OVERVIEW • Any instrument which has the requisites of
enumerated therein is negotiable and is governed by
INTRODUCTION
• Instruments are negotiable when they conform to all the
requirements prescribed by the Negotiable
Instruments Law (NIL) - Act 2031 enacted February 3,
1911.
Kinds of negotiable instruments
• Two main groups:
o Promissory note (Sec. 184); and
Evidences a promise to pay money
E.g. normal promissory note,
certificate of deposit and the bond
o Bill of Exchange (Sec. 126)
An order made by one person to
another to pay money to third
person
E.g. checks, draft
LEGISLATIVE HISTORY OF THE NIL
• Verbatim reproduction of Uniform
Negotiable Instruments Law of US (1896) o This
statute was patterned after English Bill of
Exchange Act (1882)
• Since 1911, no amendment to the NIL has been made
APPLICABILITY OF NIL
• NIL applies only to negotiable instruments i.e. to those
instruments which conform with the requisites laid
down in Sec. 1.
NEGOTIABLE INSTRUMENTS; DEFINITIONS
Section 1
Form of negotiable instruments.
An instrument to be negotiable must conform to the
following requirements:
(a) It must be in writing and signed by the
maker or drawer;
(b) Must contain an unconditional promise or
order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed
or determinable future time;
(d) Must be payable to order or to
bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise indicated
therein with reasonable certainty.
In effect gives definition of a negotiable instrument
•
the NIL. All other instruments are non-negotiable.
• Note that the fact that an instrument does not meet
the requisites will not affect its validity. Only
consequence is that it will not be governed by the NIL
but by the general law on contracts (New Civil Code).
Functions of Negotiable Instruments
• A negotiable instrument may serve any of the following
functions:
o As a substitute for money in payment for
property or services;
o As a means of creating and transferring
credit; and
o To facilitate sale of goods
KINDS OF NEGOTIABLE INSTRUMENTS & PARTIES
Section 126
Bill of exchange, defined.
A bill of exchange is an unconditional order in writing addressed
by one person to another, signed by the person giving it,
requiring the person to whom it is addressed to pay on demand
or at a fixed or determinable future time a sum certain in
money to order or to bearer.
Section 184
Promissory note, defined.
A negotiable promissory note within the meaning of this Act is
an unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or
at a fixed or determinable future time, a sum certain in money
to order or to bearer. Where a note is drawn to the maker's
own order, it is not complete until indorsed by him.
Parties and the Nature of their Liability
Parties and the nature of their liabilities
• Two parties to a promissory note: o Maker – the
promissory o Payee – the person to whom the
promise to pay is made
• Three parties in a bill of exchange:
o Drawer – the person who gives the order to
pay in a bill of exchange
o Drawee – the addressee of the order
o Payee – person to whom the payment is to
be made
Note that when the payee of an
instrument transfers it to another
by signing it at the back, he is said to
have negotiated or indorsed the
same and thereby becomes an
indorser.
 The person to whom he negotiates
it is the indorsee, who, by such
negotiation becomes the holder of
the instrument.
• As to nature of liabilities:
o Primary party – is the one who is absolutely
and unconditionally required to pay the
instrument when it falls due.
The maker is the person primarily
liable in a promissory note
No person is primarily liable in a bill
of exchange, until and unless the
drawee accepts the order of the
drawer to pay. If drawee accepts, he
becomes an acceptor who is
absolutely bound to pay on the date
specified on the bill. The drawer of a
bill of exchange and the indorsers of
either a note or a bill are the
secondary parties.
ROLE OF NEGOTIABLE; LEGAL TENDER
Section 52, RA 7653 Legal Tender
Power.
All notes and coins issued by the Bangko Sentral shall be fully
guaranteed by the Government of the Republic of the
Philippines and shall be legal tender in the Philippines for all
debts, both public and private: Provided, however, That,
unless otherwise fixed by the Monetary Board, coins shall be
legal tender in amounts not exceeding Fifty pesos (P50.00)
for denominations of Twenty-five centavos and above, and
in amounts not exceeding Twenty pesos (P20.00) for
denominations of Ten centavos or less.
• Does not constitute as a legal tender but often take
place of money as a means of payment.
• A 1249 of CC states that a “delivery of promissory
notes payable to order or bills of exchange and other
mercantile documents shall produce the effect of
payment only when they have been cashed or when
through the fault of the creditor they have been
impaired…” Tender of a check is sufficient to compel
redemption of foreclosed property since such
redemption is not an obligation but a right. However,
such tender is not in itself payment that relieves the
redemptioner from his liability to pay the redemption
price.
NEGOTIABLE NON-NEGOTIABLE
INSTRUMENTS
Warehouse Receipts
Document of Title
•
Article 1636, CC
"Document of title to goods" includes any bill of lading, dock
warrant, "quedan," or warehouse receipt or order for the
delivery of goods, or any other document used in the ordinary
course of business in the sale or transfer of goods, as proof of
the possession or control of the goods, or authorizing or
purporting to authorize the possessor of the document to
transfer or receive, either by endorsement or by delivery,
goods represented by such document.
Letter of Credit
Certificate of Stocks
Certificate of Deposit
• Is an instrument issued by a bank reciting a deposit of
certain sum of money, payable either at a fixed time
or on demand, to the depositor named therein.
Other instruments:
• Bond – is an evidence of indebtedness issued by a
corporation, public or private, payable at a definite
date in the future, usually for a long term. It is in effect
a
written promise of the corporation to pay a definite sum of
money.
• Draft – is a form of bill of exchange used mainly in
transactions between persons physically remote from
each other. It is an order made by one person (e.g.
buyer of goods) addressed to a person having in his
possession funds of such buyer, ordering addressee to
pay the purchase price to the seller of goods.
o Where irder is made by one bank to another
bank it is referred to as a bank draft.
NON-NEGOTIABLE; EXCEPTION
Estoppel – see Banco de Oro v Equitable Bank
CHAPTER 2
FORMS AND INTERPRETATION
WRITTEN AND DULY SIGNED
Section 18
Liability of person signing in trade or assumed name. - No
person is liable on the instrument whose signature does not
appear thereon, except as herein otherwise expressly
provided. But one who signs in a trade or assumed name will
be liable to the same extent as if he had signed in his own
name.
Section 19
Signature by agent; authority; how shown. - The signature of
any party may be made by a duly authorized agent. No
particular form of appointment is necessary for this purpose;
and the authority of the agent may be established as in other
cases of agency.
• In writing includes print and includes not only what is
written with pen or pencil, but also what has been
typed.
• Signature is binding whether it is one’s handwriting, or
printed, engraved, lithographed or photographed, as
long as it is intended or adopted as the signature of
the signer or made with his authority.
• Signature may appear on any part of the instrument
(usually appears at lower right hand corner)
• If signature is so placed upon an instrument that it is
not clear in what capacity the person intended to sign,
he is deemed an indorser (Sec. 17f)
UNCONDITIONAL ORDER OR PROMISE TO PAY
Section 3
When promise is unconditional. - An unqualified order or
promise to pay is unconditional within the meaning of this
Act though coupled with:
(a) An indication of a particular fund out of
which reimbursement is to be made or a particular
account to be debited with the amount; or
(b) A statement of the transaction which
gives rise to the instrument.
But an order or promise to pay out of a particular fund is not
unconditional.
• Mere acknowledgement of debt does not constitute a
promise. There should be an express promise on the
face of the instrument to pay the money.
In a bill of exchange, words which are equivalent to an
order are sufficient. Order is a command or imperative
direction. Mere request or authority to pay does not
constitute an order. But mere use of polite words does
not deprive the instrument its characteristics as an
order.
o Note that reimbursement and debit refers to
a separate transaction between the drawer
and the drawee
(Vasquez) o As a rule, unless reference to
the fund clearly indicates an intention that such
fund alone should be the source of payment,
courts usually decide in favour of negotiability.
• Recital of the transaction for which the instrument
was issued does not make the promise or order
unconditional unless:
o It appears through the recital that it qualifies
the time of payment or the sum to be paid
(Powell v Greenleaf)
• The fact that the condition appearing on the
instrument has been fulfilled will not convert it to a
negotiable one (Sec. 4)
CERTAIN SUM PAYABLE
Section 2
What constitutes certainty as to sum. - The sum payable is
a sum certain within the meaning of this Act, although it is
to be paid:
(a) with interest; or
(b) by stated installments; or (c) by stated
installments, with a provision that, upon default in
payment of any installment or of interest, the
whole shall become due; or
(d) with exchange, whether at a
fixed rate or at the current rate; or with costs of
collection or an attorney's fee, in case payment shall not be
made at maturity.
• The amount payable must be certain.
• Rationale: An instrument cannot function properly as
a substitute for money unless

