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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

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CHAPTER III: HOLDER IN DUE COURSE [Cases cited in Campos]
BPI V ALFRED BEARWIN & CO. (1928) ~ricky~ NATURE Appeal by Anselmo Diaz against the CFI of Iloilo’s order for him to satisfy 2 promissory notes he issued in favor of Alfred Berwin & Co. FACTS -The Bank of the Philippine Islands (BPI) filed a collection suit against Alfred Berwin & Co (ABC). Diaz, ABC’s debtor, was given notice, when the preliminary attachment was ordered, not to deliver the payment of his debt to ABC. The CFI of Iloilo rendered judgment in favor of BPI. -To effect the execution of the judgment, BPI prayed that Diaz be summoned to testify concerning the credit of ABC against him. Diaz acknowledged his indebtedness in the sum of P20,000, the balance of credit for a greater amount. The P20,000 was evidenced by two promissory notes he issued in favor of ABC. -It does not appear, however, from the record whether such promissory notes are still in the hands of ABC. It was not known whether ABC is still the holder in due course of the promissory notes or whether it had already been alienated. ISSUE WON Diaz may be compelled to pay Alfred Berwin & Co., or the sheriff as a credit in favor of said corporation. HELD: NO. Reasoning Diaz cannot be compelled to pay the amount of the said promissory notes to any person save the holder of such documents in due course, for said person is the one entitled to receive it. To compel Diaz to pay ABC would be to expose him to the situation in which, having paid the amount of the promissory notes without settling the same, a holder in due course may appear and within all reason demand its full payment. - The fact that he was given notice when the preliminary attachment was ordered does not change the situation because the debt was secured by negotiable instruments. Notwithstanding such notice, it was beyond Diaz’s power to prevent ABC from negotiating the promissory notes. Disposition Order revoked.

ELGIN NAT’L BANK V GOECKE (1920) ~joey~ FACTS -Elgin National Brewing Company executed two demand notes, one for $3K (Note A) and the other for $2500 (Note B), each payable to the maker’s order and indorsed in blank ink by it & by 5 accommodation indorsers, including Frank A. Goecke, the company manager. The accommodation indorsers signed on representation that the proceeds were to be used to pay for supplies for the brewery. -Both notes were diverted by Goecke from their intended purpose. Note A was indorsed to Elgin National Bank as collateral security for a note (Note C) earlier executed by Goecke as maker, the last renewal of which was made on Nov. 22, 1912 for 6 months. Note B was indorsed to the same bank as payment for 5 other notes earlier executed by the brewing company as maker and purchased by the bank. The bank did not know of the diversion of the two demand notes from their intended purpose. -Brewing company defaulted. Bank sued all 5 accommodation indorsers. -TC ruled in favor of the bank. Appellate court affirmed. ISSUE WON the accommodation indorsers are liable to the bank notwithstanding the diversion of the proceeds of the notes HELD: YES Ratio An indorsee of a negotiable note who has taken it, before its maturity, as collateral security for a preexisting debt and without any express agreement, is deemed a holder for a valuable consideration, and that he holds it free from latent defenses on the part of the maker. Reasoning -The accommodation indorsers are liable to the bank on the notes, although the bank at the time of taking the instruments knew that they were only accommodation parties, if the bank is a holder for value, as the notes were indorsed to it before maturity and without notice for their restricted use and purpose. -As for Note B, it is clear that the bank is a holder for value. The consideration paid by the bank for this note was the cancellation and surrender by it of the 5 other notes executed by the brewing company. -Note A was not delivered to the bank and accepted by it as security until Dec. 10, 1912. There is no proof in the record that at the time Note C was renewed on Nov.

22 there was an agreement that Note A was to be put up as collateral and in part consideration for the extension of Note C. Thus, it is argued by the accommodation parties that mere delivery of Note A, without agreement for further extension of time or other agreement for Note C, does not make the bank a bona fide holder for value. This contention is without merit. See ratio Dispositive Judgment affirmed. MERCHANTS’ NAT’L BANK OF ST. PAUL V STA. MARIA SUGAR CO. (1914) ~chriscaps~ FACTS -Sta. Maria gave netotiable note payable to order of American Hoist & Derrick Co (payee). -Payee deposited the note in Merchants’ Natl Bank, w/c gave depositor credit representing the principal & accrued interest ($2,427.36). -After this, there were subsequent deposits and withdrawals. The smallest balance during this period was $6,294.04. -Discounting bank had no knowledge of claimed defense of maker until receipt of its letter. -The Bank sued the maker. Maker (Sta. Maria) claimed that the Bank is not a holder for value and not a holder in due course. ISSUE WON the Bank is a holder in due course HELD: YES -Until 1 month after plaintiff had discounted the instrument, it had no knowledge or suspicion of any infirmity. -Mere discounting of the note and placing the amount of said discount to the credit of the holder would not then have constituted a transfer for value because the bank would have parted with nothing, there would have been a mere bookkeeping entry. But if the sum had subsequently been checked out, then value would have passed. -We should agree with opinion of Justice Brewer: The first debits are to be charged against the first credits. It follows therefore, that the bank was a bona fide holder for value. NAT’L BANK OF COMMERCE V MORGAN (1921) ~edel~ FACTS

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-B]

-Nat’l Hay Company (NHC) deposited with NBC a draft and a bill of lading. -Said items were received by the NBC and were then credited to the account of NHC. -Eventually, the draft with the bill of lading attached was forwarded by NBC to the First National Bank of Birmingham (FNBB) for collection and remittance to NBC and the amount of the draft was paid by the drawee to FNBB. -Prior to remittance (of the proceeds of the draft) by the FNBB to NBC, Morgan (a creditor of the NHC) instituted attachment proceedings against NHC and service was sought to be perfected by the process of garnishment directed to FNBB. -FNBB, in response to the garnishment, admitted that it held in its possession the proceeds of the draft but said that NBC had the right to claim said fund. NBC then laid claim to the fund. -Morgan won at the circuit court. Hence, this appeal by NBC. ISSUE WON NBC received the draft as a mere collecting agent or as purchaser/ WON NBC is a holder for value HELD -NBC was a mere collector. TF, NBC was not a holder for value. FNBB was ordered to pay the proceeds of the draft to Morgan. -(*Campos’ note: The ruling in this case represents the minority view that as long as the balance in the depositor’s account equals or exceeds the amount of the instrument deposited, the instrument cannot be considered withdrawn for the purpose of treating the bank as holder for value (as per sec.26 NIL.)) Reasoning In this case, NBC insists that it was a purchaser for value and that NHC’s account had never been overdrawn and it had balance to its credit in excess of the draft, continuously from the day the said draft was received until the day of the garnishment. -The Court, however, denied their contention and held that the case of Fredonia v. Tommei was not in conflict with their holding. In said case, White’s account had been fully checked out and that the proceeds of the note had been fully exhausted, just as in the case at bar, if the proof showed that the NHC had checked out its entire balance at any time between the deposit of the draft and the notice of garnishment. But as had been held, the NHC here had a standing balance to its credit with the NBC throughout this period in excess of the draft. -Furthermore, the Court thinks that their position is more just and equitable in view of the fact that a bank has the right to apply all unchecked deposits against

the debt due it by the depositor. And they added that this holding cannot be of serious detriment to banks while a contrary view might result in furnishing a weapon to the negotiator of notes and bills against their creditors or persons having a right or equity in or against the instruments negotiated. -All the other cases cited by NBC (ie. FOX v. Bank of Kansas, Dreilling v. First National Bank etc) were held to be contrary to the Court’s decision and to NBC’s contention as well. (*Basically, NBC cannot be considered as a holder in due course (as per Sec.52(3)) or as a purchaser for value in this case since NBC credited the amount of the draft to the deposit account of NHC and NBC failed to show that the amount credited was absorbed by existing debts or subsequently checked out. Here, NHC had a balance on deposit in excess of the amount of the draft continuously from the negotiation till the garnishment. TF, NBC didn’t show that they have given value for the instrument ergo NBC not a holder/purchaser for value.) UNAKA NAT’L BANK V BUTLER (1904) ~jaja~ FACTS -Harris drew a check for $15.25 on the Unaka National Bank payable to the order of Butler and delivered the check to the payee for value. The payee indorsed the check in blank and negotiated it to Davis who on the next day lost it on the highway, At the request of the indorsee, Davis, the drawer ordered payment stopped by notice to the drawee bank. The stop order was overlooked and the check was paid by the drawee to Ward & Fryberg, merchants who, within a week after the check’s issuance to the payee, had taken the check in payment of goods sold to “a customer who was unknown to them but who was supposed by them to be the owner.” The original payee, Butler, for the use of his indorsee Davis, the loser of the check, sued the drawee bank. ISSUE WON Ward & Fryberg purchased the check for value, in due of course of trade, and without actual knowledge of the infirmity in the title of the holder HELD YES. To constitute notice of an infirmity in an instrument, or defect of 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. The purchaser of a negotiable instrument owes no duty to the former holders to actively inquire into the title of the party in possession, and that circumstances of suspicion and gross negligence are not of themselves bad faith, but only evidence tending to establish it. -There is no doubt, upon this record, that Ward & Fryberg purchased this check for value, in due course of trade, and without actual knowledge of the infirmity of the title of the holder. It is equally clear that there was no bad faith in the transaction. The result is, they acquired a perfect title to the check by their purchase, and had the right to collect it; and at the same time, in consequence of the same facts, Davis lost his title, and is not entitle to recover its proceeds from the bank. Disposition Judgment of the circuit court is reversed, and the suit dismissed. DE OCAMPO V GATCHALIAN (1961) ~ina~ FACTS -Anita Gatchalian was looking for a car to buy. Her friend Emil Fajardo brought Manuel Gonzales to her house because Manuel had a car to show her. Manuel said he was duly authorized by Ocampo Clinic to sell the car. Anita liked the car. Anita told Manuel to bring the car together with the registration the next day, so that Anita's husband can inspect it also. Manuel said that the owner would most likely not allow him to bring the registration unless there's a showing that the party interested in the purchase of the car is ready and willing to pay for it. So Anita issued a check for P600 in Ocampo's name. -The next day, Manuel didn't come. Instead, he went to Ocampo Clinic and paid for her wife's outstanding balance of P441.75 with the clinic. He was given P158.25 cash as sukli. Meanwhile, when Manuel didn't come, Anita got suspicious and gave the bank a stop payment order on the check. Ocampo was not aware of the arrangement between Manuel and Anita at the time Manuel gave it to him as payment for wife's bills. -Ocampo went after Anita. Ocampo won. Anita appealed. She contends that the check is not a negotiable instrument and that Ocampo is not a holder in due course. ISSUES 1. WON original payee of the check can become a holder in due course 2. WON there was valid negotiation of the check (basically, WON Ocampo had NO NOTICE of defect of holder's title)

