Sec. 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.

Valuable consideration in general.

(1) Value means valuable consideration. (Sec. 191.)

(2) Valuable consideration may "in general terms be said to consist

either in some right, interest, profit or benefit accruing to the party who

makes the contract, or some forbearance, detriment, loss, responsibility,

act, labor or service, on the other side. And if any of these exists, it will

furnish a sufficient consideration to sustain the making or indorsing of a

promissory note in favor of the payee or other holder." (Story, on

Promissory Notes, Sec. 186; see Walker Rubber Corp. v. Nederlandsch

Indishe & Handlesbank, 105 Phil. 934 [1959].)

Sec. 25 NEGOTIABLE INSTRUMENTS IN

GENERAL

II Consideration

133

"It is no defense to an action on a promissory note for the maker to say

that there was no consideration which was beneficial to him personally. It is

sufficient if the consideration was a benefit conferred upon a third person or

a detriment suffered by the promisee, at the instance of the promissor. It is

enough that the obligee foregoes some right or privilege, or suffers some

detriment/' (Ty vs. People, 439 SCRA 220 [2004].) But a check issued to a

person who was not authorized to collect and receive the same is without

valuable consideration and is also considered issued for a non-existing

account (Carino vs. De Castro, 553 SCRA 688 [2008].)

(3) Simply defined, consideration means any prestation sufficient to

support any contract in favor of the party to an instrument, such as the

maker or indorser, and it may consist in giving, doing, or not doing, (see Art.

1156, Civil Code.) Therefore, a consideration, founded on mere love,

affection, or gratitude is not sufficient to sustain an action on a note or bill, as

for example, when an instrument is made or accepted by a parent in favor of

a child, the same cannot be enforced as between the original parties.

(Maynard v. Maynard, 105 Me. 570; Sullivan v. Sullivan, 92 S.W. 966.)

In an exchange of notes or bills, each note or bill is a good consideration

for the other. (Mehlinger v. Harriman, 185 Mass. 245; Franklin National Bank

v. Robert Bros., 168 N.C. 413.)

Adequacy of consideration.

A valuable consideration need not be adequate. It is sufficient if it is a

valuable one.

EXAMPLE:

Where P sells and delivers to M a piano worth P9,000.00 and M

issues to P a promissory note for P10,000.00, there is a valuable

consideration for the note, which is the piano.

In an action on the note, M cannot allege as a defense that the

value of the piano is not adequate for the amount of the note. The

law presumes that M is capable of managing his affairs and the

mere inadequacy of the consideration is not a sufficient ground for

relief Unless there is fraud, mistake or undue influence, (see Art.

1355, Civil Code.)

134 THE NEGOTIABLE INSTRUMENTS LAW Sec. 23

Antecedent or pre-existing debt.

An antecedent or pre-existing debt is a valuable consideration. The debt

may be that of a third person and the discharge of such debt is a valuable

consideration for a negotiable instrument, whether such instrument is

payable on demand or at a future time. It must be shown that the holder

has given up the preexisting debt or the right to sue.

The transfer of negotiable instruments not only as security for new

purchases and advances, made upon the transfer thereof but also as

security for antecedent debts has become very common in the commercial

world. Such transactions contribute largely to the benefit and convenience

both of debtors and creditors. The creditor is thereby enabled to realize or

to secure his debt, and thus may safely give a prolonged credit, or forbear

from taking any legal steps to enforce his rights. The debtor has also the

advantage of making his negotiable paper of equivalent value to cash.

Were the rule otherwise, that negotiable papers cannot be applied in

payment of, or as a security for pre-existing debts, without letting in all the

defenses between the original and antecedent parties — the value and

circulation of such securities must be essentially diminished, and the debtor

driven to the embarassment of making a sale thereof, often at a ruinous

discount, to some third person, and then by circuity to apply the proceeds

to the payment of his debts. (Brooklyn City & N.R. Co. v. National Bank of

the Republic, 102 U.S. 14; Swift v. Tyson, 10 L. Ed., 865.)

EXAMPLES:

(1) M owes P PI,000.00 payable today. M fails to pay in cash.

He issues a check for that amount to P who accepts the check.

Here, the consideration for the check is the pre-existing debt of M.

(2) If X is the debtor and he fails to pay P the amount of

PI,000.00, the check issued by M in favor of P for the benefit of X

rests on a sufficient consideration, i.e.,the pre-existing debt of X.

Sec. 25 NEGOTIABLE INSTRUMENTS IN

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II Consideration

135

Sec. 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 thattime.

What constitutes a holder for value.

Aholderfor value is one who has given a valuable consideration for the

instrument issued or negotiated to him. The holder is deemed as such not

only as regards the party to whom value has been given by him but also in

respect to all those who became parties prior to the time when value was

given.

A holder of a negotiable instrument is presumed to be a holder for

value until the contrary is shown. A holder who has not given value for an

instrument obviously will suffer no loss by being unable to recover from the

primary party in the event that the latter has a personal defense assertable

by him. (see Sec. 58.)

