Rights of Holders

8/9/2019 Rights of Holders

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Rights of HoldersHolder means the payee or indorsee of thebill or note who is in possession of it or thebearer thereof.

-It is not necessary that the holder is a holderin due course before he can enforce paymentespecially if there are no defenses available tothe parties.

-If not a holder in due course, the negotiableinstrument is subject to defenses as if it werenon-negotiable

Sec. 52. What constitutes a holder in duecourse. - A holder in due course is aholder who has taken the instrumentunder the following conditions:

(a) That it is complete and regularupon its face;

(b) That he became the holder of itbefore it was overdue, and withoutnotice that it has been previouslydishonored, if such was the fact;

(c) That he took it in good faithand for value;

(d) That at the time it wasnegotiated to him, he had nonotice of any infirmity in theinstrument or defect in the title ofthe person negotiating it.

HolderThe first requisite is that he be a holder, if he isnot a holder at all then he could not beconsidered a holder in due course.

Complete and RegularAn instrument is not complete and regular inits face if it contains material alteration. If theamount on the check is altered by increasingthe same, the instrument is irregular. If thealteration is not apparent, then therequirement that is be complete and regular isstill present.

OverdueOne day after the date specified on the periodis what is to be construed as overdue.

A person taking an overdue instrument shouldcertainly question why the instrument is still incirculation even if it is overdue.

1. Installment insturments a purchaserof an installment note after an

installment is overdue may be a holderin due course as to the balance if hehas no notice of failure to pay the firstinstallment.

2. Overdue interest payments The merefact that interest on a note wasoverdue does not, in the absence of a

stipulation making the principal dueupon failure to pay interest, affect anindorsee with notice of dishonore orput him on inquiry.

3. Demand instruments.

a. Sec. 53. When person notdeemed holder in duecourse. - Where aninstrument payable ondemand is negotiated on anunreasonable length oftime after its issue, theholder is not deemed aholder in due course.

b. What can be consideredunreasonable is relative.Section 193 of the NILprovides that indetermining what isreasonable time or anunreasonable time regardis to be had in the nature ofthe instrument, the usageof the trade or buisiness ifany with respect to suchinstruments, and the factsof the particular case.

Notice of infirmity or defect.

Notice of any infirmity in the instrument ordefect in the title of a prior party will destroythe due course holding. Notice given to theagent may bind the principal. Knowledge of theagent of any infirmity on the instrument ordefect in the title of a prior party, receivedwhile acting within the scope of this authorityis notice to the principal.

Infirmity in the instrument means anyirregularity in the instrument. Eg. Notice ofalteration, notice of forgery,Notice in the defect of the title of the personnegotiating when obtained the instrument, orany signature thereto, by fraud, duress, orforce and fear, or other unlawful means or foran illegal consideration, or when he negotiatesit in breach of faith, under such circumstancesas to amount to fraud.

Good FaithGood faith is presumed, however, thepresumption is destroyed when the payee orindorsee acquired possession of theinstrument under circumstances that should


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have put it into inquiry as to the title of theholder who negotiated the instrument.

Crossed CheckCheck to be deposited only on the account ofthe holder thereof, wherein the holder isspecified.

The act of crossing the check serves as awarning to the hjoloder that the check hasbeen issued for a definite purpose so that hemust inquire if he has received the checkpursuant to that purpose. This rule does notapply ito the payee himself who was theone who deposited the check.

Holder for valueValue is a consideration sufficient to support asimplec contract.

1. Partial performance Value underthe NIL is different from value in NCC.Love and affection considered as valuein NCC but in NIL it is not (contract ofdonation). With respect to the holders,the holder is a holder in value only tothe extent that the considerationagreed upon has been paid, deliveredor performed. Non performance of theobligation will give rise to partial or fulldefense of failure or consideration.

2. Notice before full payment Wherethe transferee receives notice of anyinfirmity in the instrument or defect inthe title of the person negotiating thesame before he has paid the full

amount agreed to be paid therfor, hewill be deemed a holder in due courseonly to the extent of the instrumentpaid therfor by him.

3. Negotiable instruments as to value value is deemed given by giving anegotiable instrument or irrevocablecommitment as payment.

Accomodation Parties Accomodationparties are not considered as part of theinfirmities on the instrument or defect on thetitle of person negotiating it.