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-C]

3. WON Ocampo is a holder in due course HELD 1. YES. Sec 191 of NIL defines HOLDER as the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. While Sec 52 defines a HDC as a HOLDER who has taken the instrument under the 4 conditions. Therefore, a payee can be a HDC. 2. YES. The check payable to Ocampo was entrusted to Manuel. The latter then was the agent of Anita. When the agent (Manuel) of drawer (anita) negotiated the check with the intention of getting its value from Ocampo, negotitation took place through no fault of Ocampo, unless it can be shown that Ocampo should be considered as having notice of the defect in the possession of holder Manuel. 3. NO. Ocampo can't be a HDC because although he had no notice of defect in title, he must also have taken the instrument in good faith. These facts should have put him on guard and inquired into the title of Manuel: a. Anita had no obligation or liability to Ocampo Clinic; b. the amount on the check didn't correspond exactly to Manuel's utang; and c. the check had two parallel lines in the upper left hand corner, which in practice means that the check was for deposit only and cant be converted into cash. -It would've been easy for Ocampo to inquire because he knew Anita's husband. His failure to do so is gross neglect in not finding out the nature of the title and possession of Manuel, which amounts to legal absence of good faith. He therefore cannot be considered a holder in good faith. Sec 52 requires the holder to be in good faith to be considered a HDC. Therefore, Ocampo cannot be a HDC. -The presumption in Sec 59 that every holder is a HDC cannot apply in this case because there were suspicious circumstances that should have put the person in to inquiry as to the title of the holder who negotiated the instrument to him. The test is of the reasonable prudent man and good faith. STATE INVESTMENT HOUSE V IAC, SPS. CHUA (1989) ~chrislao~ FACTS -New Sikatuna Wood Industries (New Sikatuna, for brevity) entered into a contract of loan with Chua. Chua's wife issued three postdated crossed checks (valued at almost 300K) payable to New Sikatuna. This

loan was subject to the condition "if and when the deposits were made to back up the checks". -New Sikatuna sold 11 checks including the said 3 checks at a discount to State Investment House. State Investment tried to deposit said checks but the same were dishonored by reason of "insufficient funds", "stop payment" and "account closed", respectively. -State House Investment filed an action for collection against Spouses Chua. RTC ruled against the spouses. IAC REVERSED. Hence, this petition. ISSUE WON State Investment House is a holder in due course and therefore not subject to the defense of the drawer (Spouses Chua) against the payee (New Sikatuna) due to absence of consideration HELD NO. IAC correctly relied on the HELD in Ocampo v. Gatchalian as regards the effects of crossing a check: the check may not be encashed but only deposited in the bank; the check may be negotiated only once—to one who has an account with a bank; and the act of crossing the check serves as a warning to the holder 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, otherwise he is not a holder in due course. -State Investment House's failure to inquire from the holder, New Sikatuna, the purpose for which the 3 checks were crossed, despite the warning of the crossing, prevents State Investment from being considered in good faith and thus it is NOT a holder in due course. -Since it is not a holder in due course, it is subject to personal defenses, such as lack of consideration between Spouses Chua and New Sikatuna. Under the facts, the checks were postdated and issued only as a loan to New Sikatuna, is and when deposits were made to back up the checks. No such deposits were made, hence no loan was ever made. The 3 checks were without consideration. -although State Investment is not a holder in due course, it doesn't mean that it could not recover on the checks. The only disadvantage is that it is subject to defenses as if the instruments were non-negotiable. CONSOLIDATED PLYWOOD INDUSTRIES, INC V IFC LEASING AND ACCEPTANCE CORP (1987) ~apple~ NATURE Petition for review on certiorari of a decision of the IAC

FACTS -Consolidated, a corporation engaged in the logging business, needed 2 units of tractors for its projects. -Atlantic Gulf & Pacific Company of Manila knew of the need and thus offered 2 used tractors to petitioner through its sister company and marketing arm, Industrial Products Marketing (the "seller-assignor"). -Petitioner inspected the tractors while seller-assignor assured petitioner-corporation that the "used" Allis Crawler Tractors which were being offered were fit for the job, and gave the corresponding warranty of ninety (90) days performance of the machines and availability of parts. -With said assurance and warranty, and relying on the seller-assignor's skill and judgment, petitionercorporation through petitioners Wee and Vergara, president and vice-president, respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00). -Seller-assignor issued the sales invoice for the two (2) units of tractors. At the same time, the deed of sale with chattel mortgage with promissory note was executed. Simultaneously with the execution of the deed of sale with chattel mortgage with promissory note, the seller-assignor, by means of a deed of assignment, assigned its rights and interest in the chattel mortgage in favor of the respondent (IFC Leasing). -Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke down and after another nine (9) days, the other tractor likewise broke down. -Vergara informed seller-assignor and asked for prompt action. The seller-assignor sent to the jobsite its mechanics to conduct the necessary repairs, but the tractors did not come out to be what they should be after the repairs were undertaken because the units were no longer serviceable. -Since the tractors were no longer serviceable, Wee asked the seller-assignor to pull out the units and have them reconditioned, and thereafter to offer them for sale. The proceeds were to be given to the respondent and the excess, if any, to be divided between the sellerassignor and petitioner-corporation which offered to bear one-half (1/2) of the reconditioning cost. -No response was received by the petitionercorporation and despite several follow-up calls, the seller-assignor did nothing with regard to the request. -IFC filed a complaint against Consolidated for the amount of the PN. -TC and IAC granted the complaint.

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-D]

ISSUE WON the respondent is a holder in due course HELD: No. (first of all, the instrument here was determined as not being a negotiable instrument because of the lack of the words of negotiability... nevertheless, the court discussed why the respondent cannot be considered a holder in the course had the instrument been negotiable) -A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of Assignment and the Disclosure of Loan/Credit Transaction shows that said documents evidencing the sale on installment of the tractors were all executed on the same day by and among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-assignor which is the Industrial Products Marketing; and the assignee-financing company, which is the respondent. -Therefore, the respondent had actual knowledge of the fact that the seller-assignor's right to collect the purchase price was not unconditional, and that it was subject to the condition that the tractors sold were not defective. -The respondent knew that when the tractors turned out to be defective, it would be subject to the defense of failure of consideration and cannot recover the purchase price from the petitioners. -Even assuming for the sake of argument that the promissory note is negotiable, the respondent, which took the same with actual knowledge of the foregoing facts so that its action in taking the instrument amounted to bad faith, is not a holder in due course, and therefore, subject to all defenses which the petitioners may raise against the seller-assignor. -We subscribe to the view of Campos and Campos that a financing company is not a holder in good faith as to the buyer. -As against the argument that such a rule would seriously affect "a certain mode of transacting business adopted throughout the State," a court in one case stated: It may be that our holding here will require some changes in business methods and will impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs. General Public-should have some protection somewhere along the line. We believe the finance company is better able to bear the risk of the dealer's insolvency than the buyer and in a far better position to protect his interests against unscrupulous and insolvent dealers... If this opinion imposes great burdens on finance companies it is a potent argument in favor of a rule which will afford public protection to

the general buying public against unscrupulous dealers in personal property... (Mutual Finance Co. v. Martin) -The respondent, a financing company which actively participated in the sale on installment of the subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said note. It follows that the respondent's rights under the promissory note involved in this case are subject to all defenses that the petitioners have against the seller-assignor, Industrial Products Marketing. For Section 58 of the Negotiable Instruments Law provides that "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. ... " Disposition Petition granted

