NEGOTIATION

SEC. 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
completed by delivery.

3 Three methods of transferring a negotiable instrument.

(1) Issue.—It is the first delivery of the instrument, complete in form, to a person who takes it as
holder (Sec. 191.); it is the first transfer of an instrument to a payee. A negotiable instrument's
legal life does not begin until it is issued by the maker or drawer to the first holder;
(2) Negotiation. — It ordinarily involves indorsement (in regard to other than bearer paper) so that
"negotiation" and "indorsement" are often used interchangeably. Negotiation makes it possible
for the transferee to acquire a better right to a negotiable instrument that the transferor had.
Whether the holder is a holder in due course depends upon factors other than the fact of
negotiation
(3) Assignment. — It is the less usual method/ which may or may not involve an indorsement in the
sense of a writing on the back of the instrument. A bill or note, whether negotiable or non-
negotiable, may be transferred by assignment. By its nature, there can be no "negotiation" of a
non-negotiable instrument. Although it may be transferred by indorsement and delivery, the
assignee acquired the instrument subject to the rules applicable to non-negotiable paper.

Methods of negotiation.
The method by which an instrument is negotiated depends upon whether the instrument is payable to
order or to bearer.

(1) Instrument payable to order. — Where the instrument is payable to order, there are two steps
required for its negotiation:
First, an indorsement by the payee of the present holder, and secondly, its delivery to the next
holder. An instrument payable to order (Sec. 8.) is payable to the payee named therein or to the
indorsee or the person ordered or authorized by the payee to collect. This order or authority is
made by means of indorsement (Sec. 31.) followed by delivery of the instrument to the indorsee.
Under Section 74, the instrument must be exhibited when presented for payment to the person
from whom payment is demanded. The party paying may thus judge the genuineness of the
indorsements and of the right of the holder to receive payment.

(2) Instrument payable to bearer.—If the instrument is payable to bearer (Sec. 9.), it is negotiated by
mere delivery without indorsement. Section 191, paragraph 4 defines "bearer" as the person in
possession of a bill or note which is payable to bearer. Hence, any person in possession of an instrument
payable to bearer is always the bearer thereof, although he may have no legal right thereto. This means
that if the instrument is negotiated to a holder in due course, the latter may acquire a better title than
that of the transferor
Payment of instrument by drawee not negotiation. The payment of a check (or other bill) by the drawee
bank is not a negotiation and does not make the bank a holder within Section 30. The bank is neither the
payee nor indorsee, The check is extinguished and cannot be put in circulation again so as to bind the
drawer or indorser.
The writing of the name of the holder on the back of the check before surrendering it for payment to the
drawee-bank is not an indorsement. Such signature merely serves as a receipt for the money. Upon
payment, the check becomes merely a voucher. Payment effects a discharge of the instrument, not a
transfer of title thereto

Meaning of assignment. An assignment of a bill or note merely means a transfer of the title to the
instrument, with the assignee generally taking only such title as his assignor has, subject to all defenses
available against his assignor.

Effect of delivery of order instrument without indorsement. A transfer of a negotiable instrument is

effected otherwise than by negotiation when an order instrument is delivered without indorsement. In
this case, the transfer operates as an ordinary assignment and the assignee is merely placed in the
position of the assignor, the former acquiring the instrument subject to all defenses, real and personal,
available against the latter.

Without the indorsement, the transferee would not be the holder of the instrument, he not being the
payee, indorsee, or the bearer thereof. However, the assignee acquires the right to have the
indorsement of the assignor. When indorsement is subsequently obtained, the transfer operates as a
negotiation only as of the time the indorsement is actually made

Negotiation and assignment distinguished.

(1) Negotiation refers only to negotiable instruments, while assignment refers generally to an ordinary
contract;
(2) In negotiation, the transferee is a holder, while in assignment, the transferee is an assignee; (3) A
holder in due course is subject only to real defenses, while an assignee is subject to both real and
personal defenses (see Sec. 57-59.); (4) A holder in due course may acquire a better title or greater
rights under the instrument than those possessed by the transferor or a prior party, while generally an
assignee merely steps into the shoes of the assignor; (5) A general indorser warrants the solvency of
prior parties, while an assignor does not warrant the solvency of prior parties unless expressly stipulated
or the insolvency is known to him; (6) An indorser is not liable unless there be presentment and notice
of dishonor, while an assignor is liable even without notice of dishonor;

KINDS of Delivery of negotiable instrument.