When unconditional

• The promise or order to pay to be unconditional must

be unqualified.
o Rationale: realty increases the ability of a
negotiable instrument to pass freely from
one person to another.
• On bills of exchange, mere indication of the particular
fund out of which reimbursement is to be made, or an
indication of a particular account to be debited with
the amount will not render an order unconditional.
o Reimbursement also presupposes previous
disbursement.

•
 the amount for which it stands for is specified and PAYABLE TO ORDER OR TO BEARER
definite. Section 8
• An agreement to pay interest does not render the sum When payable to order. - The instrument is payable to
uncertain. order where it is drawn payable to the order of a specified
o Exact amount thereof can be computed person or to him or his order. It may be drawn payable to
without looking beyond the instrument. the order of:
• Stipulation to pay higher rate of interest if the note is (a) A payee who is not maker, drawer, or
not paid at maturity or a lower rate if it is paid on or drawee; or
before maturity does not render the instrument non- (b) The drawer or maker; or
negotiable since it is entirely without force until either
(c) The drawee; or
the maturity thereof or is payment before maturity.
(d) Two or more payees jointly; or
• Sum is certain although payable in instalments as long
as the latter are stated i.e. the amount of each (e) One or some of several payees; or
instalment and its due date are fixed in the (f) The holder of an office for the time
instrument. being.
• Acceleration provision based on default will not Where the instrument is payable to order, the payee must
render sum uncertain. be named or otherwise indicated therein with reasonable
• An instrument expressed in a foreign currency may certainty.
contain a provision that the same is payable in Section 9
Philippine currency at a fixed rate of exchange or at When payable to bearer. - The instrument is payable to
the rate current at the time payment is made. This bearer:
provision does not affect the negotiability of the (a) When it is expressed to be so payable; or
instrument. (b) When it is payable to a person
• A provision in an instrument or attorney’s fees, but named therein or bearer; or
leaving the amount thereof blank, amounts to a (c) When it is payable to the order of a
promise to pay a reasonable sum as attorney’s fees fictitious or non-existing person, and such fact was
and does not make instrument non- negotiable. Such known to the person
amount may be fixed by the court. making it so payable; or
(d) When the name of the payee
Payable in money
does not purport to be the name of any person; or
When the only or last indorsement is an indorsement in
• In order to be negotiable, an instrument must be
payable in money. blank.
• Rationale: negotiable instruments are intended to be
substitutes for money, to properly perform such Section 184
function they must necessarily be capable of being Promissory note, defined.
transformed into money if holder so wishes. A negotiable promissory note within the meaning of this Act is
• Money – as used in the law – means not only legal an unconditional promise in writing made by one person to
tender but any kind of current money. another, signed by the maker, engaging to pay on demand, or
• An instrument which contains an order or promise to at a fixed or determinable future time, a sum certain in money
do an act IN ADDITION to the payment of money is to order or to bearer. Where a note is drawn to the maker's
NOT negotiable. (Sec. own order, it is not complete until indorsed by him.
5) o Rationale: Retain simplicity of form which is
absolutely necessary to the free use of negotiable • Instrument in order to be negotiable must contain the
instruments in the place of money. “words of negotiability” – i.e.
• But if the order or promise gives the holder an election must be payable to order or bearer.
to require something to be done IN LIEU of payment • These words serve as an expression of consent that
of money, an instrument otherwise negotiable would the instrument may be transferred.
not be affected thereby. • Note that the instrument need not follow the
o Should be given to PAYEE not to MAKER or the language of the law, but any term which clearly
person primarily indicates an intention to
liable conform to the legal requirements is
sufficient (Sec. 10)
When instrument payable to order
• Two ways by which an instrument may be made
payable to order:
o It is drawn payable to the order of a specified
person; and
o It is drawn payable to the order of a specified
person or his order.
• Without the words “to order” or “to the order of,” the
instrument is payable only to the person designated
therein and is therefore non-negotiable.
o Subsequent purchaser
mere assignor not holder. When
instrument payable to bearer
Examples:
Sec. 9(a)
• I promise to pay bearer/ holder the sum of P100
Sec 9(b)
• Pay to Jose Reyes or bearer
Sec 9(c)
• Pay to John Doe or order
• A name is fictitious when it is feigned or pretended
• Requisite:
o The fact that the payee is a fictitious or non-
existing person must be known to the maker
or drawer
o The theory is that since the payee is not
capable of indorsing and since the maker or
drawer knew of this fact, he must have
intended the instrument to be transferred by
mere delivery
• If the maker or drawer is no aware that the person he
named as payee is fictitious or non-existent, then the
instrument is not a bearer instrument but an order
one.
• A note payable to the order of an estate of a person
still alive at the time of the execution of the note has
been held to constitute a valid bearer paper, since it is
payable to a non-existing person.
• A note payable to the order of the estate of an already
deceased person, although not an order note because
the name of the payee does not purport to be the
name of any person.
Sec. 9(d)
• Pay to cash or pay or sundries.
• It is presumed that the maker or drawer, by using an
impersonal payee, intends the instrument to be
payable to bearer.
Sec. 9(e)
• When the last or only indorsement is an indorsement
in blank, the instrument becomes payable to bearer
even if originally payable to order of a specified
person.
• A blank instrument cannot however convert a non-
negotiable note to a negotiable one.
NOTE: Only instruments under Sec. 9 a and b are expressly
made payable to bearer.
CERTAIN DESIGNATION OF PARTIES
• Maker of a note or the drawer of a bill must sign the
instrument (usually at lower righthand corner)
• Drawee’s name – lower left hand corner, although in
checks the bank’s name sometimes appears across the
top
• The payee and successive indorsees negotiate the
instrument by signing on the back
• As long as parties to the bill or note comply with these
long established and recognized customs, it would be
clear in what capacity the parties signed. However,
once a party to an instrument deviates from the
commercial usage with respect to the place of
signature, and is not clear from the instrument in what
capacity he signs, ambiguity arises.
• The law solves this by considering such a person as an
indorser and not as a maker or drawer.
Section 8
When payable to order. - The instrument is payable to
order where it is drawn payable to the order of a specified
person or to him or his order. It may be drawn payable to
the order of:
(g) A payee who is not maker, drawer, or
drawee; or
(h) The drawer or maker; or
(i) The drawee; or
(j) Two or more payees jointly; or
(k) One or some of several payees; or
(l) The holder of an office for the time
being.
Where the instrument is payable to order, the payee must
be named or otherwise indicated therein with reasonable
certainty.
An instrument may be made payable to anyone of the following
as payees:
• to the order of payee who is not a maker, drawer, or
drawee
• to the order of maker or the drawer
• to the order of the drawee
• to two or more payees jointly o Pay to the order of
Juan Cruz and Jose Santos (jointly not alternative)
• to one or some of several payees in alternative o Pay
to the order of Juan Cruz or Jose
Santos o Only one of them may demand
payment for the full amount
 o Only one of them need to indorse when
negotiating the instrument
• to the holder of an office for the time being o Campos
views this as a floating promise – the payee may be
the person who happens to be secretary at any
particular moment
Section 128
Bill addressed to more than one drawee.
A bill may be addressed to two or more drawees jointly,
whether they are partners or not; but not to two or more
drawees in the alternative or in succession.
Section 130