SALAS V CA, Filinvest Finance And Leasing Corp (1990) ~rach~ NATURE Petition for review on certiorari FACTS -Petitioner Juanita Salas bought a motor vehicle from the Violago Motor Sales Corporation (VMS) for P58,138.20 as evidenced by a promissory note. This note was subsequently endorsed to the respondent Filinvest Finance & Leasing Corporation which financed the purchase. -Salas defaulted in her installments allegedly due to a discrepancy in the engine and chassis numbers of the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident. -Filinvest then filed a case for a sum of money against Salas. RTC ruled in favor of Filinvest and ordered Salas to pay the plaintiff the sum of P28,414.40 with interest thereon at the rate of 14% from Oct 2, 1980 until the said sum is fully paid. -Both parties appealed to the CA. Imputing fraud, bad faith and misrepresentation against VMS for having delivered a different vehicle to petitioner, the latter prayed for a reversal so that she may be absolved from the contract. -CA merely modified ordering the defendant to pay the plaintiff the sum of P54,908.30 at 14% per annum from Oct 2, 1980 until full payment. * Petitioner’s Arguments -In the light of the provision of the law on sales by description which she alleges is applicable, no contract

ever existed between her and VMS and therefore none had been assigned in favor of private respondent. -It is not necessary to implead VMS as a party to the case because VMS was earlier sued by her for "breach of contract with damages" before RTC Olongapo City. Such court originally ordered Salas to pay the remaining balance of the motor vehicle installments; this was later reversed by the same court ordering VMS instead to return to Salas the sum of P17,855.70. Such decision is still pending consideration in the CA. *Respondent’s Comment -Issues and allegations are a mere rehash of those presented and already passed upon by the CA; judgment in the "breach of contract" suit cannot be invoked as an authority as it is still pending in CA. -Petitioner's liability on the promissory note, the due execution and genuineness of which she never denied under oath is, under the foregoing factual milieu, as inevitable as it is clearly established. ISSUE 1. WON the promissory note is a negotiable instrument (which will bar completely all the available defenses of Salas against Filinvest) 2. WON Filinvest is a holder in due course HELD 1. YES Ratio The instrument in order to be considered negotiable must contain the so-called "words of negotiability i.e., must be payable to "order" or "bearer". Under Sec 8 of the Negotiable Instruments Law, there are only two ways by which an instrument may be made payable to order. There must always be a specified person named in the instrument and the bill or note is to be paid to the person designated in the instrument or to any person to whom he has indorsed and delivered the same. Without the words "or order or "to the order of", the instrument is payable only to the person designated therein and is therefore nonnegotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable instrument, but will merely "step into the shoes" of the person designated in the instrument and will thus be open to all defenses available against the latter. Reasoning Requisites under the law have been complied with: [a] it is in writing and signed by the maker Juanita Salas; [b] it contains an unconditional promise to pay the amount of P58,138.20; [c] it is payable at a fixed or determinable future time which is "P1,614.95 monthly for 36 months due and

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-E]

payable on the 21 st day of each month starting March 21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or indicated with certainty. -It was negotiated by indorsement in writing on the instrument itself payable to the Order of Filinvest Finance and Leasing Corporation and it is an indorsement of the entire instrument. **This is not a simple case of assignment of credit as petitioner would have it appear, where the assignee merely steps into the shoes of, is open to all defenses available against and can enforce payment only to the same extent as, the assignor-vendor. 2. YES Reasoning Filinvest had taken the instrument under the ff conditions: [a] it is complete and regular upon its face; [b] it became the holder thereof before it was overdue, and without notice that it had previously been dishonored; [c] it took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the latter had no notice of any infirmity in the instrument or defect in the title of VMS Corporation. -Filinvest also 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. This being so, Salas cannot set up against respondent the defense of nullity of the contract of sale between her and VMS. - Even assuming that there was deception made upon Salas, this issue cannot be resolved since VMS was never impleaded as a party. SC: “We can only extend our sympathies to Salas in this unfortunate incident.” Disposition Assailed decision is hereby AFFIRMED. COMMERCIAL CREDIT CORP V ORANGE COUNTY MACHINE WORKS (1950) ~cha~ NATURE Appeal from judgment FACTS -Orange County Machine Works (OCMW) was in the market for a Ferracute press. Ermac Company (Ermac) offered to sell to OCMW a Ferracute press for $5k (which Ermac would buy from a supplier). Commercial Credit Corp. (CCC) was asked to finance the transaction, and CCC agreed to do so after an

assignment of the contract of sale between OCMW and Ermac was made in favor of CCC. -before the assignment, Ermac obtained similar financing from CCC and CCC had some blank forms supplied to Ermac. One of these forms entitled “Industrial Conditional Sales Contract” is the agreement between Ermac (to sell the press) and OCMW (to buy the press). -the said contract stated the ff. (re: deferred payments): “the balance shown to be due hereunder (evidenced by my note of even date to your order) is payable in 12 equal consecutive installments of $355.09 each, the first installment payable one month from date hereof. Said note is a negotiable instrument separate and apart from this contract, even though at the time of execution it may be temporarily attached hereto by perforation or otherwise.” -Latter part of the contract (in a detachable portion): “This contract may be assigned and/or said note may be negotiated without notice to me and when assigned and/or negotiated shall be free from any defense, counterclaim or cross complaint by me.” …a dotted or perforated line could be detached from it. At the time the president of OCMW signed the contract and note, he raised a question regarding the said portion below the line but was told that it was just “part of the document”. -OCMW paid $1,512.50 to Ermac. Ermac assigned the contract and endorsed the note to CCC. CCC gave Ermac a check for $4,261 in return. At the time the contract was delivered to CCC, the note had not been detached. Ermac deposited the check to its bank and sent the said check to the supplier of the Ferracute press that would be sold to OCMW. However, when the check was presented by the supplier, it was dishonored. The supplier did not deliver the Ferracute press. Ermac did not pay CCC. -CCC filed complaint vs. OCMW and Ermac for the $4,261 it paid for the assignment. Ermac did not pay. OCMW demands $1,512.50 from Ermac and declaratory relief from CCC. -TC: for CCC against Ermac, for OCMW against CCC (So CCC had no claims against OCMW). CCC not a holder in due course because (1) it knew at the time it paid Ermac for the assignment that Ermac did not own the press it sells, and (2) knew that the press was not delivered to OCMW. -Arguments of CCC: (1) the note is negotiable in form, status not changed because of original physical attachment to, nor later detachment from, the sales contract; does not lose status because it was given in connection with a conditional sales contract; (2) the character of an otherwise negotiable note is not

destroyed by reason of simultaneous assignment of a conditional sales contract to the endorsee of the note; (3) the note is a separate and distinct instrument negotiable in form; OCMW is estopped from asserting failure of consideration because it knew the purpose and legal effect of the note. -Arguments of OCMW: (1) CCC did not acquire the instrument in good faith and for value and had notice of infirmities in the instrument and the defect in the title of Ermac; (2) the conditional sales contract and the attached note must be construed as constituting a single document. The sales contract is assignable but not negotiable, so subject to defenses…(3) CCC was an original party to the original transaction so it took title subject to all equities or defenses existing in its favor against Ermac. ISSUE WON CCC is a holder in due course (and so can recover from CCC – the maker) HELD: NO. Ratio. When a finance company actively participates in a transaction of this type from its inception, counseling and aiding the future vendor-payee, it cannot be regarded as a holder in due course of the note given in the transaction and the defense of failure of consideration may properly be maintained. Reasoning. CCC supplied Ermac with the forms and was twice consulted by telephone as to the impeding deal. It knew all of the details of the transaction. Indeed, financing was applied for because Ermac did not have the money to buy the machinery which OCMW desired to obtain. Throughout the entire transaction, CCC dealt chiefly with Ermac, the future payee, rather than with OCMW, the future maker. CCC advanced money to Ermac with the understanding that the agreement and the note would be assigned or endorsed to it immediately. In a very real sense, the finance company was a moving force in the transaction from its very inception and acted as a party to it. Moreover, Commercial Credit knew the financial status of Ermac. -OCMW never obtained the press for which it bargained and, as against CCC, there is no more obligation upon it to pay the note than there is to pay the installments specified in the contract. Disposition. Judgment affirmed. HAM V MERITT (1912) ~monch~ FACTS

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-F]

-Eva Merritt executed a note for $300 to Southern Hospital Assn. The latter assigned it before maturity to Asa Brunson, who later sold it to E.C. Ham for $100. -Ham sued Merritt to recover from the note. Merritt claims it was obtained from her thru fraud. Ham claims that he had no notice of such fraud and was therefore a holder in due course. ISSUE WON Ham was a holder in due course HELD: YES Ratio A large discount does not, by itself, constitute notice of fraud. Reasoning -The court said that while it can be seen that from Merritt’s testimony that the note was obtained from her fraudulently, there was no evidence to show that Ham had notice of such. -The fact that the note was sold to Ham for only $100 does not constitute as notice of fraud. Such fact, standing alone, does not deprive him of protection from the law. However, the court also notes that such large discount could be of great weight if was supported by some other evidence. Disposition Judgment reversed