ACTUAL OR CONSTRUCTIVE, from one person to another. (Sec. 191, par. 6.)

An example of constructive delivery is where A, without B's knowledge, indorses an instrument to B and
puts it into an envelop containing other papers of B.

(2) Necessity. — Delivery is an essential part of every negotiation. Indorsement, as defined by the Act,
means an indorsement completed by delivery. (Sec. 191, par. 8.) An intent to be bound is necessary to
the creation of an obligation, and delivery of the negotiable instrument is the operative fact that
evidences the intention of the maker or drawer to become bound by it.
(3) Presumption. — Delivery is presumed from possession. Except as against a holder in due course, the
maker or drawer may overcome this prima facie presumption by proof that the instrument was lost or
stolen.

Where delivery conditional.

The delivery may be conditional.
(1) Condition precedent. — Parol evidence is admissible to show that (notwithstanding delivery) the
instrument was to become operative as a contract only upon the happening of a future, contingent
event, since this is a condition precedent to the attaching of any obligation under the written
instrument.
EXAMPLE: M delivers his promissory note to P stating orally that the note is not to take effect until P
delivers to M a deed to certain property. P fails to deliver the deed. Evidence of the oral agreement is
admissible to show that the note which purports to be a contract is in fact no contract at all.

2) Condition subsequent. — Where an instrument is unconditionally delivered as an operative contract,

parol evidence is not admissible to show a parol condition (not expressed in the writing) attached to the
obligation of the contract

EXAMPLE: M is sued by P on a promissory note given by M in part payment of his tuition fee. M testifies
that P promised orally that M would be released on the note if M should decide to discontinue with his
course and should so notify P before he had received more than five lessons, and that M did so decided
and notify P in accordance with the oral agreement.

The testimony of M is not admissible as it is in direct contradiction of the written contract (as to the
existence and validity of which there is no controversy) and its admission ' i would violate the parol
evidence rule. (Babb & Martin, op. tit., pp. 188-189.)

SEC. 31. Indorsement; how made.— The endorsement 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.

Indorsement is the writing of the name of the payee on the instrument with the intent either to transfer
the title to the same, or to strengthen the security of the holder by assuming a contingent liability for its
future payment, or both,

It involves the certainty of two things:

(a) the identity of the indorser (as being the payee or true owner); and
(b) the genuineness of his signature.

It is the duty of a person cashing or paying on an instrument to ascertain both before paying.
But the acceptor does not admit the genuineness of the indorsees signature,

Indorsement and assignment distinguished.

The two terms are to be distinguished in that the latter is broader, and sometimes include the former. It
is, however, a common practice to speak of the indorsement of negotiable, and the assignment of non-
negotiable, instrument in blank

Necessity of indorsement.
(1) Indorsement is essential to the execution of an instrument payable to the order of the maker or
drawer, (see Sees. 8[b], 184.)
(2) It is also essential to the negotiation of an order instrument, not of a bearer instrument. (Sec. 30.)
(3) It is not necessary to a mere assignment of a negotiable or non-negotiable instrument, (supra.) Thus,
one may acquire title to such instrument without indorsement but without indorsement of an order
instrument, he cannot be a holder in due course thereof even though he is entitled to have the
indorsement made, (see Sec. 49.)
(4) Under proper circumstances, an estoppel may take the place of an indorsement to uphold the
transfer of a bill or note such as where the indorsement is forged or unauthorized and the party against
whom the instrument is sought to be enforced is precluded from setting up the defense of forgery or
want of authority,

Form of indorsement.
The law does not require an exclusive form by which an indorsement may be accomplished. But it "must
be written or in writing. As "writing" includes "print" the indorsement made by rubber stamp or
typewritten on the instrument complies with the requirement. The use of the word "assign" does not
make a negotiation a mere assignment. For example: "I hereby assign all my rights and interests in this
note. (Sgd.) P.
"Clearly, it cannot be said that P intends to limit the rights of the person to whom he transfers the
Instrument

SEC. 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.