When bill may be treated as promissory note. Where in a bill
the drawer and drawee are the same person or where the
drawee is a fictitious person or a person not having capacity
to contract, the holder may treat the instrument at his option
either as a bill of exchange or as a promissory note.
• When instrument is addressed to a drawee, he must
be name or otherwise indicated therein with
reasonable certainty.
• May be addressed to two or more drawees jointly i.e.
To Juan Cruz and Jose Reyes
• But not to two or more drawees in the alternative or
in succession
• Where drawer and drawee are the same person, or
where the drawee is a fictitious, or a person having no
capacity to contract, the holder may treat the
instrument either as a bill or a note because otherwise
no one can ever be made primarily liable on
the bill
CERTAIN TIMES OF PAYMENT
Section 4
Determinable future time; what constitutes. - An instrument
is payable at a determinable future time, within the meaning
of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable
future time specified therein; or
(c) On or at a fixed period after the
occurrence of a specified event which is certain to
happen, though the time of happening be
uncertain.
An instrument payable upon a contingency is not
negotiable, and the happening of the event does not cure
the defect.
Section 11
Date, presumption as to. - Where the instrument or an
acceptance or any indorsement thereon is dated, such date is
deemed prima facie to be the true date of the making,
drawing, acceptance, or indorsement, as the case may be.
Section 17
Construction where instrument is ambiguous. - Where the
language of the instrument is ambiguous or there are
omissions therein, the following rules of construction
apply:
(a) Where the sum payable is expressed in words
and also in figures and there is a discrepancy
between the two, the sum denoted by the words is
the sum payable; but if the words are ambiguous or
uncertain, reference may be had to the figures to
fix the amount; (b) Where the instrument provides
for the payment of interest, without specifying the
date from which interest is to run, the interest runs
from the date of the instrument, and if the
instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will
be considered to be dated as of the time it was
issued;
(d) Where there is a conflict between the
written and printed provisions of the instrument,
the written provisions prevail;
(e) Where the instrument is so ambiguous
that there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
(f) Where a signature is so placed upon the
instrument that it is not clear in what capacity the
person making the same intended to sign, he is to
be deemed an indorser;
Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed to
be jointly and severally liable thereon.
PROVISIONS AFFECTING NEGOTIABILITY
Section 5
Additional provisions not affecting negotiability. - An
instrument which contains an order or promise to do any
act in addition to the payment of money is not negotiable.
But the negotiable character of an instrument otherwise
negotiable is not affected by a provision which:
(a) authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
(b) authorizes a confession of judgment if the
instrument be not paid at maturity; or
(c) waives the benefit of any law intended for the
advantage or protection of the obligor; or
(d) gives the holder an election to require something
to be done in lieu of payment of money.
But nothing in this section shall validate any provision or
stipulation otherwise illegal.
OMISSIONS
Section 6
Omissions; seal; particular money. - The validity and
negotiable character of an instrument are not affected by
the fact that:
(a) it is not dated; or
(b) does not specify the value given, or that any value
had been given therefor; or
(c) does not specify the place where it is drawn or the
place where it is payable; or
(d) bears a seal; or
(e) designates a particular kind of current money in
which payment is to be made.
But nothing in this section shall alter or repeal any statute
requiring in certain cases the nature of the consideration to
be stated in the instrument.
DATES OF INSTRUMENT
Section 11
Date, presumption as to. - Where the instrument or an
acceptance or any indorsement thereon is dated, such date is
deemed prima facie to be the true date of the making, drawing,
acceptance, or indorsement, as the case may be.
Section 12
Ante-dated and post-dated. - The instrument is not invalid for
the reason only that it is antedated or post-dated, provided
this is not done for an illegal or fraudulent purpose. The person
to whom an instrument so dated is delivered acquires the title
thereto as of the date of delivery.
Section 13
When date may be inserted. - Where an instrument expressed
to be payable at a fixed period after date is issued undated, or
where the acceptance of an instrument payable at a fixed
period after sight is undated, any holder may insert therein the
true date of issue or acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong date does not
avoid the instrument in the hands of a subsequent holder in
due course; but as to him, the date so inserted is to be regarded
as the true date.
BLANKS; WHEN FILED
Section 14
Blanks; when may be filled. - Where the instrument is wanting
in any material particular, the person in possession thereof
has a prima facie authority to complete it by filling up the
blanks therein. And a signature on a blank paper delivered by
the person making the signature in order that the paper may
be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount. In
order, however, that any such instrument when completed
may be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable
time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual
for all purposes in his hands, and he may enforce it as if it had
been filled up strictly in accordance with the authority given
and within a reasonable time.
INCOMPLETE INSTRUMENTS
Section 15
Incomplete instrument not delivered. - Where an incomplete
instrument has not been delivered, it will not, if completed
and negotiated without authority, be a valid contract in the
hands of any holder, as against any person whose signature
was placed thereon before delivery.
CONSTRUCTION
Section 17
Construction where instrument is ambiguous. - Where the
language of the instrument is ambiguous or there are
omissions therein, the following rules of construction
apply:
(g) Where the sum payable is expressed in words
and also in figures and there is a discrepancy
between the two, the sum denoted by the words is
the sum payable; but if the words are ambiguous or
uncertain, reference may be had to the figures to
fix the amount; (h) Where the instrument provides
for the payment of interest, without
 specifying the date from which interest is to run,
the interest runs from the date of the instrument,
and if the instrument is undated, from the issue
thereof;
(i) Where the instrument is not dated, it will
be considered to be dated as of the time it was
issued;
(j) Where there is a conflict between the
written and printed provisions of the instrument,
the written provisions prevail;
(k) Where the instrument is so ambiguous
that there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
(l) Where a signature is so placed upon the
instrument that it is not clear in what capacity the
person making the same intended to sign, he is to
be deemed an indorser;
Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed to
be jointly and severally liable thereon.
CHAPTER 3
CONSIDERATION
PRESUMPTION
Section 24
Presumption of consideration. - Every negotiable
instrument is deemed prima facie to have been issued for a
valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.
VALUE
Section 25
Value, what constitutes. — Value is any consideration sufficient
to support a simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time.
HOLDER FOR VALUE
Section 26
What constitutes holder for value. - Where value has at any
time been given for the instrument, the holder is deemed a
holder for value in respect to all parties who become such prior
to that time.
LIEN HOLDER; HOLDER FOR VALUE
Section 27
When lien on instrument constitutes holder for value. —
Where the holder has a lien on the instrument arising either
from contract or by implication of law, he is deemed a holder
for value to the extent of his lien.
EFFECT OF WANT OF CONSIDERATION
Section 28
Effect of want of consideration. - Absence or failure of
consideration is a matter of defense as against any person not
a holder in due course; and partial failure of consideration is
a defense pro tanto, whether the failure is an ascertained and
