarily liable Acceptor.
Secondarily liable- drawers and general
indorsers.
Warranties
Warranties are affirmations of the fact on the
part of the parties that impose no direct
obligation to pay in the absence of the breach
therof. In case of breach of warranties, the
person who breached the same may either be
liable or he may be barred from asserting a
particular defense.
Action on idorser’s special contract of
indorsement conditioned on presentment, and
notice of dishonor; hid liability for breach of
warranty is not so conditioned. Action on
special contract cannot be brought upon
maturity of the instrument; while action for
breach of warranty occurring as it does at the
time of transfer, may be brought at any time.
Maker
Sec 60. The maker of a negotiable instrument,
by making it, engages that he will pay it
according to its tenor, and admits the
existence of the payee and his then capacity to
indorse.
DRAWER
Sec. 60. Liability of maker. - The maker of
a negotiable instrument, by making it,
engages that he will pay it according to
its tenor, and admits the existence of the
payee and his then capacity to indorse.
Sec. 61. Liability of drawer. - The drawer
by drawing the instrument admits the
existence of the payee and his then
capacity to indorse; and engages that, on
due presentment, the instrument will be
accepted or paid, or both, according to its
tenor, and that if it be dishonored and the
necessary proceedings on dishonor be
duly taken, he will pay the amount
thereof to the holder or to any
subsequent indorser who may be
compelled to pay it. But the drawer may
insert in the instrument an express
stipulation negativing or limiting his own
liability to the holder.
Relationship With Drawee
There is a contractual relationship between the
drawer and the drawee. A drawer may have
drawn the bill against the drawee because the
latter is holding an amount in trust for the
drawer.
Collecting Bank
When the holder deposits the check with the
collecting bank, the nature of the relationship
created at that stage is one of agency, that is
the bank is to collect from the drawee of the
check the corresponding proceeds.
Thus the privity of the contract is between the
holder-depositor and the collecting bank. There
is no privity of contract between the drawer
and the collecting bank.
ACCEPTOR
Drawee does NOT become LIABLE UNTIL he
ACCEPTS the BILL or CERTIFIES the
CHECK.
Sec. 127. Bill not an assignment of funds
in hands of drawee. - A bill of itself does
not operate as an assignment of the
funds in the hands of the drawee
available for the payment thereof, and
the drawee is not liable on the bill unless
and until he accepts the same.
It is only from the moment the drawee accepts
the bill or certifies the check that the drawee
becomes primarily liable. He becomes liable to
the hoilder by his unconditional acceptance.
This is so even if the drawer did not receive
anything for value. Since the payee is a remote
party to the contract.
Effect of warranties
Sec. 62. Liability of acceptor. - The
acceptor, by accepting the instrument,
engages that he will pay it according to
the tenor of his acceptance and admits:
(a) The existence of the drawer,
the genuineness of his signature,
and his capacity and authority to
draw the instrument; and
(b) The existence of the payee and
his then capacity to indorse.
The acceptor is precluded from setting up
certain defenses by reason of his warranties.
Thus the acceptor is precluded from setting up
the defense that the drawer is a minor or the
signature of the drawer is forged by reason of
his warranties in the first paragraph of section
62.
PAYMENT WITHOUT ACCEPTANCE
In general, acceptance, in the sense in which
this term is used in the NIL is not required for
checks for the same are payable on demand.
Acceptance of a bill is the signification by the
drawee of his assent to the order of the
drawer, which in the case of checks is the
payment on demand of a given sum of money.
Upon the other hand, actual payment of the
amount of a check implies not only an assent
to the said order of the drawer and recognition
of the drawer’s obligation to pay the
aforementioned sum, but, also, a compliance
with such obligation. The warranties of an
acceptor under Section 62 of the NIL apply to
the drawee who paid without prior acceptance.
INDORSERS
Indorser- a person who negotiates the
instrument through indorsement completed by
delivery. IF there is doubt as to the signature of
a person in the instrument, such person is
deemed and indorser.
or both, as the case may be, according to
its tenor, and that if it be dishonored and
the necessary proceedings on dishonor be
duly taken, he will pay the amount
thereof to the holder, or to any
subsequent indorser who may be
compelled to pay it.
Secondary liability is not hte same as the
liability of a guarantor under the Civil Code.

Sec. 63. When a person deemed indorser.