The reason is that the instrument must be delivered to the indorsee and there cannot be partial delivery
of one instrument.

SEC. 33. Kinds of indorsement.— An indorsement may be either special or in blank; and it
may also be either restrictive or qualified, or conditional.

Classification of indorsement.
(1) As to the methods of negotiation:
(a) special (Sec. 34.); or
(b) blank, (ibid.)

(2) As to the kind of title transferred:

(a) restrictive; or
(b) non-restrictive. (Sec. 36.)

(3) As to scope of liability of indorser:

(a) qualified; or
(b) unqualified or general. (Sees. 38,66.)

(4) As to presence or absence of limitations:

(a) conditional; or
(b) unconditional. (Sec. 39.)

(5) The other kinds of indorsements are:

(a) joint (Sec. 41.);
(b) successive (see Sees. 50,68.);
(c) irregular or anomalous (Sec. 64.); and
(d) facultative, (see Sec. 111.)

Note that once an instrument as issued satisfies all the requirements of negotiability (Sec. 1.), no
indorsement, even restrictive one (Sees. 36-37.), can negate its negotiable status

SEC. 34. Special indorsement; indorsement in blank.— A special in indorsement specifies the
person to whom, or to whose order, the blank' 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.

SEC. 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.

SEC. 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 person.
But the mere absence of words implying power to negotiate does not make an indorsement
restrictive.

SEC. 37. Effect of restricting 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.

Rights of indorsee
a. receive payment on the instrument;
b. sue there on in his name; and also
c. negotiate the instrument except when it is prohibited in the indorsement.
However, the rights of the indorsees subsequent to the first indorsee are subject to the terms of the
restrictive indorsement,

EXAMPLE: In the indorsement, "Pay to A for collection, (Sgd.) P," A is merely an agent of P and any
action he may file on the instrument is, therefore, subject to defenses available against P, his indorser.
Similarly, if A negotiates the instrument to B, a subsequent indorsee, the latter "acquires only the title"
of . A, the first indorsee, whose right is merely to collect. If P has already been paid, A and B cannot
enforce the instrument anymore.

Indorser's liability limited. — It does not mean, however, that the qualified indorser incurs no liability at
all. The effect of the qualified indorsement is merely to limit his liability.
He is secondarily liable for breach of his warranties as an indorser under Section 65.

Thus, he is liable if the instrument is dishonored by non-acceptance or non-payment due to:

(a) forgery;
(b) lack of good title to the instrument indorsed;
(c) lack of capacity to contract on the part of prior parties; or
(d) the fact that the instrument was valueless or not valid at the time of the indorsement which fact was
known to him.

But the qualified indorser is not liable to the indorsee if the instrument is dishonored for some other
reason like the insolvency of the person primarily liable.

SEC. 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.

Qualified indorsement is one which constitutes the indorser a mere assignor of the title to the
instrument.

Example:
"Pay to the order of A without recourse on me. (Sgd.) P."
"Pay to A, indorser not holder. (Sgd.) P.

recourse" in ordinary legal and commercial usage means a resort to a person who is secondarily liable
after the default of the person who is primarily liable.

An indorsement "without recourse" does not affect the negotiable quality of an instrument. It shows
only an unwillingness to be answerable for the solvency of prior parties — a prudent precaution,
particularly where the note has a long time to run before it matures.

SEC. 39. Conditional indorsement - "Where an indorsement is conditional, a 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.
Absolute vs conditional indorsements
Absolute indorsement Conditional indorsement
absolute indorsement is one by which the A conditional indorsement, on the other hand, is
indorser binds himself to pay, upon no other one by which the indorser imposes some other
condition than the failure of prior parties to do conditions to his liability or on the indorsee's
so, and of due notice to him of such failure right to collect the proceeds of the instrument.
conditional indorsement has no effect on the
further negotiation of the instrument. The party
required to pay, if he chooses, may make
payment, disregarding the condition without
incurring any liability because he is expressly
authorized to do. But the person who received
payment will hold the proceeds subject to the
right of the conditional indorser.