liquidated amount or otherwise.
ACCOMMODATION PARTY
Section 29
Liability of accommodation party. - An accommodation party
is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and
for the purpose of lending his name to some other person.
Such a person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
CHAPTER 4
TRANSFER AND NEGOTIATION
ISSUANCE AND DELIVERY
Section 16
Delivery; when effectual; when presumed. - Every contract on
a negotiable instrument is incomplete and revocable until
delivery of the instrument for the purpose of giving effect
thereto. As between immediate parties and as regards a
remote party other than a holder in due course, the delivery,
in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or
indorsing, as the case may be; and, in such case, the delivery
may be shown to have been conditional, or for a special
purpose only, and not for the purpose of transferring the
property in the instrument. But where the instrument is in the
hands of a holder in due course, a valid delivery thereof by all
parties prior to him so as to make them liable to him is
conclusively presumed. And where the instrument is no
longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery by him is presumed
until the contrary is proved.
Section 191
Definition and meaning of terms. - In this Act, unless the
contract otherwise requires:
"Acceptance" means an acceptance
completed by delivery or notification; "Action" includes
counterclaim and set-off; "Bank" includes any person or
association of persons carrying on the business of banking,
whether incorporated or not; "Bearer" means the person in
possession of a bill or note which is payable to bearer;
"Bill" means bill of exchange, and "note" means negotiable
promissory note;
"Delivery" means transfer of possession, actual or
constructive, from one person to another;
"Holder" means the payee or indorsee of a bill or note who is
in possession of it, or the bearer thereof;
"Indorsement" means an indorsement
completed by delivery;
"Instrument" means negotiable instrument; "Issue" means the
first delivery of the instrument, complete in form, to a person
who takes it as a holder;
"Person" includes a body of persons, whether incorporated or
not;
"Value" means valuable consideration; "Written" includes
printed, and "writing" includes print.
NEGOTIATION; HOLDER
Section 30
What constitutes negotiation. - An instrument is negotiated
when it is transferred from one person to another in such
manner as to constitute the transferee the holder thereof. If
payable to bearer, it is negotiated by delivery; if payable to
order, it is negotiated by the indorsement of the holder and
completed by delivery.
INDORSEMENT
By Signature on Instrument or On Allonge
Section 31
Indorsement; how made. - The indorsement must be written
on the instrument itself or upon a paper attached thereto. The
signature of the indorser, without additional words, is a
sufficient indorsement.
Where Name is Misspelled
Section 43
Indorsement where name is misspelled, and so forth. - Where
the name of a payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as therein
described adding, if he thinks fit, his proper signature.
INDORSEMENT MUST BE
ENTIRE INSTRUMENT
Section 32
Indorsement must be of entire instrument. - The indorsement
must be an indorsement of the entire instrument. An
indorsement which purports to transfer to the indorsee a part
only of the amount payable, or which purports to transfer the
instrument to two or more indorsees severally, does not
operate as a negotiation of the instrument. But where the
instrument has been paid in part, it may be indorsed as to the
residue.
KINDS OF INDORSEMENTS
Section 33
Kinds of indorsement. - An indorsement may be either special
or in blank; and it may also be either restrictive or qualified
or conditional.
Special and Blank Indorsements
Section 34
Special indorsement; indorsement in blank. - A special
indorsement specifies the person to whom, or to whose
order, the instrument is to be payable, and the indorsement
of such indorsee is necessary to the further negotiation of the
instrument. An indorsement in blank specifies no indorsee,
and an instrument so indorsed is payable to bearer, and may
be negotiated by delivery.
Section 35
Blank indorsement; how changed to special indorsement. -
The holder may convert a blank indorsement into a special
indorsement by writing over the signature of the indorser in
blank any contract consistent with the character of the
indorsement.
Payable to Bearer
Section 40
Indorsement of instrument payable to bearer. - Where an
instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the
person indorsing specially is liable as indorser to only such
holders as make title through his indorsement.
Restrictive Indorsement
Section 36
When indorsement restrictive. - An indorsement is
restrictive which either:
(a) Prohibits the further negotiation of the instrument;
or
(b) Constitutes the indorsee the agent of the indorser;
or
(c) Vests the title in the indorsee in trust for or to the use
of some other persons.
But the mere absence of words implying power to
negotiate does not make an indorsement restrictive.
Section 37
Effect of restrictive indorsement; rights of indorsee. - A
restrictive indorsement confers upon the indorsee the
right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could
bring;
(c) to transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the
first indorsee under the restrictive indorsement.
QUALIFIED INDORSEMENTS
Section 38
Qualified indorsement. - A qualified indorsement constitutes
the indorser a mere assignor of the title to the instrument. It
may be made by adding to the indorser's signature the words
"without recourse" or any words of similar import. Such an
indorsement does not impair the negotiable character of the
instrument.
CONDITIONAL INDORSEMENT
Section 39
Conditional indorsement. - Where an indorsement is
conditional, the party required to pay the instrument may
disregard the condition and make payment to the indorsee or
his transferee whether the condition has been fulfilled or not.
But any person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds thereof, subject
to the rights of the person indorsing conditionally.
INDORSEMENT TO OR BY COLLECTING BANK
UNINDORSED INSTRUMENTS
Section 49
Transfer without indorsement; effect of. - Where the holder of
an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee such
title as the transferor had therein, and the transferee acquires
in addition, the right to have the indorsement of the
transferor. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes
effect as of the time when the indorsement is actually made.
CANCELLATION OF INDORSEMENTS
Section 48
Striking out indorsement. - The holder may at any time strike
out any indorsement which is not necessary to his title. The
indorser whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the
instrument.
INDORSEMENT BY AGENT
Section 44
Indorsement in representative capacity. - Where any person is
under obligation to indorse in a representative capacity, he
may indorse in such terms as to negative personal liability.
indorsed or discharged by payment or otherwise.
Section 20
Liability of person signing as agent, and so forth. - Where the
instrument contains or a person adds to his signature words
indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if
he was duly authorized; but the mere addition of words
describing him as an agent, or as filling a representative
character, without disclosing his principal, does not exempt
him from personal liability.
PRESUMPTION AS TO INDORSEMENTS Time
Section 45
Time of indorsement; presumption. - Except where an
indorsement bears date after the maturity of the instrument,
every negotiation is deemed prima facie to have been
effected before the instrument was overdue.
Place
Section 46
Place of indorsement; presumption. - Except where the
contrary appears, every indorsement is presumed prima facie
to have been made at the place where the instrument is
dated.
Payee
Section 42
Effect of instrument drawn or indorsed to a person as cashier.
- Where an instrument is drawn or indorsed to a person as
"cashier" or other fiscal officer of a bank or corporation, it is
deemed prima facie to be payable to the bank or corporation
of which he is such officer, and may be negotiated by either
the indorsement of the bank or corporation or the
indorsement of the officer.
CONTINUATION OF NEGOTIABLE CHARACTER
Section 47
Continuation of negotiable character. - An instrument
negotiable in its origin continues to be negotiable until it has
been restrictively
 CHAPTER 5
HOLDER IN DUE COURSE

