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SECTION 57 -63


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

table thereon.


RIGHTS OF A HOLDER IN DUE COURSE.

(1) He may sue on the instrument in his own name (Sec. 51.);

(2) He may receive payment and if the payment is in due course, the

instrument is discharged (ibid.);

(3) He holds the instrument free from any defect of title of prior

parties;

(4) He holds the instrument free from defenses available to prior

parties among themselves; and

(5) He may enforce payment of the instrument for the full amount

thereof against all parties liable thereon. (Sec. 54.)


REAL DEFENSES AVAILABLE AGAINST

A HOLDER IN DUE COURSE.

• The defenses referred to in Section 57 that cannot be set up

against a holder in due course are the so-called "personal defenses"

or equities, as distinguished from absolute or real defenses.

• In the case of immediate parties, all defenses are available. A holder

not a holder in due course acquires the instrument subject to all

defenses, whether personal or real, because he is treated as a mere

assignee of a non-negotiable paper.


SECTION 58

• When subject to original defenses. - 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 illegally affecting the

instrument, has all the rights of such former holder in respect of all

parties prior to the latter.


DEFENSES IN GENERAL

• Defenses are grounds or reasons pleaded or offered by the

defendant in a case, showing why the plaintiff, as a matter of law or

fact, should not be given the relief he seeks. There are two kinds of

defenses which may be interposed to an action upon a negotiable

instrument: real, absolute, or universal defenses and personal,

limited, or equitable defenses. Some defenses are either real or

personal depending on the factual situations out of which arise the

particular defense.


REAL DEFENSES

• Real defenses are those that are available against all parties, both

immediate and remote, including holders in due course or holders

through the latter. In other words, there are cases when holder in due

course is not legally entitled to payment from the primary party. They

are called “real” because they attach to the rest, that is, the instrument

itself regardless of the merits of demerits of the holder or the conduct

or agreement of the parties to it. They challenge the validity of the

instrument itself. It cannot be enforced by the holder because there is

no contract to enforce.


EXAMPLES OF REAL DEFENSES

• Incapacity as far as the incapacitated person is concerned (Art. 1327, ibid.);

• Illegality of contract when declared by law (Art.1409, ibid.); except where the maker or drawer is himself a

party to the illegality; thus, a note for a gambling debt (an illegal consideration) is a mere personal defense (

Sec. 55.);

• Want of delivery of incomplete instrument (Sec. 15.);

• Forgery (Sec. 23.);

• Want of authority, apparent and real (ibid.);

• Duress amounting to forgery as where one takes the hands of another and forces him at gunpoint to sign his

name. There are varying degrees of duress under the law. If, for example, a person signs his name under a

vague threat through fear of economic retaliation, the defense is only personal in nature. The duress must be

so overwhelming that the victim is entirely deprived of his will;

• Fraud in factum or fraud in esse contractus (Sec. 14.);

• Fraudulent alteration by holder (Secs. 124, 1 st sentence; 125.);

• Prescription (Arts. 1140-1142, 1144-1147, Civil Code.);

• Other infirmities appearing on the face of the instrument (Sec. 52.); and

• Discharge at or after maturity. (Secs. 88, 118, 121, 122.)


PERSONAL DEFENSES

• Personal defenses are those which grow out of the agreement or conduct of a

particular person in regard to the instrument which renders it inequitable for

him, though holding the legal title, to enforce it against the party sought to be

made liable but which are not available against a holder in due course (Sec. 57.)

or holders with all the rights of a holder in due course. (Sec. 59.) They include

every defense assertable in action under ordinary contract law. They are called

"personal defenses" because they are available only against that person or

subsequent holder who stands in privity with him. (Ogden, op. cit., p. 309.) In

other words, they can be used only between original parties or immediate

parties or against one who is not a holder in due course.