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-G]

PENNOYER V DUBOIS STATE BANK (1926) ~kiyo~ FACTS -The Wyoming Live Stock Loan Company sold shares of its capital stock by fraud to Pennoyer, paid for by the latter’s two notes payable to the order of the seller, dated June 21, 1920 and payable 6 months later. On July 22, the payee negotiated them to Dubois which paid with its own notes, certificate of deposit (COD), payable to Wyoming 9 months from date. On Dec. 31, Wyoming negotiated the COD to the First National Bank of Cody (FNBC), as collateral security for a loan. After execution and issuance, the maker learned of the fraud, and refused to pay upon maturity. Dubois had no notice of the defense of fraud at the time of issuance, but did at the time it discharged the COD by payment. Dubois sued Pennoyer. Pennoyer claimed Dubois was not a holder in due course; hence the latter’s personal defense of fraud was available. HELD -Pennoyer cites Sec. 54 arguing that the Dubois was a holder in due course as it had notice of fraud before it paid anything on the COD. Dubois is unaffected by the statute if, when it acquired the notes, “it paid the full amount thereof”. When Dubois gave the COD for the notes , it took the notes for “value”; if it was under an obligation to pay the COD when due, its right to protection as a holder in due course was the same as if it had paid in money. It may be argued that upon notice of fraud, Dubois may have protected itself by enjoining transfer or impounding the COD. The Court believes that since Pennoyer put the notes into circulation and contended they were procured by fraud, bringing proceedings for such a purpose was his duty. To avoid the effects of Sec. 54, Dubois was required to prove that the COD had been negotiated and that it had paid or had become liable to pay someone other than the payee. Dubois’ evidence was sufficient to establish that the FNBC, to whom the COD was paid, was the indorsee and holder which is a prima facie showing that it is a holder in due course. FOSTER V AGUSTANNA COLL. & THEOLOGICAL SEMINARY OF ROCK ISLAND, ILL. (1932) ~athe~ FACTS -Hopkins executed and delivered to Aurelius-Swanson (payee) their negotiable instrument secured by mortgage. Swanson assigned the note and mortgage to Foster not by indorsement but by assignment in a separate instrument duly recorded. Foster redelivered

the note and mortgage to Swanson as custodian. Swanson subsequently assigned the note and mortgage to Augustanna. Augustanna had no actual knowledge that the note and mortgage had therefore been assigned to Foster. Swanson became bankrupt. Foster sued Augustanna. HELD -Doctrine of constructive notice does not apply to Foster. Augustanna had no actual knowledge of the assignment to Foster. Augustanna was a purchaser of the note not the mortgage. It is well-settled rule that where a mortgage given to secure a negotiable PN, the note imparts its negotiable character to the mortgagee, and both are bought within the purview of the statutes, and the mortgage is a mere incident to the note, and an indorsement of the note automatically assigns the mortgage, and the attempted assignment of the mortgage without the transfer of the debt it secures is a nullity. -The doctrine of constructive notice is applicable only to person who is dealing with the land itself, which is not the case here. MILES CITY BANK V ASKIN (1947) ~giulia~ FACTS -George Askin paid his losses in a game of black jack to JW Clark by 2 checks, one for $150 and another for $1,000. Each were signed by Askin as drawer, payable to Clark's order and drawn on the Bank of Baker, Montana. Askin signed his own name and inserted the numerals in lead pencil, and Clark filled the remaining blanks. -Later, Askin was sued on one of the checks (the date was changed), but at the time it was negotiated, it called for $5,000. The court found that a casual examination of the check disclosed that it had been changed after having been written. The words and figures showing the amount are written with a different pencil than the balance of the writing. There were obvious signs of erasure of the words and figures originally occupying such spaces. -The jury found for the plaintiff. Defendant appealed. HELD -The ultimate question of WON plaintiff was a holder in due course must be determined by the just, such determination to be based upon its findings as to whether, (1) the clerk was, in fact materially altered subsequent to its execution and delivery, and (2) if so, was such alteration so manifest and visible as to

reasonable impart notice to plaintiff of an irregularity in the check. -Alterations and erasures of written instruments were presumed to have been made at or prior to the time of their execution. However, when an alteration or erasure appears suspicious on its face, it demands explanation. -The ruling of the TC evidence a presumption by the court that plaintiff was a holder in due course. It should have been considered that Clark was not a depositor in plaintiff bank and had no account there; that the check was written in pencil; that the teller who cashed the check was not acquainted with the defendant or his signature and he was ignorant of the nature of Clark's business, associations, background or financial responsibility; the insistence of Clark in obtaining the cash immediately; and the apparent alterations of the check. -TC erred in refusing evidence offered to prove that in cashing the check as it did plaintiff bank departed from the usual course of business adopted and usually adhered to by the plaintiff. -For these reasons, Court held that the evidence was insufficient to sustain the verdict and judgment, which are contrary to law, and a new trial must be had to present the decisive issues. Dispositive The judgment is reversed, and the cause remanded for new trial

BRONSON V STETSON (1930) ~ajang~ FACTS -Bronson’s agent, Mears, effected the exchange of Bronson’s land in Flint with a farm. Mears, fraudulently represented that there was an $800 mortgage on the land, which he said, Bronson should assume. So Bronson made a note made of even date for $800 payable in three years and secured by a mortgage. The name of the payee and the mortgagee were left blank. It was agreed that Mears was authorized to fill the blanks with the name of Union Trust Savings Bank. -Mears received the papers, and turned them over to defendant Mrs. Stetson. Instead of writing the name of the bank as payee, Mears wrote Mrs. Stetson’s name. Mrs. Stetson asked him if he had a right to do so, and he said he had coz he was a notary public. So Mrs. Stetson paid Mears $800. There is no question that the papers were fraudulently obtained by Mears and that Mrs. Stetson knew that the

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-H]

name on the note was just written by Mears at the time she paid him the money. ISSUE WON Mrs. Stetson is a holder in due course free from all equities and defenses that could be set up against her and could thus collect from Bronson. HELD NO. At first glance, it can be said that Mrs. Stetson is a holder in due course. Mears was given parol authority to fill in the blank. He exceeded his authority in writing the name of the Mrs. Stetson. Mears had apparent authority and Mrs. Stetson was ignorant of the limitation. -It has been held that the one who entrusts an incomplete instrument to another is bound by anyone who relies in good faith on the genuineness of the instrument although the person entrusted with completing and delivering the instrument exceeded his authority. -However, the court turns with reluctance from this. Harrington Nat. Nank v. Beslin ruled that, “in order however that any such instrument may be enforced, it must be filled up strictly in accordance with the authority given and within reasonable time.” Thus, Mrs. Stetson cannot be held to be a holder in due course. TC reversed. BLISS V CALIFORNIA CO-OP PRODUCERS (1947) ~glaisa~ FACTS -The California Co-op Producers was organized to process and ship agricultural products through the use of the shipping terminal facilities. Growers of agricultural products were to be solicited to use the facilities of the corporation in the marketing of their products. Marketing contracts were entered into by the cooperative with many producers. -Agricultural producers executed non-bearing negotiable notes, payable to the co-operative, in ten annual installments, with no acceleration clause. The co-operative agreed to furnish facilities. -Shidler, Winchester and Galbreath each executed one of the notes. The three makers defaulted in the payment of the first installment. -Later, while the note is still unpaid, the co-operative negotiated the notes to Bliss to secure payment of the co-operative’s note, held by Bliss. -The co-operative, by reason of insolvency and bankruptcy, was unable to continue to perform its

obligation in its contracts with the producers, including the makers of the three notes. -The co-operative defaulted in payment to Bliss. Bliss sued the makers on their notes. ISSUE WON Bliss was a holder in due course. HELD -The transferee of an installment note is not a holder in due course as to any part of the note when the transfer has been made after the maturity of one or more but less than all of the installments. -On the issue of WON Bliss had notice of the cooperative’s failure to pay the first installment, the findings are unsatisfactory. -On the issue of the co-operative’s defense of failure of consideration (its failure to perform its obligations under the contracts), Court said that it is a good defense to an action on an instrument by one not a holder in due course -The Court ordered the case to be retried upon the issue of notice of non-payment of first installment at the time of transfer and that judgment be made according to the views expressed. TRAYNOR, dissent: -It is unnecessary to remand the case since the finding and evidence show that Bliss took the notes without notice that the first installment had not been paid. -A holder cannot be a holder in due course as to installments that were overdue when he acquired the note, but that he can be a holder in due course as to future installments, which are not overdue unless their maturity dates have been accelerated. -The mere fact that one or more installments of an installment note are unpaid when the note is negotiated does not convey knowledge to the transferee of a defense against the note; nor does it reveal such knowledge of circumstances that it can be said that the holder of the note shut his eyes to the facts and in bad faith sought to avoid the knowledge of a defense. -A notice of default in the payment of an installment of principal disconnected from other facts does not prevent the transferee from being a holder in due course. -The inquiry may reveal that default is fully explained by circumstances and it constitutes no warning that the maker has defense with regard to installments to mature in the future. Thus, it may appear that prompt payment has been waived and that the delay with regard to one or more past due installments does not