Presumption

Sec. 59. Who is deemed holder in duecourse. - Every holder is deemed primafacie to be a holder in due course; butwhen it is shown that the title of anyperson who has negotiated theinstrument was defective, the burden ison the holder to prove that he or someperson under whom he claims acquiredthe title as holder in due course. But the

last-mentioned rule does not apply infavor of a party who became bound onthe instrument prior to the acquisition ofsuch defective title.

Presumption cannot operate if the a demandinstrument is is negotiated for an unreasonable

length of time. (Sec 53. NIL)

Payee as holder in due courseA payee can be a holder in due course. It ispossible for a payee to be holder in due courseunder any circumstance in which he meets therequirements of Section 52 of the NIL. SinceSec 191 defines holder as the payee orindorsee of a bill or note, who is in possessionof it or the bearer therof.

Rights of Holders in Due Course

Personal DefensesA holder in due course holds the instrument

free from any defect of title of prior parties,and free from defense available to prior partiesamong themselves, and may enforce paymentof the instrument for the full amount therofagainst all parties liable theron.

A holder in due course if free from personaldefenses.Real DefensesA holder in due course is not free from realdefenses. The real defense of FORGERY may beraised against the holder even if he is a holderin due course.

When not a holder in due courseWhen a holder is not a holder in due course, heis not free from all types of defenses whetherreal or personal. He is subject to all defensesas if the instrument is non-negotiable.

SHELTER RULEWhen a person is not a holder in due courseand he derives his title from a holder in duecourse.

Sec. 58. When subject to original defense.-In the hands of any holder other than a holderin due course, a negotiable instrument issubject to the same defenses as if it were non-

negotiable. But a holder who derives histitle through a holder in due course, andwho is not himself a party to any fraud orillegality affecting the instrument, has allthe rights of such former holder inrespect of all parties prior to the latter.(Shelter rule)

PROTECTION UNDER THE CONSUMER ACT


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Art. 146. Sale of Consumer Products OnInstallment Payment. - In a consumer creditsale other than one pursuant to an open-endcredit plan, the obligation of the consumer towhom credit is being extended shall beevidenced by a single instrument which shallinclude, in addition to the disclosures required

by this act, the signature of the seller and theperson to whom credit is extended, the date itwas signed, a description of the property soldand a description of any property transferredas a trade-in. The instrument evidencing thecredit shall contain a clear and conspicuoustypewritten notice to the person to whomcredit is being extended that:

(a) he should not sign the instrument ifit contains any blank space;

(b) he is entitled to a reasonable returnof the precomputed finance charge ifthe balance is prepaid; and

(c) he is entitled to an exact, true copyof the agreement.

In cases where the instrument will be soldat a discount to a bank, financingcompany or other lender, the saidtransferee shall be subject to all claimsand defenses which the debtor couldassert against the seller of consumerproducts obtained hereto or with theproceeds thereof.

EG. X bought TV from Y store for credit. Ynegotiates PN to Z. TV not delivered. Defenseof lack of consideration exists on the part of X,

even if Z is a holder in due course.

-Excludes transactions pursuant to an opencredit.

Holders in bill in set

Bills in set actually involve one bill althoughdrawn on set

Sec. 178. Bills in set constitute one bill. -Where a bill is drawn in a set, each partof the set being numbered and containinga reference to the other parts, the wholeof the parts constitutes one bill.

Sec. 179. Right of holders where different parts are negotiated. - Where two ormore parts of a set are negotiated todifferent holders in due course, theholder whose title first accrues is, asbetween such holders, the true owner ofthe bill. But nothing in this sectionaffects the right of a person who, in duecourse, accepts or pays the parts first

presented to him.

Sec. 180. Liability of holder who indorsestwo or more parts of a set to differentpersons. - Where the holder of a setindorses two or more parts to differentpersons he is liable on every such part,

and every indorser subsequent to him isliable on the part he has himselfindorsed, as if such parts were separatebills.

Sec. 181. Acceptance of bill drawn insets. - The acceptance may be written onany part and it must be written on onepart only. If the drawee accepts morethan one part and such accepted partsnegotiated to different holders in duecourse, he is liable on every such part asif it were a separate bill.

Parties Who Are Liable

Active subject in Negotiable instrument is theholder.Holder is the person or entity given the right todemand the performance of the obligationreflected in the negotiable instrument, that is,the obligation to pay a sum certain in monay.Holder is therefore the owner of the intangiblepersonal property evidenced by theinstrument.

Section 192 NIL Persons primarily liable theperson, who, by the terms of the

instrument, is absolutely required to paythe same. Secondarily liable if heengages, that, on due presentment, theinstrument shall be accepted or paid, orboth, as the case may be, according to itstenor, and that if it be dishonored and thenecessary proceedings on dishonor beduly taken, he will pay the amount therofto the hjolder, or to any subsequentindorser who may be compelled to payit.