EXAMPLES OF PERSONAL DEFENSES

(a) Filling of wrong date (Sec. 13.);

(b) Filling up of blanks not in accordance with the authority given and within

reasonable time (Sec. 28.);

(c) Want of delivery of complete instrument (Sec. 16.);

(d) Absence or failure of consideration (Sec. 28.);

(e) Simple fraud or fraud in inducement (Sec. 55.); (1) Acquisition of instrument

(not signature) by duress, or force and fear (ibid.);

(g) Acquisition of instrument by unlawful means (ibid.);

(h) Acquisition of instrument for an illegal consideration (ibid.);


(i) Negotiation of breach of faith (ibid.);

(j) Negotiation under circumstances that amounts to fraud (ibid.);

(k) Innocent alteration or spoliation. (Secs. 124 (last sentence], 125.) Spoliation is an alteration

made by a stranger to an instrument. If the original meaning can be ascertained, the holder in due

course may recover according to its original tenor;

(1) Set-off between immediate parties (Sec. 58.);

(m)Discharge by payment or renunciation or release

before maturity (Secs. 50, 121, 122.);

(n) Discharge of party secondarily liable by discharge of prior party (Sec. 20[c].);

(o) Usury - because the contract of loan itself is not void but only the agreed interest (see Sec. 7,

Usury Law; Art. 1413, Civil Code.); and

(p) Want of authority of the agent who has apparent authority. (see Art. 1869, ibid.), but if the

principal can show that the agent had no express, implied, or apparent authority to sign, the

defense is real.


IMMEDIATE, REMOTE, AND PRIOR PARTIES

(1) Immediate parties. - Assume that M makes and delivers his promissory note to P

(payee) and that P indorses to A, and A to B. M and P are said to be immediate parties

because they are in direct contractual relation to each other. Where, however, M makes

and delivers to X, an intermediary, his (M's) promissory note payable to the order of P,

and X delivers the note to P(payee) for value, Mand P are not immediate parties.

Immediacy signifies privity not mere proximity (Sec. 16.)

(2) Remote parties. - A remote party is one who takes title to an instrument by

negotiation from either the original payee or any subsequent holder. In the preceding

illustration, M and B are remote parties — that is, parties who are not in direct

contractual relation to each other. Other pairs of remote parties are: Mand A, P and B.

(3) Prior parties. - In the example given in (1) above, M, P, and A are prior parties with

respect to B. (Babb & Martin, op.cit., p. 223, see comments under Sec. 16.)


DEFENSES AVAILABLE AGAINST A HOLDER

NOT A HOLDER IN DUE COURSE.

•A mere assignee or one who is not a holder in due

course takes the instrument subject to all valid

claims of any party which would be available in an

action on an ordinary contract.


DEFENSES SUBJECTED TO ESTOPPEL

• Through estoppel, an admission or representation is rendered conclusive

upon the person making it, and it cannot be denied or disproved as

against the person relying thereof. (Art. 1431, Civil Code.)

• Real and personal defenses are subject to estoppel since the rules and

principles governing estoppel generally are applied to commercial

instruments. In fact, practically all the defenses such as forgery or

illegality may be precluded by estoppel. ( Ogden, op. cit., p. 357; Sec. 23.)


FRAUD IN FACTUM

• Fraud in the execution or fraud in factum. - It exists in those cases in which a

person, without negligence, has signed an instrument which was in fact a

negotiable instrument, but was deceived as to the character of the instrument

and without knowledge of it, as where a note was signed by one under the

belief that he was signing as a witness to a deed, or where the signature was

procured by fraudulent use of carbon paper. This kind of fraud is a real defense

(Sec. 14.) because there’s no contract. It implies that the person did not know

what he was signing. But where the signer by the exercise of reasonable

diligence could have discovered the nature of the instrument, the fraud cannot

be considered a real defense, as where a person, who can read, signed a note

but failed to read it.