- A person placing his signature upon an
instrument otherwise than as maker,
drawer, or acceptor, is deemed to be Warranties
indorser unless he clearly indicates by
appropriate words his intention to be General Indorser warranties
bound in some other capacity.
Sec. 65. Warranty where negotiation by
By Agent – Indorsement can be made through delivery and so forth. — Every person
agent . If it is established that the indorsement negotiating an instrument by delivery or
was made by a duly authorized attorney-in- by a qualified indorsement warrants:
fact, the principal is liable as the indorser. (a) That the instrument is genuine
and in all respects what it purports
Sec. 68. Order in which indorsers are to be;
liable. - As respect one another, indorsers
are liable prima facie in the order in (b) That he has a good title to it;
which they indorse; but evidence is
admissible to show that, as between or (c) That all prior parties had
among themselves, they have agreed capacity to contract;
otherwise. Joint payees or joint indorsees
who indorse are deemed to indorse jointly (d) That he has no knowledge of
and severally. any fact which would impair the
validity of the instrument or
GENERAL INDORSER render it valueless.
Secondary Liability But when the negotiation is by delivery
A general indorser is one who indorses the only, the warranty extends in favor of no
instrument without any qualification. He is holder other than the immediate
secondarily liable to the holder or any transferee.
subsequent indorser who may be compelled to
pay the instrument on account of the following The provisions of subdivision (c) of this
engagement in Section 66 of the NIL. section do not apply to a person
negotiating public or corporation
Sec. 66. Liability of general indorser. - securities other than bills and notes.
Every indorser who indorses without
qualification, warrants to all subsequent Sec. 66. Liability of general indorser. -
holders in due course: Every indorser who indorses without
(a) The matters and things mentioned qualification, warrants to all subsequent
in subdivisions (a), (b), and (c) of the holders in due course:
next preceding section; and (a) The matters and things
mentioned in subdivisions (a), (b),
(b) That the instrument is, at the time and (c) of the next preceding
of his indorsement, valid and section; and
subsisting;
And, in addition, he engages that, on due (b) That the instrument is, at the
presentment, it shall be accepted or paid,
 time of his indorsement, valid and
subsisting; Parole evidence

And, in addition, he engages that, on due
presentment, it shall be accepted or paid,
or both, as the case may be, according to
its tenor, and that if it be dishonored and
the necessary proceedings on dishonor be
duly taken, he will pay the amount
thereof to the holder, or to any
subsequent indorser who may be
compelled to pay it.
GENERAL INDORSER
(a) That the instrument is genuine and in
all respects what it purports to be;
Oral testimony is not admissible to establish
that an unqualified indorsement is in fact
qualified.
INDORSER OF BEARER INSTRUMENTS
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.

(b) That he has a good title to it; PERSON NEGOTIATING BY DELIVERY

(c) That all prior parties had capacity to Warranties

contract;
(a) That the instrument is genuine
(d) That the instrument is, at the time of and in all respects what it purports
his indorsement, valid and subsisting; to be;

ORDER OF LIABILITY (b) That he has a good title to it;

Sec. 68. Order in which indorsers are (c) That all prior parties had
liable. - As respect one another, indorsers capacity to contract;
are liable prima facie in the order in
which they indorse; but evidence is (d) That he has no knowledge of
admissible to show that, as between or any fact which would impair the
among themselves, they have agreed validity of the instrument or
otherwise. Joint payees or joint indorsees render it valueless.
who indorse are deemed to indorse jointly
and severally. Same as qualified indorser, however a person
negotiating by mere delivery’s warranties
QUALIFIED INDORSER extend only in favor of his immediate
transferee.
Warranties
AGENTS
(a) That the instrument is genuine
and in all respects what it purports Sec. 69. Liability of an agent or broker. -
to be; Where a broker or other agent negotiates
an instrument without indorsement, he
(b) That he has a good title to it; incurs all the liabilities prescribed by
Section Sixty-five of this Act, unless he
(c) That all prior parties had discloses the name of his principal and
capacity to contract; the fact that he is acting only as agent.