exceed the delay in the payment of other installments that have been paid in the past. -The rule set forth in the majority opinion that a purchaser of an installment note who has knowledge that a past due installment was unpaid when he acquired the note “is put on inquiry and there may be some defenses against it and… cannot be a holder in due course” cannot be reconciled with the provisions of the Uniform Negotiable Instruments Act. BARBOUR V FINKE (1924) ~tito romy~ NATURE Petition for Certiorari FACTS -In January 11, 1915, Finke issued a negotiable note for $3,000 payable on or before ten years from the date of the note. The stated interest rate was six percent per annum payable annually on January 11 of each year. The note was likewise secured by a real estate mortgage. -In March, 1918, the note was endorsed and the mortgage was assigned to Barbour. At the time of the endorsement, a notation on the note stated that interest thereon was up to October 1, 1917. Barbour at some point filed an action for the foreclosure of the mortgage. The lower court ruled for Barbour. But Finke alleged that Barbour is not a holder in due course based on the fact that the non-payment of interest amounted to a dishonor of the note and that Barbour had notice of this as the same is clearly indicated on the note via the notation. Such being the case, Barbour is subject to any defense Finke might have against the original. ISSUE WON Barbour was a holder in due course of both the note and mortgage HELD YES Ratio The mere fact that interest due is unpaid, the principal not being due, does not render the note dishonored. It is also a settled rule of the jurisdiction that a mortgage is merely an accident to the note which it secures. Hence the transfer of the debt secured by the mortgage carries with it the security. As Barbour is a holder in due course of the note, she is also a holder in due course of the mortgage. -The court just stated that this conclusion is in accord with the great weight of authority and is in accord with

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Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-I]

the spirit and intent of the NIL (there was no discussion on how the conclusion is in accord with the spirit…) Dispositive Judgment affirmed. LE DUE V FIRST NAT’L BANK OF KASSON (1883) ~owen~ FACTS -Payee of a draft indorsed it to Edison, against whom the drawer, the defendant bank, had an offset. Edison indorsed the draft to Jordan on March 8, 1882 – 4 months and 23 days after the draft became due. ISSUE WON the draft is overdue and dishonored HELD YES Ratio Indorsers subsequent to Edison took it subject to the same offset to which it was subject in his hands. Reasoning -The term “overdue” in a demand bill of exchange (as in this case) is applied when a bill has come into the hands of the indorser so long after its issue as to charge him with notice of dishonor, and thus subject it in his hands to the defenses which the drawer had against it in the hands of the assignor. -General rule is that a bill, note or check, payable on demand, must be presented for payment within reasonable time, having in view ordinary business usages and the purposes which paper of that class is intended to subserve. But, without any explanation of the reason, this draft which is outstanding nearly 5 months after its date, the trial court is fully justified in holding it overdue and dishonored when Jordan took it, so as to charge it in his hands, or the hands of those who hold under him, with any defense or set-off which the drawer had against it in the hands of Edison. IDAHO STATE BANK V HOOPER SUGAR CO (1929) ~maia~ FACTS Hooper Sugar made a note payable to Wright for $30,000 (note details: issued on Sept. 5, 1919, payable in 6 mos.). Wright then indorsed the note in blank on Sept. 2, 1920 (1 year after). On the same date, he renewed a personal note that was held by National City Bank of Salt Lake (NCBSL), also for $30,000. Wright also forwarded the note made by Hooper to NCBSL but allegedly for a different purpose -However, the cashier of NCBSL altered the renewal note (1) by erasing the name of his bank as payee and

inserting that of a bank in Pocatello, Idaho, (2) by changing the interest rate from 6% to 7% p.a., and (3) by adding a recital that the note (issued by Hooper) was deposited as collateral security for the renewal note. He then transferred the note to the Pocatello Bank for $30,000. In Oct. 11, 1920, the Pocatello Bank sold the 2 notes to Idaho State Bank (plaintiff). -Idaho State Bank (ISB) now claims as holder of the note (made by Hooper) from Hooper and Wright, the same note being the collateral to the renewal note. ISSUE 1. WON Idaho State Bank may claim on the renewal note made by Wright 2. WON Idaho State Bank may claim on the note made by Hooper from Wright as an indorser HELD 1. NO, but this does not mean that Wright is freed from the principal obligation which gave rise to the renewal note. On alterations on the renewal note made by Wright Ratio When a mere inspection of the instrument shows that it has been altered, a purchaser is not a holder in due course because such note is not regular on its face Reasoning – ISB is not a holder in due course of the altered renewal note. It follows then that such note was avoided in the hands of ISB Obiter: it is further alleged by Wright (as a defendant) that not only is IBS precluded from recovery on the altered renewal note, but that such alteration absolved him ultimately of the principal obligation for which the renewal note was given -the court rejected this contention and said that although the alteration was indeed material and intentionally made, there is no finding that Wright’s renewal note was altered with fraudulent intention. While a material alteration of a note is a defense to an action on the instrument itself, in order that such an alteration may be a bar to recovery on the original debt, it must appear that the alteration was made with fraudulent intent. Thus, Wright remains liable on the original obligation to ISB independent of the altered renewal note. 2. YES Ratio When Wright indorsed the note and delivered it to NCBSL after its maturity date, such note as to Wright became a demand note. As a demand note it did not become overdue as to Wright until a reasonable length of time after it was indorsed by him. Reasoning Next in issue is the liability of Wright as an indorser of the note made by Hooper. Wright posits that the note was overdue at the time it reached the hands

of IBS, thus IBS may not be considered as a holder in due course to such note. On the other hand, IBS insists that the note was not overdue when received by it, relying on the provision “ where an instrument is issued, accepted, or indorsed when it is overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand.” -the interpretation of the above-quoted provision can only mean one thing: see the ratio above. -citing the Harvard Law Review: “the instrument takes a new lease of life with respect to an indorser after maturity, and his equitable defenses are not let in until a reasonable time after he indorses, although the paper is apparently overdue. … A contract after maturity has a special maturity of its own, i.e. a reasonable time after execution, and bona fide purchasers within that time will be protected from all equities of the party who signed, even equitable defenses.” -in this case, when Wright indorsed the note after its maturity, he gave the note a second maturity date as to him, namely, a reasonable time, after the transfer. ISB became such holder within that reasonable time, and as regards Wright, IBS received the note free from any equities of Wright founded upon the mere fact that the note appeared to be overdue. Disposition Wright is liable to IBS, must honor the note (since he indorsed it after the maturity, thus effectively made the note “on demand” as between him and IBS). DUNN V O’KEEFEE (1816) ~dahlia~ FACTS J and T Dunn drew a bill of exchange on Ricketts, Thorne, George & Co. dated June 19, 1813 and due July 19,1913 for £1000 payable to the order of J. Sinclair and issued to the payee for value. On June 20, 1813, the payee presented the bill to the drawee for acceptance but the bill was then dishonored by nonacceptance . No notice of dishonor by non-acceptance was given to the drawer. Subsequently and on July 13,1913, the payee negotiated the bill to the plaintiff Mary O'Keefe, who had no knowledge of the prior dishonor by non-acceptance . The drawee again dishonored the bill. The indorsee immediately gave notice of dishonor to the drawer. The indorsee sued the drawer. There was judgment for the plaintiff. ISSUE WON the drawer is liable to the indorsee(who had no knowledge of the prior dishonor) given that the payee did not give the drawer a notice of dishonor.