HOLDER
Section 191
"Holder" means the payee or indorsee of a bill or note who is in possession of it,
or the bearer thereof;

HOLDER FOR VALUE

Section 26
What constitutes holder for value. - Where value has at any time been given for
the instrument, the holder is deemed a holder for value in respect to all parties
who become such prior to that time.

HOLDER IN DUE COURSE

What constitutes a holder in due course. - A holder in due
course is a holder who has taken the instrument under the
following conditions:
(a)That it is complete and regular upon its face;
(b) That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d)That at the time it was negotiated to him, he had no
notice of any infirmity in the instrument or defect
in the title of the person negotiating it.
Section 52
Negotiability
• The fact that a holder is not a holder in due course will
not affect the negotiability of the instrument.
o Only affects such holder’s rights and does not
necessarily prevent subsequent holders
from acquiring the status of due course
holders
NOTE: Question of WON a holder is a holder in due course is
significant only when there is existing defense between prior
parties. If there is no such defense and the instrument is
completely valid, then it will not matter WON a holder is a
holder in due course.

Section 53 HOLDER FOR VALUE

When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an
unreasonable length of time after its issue, the holder is not
deemed a holder in due course.
Rights
• A holder in due course can acquire a better title than
his predecessors because he takes the instrument
free from any defect of title of prior parties.
• He is also free from defenses available to prior parties
among themselves.
Defenses
• A holder NOT in due course takes instrument subject
to all defenses because he is treated as a transferee
of a nonnegotiable paper.
• Real defenses which attach to the instrument itself
would be available even against a holder in due
course.
Section 24
Presumption of consideration. - Every
negotiable instrument is deemed prima facie to have been
issued for a valuable consideration; and every person
whose signature appears thereon to have become a party
thereto for value.
Section 25
Value, what constitutes. — Value is any consideration
sufficient to support a simple contract. An antecedent or pre-
existing debt constitutes value; and is deemed such whether
the instrument is payable on demand or at a future time.
Section 26
What constitutes holder for value. - Where value has at any
time been given for the instrument, the holder is deemed a
holder for value in respect to all parties who become such
prior to that time.
Section 27
When lien on instrument constitutes holder for value. —
Where the holder has a lien on the instrument arising either
from contract or by implication of law, he is deemed a holder
for value to the extent of his lien.
What constitutes value
Value
• means valuable consideration
• any consideration sufficient to support a simple
contract
• VASQUEZ: includes liberality
BUT CAMPOS: In cases where a negotiable instrument is given
as a gift to the indorsee or transferee, whatever defenses that
can be set up against the transferor can also be set up against
the transferee.
Value and consideration are generally convertible terms. But:
Consideration is more proper term when the payee of the note
sues the maker, or the payee of a bill sues the drawer, or an
indorsee sues his immediate indorser.
Value is more appropriate where a holder sues any party to
the instrument with whom he himself has not dealt
Value need not be full and a holder will be one for value even
if he gave less than the face value of the instrument, provided
that the intention of the transferor is to transfer the fill amount
represented by the instrument.
Bank credit as value
When the holder of a check deposits it with his bank (assuming
it is not the drawee bank) and the bank credits it to his account,
is the bank at this stage a holder for value?
CAMPOS: Most courts hold that it is not on the theory that the
bank has parted with nothing and that the crediting is a mere
bookkeeping entry.
The bank becomes a holder for value only when the depositor
withdraws the amount of the deposited instrument.
VASQUEZ: If bank credits in advance prior to
clearing – a holder. If waits for clearing – not a
holder.
IN GOOD FAITH
Section 55
When title defective. - The title of a person who negotiates an
instrument is defective within the meaning of this Act when
he obtained the instrument, or any signature thereto, by
fraud, duress, or force and fear, or other unlawful means, or
for an illegal consideration, or when he negotiates it in breach
of faith, or under such circumstances as amount to a fraud.
Section 56
What constitutes notice of defect. - To constitutes notice of
an infirmity in the instrument or defect in the title of the
person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity
or defect, or knowledge of such facts that his action in taking
the instrument amounted to bad faith.
In order to constitute notice, the holder must have ACTUAL not
merely constructive knowledge of the defect, or he must have
acted in bad faith.
Gross negligence in itself would not constitute notice since it is
not the equivalent of bad faith nor actual knowledge.
Notice, bad faith
Test established in Sec. 56 is subjective.
Bad faith being a state of mind can only be proven by
circumstantial evidence.
• It is a question of fact which must be determined in
accordance with the particular circumstances of each
case.
Article 1338, CC
There is fraud when, through insidious words or machinations
of one of the contracting parties, the other is induced to enter
into a contract which, without them, he would not have agreed
to. (1269)
Article 1344, CC
In order that fraud may make a contract voidable, it should be
serious and should not have been employed by both
contracting parties.
Incidental fraud only obliges the person employing it to pay
damages. (1270)
Holder must have taken the instrument in good faith and that
at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person
negotiating it.
Due course holding is NOT affected by the holder’s acquisition
of knowledge AFTER he has taken the instrument.
Crossing a Check; Bad Faith
Financing Company; Holder in Good faith
Tendency of courts is to protect the buyer against the finance
company in the event that the goods sold turn out to be
defective. The finance company will be subject to the defense
of failure of consideration and cannot recover the purchase
price from the buyer.
NOTE: Article 146 of Consumer’s Act - Sale of Consumer
Products On Instalment Payment. – In a consumer credit sale
other than one pursuant to an open-end credit plan, the
obligation of the consumer to whom credit is being extended
shall be evidenced by a single instrument which shall include,
in addition to the disclosures required by this act, the signature
of the seller and the person to whom credit is extended, the
date it was signed, a description of the property sold and a
description of any property transferred as a trade-in. The
instrument evidencing the credit shall contain a clear and
conspicuous typewritten notice to the person to whom credit
is being extended that:
a) he should not sign the instrument if it contains any
blank space;
b) he is entitled to a reasonable return of the
precomputed finance charge if the balance is prepaid;
and
c) he is entitled to an exact, true copy of the agreement.
In cases where the instrument will be sold at a discount to a
bank, financing company or other lender, the said transferee
shall be subject to all claims and defenses which the debtor
could assert against the seller of consumer products obtained
hereto or with the proceeds thereof.
Postdating a Check
Section 12
Ante-dated and post-dated. - The instrument is not invalid for
the reason only that it is antedated or post-dated, provided
this is not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is delivered acquires
the title thereto as of the date of delivery.
Antedated instruments
• If an instrument bears a date earlier than the date of its
actual issuance
Postdated
• If an instrument contains a date later than the date of its
issuance
The instrument is not only valid but negotiable though it is
