Holder in due course -has no notice of any infirmities and defect on the title of the person negotiating it

-he became the holder of it before it was overdue and for value and without notice
that it had been previously dishonored

Under Section 56, the person to whom an instrument was negotiated must have had actual or direct
knowledge of the infirmity or defect or knowledge of such facts that his action in taking the instrument
amounted to bad faith.

- You are disqualified from being a holder in due course if you have actual knowledge or by
virtue of being a witness, the knowledge was already available to you.

Question: Can you still be deemed a holder in due course even if you yourself knew that there is an
infirmity in the instrument or defect in title?

Answer: Yes, provided that the holder has no participation in the acquisition of the defective
title or infirmity of the instrument. – Section 58

Under Section 55, the following would constitute a defective title:

1.) Title was acquired by fraud on acquisition

2.) Title was acquired under duress
Duress- violence or intimidation
3.) Title was acquired by illegal consideration
4.) Title was acquired by unlawful means
5.) Title which was negotiated in breach of faith

Question: What knowledge does the law require to disqualify a holder as a holder in due course?

Answer: Knowledge must be actual and direct. If it is imaginary and indirect, you can still be
classified as a holder in due course.

Question: Does it necessarily follow that if a holder has knowledge of the fact that the instrument
negotiated to him is suffering from infirmities or came from a party who has a defective title, he is no
longer a holder in due course?

Answer: It depends, if the holder acquires the instrument before he knew the defect to the title
of the person negotiating it or infirmities to the instrument itself, he remains a holder in due course.
But, if the holder acquires the instrument after he knew the defect to the title of the person negotiating
it or of the infirmities to the instrument itself, he cannot be considered a holder in due course.

Question: Is there any right for the holder aside from the right to receive payment and to sue in his own
name?

Answer: Yes, if the holder is a holder in due course. Under Section 57 he is given additional rights
such as:
 - Right to be free from any defect of the title from prior parties;
- Right to be free from defenses available to prior parties.

The difference between infirmity and defective title is that infirmity refers to a defect in the instrument
itself while defective title refers to a defect in the title of the person negotiating it.

Infirmity means something is wrong or defective.

When you are a holder in due course by virtue of Section 57, you can still demand payment even if prior
parties refuse to pay on the grounds that the instrument is defective because of certain infirmities.

If payment is made in due course, all parties liable will be discharged and the instrument will merely
serve as a souvenir of a business transaction.

If payment has not been made, use the instrument to sue those parties bound to pay but did not pay

Section 191

Who is the holder?

-In the case of an order instrument, the payee or indorsee in possession of the instrument

-In the case of a bearer instrument, anyone in possession of the instrument

If instrument was acquired through assignment, the acquirer only becomes an assignee

Personal defenses- also called equitable or relative defenses

Real defenses- also called absolute or legal defenses

Examples of Personal Defenses Examples of Real Defenses

1.) Want of delivery of complete instrument 1.) Want of delivery of incomplete
instrument
2.) Absence or failure of consideration 2.) Forgery
3.) Fraud in inducement 3.) Fraud in factum
4.) Illegal consideration 4.) Illegality of contract
5.) Breach of faith 5.) Incapacity
6.) Prescription

Liabilities of parties

Question: Who are parties liable?

Maker, drawer, acceptor, indorser, person negotiating by mere delivery and certifier of
check
Parties primarily liable:

Maker- Promissory note

Acceptor- Bill

Certifier- Check

Question: Who is a certifier of a check?

Answer: The bank itself through its agent

If a check with insufficient funds is issued and that fact is known to the drawer of the check. Under the
Bouncing Check Law or BP 22, the drawer of the check will be liable under the crime of estafa.

No certifier will certify a check that is not fully funded.

If party primarily liable did not pay, remember that there are other parties to whom you can collect
payment from and these are parties secondarily liable.

Question: What is the common warranty between maker and acceptor?

Answer: They warrant that they will pay according to the tenor of their promise or in the case of
the acceptor, his acceptance.

Drawer is just secondarily liable.

Common warranty between maker, drawer and acceptor- they admit to the existence of the payee and
his capacity to indorse

Common warranty between drawer and indorser- they warrant that if the instrument is presented, it
will be paid and if dishonored, they will pay the holder if all the necessary proceedings have been taken.

Difference between negotiable instruments and non-negotiable instruments is that negotiation can only
exist in negotiable instruments. For non-negotiable instruments, assignment applies.

Whether negotiable or non-negotiable, as long as it has:

 Object
 Consent
 Consideration

It is a contract
Question: Is an acceptor a drawee?

Answer: Yes, all acceptors are drawees but not all drawees are acceptors

Question: When does the drawee become an acceptor?

Answer: Upon his acceptance of the order of the drawer.

Guarantor- subsidiarily liable, not primarily nor secondarily

- undertakes the liability to pay when party primarily liable didn’t pay
- they can only be made liable if the party primarily liable has no more means or capacity or
capability to pay
- all other means to settle the obligation must first be exhausted before they become liable

Question: M made a promissory note to P and P indorsed it to A, B, C, D and E. X is M’s guarantor and
when E presented the instrument to M, it was dishonored.E then properly notified all the indorsers. Can
E make X liable?

Answer: Not yet, he can still exercise his right against secondary parties but if all secondary
parties cannot pay him, that is the only time when X will be liable.

Co-maker- suretor

- principally liable solidarily with maker

M P A B C D

Question: D did not present the instrument to M but to P and yet the instrument was discharged.
When can this happen?