EXAMPLES:

(1) M issues a note to P, the payee, without consideration. P,

also without consideration, indorses it to A who, with value,

indorses it to B.

Under Section 26, B is deemed a holder for value not only as

regards A but also as regards M and P. If B is a holder in due course

(Sec. 52.), he may enforce payment for the full amount of the note

against M, P and A. (Sec. 57.) If B is not a holder in due course, M

can set up the defense of absence of consideration. (Sec. 58.)

(2) Now suppose in the same example, B negotiates the note

to C by way of a gift.

C is a holder for value within the meaning of Section 26 as

against M, P, and A because they became parties prior to the time

when value was given on the note by B.

(3) P is the payee of a check drawn by R against E bank. He

deposits the check with W bank, his bank, which credits the

amount thereof to his account. Is W bank a holder for value under

Sections 25 and 26?

No, because W has parted with nothing and crediting the

amount involves a mere bookeeping entry, (see Merchant's

136 THE NEGOTIABLE INSTRUMENTS LAW Sec. 23

National Bank of St. Paul v. Sta. Maria Sugar Co., 147 N.Y. Supp.

498,162 App. Div. 248.) It does not constitute the giving of value.

Therefore, E is not entitled to recover from R assuming that R has a

personal defense against C. However, if P, after depositing the

check, withdrew from his account to such an • extent that the

particular credited item was exhausted, E, is a holder for value.

If the sum had subsequently been checked out, then value would have

passed. But how shall one determine whether or not the funds represented

by the particular check have been withdrawn where there has been a

continuous flow of deposits and drawings by the depositor? Under the rule,

that "the first money in is the first money out," the first debits are to be

charged against the first credits.

A different rule states that as long as the balance of the depositor of P is

equal to or exceeds the amount of the check paid, said balance cannot be

considered as withdrawn and, therefore, W bank, at this stage, is not a

holder for value, (see Nat. Bank of Commerce v. Morgan, 24 A.L.R. 897.)

The second is the better rule. Under our law, bank deposits are

governed by the provisions on simple loan. (Art. 1980, Civil Code.) As

creditor, the depositor does not expect to receive the identical money in

return but an equivalent sum. (see Art. 1953, ibid.) His money becomes the

money of the bank and is mingled with the other money, the entire amount

forming a single fund from which all deposits are paid, (see 2 C.J. 628.)

Sec. 27. When Hen 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.

Where a holder has lien on instrument.

One who has taken a negotiable instrument as collateral security for a

debt has a lien on the instrument. As such holder of collateral security, he

would be a pledgee but the requirements therefor and the effects thereof,

not being provided for by the

Sec. 25 NEGOTIABLE INSTRUMENTS IN

GENERAL

II Consideration

137

Negotiable Instruments Law, shall be governed by the provisions of the Civil

Code on pledge of incorporeal rights.1 (Caltex [Phils.], Inc. vs. Court of

Appeals, 212 SCRA 458 [1992].)

If the amount of the instrument is more than the debt secured by

such instrument, the pledgee is a holder for value to the extent of his lien.

He can collect the full value of the instrument, and apply the same to the

payment of the debt but he must deliver the surplus to the pledgor, (see Art.

2118, Civil Code.)

If, between the pledgor and the party liable on the instrument,

there are existing defenses, then die pledgee can collect on the instrument

only to the extent of the amount of the debt.

If the amount of the instrument is less than or the same as the debt

secured by such instrument, the pledgee is a holder for value for the full

amount and may, therefore, recover all.

If the defenses of the party liable on the instrument are real

defenses, then the pledgee can recover nothing upon the instrument.

EXAMPLES:
(1) M makes a promissory note for PI,000.00 to the order of P

who pledges it to A to secure the payment of P's debt of P800.00.

The note is indorsed and delivered by P to A. (see Art. 2095, ibid.)

In this case, A is a holder for value to the extent of P800.00

which is also the extent of his lien. On the maturity of the note,

even if the debt of P800.00 is not yet due (see Art. 2118, ibid.), A

may recover the full amount of P1,000.00, holding the surplus for P,

the pledgor.

(2) If M has defenses against P, indorser, such as absence or

failure of consideration (Sec. 28.), A can collect only P800.00

'Art. 2095. Incorporeal rights, evidenced by negotiable instruments,

bills of lading, shares of stock, bonds, warehouse receipts and similar

documents may also be pledged. The instrument proving the right

pledged shall be delivered to the creditor, and if negotiable, must be

indorsed.

Art. 2096. A pledge shall not take effect against third persons if a

description of the thing pledged and the date of the pledge do not appear

138 THE NEGOTIABLE INSTRUMENTS LAW Sec. 23

on the note even if he is a holder in due course. As the note in the

hands of M is void, all that ought to be recovered by A is the

amount due on the loan.

(3) Supposing that the amount of the instrument is P700.00

then A is a holder for value for the full amount of P700.00 and is

entitled to recover to that extent.

(4) If the signature of M is a forgery, A can collect nothing

from M because M's signature is inoperative. As against M, A

acquired no right to enforce payment of the note. (Sec. 23.)

Forgery is a real defense, (see Sec. 57.)