antedated or postdated.
A holder thereof can therefore be holder in due course, and he
is not put on inquiry by the mere fact of its being antedated or
postdated.
e.g. an instrument which is antedated in order to evade the
effects of the Usury Law
• Illegal under this section
Suspicious circumstances
Negligence in tracking down a suspicious circumstance which
would put a prudent man on inquiry is not of itself sufficient to
prevent recovery, though it may properly be admitted together
with other circumstances as evidence of bad faith.
But where the suspicious circumstances are so cogent and
obvious that to remain passive would amount to bad faith, the
holder would be subject to defences.
There is difference between the existence of suspicious
circumstances and actual suspicion of the purchaser.
• If he does in fact suspect and fails to make investigation
lest it disclose a defense, he is not a purchaser in good
faith.
In order to show that the defendant had
“knowledge of such facts that his action in taking the
instrument amounted to bad faith” it is not necessary to prove
that the defendant knew the exact fraud that was practiced
upon the plaintiff by the defendant’s assignor, it being
sufficient to show that the defendant had notice that there was
something wrong about his assignor’s acquisition of title,
although he did not have notice of the particular wrong that
was committed.
Bad faith may under certain circumstances be imputed from
knowledge of the purchaser of other suspicious transactions of
the transferor.
Effect of Purchase at a Discount
The purchase of an instrument at a discount does not, of itself,
constitute bad faith.
• In most cases a purchaser at a discount is influenced
by the financial condition of the issuer of the
instrument rather than by the possibility that it was
obtained subject to defense.
However, if the instrument is purchased at a heavy discount,
this fact together with other facts, may be taken into account
in deciding the issue of purchase in good faith.
Eg. Purchase at a discount although maker is known to be:
• Solvent,
• Note is amply secured
• Or is taken from a total stranger
These additional circumstances taken with the fact of heavy
discount might prove bad faith.
Effect of Notice Not Sufficient
Section 54
Notice before full amount is paid. - Where the transferee
receives notice of any infirmity in the instrument or defect in
the title of the person negotiating the same before he has
paid the full amount agreed to be paid therefor, he will be
deemed a holder in due course only to the extent of the
amount therefore paid by him.
Notice of defenses to a purchaser before he has acquired title
and before he has paid any portion of the purchase price is fully
operative to prevent him from being a holder in due course.
But where he receives such notice after he has partially paid
the instrument, he is a holder in due course as to such amount
paid by him.
Should he pay the remainder despite notice he cannot
thereafter recover such amount from the maker because to
that extent, he will be subject to the defences which the maker
may have.
Constructive Notice Not Sufficient
Just as a purchaser of a negotiable instrument is not put on
inquiry, neither he is charged with notice of defenses or
equities disclosed by public records nor is he affected by the
doctrine of lis pendens.
Notice to agent is chargeable against the principal
Notice of Accommodation Not Notice of Defect
Section 29
Liability of accommodation party. - An accommodation party
is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and
for the purpose of lending his name to some other person.
Such a person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
A holder’s title is not rendered defective by his knowledge that
the party sought to be held liable was an accommodation
party. Also it does not prevent such holder from being a holder
in due course.
COMPLETE AND REGULAR; MATERIAL
ALTERATION
Section 124
Alteration of instrument; effect of. - Where a negotiable
instrument is materially altered without the assent of all
parties liable thereon, it is avoided, except as against a
party who has himself made, authorized, or assented to
the alteration and subsequent indorsers.
But when an instrument has been materially altered and is
in the hands of a holder in due course not a party to the
alteration, he may enforce payment thereof according to
its original tenor.
Holder must have taken the instrument complete and regular
on its face.
• If a purchaser of a negotiable paper takes prior to
completion or contemporaneously with the act of
completion, he is not a holder in due course.
• Mere failure to affix revenue stamps as required by
law does not render the instrument incomplete.
• An instrument payable in __(blank)___ days after date
is NOT complete and regular on its face.
• Where it specifies the date but not the year of
maturity, it is also not complete.
• Also when it is blank as to the payee, although the
holder can sue on the said instrument without filling
in the payee’s name (?)
• Where the instrument is executed in blank and is
subsequently filled up and issued to the first holder
who has no knowledge of execution in blank, the
holder is a holder in due course.
• If the first holder takes the instrument complete in
form with knowledge of original execution in blank, he
is not a holder in due course, although he actually took
it complete.
• Taking of an incomplete instrument lets in all
defenses and equities, WON connected with the
execution in blank.
• Same rule when holder takes and instrument irregular
on its face:
o E.g. alteration which is apparent on the
instrument.
Section 125
What constitutes a material alteration. - Any alteration
which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:
(d) The number or the relations of the
parties;
(e) The medium or currency in which payment is to
be made;
(f) Or which adds a place of payment where no place
of payment is specified, or any other change or
addition which alters the effect of the instrument
in any respect, is a material alteration.
See Sec. 124:
• If alteration is apparent on the instrument, it renders
the instrument irregular within Sec. 52(a), even if the
change may have been authorized or assented.
• And this puts the purchaser on inquiry as to all
defenses and equities, WON connected with the
alteration.
• If the unauthorized alteration is BOTH APPARENT and
MATERIAL, then not only is the holder deprived of the
rights of a holder in due course, but the instrument is
entirely void and is a real defense against
enforcement.
Sec 52 (a) – deals with matters evidencing bad faith which are
to be found on the instrument
Sec 52 (c) and (d) and Sec 56 – deal with the issues of bad faith
where the evidence thereof is not on the face of the
instrument, but lies in extrinsic circumstances.
HOLDER AT OR AFTER MATURITY AND WITHOUT NOTICE OF
DISHONOR
Section 53
When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an
unreasonable length of time after its issue, the holder is not
deemed a holder in due course.
• Under Sec 52(b) a holder in order to be a holder in due
course must become a holder of the instrument
before it is overdue and without notice that it has
been previously dishonoured if such was the fact.
• The fact that the instrument is overdue is a
strong indication that it was dishonoured and the law puts
the potential holder on inquiry as to whether it was
dishonoured and the reason therefor.
• An instrument may be dishonoured:
o By Non-acceptance
Can refer only to a bill of exchange
takes place when the drawee
refuses to accept the order of the
drawer as stated in the bill. This may
occur even before the date of
maturity of the bill.
o By non-payment
Occurs at the time of maturity
When the party primarily liable i.e.
the maker of the note, or the
acceptor of the bill, fails to pay the
instrument at the date of maturity.
NOTE: An instrument is not overdue on the day of its maturity.
If instrument is payable after sight
• The date of maturity is fixed by the date of
presentment
If instrument is payable on the occurrence
• The date of the instrument is fixed by the happening
of the event
Purchase made outside reasonable time
• If the purchase of a demand instrument is made