(d) That he has no knowledge of Agent must disclose his principal in order that
any fact which would impair the he may not incur any liability.
validity of the instrument or
render it valueless. Sec. 18. Liability of person signing in
trade or assumed name. - No person is
Even if the the validity of the instrument was in liable on the instrument whose signature
fact already impaired at the time of does not appear thereon, except as
negotiation, the qualified indorser does not herein otherwise expressly provided. But
breach his warranty if he has no knowledge of one who signs in a trade or assumed
such fact. name will be liable to the same extent as
if he had signed in his own name.
Sec. 19. Signature by agent; authority;
how shown. - The signature of any party
may be made by a duly authorized agent.
No particular form of appointment is
necessary for this purpose; and the
authority of the agent may be established
as in other cases of agency.
Sec. 20. Liability of person signing as
agent, and so forth. - Where the
instrument contains or a person adds to
his signature words indicating that he
signs for or on behalf of a principal or in a
representative capacity, he is not liable
on the instrument if he was duly
authorized; but the mere addition of
words describing him as an agent, or as
filling a representative character, without
disclosing his principal, does not exempt
him from personal liability.
Sec. 21. Signature by procuration; effect
of. - A signature by "procuration"
operates as notice that the agent has but
a limited authority to sign, and the
principal is bound only in case the agent
in so signing acted within the actual
limits of his authority.
PERSON WHO SHOULD SIGN
No person is liable on the instrument whose
signature does not appear theron. The party
must sign in his own name.
Exceptions
1. One who signs in a trade name or
assumed name
2. One who signs through and agent or
authorized representative
3. Incapacitated persons who sign
through their legal guardian
4. Forgers of signatures
5. Persons whose signatures were forged
but who are precluded from setting the
defense of forgery
6. In case of constructive acceptance
7. Indorsers who sign on an allonge
8. Persons who negotiate by mere
delivery.
TRADE NAME OR ASSUMED NAME
EG. ERAP
AGENT
He must indicate that he is signing as mere
agent
He must indicate ne name of principal.
PER PROCURACION
Signature by procuration operates as notice
that the agent has but limited authority to sign,
and the principal is bound only in case the
agent in so signing acted within the actual
limits of authority.
ACCOMODATION PARTIES
Sec. 29. Liability of accommodation party.
- An accommodation party is one who has
signed the instrument as maker, drawer,
acceptor, or indorser, without receiving
value therefor, and for the purpose of
lending his name to some other person.
Such a person is liable on the instrument
to a holder for value, notwithstanding
such holder, at the time of taking the
instrument, knew him to be only an
accommodation party.
Requisites:
1. He must be a party to the instrument,
signing in as maker, drawer, acceptor
or indorser
2. He must not receive value therfor
3. He must sign for the purpose of lending
his name or credit to some other
person
An accomodation party ios liable according to
the face of his undertaking, the same as if he
were himself financially interested in the
transaction.
Without receiveing any value therfor by virtue
of the instrument only
SURETY OF ACCOMODATED PARTY
By lending his name, the accomodated party is
in effect a suret of the accomodated party.
IRREGULAR INDORSERS
Are usually accomodation parties.
Sec. 64. Liability of irregular indorser. -
Where a person, not otherwise a party to
an instrument, places thereon his
signature in blank before delivery, he is
liable as indorser, in accordance with the
following rules:
(a) If the instrument is payable to
the order of a third person, he is
liable to the payee and to all
subsequent parties.
(b) If the instrument is payable to
 the order of the maker or drawer, 4. He is made by a specific provision of
or is payable to bearer, he is liable law to personally answer for his
to all parties subsequent to the corporate action
maker or drawer.

(c) If he signs for the

accommodation of the payee, he is
liable to all parties subsequent to
the payee.

LIABILITY AMONG THEMSELVES

A solidary accomodation party may seek
reimbursement from the accomodated party or
other accomodation parties subject to the ff:

1. A joind and several accomodation party

such as an accomodation maker may
demand from the principal debtor
reimbursement for the amount that he
paid to the payee
2. A solidary accomodation maker who
pays the said promissory note may
directly demand reimbursement from
his co-accomodation maker without
first directing his action against the
principal debtor provided that :
a. He mae the payment by virtue
of a judicial demand
b. A principal debtor is insolvent

CORPORATIONS
Rule on accomodation party does not apply to
corporations. This is because the issue or
indorsement of a negotiable paper by a
corporation without consideration and for the
accommodation of another is Ultra vires.

Personal liability of the officers of the

corporation may attach in the following
circumstances:
1. He assents:
a. To a patently unlawful act of
the corporation
b. For bad faith or gross
negligence in directing its
affairs
c. For conflict of interes, resulting
in damages to the corporation,
its stockholders and other
persons.
2. He consents to the issuence of watered
down stocks, who having knowledge
therof, does not forthwith file with the
corporate secretary his written
objection thereto
3. He agrees to hold himself personally
and solidarily liable with the
corporation