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Law 108: Negotiable Instruments

First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-J]

HELD When party holding a bill of exchange receives notice of its dishonor, he is bound to communicate this to the drawer. But a bill of exchange is NOT a void security in the hands of an innocent indorsee who has no knowledge that the bill has ever been dishonored because a former holder has omitted to give notice to the drawer that the bill has ever been refused acceptance.The drawer is liable to the innocent indorsee. He issued it in an imperfect state and cannot justly complain of the neglect of any indorsee who takes the bill in his state, having no knowledge of any circumstance to vitiate it, and looking merely at the names upon it. TRIPHONOFF V SWEENEY (1913) ~bry_sj~ FACTS -J.W. Sweeney Construction Company drew its check on the US National Bank of Portland Oregon for USD 2,294.74 payable to the order of DAN MALCHEFF. The check was drawn and delivered on or about March 25, 1911 but was POSTDATED APRIL 15, 1911. -Malcheff negotiated it to TRIPHONOFF before April 15, 1911 who took it for value and in good faith. J.W. SWEENEY CONSTRUCTION (the drawer) stopped payment for the check on the ground that Malcheff (the named payee), an employee of the drawer, obtained the check by means of false and forged estimates of work done by him for the drawer. The check was DISHONORED UPON PRESENTMENT about APRIL 17, 1911. -Triphonoff (INDORSER) sued the drawer J.W. SWEENEY. The latter argued that Triphonoff should have been put on notice of the infirmity in the instrument or defect in the tile of MALCHEFF by the fact that the check was POSTDATED. Counsel for Sweeney goes as far as arguing that a postdated check is not a negotiable instrument if taken before the date on which demand can be made for payment but is simply an assignment of rights of the payee and opens the check to all equities and defenses. ISSUE 1. Whether or not the check in this case is NOT a negotiable instrument. 2. Whether or not postdating of the check amounts to a notice of the infirmity on the instrument as to disqualify the holder from becoming a HIDC HELD

1. NO. The check is a negotiable instrument. It is full and complete on its face as it satisfies the requirements of the law for an instrument to be negotiable. It is worthy to note that the law does not require an instrument to be dated. It is settled that the instrument is not rendered invalid by its antedating or postdating provided that it is not done for an illegal or fraudulent purpose. 2. NO. The plaintiff indorsee was not as a matter of law put into inquiry by reason of the check’s being negotiated prior to day of its date. The law itself does not proscribe postdating of the check. It is noteworthy that the drawing of a postdated check is an everyday occurrence in the commercial world and the uniform understanding of the parties is that, when a check is postdated, it is payable on the day it purports to be drawn even though it be negotiated beforehand. HOWARD NAT’L BANK V WILSON (1923) ~mel~ NATURE Action by Howard National Bank against Graham Wilson and another. FACTS -Elliot was acting president of the bank and had general oversight and management of its affairs. He was also interested in a lumber business conducted as the W. E. Elliot Lumber Company and acted as its treasurer. -He had 2 check accounts with the plaintiff bank, one his personal account and the other an account as Treasurer of the lumber company. He also had an account as treasurer of the lumber company with the Waterbury Savings Bank. -From July 6, 1919, to sept 18, 1919, his personal account with the plaintiff was overdrawn in increasing amounts until the overdraft amounted to $14,594.14. an arrangement was entered into by which the plaintiff made a loan to the lumber company which was deposited in its account with the plaintiff, and Elliot transferred $14,750 from this to his personal account, leaving a balance to his credit of $155.86. -On sept 15, Elliot had drawn a check on his personal account for $10,000 which had not been returned to the bank when this adjustment was made. To cover this check when returned, he drew a check to himself on the Waterbury Bank for a like amount, which he deposited in his personal account. This overdrew the lumber company’s account at the Waterbury Bank about $8,700. There was no evidence that anyone other than Elliot knew of this situation at the time the note in question was given.

-On the day the note was given, the defendant called at the plaintiff ank on business which was transacted with Elliot in the director’s room. In the course of the interview Elliot procured the defendant to sign a note for his (Elliot’s) accommodation. No question is made but that they were false and fraudlent. The note was executed and Elliot took it out into the bank and directed the assistant cashier to make a cashier’s check in favor of the defendant for the amount of the note. Elliot returned with the check which the defendant indorsed in blank and delivered to Elliott. The latter deposited the check to the credit of the lumber company in the Waterbury Bank on Sept 20. The movement of these checks was so timed that want of funds did not appear on the books of either bank. Elliot paid the interest on the note indorsed January 1, 1920. he died in the latter part of January 1920, when for the first time, so far as appeared, it was discovered that he was insolvent. -Defendant insists that the plaintiff, being the payee of the note, is not a holder in due course as a matter of law. ISSUE 1. WON plaintiff (being the payee) is a holder in due course 2. WON plaintiff took the check in good faith HELD: 1. YES -That a payee is capable of being a holder in due course at common law has been held almost without dissent. This view is confirmed by the definition of “negotiation” found in Sec 30 of the act, which provides that an instrument is negotiated when it is transferred from person to another in such a manner as to constitute the transferee the holder thereof. As said, the remaining sentence of the section, “if payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery” was not intended to include all the ways in which an instrument might be negotiated, nor to restrict the comprehensive terms of the preceding sentence. 2. YES -Evidence was uncontradicted that Elliot had authority and was accustomed to approve and direct loans as this loan was approved and directed, and that the defendant was a regular customer of the bank. Assuming that the evidence had the tendency claimed for it, we are at loss to see how, in the circumstances, it can be thought that the cashier had any reason to suspect fraud in the inception of the note or any

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-K]

wrongdoing in the transaction. The note was taken in usual course, for full value and without circumstances calling for or warranting inquiry respecting the occasion for giving it. This being so, it cannot be conceived how a reasonable man could think that the note was taken otherwise than in good faith. PIERCE V CARLTON (1922) ~eva~ NATURE From a Judgment for Defendants, Plaintiff Appeals FACTS -the action is to recover the balance due on 3 promissory notes, executed by MJ Carlton and others payable to Crawford & Ceas, dated Feb.11,1913 and payable June 1 of 1914,1915 and 1916, with an aggregate amount $2100. -on the afternoon of Feb. 11, the notes having been indorsed in blank by the payees, Pierce bought said notes for $1800, and without notice or knowledge of any infirmity affecting the validity of said notes -in Feb.1913 plaintiff sold and delivered said notes to his brother, Thos.B.Pierce, for $2100; said Pierce being also a purchaser for value without notice -June 1915, plaintiff bought the notes back from his brother for $2100 and indorsed to plaintiff without recourse (he didn’t want his brother to be involved in the controversy on the notes) -Defendants: there was allegation with evidence tending to show that said notes were procured by false and fraudulent representations on the part of the payees, and that plaintiff, not only had full notice and knowledge of the fraud at the time he first acquired said notes, but that he had actually aided and abetted the payees in the fraudulent conduct and representations by which the note was procured. -judgment was rendered for the defendants ISSUE WON the court erred in the refusal to nonsuit for want of any evidence to show participation in the alleged fraud on part of plaintiff. HELD: NO. -The principle that one who acquires title from a holder in due course may recover, though he himself may have had notice of the infirmity when he acquired the instrument from such holder, was recognized before the enactment of this statute (Sec.3040 Negotiable Instruments ).

-“But this rule is subject to the single exception that, if the note were invalid as between the maker and the payee, the payee could not himself, by purchase from a bona fide holder, become successor to his rights, it not being essential to such bona fide holder’s protection to extend the principle so far” (Calvert’s Daniel 6th ed. Sec.805). And this exception is approved by the general current of authority. -The exception, we think, extends to the agent who acts for such a payee in reacquisition of the instrument, or to one who aids and abets the payee in the fraud by which the instrument is procured. -There are also decisions which seem to hold that the exception referred to properly applies to one who, not being a party or participant in the fraud, has purchased such a note from the payee with knowledge or notice thereof, and reacquires the same from a bona fide holder. -There is doubt if our statute permits an interpretation which would apply to the facts presented in these last cases. The more natural meaning of the language used would apply the exception to the payee or other taking part in the fraud or illegality which rendered the instrument invalid. -On the facts of the present record we are not called on to make definite decision on this question for the reason that his honor, in submitting the second issue, that as to present plaintiff’s ownership in good faith of the notes, instructed the jury that if present plaintiff held the notes by indorsement for value from a bona fide holder, he was entitled to their verdict on the issue, unless defendants has satisfied them by the greater weight of the evidence that plaintiff was a “participant in the fraudulent conduct which the note were secured.” -It is recognized principle in this jurisdiction that a verdict may be given significance and correctly interpreted by reference to the pleadings, the facts in evidence, and the charge of the court. And the plaintiff having received the full benefit of the position, the refusal of the court to submit the question in the precise terms of the issue as tendered is not erroneous. Dispositive The facts in evidence are fully sufficient to require that the issues be submitted to the jury, and that plaintiff’s motion to nonsuit was properly overruled. LILL V GLEASON (1914) ~jat~ FACTS -Nelson Gleason (maker) executed and delivered a negotiable P/N due on Sept.1, 1908, to Peerless

Machinery Co. (payee) for the purchase of stocks in the said company. The note was accompanied by a written contract permitting Gleason to return the stock and receive back his note duly canceled provided he gives the company prior notice of his intentions. Gleason gave notice to Peerless but the note was not returned. -Why? Because Peerless had indorsed the P/N in blank before maturity (making the originally order instrument into a bearer instrument) and left it with Andale State Bank (bank) as security for money to be advanced to it by the bank but the bank refused to make any advancement on the note until it was indorsed by Michael Lill. So Lill went to the bank and wrote his name on the back of the note. The bank then cashed the note. When the note matured Gleason refused to pay. Upon the bank’s demand, Lill paid the note and received it without indorsement from the bank. -Lill then filed an action against Gleason in the district court, which ruled in favor of the latter and held that Lill was not a holder in due course. Lill appeals. ISSUE 1. WON Lill is a holder in due course 2. WON the note was discharged by Lill’s payment HELD 1. YES. Sec. 58 NIL: xxx 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 the latter. -The order note, having been indorsed by the payee (Peerless) in blank, became payable to bearer and negotiable by delivery (Sec. 34 NIL). Thus, when the note was delivered to the bank, the bank became the holder thereof in due course. And when the bank delivered the note to Lill, Lill became the bearer and holder (Sec.191 NIL). Having derived his title from the bank, which was a holder in due course, and not having been a party to any fraud or illegality affecting the instrument, Lill became possessed of all the rights of the bank against the maker (Sec.58 NIL). 2. NO. The general rule is that payment by a party other than the principal debtor does not discharge parties prior to the one making the payment, and the payment, instead of extinguishing the instrument, operates as a transfer of it to the party paying. *What is Lill’s status as a party to the note and what are his rights as such?