outside of the reasonable time after issue, the
purchase is one of an overdue instrument.
• Usage of time o Sec 193 provides that “regard is to be
had to:
the nature of the instrument,
the usage of trade or business with
respect to such instrument and
the fact of the particular case”
o With regard to the nature of the instrument, it
is the function of the instrument which must be
noted in determining whether reasonable time
has elapsed or not.
o Evidence as to usage of trade or business is
admissible to show lapse of reasonable time,
and it is not sufficient that such usage is general
but it should be local in the sense that it may not
be the same in all localities. o Facts of the
particular case will vary in each case.
Payment of interest may be an important factor in determining
reasonableness of time
With respect to instruments with a fixed maturity but subject
to acceleration, either automatically or at the option of the
holder, the ultimate date of maturity is the date of maturity for
the purpose of determining whether a purchaser is a holder in
due course, UNLESS such purchaser had knowledge of earlier
maturity at the time he acquired title.
RIGHTS OF A HOLDER IN DUE COURSE
Section 57
Rights of holder in due course. - A holder in due course holds
the instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for
the full amount thereof against all parties liable thereon.
Section 58
When subject to original defense. - In the hands of any holder
other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable. But
a holder who derives his title through a holder in due course,
and who is not himself a party to any fraud or illegality
affecting the instrument, has all the rights of such former
holder in respect of all parties prior to the latter.
EFFECT OF QUALIFIED CONDITIONAL AND RESTRICTIVE
INDORSEMENTS
• The status of a holder as a holder in due course is not
affected by his taking under qualified indorsement.
o Does not necessarily imply that there is a
defect in the instrument or in the title of any
prior party
• Conditional indorsement does not by itself deprive the
conditional indorsee or any subsequent holder of the
rights of a holder in due course.
o The fact that a condition is imposed on the
indorsee does not necessarily mean that
there is some defect in the title or infirmity in
the instrument. It merely subjects him to the
rights of the conditional indorser should he
receive payment before condition is fulfilled.
• Restrictive indorsement which prohibits further
negotiation will not prevent the indorsee from being a
holder in due course. However, should he violate the
prohibition and indorse the instrument to another,
then the latter cannot be a holder in due course.
o There is no valid negotiation.
 Transferee will never be a holder o The
restrictive indorsement serves as a notice to any
prospective purchaser of the instrument of the
prohibition to negotiate
• A restrictive indorsement which constitutes the
indorsee as an agent of the indorser can vest the
former with the rights of a holder in due course, if his
principal, the restrictive indorser, is a holder in due
course. If restrictive indorser is not a holder in due
course, neither is the restrictive indorsee, since he
merely is an agent of the indorser.
o Any subsequent holder from the indorsee-
agent will have the same rights as the latter.
But such subsequent holder can never
acquire rights which are antagonistic to the
indorserprincipal, for he is merely a subagent
of the latter.
• Where the restrictive indorsement vests title in the
indorsee in trust for a third person can be a holder in
due course, regardless of the status of the restrictive
indorser.
PAYEE AS HOLDER IN DUE COURSE
GR: A payee cannot be a holder in due course because he has
dealt directly with the maker or drawer and thus must have
knowledge of facts which may create defense.
XPN: Circumstances which he is insulated from the maker or
drawer by a third party, such as a remitter. Hence provided he
meets requirement in Sec. 52, weight of authority considers
him a holder in due course.
RIGHTS OF A PURCHASER FROM A HOLDER IN DUE COURSE
Section 58
When subject to original defense. - In the hands
of any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-
negotiable. But a
holder who derives his title through a holder in due course,
and who is not himself a party to any fraud or illegality
affecting the instrument, has all the rights of such former
holder in respect of all parties prior to the latter.
A holder who derives title to the instrument through a holder
in due course has all the rights of the latter even though he
himself satisfies none of the requirements of due course
holding.
• A purchaser with notice of defect in title who takes
from a holder in due course, acquires all the rights of
the latter and is free from defenses.
• A purchaser after maturity from a holder in due
course, WON he took with notice acquires all the
rights of the latter and is free from defenses.
• A holder not for value who takes from a holder in due
course, WON he takes the instrument before maturity
and with or without notice, acquires all the rights of
the latter and is free from defenses.
• RATIO: If a holder in due course cannot invest his
transferee with the rights which come with his
improved position, his status as a holder in due course
would oftentimes lose its significance because the
marketability of the instrument would be seriously
hampered.
NOTE:
• If the purchaser from a holder in due course is party to
the fraud or illegality affecting the instrument, he does
not acquire the rights of his predecessor.
• A payee whose title was defective at the time the
instrument was issued to him cannot better it by
selling the instrument to a holder in due course and
buying it back again.
• A person not an original party to the instrument but
who was a party to the fraud in procuring it, cannot
later recover on the instrument, even if he purchased
it from a holder in due course.
PRESUMPTION IN FAVOR OF DUE COURSE HOLDING
Section 59
Who is deemed holder in due course. - Every holder is deemed
prima facie to be a holder in due course; but when it is shown
that the title of any person who has negotiated the
instrument was defective, the burden is on the holder to
prove that he or some person under whom he claims
acquired the title as holder in due course. But the last-
mentioned rule does not apply in favor of a party who
became bound on the instrument prior to the acquisition of
such defective title.
The presumption established by this provision applies in favour
of holders only and not to other kinds of transferees.
Before the presumption can be availed of by the plaintiff, he
must prove:
• That he is a holder
• The genuineness of the maker’s or drawer’s signature
to establish, at least presumptively, the existence of
the obligation
• The genuineness of all indorsements necessary to his
title, to establish his link to the maker and thus his
status as a holder.
Once the plaintiff proves that he is a holder, then the
presumption that he is a holder in due course arises.
• If the defendant claims to have a personal defense, he
will have to prove it. Should he succeed in doing so,
the burden of proving due course holding will be on
the plaintiffholder.
• The law, however, in the second sentence of Sec. 59,
establishes an exception to the last mentioned rule
where the defendant’s defense is not his own i.e. the
 burden of proving due course holding will not be on An intention by both parties at the time of the transfer to have
the plaintiff if the defendant became bound on the the paper indorsed is not enough for it is the actual act of
instrument prior to the acquisition of the defective indorsement which constitutes the negotiation.
title.
Campos, further states, that in the absence of proof of the time
The presumption refers only to the status of the present holder of the subsequent indorsement, the presumption of Sec. 45
and not to any previous holder. that every negotiation is prima facie deemed effected before
• Thus if the present holder’s rights depend on a the instrument was overdue, can probably apply.
previous holder’s status as a holder in due course, he
would have to prove such fact and cannot rely on the
presumption because the latter is no longer the
holder.