Different combinations of indorsements. All indorsements are either special or in blank; restrictive non-
restrictive, etc. Thus, different combinations are possible.

EXAMPLE:
(1) special and restrictive "Pay to A only. (Sgd.) P"
(2) special and qualified "Pay to A without recourse. (Sgd.) P"
(3) special and conditional "Pay to A if he marries before he reaches the age of 25. (Sgd.) P"
(4) blank and restrictive "For collection only. (Sgd.) A"
(5) blank and qualified "Without recourse. (Sgd.) A"
(6) blank and conditional "Payable upon completion of my house in Pateros, Metro Manila. (Sgd.)A"
(7) special, unrestrictive, unqualified "Pay to B. (Sgd.) A"

SEC. 40. Indorsement of instrument payable to bearer.— Where instruments to 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.

An instrument payable to bearer is not converted into an instrument payable to order by being indorsed
specially and, therefore, notwithstanding the provisions of Section 34

EXAMPLE:

M issues a promissory note payable to P or bearer and delivers it to P. To negotiate the note to A, P has
only to deliver the same to A. With or without the indorsement of P, A becomes the holder of the
instrument by its delivery because indorsement is not necessary

If P indorses the instrument to A, the latter may nevertheless negotiate it by mere delivery to B.
However, B will have no right against P since he (B) did not obtain his title through the indorsement of P.
But A, as indorser and M, as maker, will be liable to B.
Application of Section 40.
(1) This section applies only to instruments originally payable to bearer. Therefore, it cannot apply
where the paper is originally made payable to order and indorsed in blank

The reason for making a distinction-

In instrument drawn payable to bearer, the maker or drawer has expressly provided that the instrument
shall be payable to bearer, and it cannot be made payable to order without modifying these terms.

But where, upon its face, it is payable to order, a transferee, taking a blank indorsement does not, by
indorsing it specially, change its tenor as originally drawn

SEC. 41. Indorsement where payable to two or more persons.— Where an instrument is
payable to the order of two or more payees more' or indorsees who are not partners, all
must indorse, unless the one indorsing has authority to indorse for the others.

This section refers to a joint indorsement.

(1) Two or more payees or indorsees jointly. —

(2) Indorsement by all payeesn or indorsees. — If the instrument isling payable to the order of two
or more payees or indorsees, all must indorse in order for the transaction to operate as a
negotiation. If only one indorses, his indorsee would have no right of action for said
indorsement would be contrary to the provisions of Section 32.
(3) Indorsement to a co-payee. — A check payable to the order of two persons, when indorsed by
only one of such payees, who had no authority to indorse for the other, was held no longer
transferable as a negotiable instrument but only as a non- negotiable chose in action. But it has
been held that the indorsement and delivery of the instrument by one of two joint payees to his
co- payee may transfer full title to the latter

When joint indorsement by all payees or indorsees not required. There are two exceptions to the rule
requiring joint indorsement.
(1) Where the payees or indorsees are partners; and
(2) Where the payee or indorsee indorsing has authority to indorse for the others

SEC. 42. Effect of instrument drawn or indorsed to a person as — 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.

-cashier of a bank, the president of a corporation or any other administrative officer, as secretary or
treasurer, may be expressly authorized to issue negotiable paper for the corporation, or he may have
such power from implication by reason of having previously exercised the power.

Example:
An instrument drawn or indorsed to the order of the "cashier of the University of the Philippines" is
deemed prima facie payable to said university and may be negotiated by the university through the
indorsement of any of its duly authorized officers. Thus, if the president is authorized by the by-laws of
the university, he may indorse the instrument.

he presumption established in this section may be disproved by sufficient evidence to the contrary. It
may be shown that the instrument really belongs to the cashier personally as the real creditor of the
maker or drawer,

SEC. 43. Indorsement where name in 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 think fit, his proper signature.