FRAUD IN THE INDUCEMENT OR

SIMPLE FRAUD

• It is that which relates to the quality, quantity, value or character of the consideration of the

instrument. In this case, the signer is led by deception to execute what he knows is a

negotiable instrument and, therefore, necessarily signed with knowledge that the instrument

would probably pass into the hands of an innocent purchaser. Here, the deceit is not in the

character of the instrument but in its amount or its terms. (Ogden, op. cit., p. 326.) It implies

that the signer knew what he was signing but that he was induced by fraud to sign. (Babb &

Martin, op. cit., p. 231.)

• A clear illustration of this fraud exists where a person is induced to sign a note for the price of

a worthless stock which was fraudulently represented by the payee as to its value. Such type of

fraud is only a personal defense because it does not prevent a contract.


RIGHTS OF HOLDER NOT IN DUE

COURSE.

(1) He may sue on the instrument in his own name (Sec. 51.);

(2) He may receive payment and if the payment is in due course, the instrument

is discharged (ibid.);

(3) He is entitled to the instrument but holds it subject to the same defenses as

if it were non-negotiable (Sec. 58.); and

(4) He has all the rights of the holder in due course from whom he derives his

title in respect of all parties prior to such holder, provided he is not himself a

party to any fraud or illegality affecting the instrument. (ibid.)


RIGHT OF HOLDER NOT IN DUE COURSE

TO RECEIVE PAYMENT.

• It does not follow as a legal proposition that simply because one is not a

holder in due course he cannot recover on the instrument. The law does not

provide that a holder not in due course may not, in any case, recover on the

instrument. If B, for instance, purchases from A an overdue negotiable

promissory note signed by M, B is not a holder in due course but he may

recover from M (Sec. 51.) or A, if M or A has no valid excuse for refusing

payment. The only disadvantage of a holder who is not a holder in due course

is that the negotiable instrument is subject to defenses as if it were nonnegotiable.

(Sec. 58; Chan Wan vs. Tan Kim, 109 Phil. 76 [1960].)


RIGHTS OF PURCHASER FROM A HOLDER

IN DUE COURSE.

(1) Rights of a mere transferee. - If a person is not a holder in due course, his

rights are those of a transferee of a non-negotiable instrument so that he is

not free from personal defenses.

(2) Rights of transferee from a holder in due course. — Section 58 provides this

exception: a holder who derives his title from a holder in due course has all the

rights of the latter even though he himself is a mere transferee or does not

satisfy the requirements of a holder in due course. ( Sec. 59.)


EXAMPLE

M is induced through (simple) fraud committed by P to issue

a promissory note in favor of P. Here, P is a party to the

fraud. P indorsed the note to A. A has notice of the fraud but

did not take part in it. By A, the note is indorsed to B, a

holder in due course. B, in turn, indorses the note to C who

knows how the note was obtained but without being a party

to the fraud.


(1) In this case, even if C is not a holder in due course, he has all the rights of such holder in respect

of P, and A having derived his title from B, a holder in due course, and the defenses of fraud cannot be

set up against him. In effect, C is a holder in due course relative to M, P, and A.

(2) If instead of indorsing the note to C, B indorses it to P, payee, the latter cannot recover on the

instrument because he is party to the fraud. P is remitted to his original position when he first

acquired the note from M.

(3) If the note is indorsed by C to D, who has also notice of the defect but was not a party to the

fraud, D cannot recover from M because D did not acquire his title from a holder in due course.

(4) Assuming that C is a holder in due course and A reacquires from him the note, the latter is not

given the former’s rights although he was not a party to the fraud. A is remitted to his original position

which he occupied when he first acquired the note from The act of A in negotiating the note to a

holder in due course in order to cut off M's defense upon his (A's)

reacquisition of the instrument may be considered fraud under Section 55.

(5) If B who takes the note from A as a holder in due course and negotiates it to C who is not a

holder in due course, reacquires it from C, B will hold the note as a holder in due course. He is

remitted to his former position.


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 rules does not apply In favor of a

party who became bound on the instrument prior to the

acquisition of such defective title.


WHEN HOLDER PRESUMED A HOLDER

IN DUE COURSE.