Answer: Where the party paying is the accomodated party. (Section 119, paragraph B)

What is the purpose of presentment for payment?

-To establish the liability of parties secondarily liable, not to establish liabilty of parties primarily
liable (Sec. 70)

Failure to make presentment for payment will discharge all parties secondarily liable.

Question: When should presentment be made?

Answer: At maturity and in the case of a demand instrument, maturity is any time within
reasonable time.

If the date falls due on a Sunday, the maturity shall be the next business day
 If the date falls on a Saturday and it is payable on demand, it can be presented in the morning of
Saturday otherwise, wait until the next business day.

If today is the maturity date and a calamity happens which prevents you from making
presentment, you should make presentment at the time the calamity or riot or fortuitous event ceases.

Question: There was no calamity, no strike, no fortuitous event; times remain normal and no
presentment for payment and yet drawers and indorsers can now be made liable. When can that
happen?

Answer: When you can no longer find the debtor after exercising reasonable dilligence.

Computation of time- exclude the first day and include the last day

Section 74

Manner of indorsement

-Produce the instrument, show it, otherwise, you did not make a valid presentment.

Section 84- When the instrument has been dishonored, the holder shall have an immediate right of
recourse against all parties secondarily liable

Reason why notice of dishonor is given

- So that drawers and indorsers can ready themselves to pay the instrument

Where should presentment be made?

a) Designated place
b) Given address
c) Usual place of business or in the residence of the person
d) Last known address
e) Wherever you can find him

If you can no longer find him, it shall be deemed dishonored and therefore dispense with presentment
for payment.

When presentment is not necessary to charge drawer (Section 79):

a.) Drawer and drawee are same person

b.) Drawee is fictitious
c.) Drawee is incapacitated
 d.) Presentment is waived

When presentment is not necessary to charge indorser (Section 80):

a.) Party primarily liable is fictitious

b.) Party primarily liable is incapacitated
c.) Instrument was made for his accomodation

Difference between dispensed with presentment for payment and excused in making presentment:

Excused means that you will still have to present the instrument while if dispensed, no
presentment is needed.

If instrument is presented after maturity and was dishonored, you can no longer make drawer or
indorsers liable since their warranties state that present the instrument at maturity and it shall be paid.

Notice of dishonor is a requisite to make secondary parties liable.

To whom should presentment be made?

Parties primarily liable or their representatives

What constitutes a valid presentment for payment?

- When it is presented by the proper party to the proper party at the proper place in the
proper time at the proper manner

To whom: Maker or acceptor- parties primarily liable or anyone authorized by them

By whom: Holder or anyone authorized by him to make presentment in his behalf

Where: Section 73

When: On the date of maturity (Sec. 85-86)

How: Exhibit the instrument, show it

In notice of dishonor:

To whom: Drawer or indorser or anyone authorized by them- parties secondarily liable

By whom: Holder or anyone authorized by him to make presentment in his behalf

Where: Section 108

When: Within 24 hours from the time of dishonor

How: In any form- whether oral or written

Notice of dishonor is not needed to be given to drawer in the following cases:

A.) Drawer and drawee are the same person

B.) Drawee is fictitious or incapacitated
C.) Drawer has no right to expect that the drawee or acceptor will pay
D.) Drawer was the one who was presented for payment
E.) Drawer has countermanded payment

Notice of dishonor is not needed to be given to indorser:

A.) Indorser was aware of the fact that the drawee was fictitious or incapacitated at the time
of his indorsement
B.) Indorser was the one who was presented for payment
C.) Where the instrument was made or acquired for his accomodation

Protest is different from notice of dishonor in that protest is required to be in writing.

Protest-applicable only to foreign bill

Inland bill- drawn and payable in the Philippines, if one of this is missing, then the bill is a foreign bill

Instrument, how discharged:

a.) Payment of the principal or in due course

b.) Payment by the accomodated party in an accomodation instrument
c.) Intentional cancellation of the holder- if not intentional, the obligation will remain in force(
Section 123)
d.) By any other act which will discharge a simple contract of loan of money- loss is not applicable
e.) When the principal debtor becomes the holder

Persons secondarily liable, how discharged:

a.) Any act which discharges the instrument

b.) Intentional cancellation of his signature by the holder- striked out
c.) Discharge of a prior party- discharge by operation of law does not apply
 d.) By any agreement to extend the time of payment if they did not assent- if they agree, they will
still be held liable

When secondary party pays, he is remitted to his former rights as regards to all prior parties except
when it is payable to the order of a third person and the one who paid is the drawer.

Drawee cannot be held liable unless and until he accepts

When bill can be treated as promissory note:

a.) Drawer and drawee are the same person

b.) Drawee is fictitious
c.) Drawee is incapacitated
d.) Instrument is ambiguous

Three parties that the holder can dispense with in a bill

a.) Acceptor for honor- any third party

b.) Payer for honor- any party or any third party
c.) Referee in case of need

Presentment for acceptance- includes presentment for payment

Qualified acceptance by the drawee can be treated as a dishonor for non-payment

Qualified acceptance- it varies the effect of the bill as drawn

When there is qualified acceptance, drawers and indorsers are discharged if they do not agree to it, if
agree, then they are still liable.

Bills in a set- acceptance of 1 in the set is acceptance of all bills in the set

- Classified as only one bill with many parts

Memorandum check- can be paid by the bank or by the drawer

Cashier’s check and manager’s check- can be treated as promissory note

Certified check- can only be treated as promissory note at the time it was certified