The payee or indorsee may sign his name in the same way as it appears in the instrument but signature
in both names may be required by a person paying or giving value for the instrument, (see [US] U.C.C.,
Sees. 3-203.)
A person may correct a spelling error only if the intention of the maker or drawer was that the
instrument should be payable to the person making the correction.

Any variance between the name of the payee on the face of an instrument and the signature on the
back thereof should be ignored if the payee and the indorser are the same person.

SEC. 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.

An instrument may be indorsed by a person either personally or through an agent. The authority of the
agent need not be in writing. See comments under Section 20 as to how such indorsement should be
made.

SEC. 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.

RULE: in order to constitute one a holder in due course he must have taken the instrument before it
was overdue.

- If the indorsement bears a date, the presumption is that it is the true date
- If the indorsement is without a date, the presumption is that it was negotiated before maturity.

SEC. 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.

-In the absence of evidence to the contrary, an indorsement is presumed to have been made at the
place where the instrument is dated. Again, the presumption is rebuttable.

SEC. 47. Continuation of negotiable; presumption.— An instrument negotiable character.

negotiable in its origin continues to be negotiable until it has been' restrictively indorsed or
discharged by payment or otherwise.

GEN RULE: an instrument negotiable in origin is always negotiable until paid.

- An instrument indorsed after it become overdue is considered payable on demand.

(2) Exceptions. —
(a) When the instrument has been restrictively indorsed; or
(b) When it has been discharged by payment or otherwise.
It should be remembered that not every restrictive indorsement prohibits further negotiation of the
instrument (see Sec. 36.) therefore, the words "restrictively indorsed" in this section should be
construed to refer only to such restrictive indorsement as prohibits further negotiation of the
instrument,

Conversion from non-negotiable to negotiable instrument

An instrument that is originally not negotiable for lack of words of negotiability, yet if it is indorsed to
"order" or "bearer," it becomes as between the indorser and subsequent holders, it becomes a
negotiable instrument.

SEC. 48. Striking out indorsement.— The holder may at any time strike out any indorsement
which is not; necessary to Its title. The indorser whose indorsement is struck out, and all
indorsers subsequent to him, are thereby relieved from liability on the instrument.

SEC. 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.

Effect of transfer without indorsement

- Where the holder of a bill payable to order transfers it for value without indorsing it, the transferee
cannot negotiate the bill by indorsing it to another

The transaction operates as an equitable assignment and the transferee acquires the instrument subject
to defenses and equities available among prior parties. He cannot negotiate it.
The negotiation takes effect as of the time the indorsement is actually made for the purpose of
determining whether or not the transferee is a holder in due course

Effect of indorsement after transfer

The indorsement of P converts the transfer into a "negotiation" and makes A a "holder,"

The reason is that negotiation is completed at the time of indorsement, not at the time of delivery

SEC. 50. When prior party may negotiate instrument.—Where an instrument is negotiated
back to a prior party, such party may, subject to the provisions of this Act, reissue and
further negotiate the same. But he is not entitled to enforce payment thereof against any
intervening party to whom ho was personally liable.

- Section 50 refers to a reacquirer or a holder who negotiates an instrument and then subsequently
reacquires it.

If a prior party reacquires an instrument before maturity, he may negotiate the same further.
But after paying the holder, he may not claim payment from any of the intervening parties.
The law, to avoid multiplicity of suits, denies an action to a party thus situated

However, it was ruled in a case, if the instrument had passed through his hands without indorsement, or
it had been indorsed by him without recourse, the reason would not exist, and there could be no
objection, founded on his prior holding or indorsement, to the maintenance of an action by him against
the parties liable on the instrument.

EXAMPLE:
M makes a note payable to the order of P. It is indorsed successively as follows:
Pay to A (Sgd.) P
Pay to B (Sgd.) A
Pay to C (Sgd.) B
Pay to D (Sgd.) C
Pay to B (Sgd.) D
Pay to E (Sgd.) B

In the above example B, a prior party, reacquires the note. He may further negotiate the same to any
subsequent holder.