TRANSFER OF UNINDORSED INSTRUMENT

Section 49
Transfer without indorsement; effect of. - Where the holder
of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee such
title as the transferor had therein, and the transferee
acquires in addition, the right to have the indorsement of the
transferor. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes
effect as of the time when the indorsement is actually made.

WON transferee under this section would acquire the rights of

holder in due course under Sec. 58 if his transferor is a holder
in due course:

Two views:
• 1st view: Since Sec. 58 favors a holder, it cannot apply
to one who is not a holder like a transferee without
indorsement. Sec. 49 grants such transferee the title
but not necessarily the all the rights of the transferor.
In order to acquire the rights of a prior holder in due
course, the transferee must first acquire the latter’s
indorsement.
• 2nd view: Sec. 49 and 58 taken together give him the
title of the previous holder in due course free from
defences and equities of prior parties.
o The Uniform Commercial Code has settled the
conflict in favour of the latter view in the
jurisdictions which have adopted it. It
provides that the transfer without
indorsement vests in the transferee such
rights as the transferor had therein.

If the transferor who did not indorse was not a holder in due
course, then his transferee is subject to all defenses as if the
instrument were nonnegotiable, although he himself may
satisfy the requirements of Sec. 52, unless he obtains the
former’s indorsement.

However, if at the time of such indorsement, the transferee

already knew of the defense or he obtains the indorsement
after maturity, such indorsement will not improve his status
since his being a holder in due course is determined as of the
time of indorsement.