(1) Proof of being a holder. - Once the person through whose hands an instrument has

passed shows that he is a holder, the presumption accrues in his favor. He does not have

to prove that he acquired the instrument under all the circumstances required under

Section 52.

(2) Where indorser's title defective. - When it is shown that the title of any person who

has negotiated the instrument was defective (see Sec. 55.) as when the instrument is

not payable to him or to bearer (De Ocampo vs. Gatchalian, 3 SCRA 596 (1961). Then

the burden of proof shifts to the holder who must show he is a holder in due course

although he is not himself a holder in due course. A person who acquires title from a

prior holder in due course is referred to as holder through a holder in due course.


EXAMPLES

(1) P obtained the note of M through (simple) fraud, and negotiates it to A, A to B, B to C, and C

to D, the present holder. The presumption is that D is a holder in due course. But once M

proves the fraud committed by P, the burden is shifted to D to prove that he is actually a

holder in due course or that C, from whom he acquired title, is a holder in due course.

(2) Suppose the fraud was committed by A against P, the presumption that D is a holder in due

course is not destroyed because M became bound on the instrument before the acquisition of

the defective title by A. Note that P is similarly situated as M in the first example. As P became

bound on the instrument contemporaneous (not prior to) with the acquisition of A's defective

title, the presumption of due course holding does not accrue in favor of D as far as P is

concerned once P shows that the title of A was defective.

(3) Let us suppose now that the fraud was committed by B against A. In this case, the situation of

A is the same as that of M in the first example, and P, the same as that of M in the second

example.


SECTION 60

•Liability of maker. - The maker of a negotiable instrument

by making it engages that he will pay it according to its

tenor, and admits the existence of the payee and/his then

capacity to indorse.

•Liability refers to the obligation of a party to a negotiable

instrument to pay the same according to its terms.


(1) Primarily liable:

(a) the maker of a promissory note;

(b) the acceptor of a bill of exchange, and

(c) the certifier of a check.

(2) Secondarily (conditionally) liable:

(a) the drawer of a bill; and

(b) the indorser of a note or a bill.

(3) Not liable:

(a) The drawee until he accepts the instrument in which case he becomes an

acceptor. A person becomes a party to an instrument by signing his name

thereon. The general rule is that no person is liable on an instrument unless his

signature appears thereon. (Secs. 18-21.)


PRIMARY PARTY AND SECONDARY PARTY

DISTINGUISHED.

• Under the law (Sec. 192.), the "person primarily liable on the instrument

is the person who by the terms of the instrument is absolutely required

to pay the same. All other parties are secondarily liable.“

• Generally, the liability of all secondary parties to an instrument ends

when the primary party pays the full amount of the instrument to the

proper party. (see Secs. 119-120.) In short, secondary parties face only

potential secondary liability on the instrument.


LIABILITY OF MAKER

•The term "maker" here applies only to the

promissory note. It includes an accommodation

maker and a surety who signs as maker.

(1) Liability unconditional

(2) Presumption arising from signature


EXAMPLE

M issues a promissory note to P for P500.00 payable

on demand. P indorses the note to A. Upon being

sued by A, M cannot say that the agreement between

him and P was to pay only P300.00. Neither can he

allege that is a non-existent nor fictitious person. He

is also precluded from setting up such defenses as

minority, insanity, or ultra vires act of a corporation.


SECTION 61

• Liability of drawer. - The drawer by drawing the instrument admits the

existence of the payees and his then capacity to indorse; and engages that on

duo prosentment the Instrument will be accepted paid, or both, according to

its tenor, and that If it be dishonor, and the necessary proceedings on dishonor

be duly taken, he will pay the amount thereof to the holder, or to any

subsequent indorser who may be compelled to pay It. But the drawer may

insert in the instrument an express stipulation negativing or limiting his own

liability to the holder.


LIABILITY OF DRAWER

(1) Liability conditional

(a) The bill is presented for acceptance (Sec. 143.) or for payment (Sec. 70.), as

the case may be, to the drawee;

(b) The bill is dishonored by non-acceptance or non- payment, as the case may

be; and

(c) The necessary proceedings of dishonor are duly taken. Such proceedings are:

(2) Liability of a general indorser.