Limitations on renegotiation. In the following cases, a prior party cannot further negotiate the
instrument:
(1) Where it is payable to the order of a third person, and has been paid by the drawer
(2) Where it was made or accepted for accommodation and has been paid by the party accommodated
(3) In other cases, where the instrument is discharged when acquired by a prior party.

1. PHIL EDU COM INC VS SORIANO 39 SCRA 587

2. ANG TEK LIAN VS CA 87

WHO IS HOLDER

SEC. 51. Bight of holder to sue; payment.— The holder of a negotiable instrument may sue
thereon in his own name; and payment to him in due course discharges the instrument.

"Holder" means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof
(Sec. 191, par. 7.) entitled to receive the sum for which it calls. Thus, the term includes not only persons
possessing bearer Instruments but also payees and indorsees possessing orderinstruments
3 CLASSESS OF HOLDER

(1) Holders simply (Sec. 51.);

(2) Holders for value (see Sec. 26.); and
(3) Holders in due course. (Sees. 52,57.)

1. Ordinary holder or mere holder (or assignee or transferee)- A person who qualifies as a holder
but does not meet all the conditions to qualify as a holder in due course

Rights of a holder:
1. a holder may sue in his own name, but A person who is neither the payee nor a holder of a bad
check has neither the personality to sue nor a cause of action against the drawer.
2. a holder may receive payment, He may receive payment and if the payment is in due course

Payment in due course is payment "made;

(a) at or after the maturity of the instrument
(b) to the holder thereof
(c) in good faith and without notice that his title is defective

Sec. 52. What constitutes a holder in due course. — A holder in due course is a holder who has taken the
instrument under the following conditions:
Requisites for a Holder in Due Course (HDC):
a. receives the instrument complete and regular on its face
b. became a holder before it was overdue and had no notice that it had been previously dishonored
if such was the fact
c. takes the instrument for value and in good faith
d. at time he took the instrument, no notice of infirmity in instrument or defect in the title of the
person negotiating it

(1) Presence of all conditions. — All the four conditions must concur in order to qualify a
person as a holder in due course. If any one of them is absent, the holder cannot be
considered a holder in due course.
(2) Status as mere assignee. — The holder of a non-negotiable instrument cannot attain the
status of a holder in due course. He is a mere assignee subject to defenses.
(3) Presumption. — A prima facie presumption exists that the holder of a negotiable
instrument is a holder in due course. Consequently, the burden of proving otherwise lies
in the person who disputes the presumption.
(4) Rights of the holder in due course/not a holder in due course. — The only disadvantage
of a holder who is not a holder in due course is that the instrument is subject to
defenses as if it were non-negotiable. On the other hand, holder in due course is
afforded most-favored status under the law. He takes the instrument free of many
defenses that exist between the original parties

Payee as holder in due course. Is the payee entitled to the same protection under Section 52 as any
other bona fide holder for value? YES. Since 'holder/ as defined in Section 191, includes a payee who is
in possession, the word 'holder' in the first clause of Section 52 and in the second subsection may be
replaced by the definition in Section 191 so as to read a 'holder in due course is a payee or indorsee who
is in possession'

Drawee as holder in due course. , a drawee does not, by paying a bill, become a holder in due course
under this section

(1) Wanting in any material particular. — An instrument is incomplete when it is wanting in any
material particular or particular proper to be inserted in a negotiable instrument without which
die same will not be complete.
(2) Alteration apparent on face of instrument. — The instrument must also be regular upon its
face. The most common type of irregularity is an alteration in the instrument.
To render the instrument irregular)\, alteration, tampering or erasure must be visible or
apparent on the face of the instrument, for if it is not apparent, the matter is governed solely by
Section 124 which renders the instrument void. Therefore, the rule is that when a mere
inspection of an instrument shows that it has been altered, a purchaser is not a holder in due
course because such instrument is not regular on its face

(1) When instrument overdue. —after the date of maturity.

(a) The date of maturity is the time fixed therein
(b) If the instrument is payable on demand , the date of maturity is determined by the date of
presentment.