Sec. 192. Persons primarily liable oninstrument. - The person "primarily" liableon an instrument is the person who, by

the terms of the instrument, is absolutelyrequired to pay the same. All otherparties are "secondarily" liable.PN Primarily liable is the maker.BoE- Primarily liable Acceptor.Secondarily liable- drawers and generalindorsers.

Warranties


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Warranties are affirmations of the fact on thepart of the parties that impose no directobligation to pay in the absence of the breachtherof. In case of breach of warranties, theperson who breached the same may either beliable or he may be barred from asserting aparticular defense.

Action on idorsers special contract ofindorsement conditioned on presentment, andnotice of dishonor; hid liability for breach ofwarranty is not so conditioned. Action onspecial contract cannot be brought uponmaturity of the instrument; while action forbreach of warranty occurring as it does at thetime of transfer, may be brought at any time.

Maker

Sec 60. The maker of a negotiable instrument,by making it, engages that he will pay itaccording to its tenor, and admits the

existence of the payee and his then capacity toindorse.

DRAWER

Sec. 60. Liability of maker. - The maker ofa negotiable instrument, by making it,engages that he will pay it according toits tenor, and admits the existence of thepayee and his then capacity to indorse.

Sec. 61. Liability of drawer. - The drawerby drawing the instrument admits theexistence of the payee and his then

capacity to indorse; and engages that, ondue presentment, the instrument will beaccepted or paid, or both, according to itstenor, and that if it be dishonored and thenecessary proceedings on dishonor beduly taken, he will pay the amountthereof to the holder or to anysubsequent indorser who may becompelled to pay it. But the drawer mayinsert in the instrument an expressstipulation negativing or limiting his ownliability to the holder.

Relationship With DraweeThere is a contractual relationship between the

drawer and the drawee. A drawer may havedrawn the bill against the drawee because thelatter is holding an amount in trust for thedrawer.

Collecting BankWhen the holder deposits the check with thecollecting bank, the nature of the relationshipcreated at that stage is one of agency, that is

the bank is to collect from the drawee of thecheck the corresponding proceeds.

Thus the privity of the contract is between theholder-depositor and the collecting bank. Thereis no privity of contract between the drawerand the collecting bank.

ACCEPTORDrawee does NOT become LIABLE UNTIL heACCEPTS the BILL or CERTIFIES theCHECK.

Sec. 127. Bill not an assignment of fundsin hands of drawee. - A bill of itself doesnot operate as an assignment of thefunds in the hands of the draweeavailable for the payment thereof, andthe drawee is not liable on the bill unlessand until he accepts the same.

It is only from the moment the drawee accepts

the bill or certifies the check that the draweebecomes primarily liable. He becomes liable tothe hoilder by his unconditional acceptance.

This is so even if the drawer did not receiveanything for value. Since the payee is a remoteparty to the contract.

Effect of warranties

Sec. 62. Liability of acceptor. - Theacceptor, by accepting the instrument,engages that he will pay it according tothe tenor of his acceptance and admits:

(a) The existence of the drawer,the genuineness of his signature,and his capacity and authority todraw the instrument; and

(b) The existence of the payee andhis then capacity to indorse.

The acceptor is precluded from setting upcertain defenses by reason of his warranties.Thus the acceptor is precluded from setting upthe defense that the drawer is a minor or thesignature of the drawer is forged by reason ofhis warranties in the first paragraph of section62.

PAYMENT WITHOUT ACCEPTANCEIn general, acceptance, in the sense in whichthis term is used in the NIL is not required forchecks for the same are payable on demand.

Acceptance of a bill is the signification by thedrawee of his assent to the order of thedrawer, which in the case of checks is thepayment on demand of a given sum of money.


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Upon the other hand, actual payment of theamount of a check implies not only an assentto the said order of the drawer and recognitionof the drawers obligation to pay theaforementioned sum, but, also, a compliancewith such obligation. The warranties of anacceptor under Section 62 of the NIL apply to

the drawee who paid without prior acceptance.

INDORSERSIndorser- a person who negotiates theinstrument through indorsement completed bydelivery. IF there is doubt as to the signature ofa person in the instrument, such person isdeemed and indorser.

Sec. 63. When a person deemed indorser.- A person placing his signature upon aninstrument otherwise than as maker,drawer, or acceptor, is deemed to beindorser unless he clearly indicates byappropriate words his intention to be

bound in some other capacity.