(3) Liability of a drawer of a check.


EXAMPLE

Suppose R, as drawer, draws a bill on W, as drawee, payable to the

order of P. The bill is indorsed successively by P to A, by A to B, and

by B to C, the present holder. In this case, R is liable only to C if W

dishonors the bill by non-acceptance or non-payment and the

necessary proceedings of dishonor are taken. After such proceedings

are taken, the indorsers P, A, and B would also be liable to C and if,

say, B pays C, B may, in turn, recover from R, P., or A. P, A, and B are

the intervening indorsers. R, as drawer, is permitted by law to

negative or limit his own liability to the holder. Thus, R may insert in

the bill the words "I shall not be bound in case this instrument is

dishonored" or "without recourse.“


DRAWER DISTINGUISHED FROM

MAKER

(1) The drawer issues a bill of exchange, while the maker, a

promissory note;

(2) The drawer is only secondarily liable, while the maker is primarily

liable; and

(3) The drawer can negative, or limit his liability, while the maker may

not do so.


SECTION 62

•Liability of acceptor. - The acceptor by accepting the

instrument engages that he will pay it according to the

tenor of his acceptance; and admits -

(a)The existence of the drawer, the genuineness of his

signature, and his capacity and authority to draw the

instrument; and

(b) The existence of the payee and his then capacity to

indorse.


LIABILITY OF ACCEPTOR

• Liability of drawee before acceptance.

• Liability of drawee after acceptance

• Retraction of acceptance.

• Payment of check despite stop-payment

order.

• Similarity to liability of maker and drawer.


LIABILITY DEPENDS ON TENOR OF

ACCEPTANCE

•In general, no one but the drawee may accept; a

stranger or volunteer is not bound by acceptance.

(ibid., p. 192.) The exception is when a bill is

accepted for honor supra protest. (Secs. 158, 161.)


EXAMPLE

If R draws on W a bill for P500.00 payable 30 days sight, W, not being

a party to the bill may refuse to accept the same. If he accepts, he

becomes primarily liable. But his liability depends on the kind of

acceptance that he makes. Thus, if W accepts the bill for P200.00, he

is liable only for P200.00; the tenor of his acceptance, and not

P500.00, the tenor of the bill. Similarly, if he accepts the bill but

payable “90 days after sight," he is bound to pay the bill as accepted.

It he merely signs the bill as acceptor, then he is bound to pay

unconditionally the bill according to its tenor which is the same as

the tenor of his acceptance.


EFFECT OF ACCEPTANCE OF AN

ALTERED BILL

Suppose a bill is altered without authority by the payee before acceptance, and is subsequently

accepted by the acceptor as altered, is the latter liable to an innocent holder according to the

original tenor of the bill or according to its altered tenor. In other words, is the altered tenor of

the bill, the tenor of acceptance?

For instance, if a bill originally for P3,000.00 is altered by P, the payee, to P8,000.00 and is

accepted by W, the acceptor, for P8,000.00, how much is W liable to A, a holder in due course –

for P3,000.00 or P8,000.00?

Before the adoption of the Uniform Negotiable Instruments Law, the common law rule was that

an acceptor was liable according to the tenor of the bill. Since the adoption of the Negotiable

Instruments Law, writers and authorities on the law on negotiable instruments have differed in

their views as to the effect of Section 62 on an altered instrument.


(1) Tenor of acceptance. - According to one view, W is liable for P8,000.00 as it is

the tenor of his acceptance. "Since an acceptor by Section 62, engages to pay

the bill according to the tenor of his acceptance, he must pay to the innocent

payee or subsequent holder the amount called for by the bill at the time he

accepted, even though larger than the original amount ordered by the

drawer." (Ames and Woodword as cited in Beutel's Brannan, op. cit., p. 904.)