Under the law, presentment must be made within a reasonable time after its issue, if it is a promissory
note, or after the last negotiation thereof, if it is a bill of exchange, After the lapse of such reasonable
time, the instrument is deemed overdue.

(c) If the instrument is with a fixed maturity designated by a calendar date (e.g., June 10), it is overdue at
the beginning of the day after the fixed date (i.e., June 11). If it is payable on the occurrence of a
specified event which is certain to happen

Note:
- Overdue instrument puts all persons on notice.
- An overdue instrument is still negotiable, and although (in the hands of one who neither is, nor makes
title through, a holder in due course) it is subject to defenses existing at the time of transfer, it is
certainly not "subject to the same defenses as if it were non-negotiable

(2) Where instrument in part overdue and in part not

(1) Where installments due before transfer. — An installment note is overdue as to installments due
before the transfer, and a transferee thereof cannot be a holder in due course as to such installments,
whether or not he had notice ofthe non-payment
(2) Where transferee without notice of non-payment. — If the transferee had no notice of the non-
payment, he is a holder in due course as to installments to mature in the future. In the absence of an
acceleration clause, the fact that the maturity date of one or more installments have passed cannot
make the instrument overdue as to installments payable in the future.
 (3) Holder without notice of dishonor.
(1) Ways and time of dishonor. — An instrument may be dishonored either by non-acceptance
(see Sec. 149.) or by nonpayment. (see Sec. 83.) Dishonor by non-acceptance refers only to a
bill of exchange. While dishonor by non-payment can only take place at the time of
maturity, dishonor by non-acceptance of a bill may occur even before the date of its
maturity
(2) Negotiation after maturity or dishonor. — An overdue or dishonored instrument may still be
negotiated either by indorsement or by delivery to the same extent as before maturity (see
Sec. 47.), but in the case of the former, the holder cannot be a holder in due course (Sec.
52[b].) while in the case of the latter, the holder without notice can be a holder in due
course
(3) The great weight of authority holds that the mere fact that interest due is unpaid, the
principal not being due, does not render the note dishonored

(4) Holder in good faith

Meaning of "in good faith" under Section 52(c) refer only to the good faith of the indorsee of transferee
and not to the seller of the paper. (
Good faith means "honesty in fact in the transaction concerned." Each situation must be examined
separately to determine good faith. A holder must take in good faith, but if he does not take in bad faith,
his good faith is sufficiently shown

Proof of good faith. — Good faith is a broad term that cannot be precisely defined. Its existence or
absence is to be determined by a consideration of the facts and cicumstances of the particular case. It is
generally agreed, however, that the term implies not only honesty of intention but the absence of
suspicious circumstances, or if such circumstances exist, then such inquiry as will satisfy a prudent man
of the validity of the transaction,

Meaning of bad faith. — Under Section 56, it means that the person to whom an instrument is
negotiable must have actual knowledge of facts which render it dishonest for him to take a particular
piece of negotiable paper.

Proof of bad faith. - To show knowledge of such facts that the taking would amount to bad faith, it is not
necessary to show knowledge of the exact truth. It is sufficient that if the facts within the knowledge
tend to show that there was something wrong with the transaction

Effects of crossing a check.

(1) The check may not be encashed but only deposited in the bank;
(2) The check may be negotiated only once—to one who has an account with a bank; and
(3) The act of crossing the check serves as warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check pursuant to that purpose;
otherwise, he is not a holder in due course

A holder, therefore, cannot claim it acted in good faith when it accepted and discounted post-dated
crossed checks from tha payee, when it was all too aware that the subject checks were crossed and bore
restrictions that they were for deposit to payee's account only; hence, could not be further negotiated
to it.
Note that the law does not absolutely bar a holder who is not a holder in due course from recovering on
the checks. The holder may recover from the party who indorsed/encashed the checks "if the latter has
no valid excuse for refusing payment."

Holder for value.