By Agent Indorsement can be made throughagent . If it is established that the indorsementwas made by a duly authorized attorney-in-fact, the principal is liable as the indorser.

Sec. 68. Order in which indorsers areliable. - As respect one another, indorsersare liable prima facie in the order inwhich they indorse; but evidence isadmissible to show that, as between oramong themselves, they have agreedotherwise. Joint payees or joint indorsees

who indorse are deemed to indorse jointlyand severally.

GENERAL INDORSERSecondary LiabilityA general indorser is one who indorses theinstrument without any qualification. He issecondarily liable to the holder or anysubsequent indorser who may be compelled topay the instrument on account of the followingengagement in Section 66 of the NIL.

Sec. 66. Liability of general indorser. -Every indorser who indorses withoutqualification, warrants to all subsequent

holders in due course:(a) The matters and things mentionedin subdivisions (a), (b), and (c) of thenext preceding section; and

(b) That the instrument is, at the timeof his indorsement, valid andsubsisting;

And, in addition, he engages that, on duepresentment, it shall be accepted or paid,

or both, as the case may be, according toits tenor, and that if it be dishonored andthe necessary proceedings on dishonor beduly taken, he will pay the amountthereof to the holder, or to anysubsequent indorser who may becompelled to pay it.

Secondary liability is not hte same as theliability of a guarantor under the Civil Code.

Warranties

General Indorser warranties

Sec. 65. Warranty where negotiation bydelivery and so forth. Every personnegotiating an instrument by delivery orby a qualified indorsement warrants:

(a) That the instrument is genuineand in all respects what it purportsto be;

(b) That he has a good title to it;

(c) That all prior parties hadcapacity to contract;

(d) That he has no knowledge ofany fact which would impair thevalidity of the instrument orrender it valueless.

But when the negotiation is by deliveryonly, the warranty extends in favor of noholder other than the immediatetransferee.

The provisions of subdivision (c) of thissection do not apply to a personnegotiating public or corporationsecurities other than bills and notes.

Sec. 66. Liability of general indorser. -

Every indorser who indorses withoutqualification, warrants to all subsequentholders in due course:

(a) The matters and thingsmentioned in subdivisions (a), (b),and (c) of the next precedingsection; and

(b) That the instrument is, at the


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time of his indorsement, valid andsubsisting;

And, in addition, he engages that, on duepresentment, it shall be accepted or paid,or both, as the case may be, according toits tenor, and that if it be dishonored and

the necessary proceedings on dishonor beduly taken, he will pay the amountthereof to the holder, or to anysubsequent indorser who may becompelled to pay it.

GENERAL INDORSER

(a) That the instrument is genuine and inall respects what it purports to be;


(c) That all prior parties had capacity tocontract;

(d) That the instrument is, at the time ofhis indorsement, valid and subsisting;

ORDER OF LIABILITY

Sec. 68. Order in which indorsers areliable. - As respect one another, indorsersare liable prima facie in the order inwhich they indorse; but evidence isadmissible to show that, as between oramong themselves, they have agreedotherwise. Joint payees or joint indorseeswho indorse are deemed to indorse jointly

and severally.

QUALIFIED INDORSER

Warranties





Even if the the validity of the instrument was infact already impaired at the time ofnegotiation, the qualified indorser does notbreach his warranty if he has no knowledge ofsuch fact.

Parole evidence

Oral testimony is not admissible to establishthat an unqualified indorsement is in factqualified.

INDORSER OF BEARER INSTRUMENTS

Sec. 40. Indorsement of instrumentpayable to bearer. - Where an instrument,payable to bearer, is indorsed specially, itmay nevertheless be further negotiatedby delivery; but the person indorsingspecially is liable as indorser to only suchholders as make title through hisindorsement.

PERSON NEGOTIATING BY DELIVERY

Warranties





Same as qualified indorser, however a personnegotiating by mere deliverys warrantiesextend only in favor of his immediatetransferee.

AGENTS

Sec. 69. Liability of an agent or broker. -Where a broker or other agent negotiatesan instrument without indorsement, heincurs all the liabilities prescribed bySection Sixty-five of this Act, unless hediscloses the name of his principal andthe fact that he is acting only as agent.

Agent must disclose his principal in order thathe may not incur any liability.

Sec. 18. Liability of person signing intrade or assumed name. - No person isliable on the instrument whose signaturedoes not appear thereon, except asherein otherwise expressly provided. Butone who signs in a trade or assumedname will be liable to the same extent as


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if he had signed in his own name.