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-L]

Lill became a party to the note for the accommodation of the payee (Peerless), and his original status insofar as liability was concerned, was that of an indorser, since he did not indicate an intention to be bound in some other capacity. As an indorser, he thus became secondarily liable to all parties subsequent to the payee, in this instance to the bank. The contract of an indorser for the accommodation of the payee is wholly independent of that of the maker, and such indorser, upon making payment, succeeds to the title and rights of the holder as against the maker. Disposition Judgment of district court REVERSED. FOSSUM V FERNANDEZ HERMANOS (1923) ~kooky~ FACTS -Charles A. Fossum was the resident agent in Manila of the American Iron Products Company, Inc., engaged in business in New York City, while Fernandez Hermanos is a general commercial partnership engaged in business in the Philippines -on Feb 10, 1920, Fossum, acting as agent of AIPCI, procured an order from Fernandez Hermanos, to deliver a tail shaft, to be installed on the ship Romulus. It was stipulated that the tail shaft would be in accordance with the specifications contained in a blueprint given to Fossum on or about Dec 18, 1919; and it was further understood that the shaft should be shipped from New York in March or April 1920. -The manufacture and shipment of the shaft was delayed considerably; it arrived in Jan 1921. Meanwhile AIPCI had drawn a time draft for $2250, at 60 days, upon Fernandez Hermanos, for the price of the shaft, and payable to Philippine National Bank (PNB). It was presented to Fernandez Hermanos, and was accepted by it on Dec 15, 1920, according to its tenor. -The shaft was found not to be in conformity with the specifications and was incapable of use for its intended purpose. Upon discovering this, Fernandez Hermanos refused to pay the draft, and it remained for a time dishonored in PNB Manila. Later the bank indorsed the draft in blank, without consideration, and delivered it to, Fossum, who then instituted this action against Fernandez Hermanos. -The TC held, and it is evident, that the consideration for the draft and for its acceptance by Fernandez Hermanos has completely failed; and no action whatever can be maintained on the instrument by AIPCI, or by any other person against whom the defense of failure of consideration is available. ISSUE:

WON Fossum is a holder in due course, such that an action can be maintained on the instrument HELD: NO -Fossum is far from being a holder in due course. He was himself a party to the contract which supplied the consideration for the draft, albeit acting in a representative capacity. Also, he procured the instrument to be indorsed by the bank and delivered to himself without the payment of value, after it was overdue, and with full notice that, as between the original parties, the consideration had completely failed. Under these circumstances, recovery on the draft is out of the question. -He calls attention, however, to the familiar rule that a person who is not himself a holder in due course may yet recover against the person primarily liable where it appears that such holder derives his title through a holder in due course. -there is not a line of proof tending to show that the bank itself was ever a holder in due course. It was incumbent on Fossum to show that the bank was a holder in due course, and can have no assistance from the presumption expressed in sec 59 of NIL, to the effect that every holder is deemed prima facie to be a holder in due course. This presumption arises only in favor of a person who is a holder in the sense defined in sec 191 of NIL, that is, a payee or indorsee who is in possession of the draft, or the bearer thereof. Under this definition, in order to be a holder, one must be in possession of the note or the bearer thereof. (Night & Day Bank vs. Rosenbaum) If this action had been instituted by the bank itself, the presumption that the bank was a holder in due course would have arisen from the tenor of the draft and the fact that it was in the bank's possession; but when the instrument passed out of the possession of the bank and into the possession of Fossum, no presumption arises as to the character in which the bank held the paper. The bank's relation to the instrument became past history when it delivered the document to Fossum; and it was incumbent upon him to show that the bank had in fact acquired the instrument for value and under such conditions as would constitute it a holder in due course. -Moreover, Fossum personally made the contract which constituted the consideration for the draft. He was therefore a party in fact, if not in law, to the transaction giving origin to the instrument; and it is difficult to see how he could strip himself of the character to agent with respect to the origin of the contract and maintain this action in his own name where his principal could not. An agent who actually makes a contract, and who has notice of all equities emanating therefrom, can stand on no better footing than his principal with

respect to commercial paper growing out of the transaction. To place him on any higher plane would be incompatible with the fundamental conception underlying the relation of principal and agent. -if the original payee of a note unenforceable for lack of consideration repurchases the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee's hands to the same defenses to which it would have been subject if the paper had never passed through the hands of a holder in due course. The same is true where the instrument is retransferred to an agent of the payee. Disposition Decision affirmed MALCOLM, J., dissenting: -Sec 58 of NIL provides: ". . . 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." Under the provisions of this section, Fossum is in exactly the same situation as PNB would be. He is entitled to all the rights that pertain to PNB as holder in due course. -The absence or failure of consideration is not a defense against a holder in due course, although it is a defense against a holder not in due course. ASIA BANKING CORP SOBRINOS (1923) ~aida~ V TEN SEN GUAN Y

FACTS -Asia Banking is a foreign corporation licensed to engage in banking in Manila. Defendant is a duly registered partnership indebted to Asia Banking in the sum of $10,475.51 for and on account of New York draft which was drawn by Snow’s Ltd. Asia Banking had demanded for payment from Ten Sen Guan but the latter refused to do so. -February 25, 1920 – Defendants ordered from Snow’s Ltd. 10 cases of mercerize batiste to be shipped from New York freight prepaid to Manila. -When the merchandise arrived in Manila, a draft drawn by Snow’s Ltd. against the defendants for the amount alleged was presented for acceptance to the defendants. This was done through Asia Banking, an agent of Snow’s Ltd. Snow’s Ltd. had negotiated the draft with Asia Banking’s counterpart in New York. -The delivery of the bill of lading and other documents was refused by Asia Banking until Ten Sen Guan accepted the draft. -Ten Sen Guan accepted the draft and received delivery of the bill of lading and made entry of the goods at

[ch3-M]

Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-M]

customs. -When the cases were opened, they were found to contain burlap and not the batiste ordered by Ten Sen Guan. So Ten Sen Guan declined to receive the goods and left them at customs. They then returned the bill of lading to Asia Banking and demanded that their acceptance of the draft be cancelled. - The lower court found for the defendant. ISSUE WON Ten Sen Guan is liable for the amount due HELD NO, because Asia Banking is not a holder in due course. -The evidence presented to prove that Asia Banking was a holder of the draft for value is not convincing. To give an authentic account of the transaction, it should have been established by competent evidence how Asia Banking acquired the draft. Asia Banking only presented a local employee of the bank who testified as to the alleged meaning of certain entries made in the bank records. -The trial court also found that the acceptance of the draft by the defendants was conditional. It was also found that the plaintiff released and discharged the defendants from liability upon the draft because of fraud. Disposition Judgment affirmed. STREET [concur] -It was fraud on the part of Snow’s Ltd. to negotiate the draft in question to the New York branch of Asia Banking. -This fraud having been set up in the defendant’s answer and established by proof, it became incumbent upon the plaintiff to prove that it occupies the position of bona fide purchaser of the draft for value and without notice. This requirement is not met by the presumption which the law raises in favor of the holder of a negotiable instrument arising from the mere possession of the instrument. The plaintiff must go further and prove that it is such a purchaser. -The reason for this is that the guilty maker or holder of an instrument vitiated by fraud of illegality will naturally seek to put it in the hands of some other person in order to cut off the defense to which the instrument is subject. VAN SYCKEL V EGG HARBOR COAL & LUMBER CO. (1932) ~lora~ FACTS

-The plaintiff, Van Syckel purchased 3 promissory notes differing only in the amount from one Joseph Ginsberg. -The form and indorsement of the notes were precise with the following:
“$2500 Egg Harbor City, N. J., December 5, 1929. Four months after date We Promise To Pay The Order of Max Orocofsky at the Egg Harbor Commercial Bank, Egg Harbor City, N.J., $2500 And 00 Cts Dollar With Defalcation for Value Received. Egg Harbor Coal & Lumber Co. Arthur Mueller (Signed) Pres. Kate Mueller (Signed) Pres. No. 37220 Due Date Apr. 5.”