- Any consideration sufficient to support a simple contract is value.
It is not necessary that die consideration should be adequate. However, where the discount is unusually
large or grossly unreasonable this fact, together with other facts, may be material on the question of
good faith.

sec. 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.
- if the negotiation of a demand instrument is made outside of the reasonable time after its issue,
the holder cannot be deemed a holder in due course, for the fact that the instrument has been
in circulation for such a length of time gives rise to a strong indication that it has already been
dishonored
-
As to what constitutes a reasonable time, depends upon the facts of the particular case. The law
provides that "regard is to be had to 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.

SEC. 54. Notice before full amount 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 theretofore
paid by him.

Effects of notice
1) When No amount has yet been paid. — Where an instrument has been taken but the purchaser has
not yet paid anything, and he receives notice of infirmity in the instrument, he is relieved from the
obligation to make payment. If he does so, it is quite clear that he is not entitled to the same protection
as a holder in due course.

The term "paid," as used in Section 54, is not limited to the payment of money, but includes; the
performance in any other manner of an obligation.

(2) When An amount has been paid. — Where the instrument has been transferred to him in
consideration of his promise to make future payments to his transferor, he is under no legal
obligation to pay the balance of the amount he has agreed to pay on discovering the infirmity or
defect. If he does, he can be considered a holder in due course only to the extent of the amount
theretofore paid to him

When Section 54 not applicable.

(1) It is APPLICABLE only where the obligation incurred by the holder of a bill or note is such that upon
discovering the infirmity in the instrument, he is relieved from all further legal obligations to make
further payments, as, for example, where the note has been transferred to him in consideration of his
promise to make future payments to his transferor. In that case, if it should turn out that, by reason of
fraud on the part of the transferor, the maker of the note had a defense thereto, the transferee would
be under no obligation to pay the balance of the amount that he had agreed to pay the transferor.

(2) It does NOT APPLY where the holder has given for the paper his promise which he must perform, as,
for instance, when he has incurred liability to a third person. In such a case, he is in the same position
and entitled to the same protection as one who has paid for the instrument in money or property at the
time of the transfer.
SEC. 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.

SEC. 56. What constitutes notice of defect.— To constitute 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 had faith.

SEC. 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 payee 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.

SEC. 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 nonnegotiable. 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.

SEC. 59. Who deemed holder in due course.— Every holder is deemed prima facie to be a holder in due
course; but when it iacourse' 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 srich defective title.

CHAPTER V.

LIABILITIES

SEC. 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.

SEC. 61. Liability of drawer.— The drawer by drawing the instru-ment admits the existence of the payee and
his then capacity to indorse; and engages that on due presentment the instrument will be accepted or paid,
or both, according to its tenor, and that if it be dishonored, 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.

SEC. 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.
SEC. 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.

SEC. 64. Liability of irregular indorser.— Where a person, not otherwise a party to an instrument, places
thereon his signature in blank before delivery, he is liable as indorsee in accordance with the following rules:

(a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent
parties.
(b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all
parties subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.
SEC 65. Warranty where negotiation by delivery, and so forth.—

Every person negotiating an instrument by delivery or by a qualified indorsement warrants—

(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the
immediate transferee.

The provisions of subdivision (c) of this section do not apply to persons negotiating public or corporation
securities, other than bills and notes.

SEC. 66. Liability of general indorser.—Every indorser who indorses without qualification, warrants to all
subsequent holders in due course—

(a) The matters and things mentioned in subdivisions (a), (&), and (c) of the next preceding section; and
(b) That the instrument is at the time of his indorsement valid and subsisting.
And, in addition, he engages that on due presentment, it shall be accepted or paid, or both, as the case may
be, according to its tenor, and that if it be dishonored, 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.

SEC. 67. Liability of indorser where paper negotiable by delivery.— Where a person
places his indorsement on an instrument negotiable by delivery he incurs all the liabilities of an indorser.

SEC. 68. Order in which endorsers are liable.— As respects one another, indorsers are liable prim a facie in
the order in which they indorse; but evidence is admissible to show that as between or among themselves
they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly
and severally.

SEC. 69. Liability of an agent or broker.— Where a broker or other agent negotiates an instrument without
indorsement, he incurs all the liabilities prescribed by section sixty-five of this Act, unless he discloses the
name of his principal and the fact that he is acting only as agent.