(2) Original tenor of hill. — The opposite view holds that W is liable only for

P3,000.00, the original tenor of the bill. This view seems to be more logical.

Section 62 should be read in relation to the definition of acceptance in

Section 132." Assent to the order of the drawer" in Section 132 means

"assent to pay according to the order of the drawer" and not according to

what appears to be the order of the drawer.


WARRANTIES OF THE ACCEPTOR

• The acceptor, by signing the bill as such, warrants the existence of

the payee and his then capacity to indorse. In addition, he also

admits the existence of the drawer, the genuineness of his signature,

and his capacity and authority to draw the bill.

❑ Defenses precluded

❑ Matters not admitted


PAYMENT WITHOUT ACCEPTANCE

• For purposes of the rule, payment by the drawee may not be

considered as equivalent of acceptance. (Sec. 23.) There is a

distinction between payment and acceptance. (see Sec. 189.) The

latter is a "promise to perform an act" whereas the former is the

actual performance thereof." In the words of the law, "the

acceptance of a bill is the signification by the drawee of his assent

to the order of the drawer." But acceptance is not required for

checks, for the same are payable on demand.


ILLUSTRATIVE CASE

Drawee bank requested indorsee who was asking payment of a check to furnish it with

photostatic copies thereof and present the check for certification. Facts: R (province of Samar)

issued a check to P(postmaster of Borongan, Samar) for the sum of P25,000 drawn against the

Cebu branch of W (Phil. National Bank). P negotiated the check to A who presented the check to

the municipal treasurer of Borongan for payment, but the latter did not choose to pay the same.

The letters of A to the Bureau of Posts seeking payment were referred by its Director to W, the

drawee, which requested the Bureau of Posts to furnish it with photostatic copies of the check

which copies it duly received, and A to present the check to the provincial treasurer and

provincial auditor of R for certification in accordance with a circular issued by the Secretary of

Finance.

Before the check could be certified as being in order R withdrew its deposit with W. thereby

leaving a small balance insufficient to cover the amount of the check. A transferred his rights to B

who was unable to cash it.


Issue: Was there an implied acceptance by W?

Held: (1) Yes. In requesting photostatic copies of the check in question and requiring A to present the

check for certification, W voluntarily assumed the obligation of holding so much of the deposit as

would be sufficient to cover the amount of the check, or before allowing the withdrawal that

exhausted said deposit, of making the necessary inquiry on the matter. An implied acceptance of the

check by W was thereby created. The request on the Bureau of Posts and the requirement imposed

on A by W would be an empty gesture if W did not thereby mean to assume the obligation of paying

the check and holding sufficient deposit of R for the purpose. However, such obligation is merely

subsidiary, R being primarily liable to pay the same. (Sumacad us. The Province of Samar, supra.)

(2) No. Under the facts of the case, no obligation was created on the part of W to pay the amount of

the check. To hold W liable, the original check must have been presented to W for payment and W

should have refused to honor or cash it. The subsequent withdrawal of R of its deposit could not be

prevented by W and if it had refused, it might be held responsible for damages for refusing to allow

the withdrawal. The only party liable for the payment of the check is R. W should be held free from

any liability, primarily or subsidiarily. (Justice S. Padilla, dissenting, see Sec. 132.)


SECTION 63

• When person deemed indorser. - A person placing his signature

upon an instrument otherwise than as maker, drawer or acceptor is

deemed to be an indorser, unless he clearly indicates by appropriate

words his intention to be bound In some other capacity. When a

person deemed an indorser.

❑ Parol evidence inadmissible.

❑ Reason for the rule.


WHEN A PERSON LIABLE AS GUARANTOR

OR SURETY

• Liability as a guarantor

• Liability as surety

• Signature made for identification only

• Engagement of guarantor

❑ When a guarantor signs an instrument payment

❑ When he signs collection guaranteed


LIABILITY OF AGENT BANK FOR

COLLECTION

•An intermediate or collecting bank which accepts a

check for deposit and forwards it to the draweebank

for payment stamped.

•A bank is estopped.

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