NEGOTIABLE INSTRUMENTS LAW

MODULE 2

LEARNING OUTCOMES
At the end of this module, you are expected to:
A. Differentiate the concept of transfer and negotiation;
B. Elaborate the different kinds of Negotiation;
C. Enumerate the requisites of a Holder in Due Course;
D. Determine the rights of a Holder in Due Course; and
E. Define the concept of a holder for value.
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11. TRANSFER AND NEGOTIATION

11.01. If the instrument is negotiable, transfer thereof can be effected either through:

(a) negotiation; or
(b)assignment.
a) If the negotiable instrument is merely assigned, the transferee does not
become a holder, and he merely steps into the shoes of the transferor Any
defense available against the transferor is available against the transferee.
Example: Where the instrument that is payable to order was merely delivered
without indorsement.
b) A non-negotiable instrument can be assigned and cannot be negotiated.
However, this is still transfer of a right to claim payment.
11.02. a) ISSUANCE
"Issue" is the first delivery of the instrument complete in form to a person who
takes it as a holder (Sec. 191, NIL).

1) Issuance to the payee is negotiation because the transfer constitutes the

payee the holder of the instrument. The payee may even be a holder in due
course if he has acquired the note from another holder or he has not directly
dealt with the maker thereof.
2) Delivery is defined as the transfer of possession of the instrument by the
maker or drawer with the intention to transfer title to the payee and recognize
him as holder thereof.
b) 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.

1) if payable to bearer, it is negotiable by delivery.

2) if payable to order, it is negotiated by the indorsement of the holder
completed by delivery.

C) BEARER INSTRUMENT ALWAYS A BEARER INSTRUMENT. Where an instru-

ment, payable to bearer, is indorsed specially, it may nevertheless, be further negoti-
ated by delivery; but any person indorsing specially is liable as indorser to only such
holders as make title through his indorsement.

D) INCOMPLETE NEGOTIATION OF ORDER INSTRUMENT

1) where the holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vest in the transferee such title as the
transferor had therein, and the transferee acquires in addition, the right to have
indorsement of the transferor (Sec. 49, NIL)
2) 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 (Sec 49, NIL).
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Example:

Mr. M through fraud was induced by Mr. A to issue a negotiable promissory note
payable to the order of Mr. A. The payee, Mr. A, delivered the note to Mr. B on May 3, 2021
without indorsing it. On May 20, 2021, Mr. A, upon Mr. B’s request, placed his indorsement at
the back of the note: “Pay to B, Sgd. A.” If Mr. B learned about the fraud committed by Mr. A
prior to May 20 2021, Mr. B cannot be a holder in due course because he had knowledge of the
defect of title of Mr. A at the time the negotiation was made complete. He can be a holder in
due course if he had no knowledge at the time the indorsement was made on May 20, 2021.

11.03 INDORSEMENT
A) Where the indorsement should be placed
1) on the instrument itself; or
2) separate piece of paper attached to the instrument called “allonge” (sec. e31
NIL)

B) Indorsement must be of the entire instrument (Sec. 32, NIL).

Example: An instrument for P 5,000.00 cannot be indorsed for less like P1,000.00.
Exception. When there was previous partial payment

C) Section 32 of the NIL disallows negotiation to two or more indorsees severally.

Example: Indorsement of a P20,000.00 note that states “Pay to Jose Cruz, P 15,000.00
and Pedro Santos P,5000.00” is not considered negotiation although it may be
considered an assignment.

D) Kinds of Indorsement

1) Blank Indorsement - no indorsee is specified and it is done by affixing the

indorsee’s signature.

2) Special Indorsement - designates the indorsee. "Pay to X."

Note: 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 (Sec. 35, NIL).

3) Qualified Indorsement - qualified indorsement constitutes the indorser a

mere assignor of the title to the instrument. It may be made by adding tip the
indorser's signature the words or any words of similar import. Such an
indorsement does not impair the negotiable character of the instrument.

4) Conditional Indorsement (Sec. 39, NIL) - the party required to pay the
instrument may disregard the condition and make payment to the indorse or his
transferee whether the condition has been fulfilled or not.
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5) Restrictive Indorsement (Sec. 36, NIL).
(i) Prohibits the further negotiation of the instrument ("Pay to X
only"); or
(ii) Constitutes the indorse the agent of the indorser ("'Pay to X
for collection' ); or
(iii) Vests the title in the indorsee in trust for or to the use of some
other persons ("Pay to X in trust for Y").

6) Rights of Restrictive Indorse (Sec. 37, NIL)

(i) To receive payment of the instrument;
(ii) To bring any action thereon that the indorser could bring;
(iii) To transfer his rights as such indorsee, where the form of the
indorsement authorizes him to do so. In case of transfer, all
subsequent indorsees acquire only the title of the first indorsee
under the restrictive indorsement.

7) Irregular Indorsement - blank indorsement affixed by a person

(known as irregular indorser) who is not a party to the
instrument and placed such signature in blank before delivery; he
is liable as a general indorser and the liability may be as an
accommodation party.

11.04. Negotiation by prior party. Where an instrument is negotiated back to a prior

party, such party may reissue and further negotiate the same. But he is not
entitled to enforce payment thereof against any intervening party to whom he
was personally liable (Sec. 50, NIL). However, he may strike out the intervening
indorsements because they are not necessary for his title and he is liable to
them because of his initial indorsement (Sec. 48, NIL). Example: "A" payee
indorsed the instrument to B, then B indorsed it to C, C to D, then D to B. B can
further negotiate the instrument. He may also strike out the indorsements of
C and D.