Sec. 19. Signature by agent; authority;how shown. - The signature of any partymay be made by a duly authorized agent.No particular form of appointment isnecessary for this purpose; and the

authority of the agent may be establishedas in other cases of agency.

Sec. 20. Liability of person signing asagent, and so forth. - Where theinstrument contains or a person adds tohis signature words indicating that hesigns for or on behalf of a principal or in arepresentative capacity, he is not liableon the instrument if he was dulyauthorized; but the mere addition ofwords describing him as an agent, or asfilling a representative character, withoutdisclosing his principal, does not exempthim from personal liability.

Sec. 21. Signature by procuration; effectof. - A signature by "procuration"operates as notice that the agent has buta limited authority to sign, and theprincipal is bound only in case the agentin so signing acted within the actuallimits of his authority.

PERSON WHO SHOULD SIGN

No person is liable on the instrument whosesignature does not appear theron. The partymust sign in his own name.

Exceptions

1. One who signs in a trade name orassumed name

2. One who signs through and agent orauthorized representative

3. Incapacitated persons who signthrough their legal guardian

4. Forgers of signatures5. Persons whose signatures were forged

but who are precluded from setting thedefense of forgery

6. In case of constructive acceptance7. Indorsers who sign on an allonge

8. Persons who negotiate by meredelivery.

TRADE NAME OR ASSUMED NAMEEG. ERAP

AGENTHe must indicate that he is signing as mereagentHe must indicate ne name of principal.

PER PROCURACIONSignature by procuration operates as noticethat the agent has but limited authority to sign,and the principal is bound only in case theagent in so signing acted within the actuallimits of authority.

ACCOMODATION PARTIES

Sec. 29. Liability of accommodation party.- An accommodation party is one who hassigned the instrument as maker, drawer,acceptor, or indorser, without receivingvalue therefor, and for the purpose oflending his name to some other person.Such a person is liable on the instrumentto a holder for value, notwithstandingsuch holder, at the time of taking theinstrument, knew him to be only anaccommodation party.

Requisites:

1. He must be a party to the instrument,signing in as maker, drawer, acceptoror indorser

2. He must not receive value therfor3. He must sign for the purpose of lending

his name or credit to some otherperson

An accomodation party ios liable according tothe face of his undertaking, the same as if hewere himself financially interested in thetransaction.

Without receiveing any value therfor by virtueof the instrument only

SURETY OF ACCOMODATED PARTYBy lending his name, the accomodated party isin effect a suret of the accomodated party.

IRREGULAR INDORSERS

Are usually accomodation parties.

Sec. 64. Liability of irregular indorser. -Where a person, not otherwise a party to

an instrument, places thereon hissignature in blank before delivery, he isliable as indorser, in accordance with thefollowing rules:

(a) If the instrument is payable tothe order of a third person, he isliable to the payee and to allsubsequent parties.

(b) If the instrument is payable to


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the order of the maker or drawer,or is payable to bearer, he is liableto all parties subsequent to themaker or drawer.

(c) If he signs for theaccommodation of the payee, he is

liable to all parties subsequent tothe payee.

LIABILITY AMONG THEMSELVESA solidary accomodation party may seekreimbursement from the accomodated party orother accomodation parties subject to the ff:

1. A joind and several accomodation partysuch as an accomodation maker maydemand from the principal debtorreimbursement for the amount that hepaid to the payee

2. A solidary accomodation maker who

pays the said promissory note maydirectly demand reimbursement fromhis co-accomodation maker withoutfirst directing his action against theprincipal debtor provided that :

a. He mae the payment by virtueof a judicial demand

b. A principal debtor is insolvent

CORPORATIONSRule on accomodation party does not apply tocorporations. This is because the issue orindorsement of a negotiable paper by a

corporation without consideration and for theaccommodation of another is Ultra vires.

Personal liability of the officers of thecorporation may attach in the followingcircumstances:

1. He assents:a. To a patently unlawful act of

the corporationb. For bad faith or gross

negligence in directing itsaffairs

c. For conflict of interes, resultingin damages to the corporation,its stockholders and other

persons.2. He consents to the issuence of watered

down stocks, who having knowledgetherof, does not forthwith file with thecorporate secretary his writtenobjection thereto

3. He agrees to hold himself personallyand solidarily liable with thecorporation

4. He is made by a specific provision oflaw to personally answer for hiscorporate action

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