- Reverse side:

Without recourse C.S. Van Syckel, Att’y. (Signed)”

“ Max Orocofsky by J.G., pr. Att’y. (Signed)

-Plaintiff claims that the notes were not paid and that the amounts therein stated were due and owing. -The maker’s signature was admitted however, the case is barren of any proof of the genuineness of the signature of the payee. -The lower court ruled in favor of the plaintiff: proofs showed that the plaintiff was holder of the instrument and that under Section 59 of the NIL, the duty was cast upon the defendant to show a defect as follows: “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 who he claims acquired the title as a 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." -Defendant appealed. ISSUES 1. WON the defendant has the burden of proof of showing defect in the instrument. 2. WON plaintiff is a holder in due course. HELD 1. NO. -At common law, one who sues upon a written contract is obliged, in the absence of admission, to prove the sigNATUREof the defendants before the instrument can be received in evidence. Similarly, the plaintiff, when not name in the contract, has always been required to show the right on which he stands. -The notes were not payable to bearer, but were order notes, and title did not pass until indorsed by the

payee. The proof of the sigNATUREof the payee was a necessary part of the plaintiff’s case, unless the fundamental rule of the common law has been changed by the NIL. -There are no statutes changing the law of evidence in this respect. The NIL was intended as a codification of the common law rules relating to negotiable instruments, and is, for the most part, declaratory of the common law. -Sec 55 of NIL: “the title of a person who negotiated 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.” -Sec. 59 should be read in the light of Section 55 and the intervening Sections and should be taken to mean that proof having been offered of the genuineness of the maker’s and payee’s signatures, the holder is deemed to be a holder in due course, and the duty of proceeding to offer some proof of fraud or defect specified, in procuring essential signatures, is cast upon the party alleging it, and, until such proof is offered, there is no duty upon the holder to prove that he or some person under whom he claims acquired the title as holder in due course. -The Court does not think that it was intended that the presumption should arise under Section 59, without proof that the essential names on the front and back of an order instrument were signatures of the named persons. 2. NO. The court and the jury had no evidence before them that the signature upon the back of the note was the signature of the payee, or that the agent purporting to sign the same was authorized so to do. It seems that such proof would be necessary, in view of Sections 16, 19 and 33 of NIL before a presumption would arise of a valid and intentional delivery. -Since note obligation do not arise save by the signature of the maker, it would seem equally to follow that the signature of the payee by way of indorsement is the foundation of the rights of holder in due course, subsequent to the payee. Upon the proof of the genuineness of the necessary signatures the holder’s rights arise as specified in Article 4 of the act, but in the absence of such proof there was nothing to indicate that the instruments in suit had been negotiated, or that the person possessed of the physical paper had title thereto, or the right to the proceeds thereof. -A note payable to order is negotiated by the indorsement of the holder completed by delivery.

[ch3-N]

Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-N]

-In this case, the holder, prior to the indorsement was Max Orocofsky. His signature was sufficient indorsement. There was however, no proof of authority of the person purporting to act as agent to affix the signature. Disposition Judgment Reversed. BEACON TRUST CO. V RYDER (1931) ~marge~ FACTS -Promissory note for $20k dated March 18, 1929, payable to Morris Rudnick six months after date, was purportedly made by Robert L. Ryder. The same was indorsed in blank by Charles W. Ryder “waiving demand, notice and protest” and subsequently indorsed in blank also by Morris Rudnick and “E.S. Company, Inc. Morris Rudnick, Treas.” Before its maturity, said promissory note was delivered by Rudnick to plaintiff Beacon Trust Co. for discounting. -On its due date, PN was protested for nonpayment. Ryders were notified. -Ryders denied their signatures on the PN and allege that there was no consideration and no delivery. They also allege that there was fraudulent transfer and insist that plaintiff prove that it is a HIDC. ISSUE WON plaintiff may be compelled to prove it is a HIDC HELD NO. GenRule: The holder of a negotiable instrument is deemed prima facie to be a HIDC. No further burden rests upon him to prove that he or some other person under whom he claims acquired the title as HIDC. XCPT if it is shown that the title of some person who has negotiated the instrument was defective (i.e., negotiation was “in breach of faith”). -The burden of establishing that the payee’s title was defective was on the Ryders. Failing to sustain this burden [their testimonial evidence did not convince the court], they cannot insist that Beacon Trust Co. prove its prima facie case that it is a HIDC. -Plaintiff Beacon Trust Co.’s right to charge the account of the payee was not necessarily inconsistent with it being a HIDC. -Indifference on the part of the plaintiff as to the outcome of the action would not tend to show that it was not a HIDC. Such indifference might result from a consciousness that there was a good indorser.

FARMERS’ STATE BANK V KOFFLER (1930) ~anton~ NATURE Action to recover on a check which payment was stopped by the drawer. FACTS -September 15, 1928: Koffler (defendant) drew a check on the Farmer’s and merchant’s bank if New England in which he had an account, payable to the order of Kenneth Davis. -The consideration was $250, and the check was intended for that amount. The sum payable was written in figures “$250.00,” but in the body it was expressed in “Two Hundred and 50/100th Dollars” ($200.50). -Davis indorsed the check, and then the check was “lost or stolen.” -October 1: the check was presented to the plaintiff bank, which cashed it in the usual course of business. The bank was acquainted neither with Davis nor the bearer who presented the check. -Davis and Koffler learned that the plaintiff had cashed the check. Koffler notified the drawee bank (Farmer’s and Merchants’) not to pay the same. -The check was transmitted by plaintiff Farmers’ State Bank in the usual course for collection and remittance, but the Farmer’s and Merchants’ refused to pay the same pursuant to Koffler’s notification. -In meantime, after Koffler learned that the Farmers State Bank cashed the check, he gave Davis another one in lieu of the original. Defendant’s Claim -The instrument was complete and regular upon its face and had never previously been dishonored. -Farmers’ State Bank became the holder of it for value and before it was overdue. -The bearer of the check for whom the check was cashed had a defective title within Sec. 55 of the Negotiable Instruments Law (NIL). -The title of the bearer who negotiated the instrument was defective, pursuant to Sec. 59 of the NIL. ISSUE 1. WON the bearer was a holder in due course. 2. WON Farmers’ State Bank had the burden to prove it took the instrument in good faith. HELD 1. YES -Koffler disregarded the last sentence of Sec. 59 of the NIL. Sec. 59.—Every holder is deemed prima facie to be 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 other person under whom he claims acquired the title as a 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. -Here there is no defect n the title so far as the maker is concerned. The action is not brought against Davis to charge him as indorsee. It is brought against the defendant as maker. Koffler became bound to on the instrument at the time he delivered it to Davis. Davis indorsed the instrument (at the time he delivered) and made it payable to bearer. -Koffler has no defense against Davis. Koffler is interposing a defense which might have been available to Davis only. -The check was in all aspects regular except for the discrepancy between the figures indicating the sum payable and its statement in writing. There was nothing about it to challenge the attention of the plaintiff when it was cashed except this discrepancy. -Plaintiff naturally assumed that the bearer was Davis. When the check was presented, the bearer turned to the desk for that purpose and made the indorsement. -There was nothing suspicious which would charge the bank with notice of a defect in title or show lack of good faith. -As to the amount, the one in words controls in instances of discrepancy, unless the words are ambiguous. 2. NO -Sec. 59 considered as a whole does not have the effect of shifting to the plaintiff the burden of proving that he is the holder in due course of the note on which he sues merely by a showing on the part of the defendant that the title to the instrument was defective as against some intermediate indorsee. -The fraud in putting a note in circulation which will operate as a defense or charge the burden of proof must be a fraud against the defendant. -It is where the fraud is done as to the defendant or maker, and not where it is done as to the payee or some intermediate holder or party to the paper. Disposition Amount is reduced to accord with the sum payable. Judgment is affirmed against Koffler. COMMERCIAL BANK OF LA FAYETTE & TRUST CO. V BARRY (1934) ~jonas~

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Law 108: Negotiable Instruments First Semester

AY 2008-09

Prof. Rogelio V. Quevedo

[Ch3-O]

NATURE Appeal from judgment of lower court FACTS -J.C. Barry, Trustee, executed demand notes payable to the order of the Bank of Lafayette & Trust Company, of which he was president. These notes were issued in transactions whereby the bank purchased its own stock from stockholders who wished to dispose of them. The understanding was that Barry would not be personally liable on the notes but that the notes would be paid out of the proceeds of the resale and from dividends. -The Bank of Lafayette & Trust Company sold all its assets, including the Barry note for $8,711 being sued on, to the plaintiff, the Commercial Bank of Lafayette & Trust Company. The note was not indorsed by the payee bank to the plaintiff bank. -Plaintiff contends that it acquired the note for valuable consideration before maturity, & hence is a holder against whom prior equities will not avail. Thus, the bank objected to the offer of any evidence by the defendant in support of his defense. ISSUE WON plaintiff bank is a holder in due course HELD NO Ratio There having been no negotiation of the note sued on, because it was never indorsed by the payee; it is immaterial whether plaintiff acquired the note prior to its maturity. It follows that plaintiff cannot be regarded as a holder in due course, & the instrument sued on is subject to the same defenses as if it were non-negotiable. The defense of want of consideration is therefore available. Reasoning At common law, under the law merchant, & independently of the Negotiable Instruments Law, a transferee of a note payable to order could not & did not obtain a legal title thereto, except by endorsement of the payee, and a holder without such endorsement took it ‘subject to all the equities vested in prior parties.’ Disposition Judgment appealed from is affirmed.

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