12. HOLDERS

12.01. Holder - the payee or indorse of a bill or note who is in possession of it or the bearer
thereof (Sec. 191, NIL). In other words, the payee or indorse is the holder of an order
instrument, while the payee or the bearer is the holder of bearer instrument.

12.02. REQUISITES OF HDC (Sec. 52, NIL). A holder in due course is a holder who has taken
the instrument under the following conditions:

1) That it is complete and regular upon its face;

2) 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;
3) that he took it in good faith and for value;
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4) 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.

A) 1) Even a holder not in due course may sue thereon in his own name and
payment to him in due course discharges the instrument (Sec. 51, NIL). The
only disadvantage of a holder not in due course is that the instrument is
subject to defenses as if it were non-negotiable.

2) A payee can be a holder in due course. Section 191 defines "holder" as the
payee or indorsee of a bill or note, who is in possession of it, or the bearer
thereof. Hence, the word "holder" in the first clause of Section 52 and in the
second subsection thereof "may be replaced by the definition in Section 191
so as to read a holder in due course is a payee or an indorsee in possession,
etc.".
This applies even to crossed checks where the payee was not involved in the
underlying transaction.

3) The rules on holders in due course apply to holders of manager's checks;

the purchaser of the manager's check can submit a stop order to the bank
(which is both the drawer and the drawee) and the bank can interpose the
personal defense of the purchaser if the holder is not a holder in due course.

B) Demand Instruments
Where an instrument payable on demand is not negotiated after an
unreasonable length of time after its issue, the holder is not deemed a holder
in due course (Sec. 53, NIL).

1) What can be considered "unreasonable" is relative. Section 193 of the

NIL provides that "in determining what is 'reasonable time' or an unreasonable
time, regard is to be had in the nature of the instrument, the usage of trade or
business (if any) with respect to such instruments, and the facts of the particular
case.

C) Notice of Infirmity and Defect

Infirmity in the instrument means any irregularity in the instrument.
Thus, notice of an alteration which is apparent is notice of an infirmity in the
instrument. Notice of forgery in the maker or the drawer's signature is also
notice of infirmity in the instrument. On the other hand, a title of a prior party is
defective 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. 57, NIL).

D) Good Faith
although good faith on the part of the holder is presumed, such
presumption is destroyed if the payee or indorsee "acquired possession of the
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instrument under circumstances that should have put him to inquiry as to the
title of the holder who negotiated the instrument." The burdenis now on the part
of the holder to show that notwithstanding the suspicious circumstances, it
acquired the check in actual good faith.

Note: A person who takes a crossed check without making further

inquiries is not a holder in due course. The act of crossing a check serves as
warning to the holder that the check has been issued for a definite purpose

E) Holder for Value

Value - a consideration sufficient to support a simple contract. These include

antecedent debts and a lien on the instrument. Note, however, that the instru-
ment is presumed to have been issued for valuable consideration and that the
holder is a holder for value (2014 Bar).

1) The holder is a holder for value only to the extent that the consideration
agreed upon has been paid, delivered, or performed. Non-performance of the
obligation will give rise to partial or full defense of failure of consideration as
the case may be. If the consideration is a lien, the holder is a holder for value
only up to the extent of the lien.

2) 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 paid therefor by him. Example: If the holder
took the instrument on the strength of his promise to deliver P200,000.00, but
he had only delivered P100,000.00, he is a holder in due course only up to
P100,000.00 if he receives notice of infirmity before he could fully pay the con-
sideration.

3) As regards an accommodation party, the fourth condition, i.e., lack of notice of

any infirmity in the instrument or defect intitle of the persons negotiating it, has
no application. However, the inapplicability of the fourth requisite is limited to
notice of absence of consideration, that is, notice of the fact that the party is a
mere accommodation party who did not receive any consideration on the
instrument. If the holder has notice of other infirmity in the instrument or defect
in title of the persons negotiating the instrument, then the holder is subject to
personal defenses.

Note: An accommodation party may be a prior party to the accommodated party

like in a case where a prior indorser is the accommodation party of the
subsequent indorser.
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12.03. RIGHTS OF A HOLDER IN DUE COURSE (HDC)

a) 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 lia-
ble thereon.

1) a holder in due course is free from personal defenses.

2) a holder in due course is not free from real defenses.

b) A holder not in due course is subject to personal and real defenses (1978 Bar).

Exception: A holder who is not a holder in due course, but he derived his title
from a holder in due course (Sec. 58, NIL).

c) May one who fails to inquire as to an infirmity in a negotiable instrument and defect
in the holder's title, be a holder in due course?

Yes. The law does not impose on a holder the obligation to inquire into the infir-
mity in the instrument or defect of the title of the person negotiating it to him. Howev-
er, failure to make inquiry, when the circumstances indicate defect, renders the holder
not a holder in due course. Gross negligence may amount to legal absence of good
faith.

d) Shelter Rule. A Holder who is not himself a holder in due course but is not a party to
any fraud or illegality affecting the instrument, and who derives his title from a holder
in due course acquires the rights of a holder in due course.