Negotiable Instruments Notes: Rights of the Holder (Sec. 51-59)


IV. RIGHTS OF THE HOLDER

Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument 
  1. may to sue thereon in his own name; and (NOTE: if unindorsed instrument, if transferor can [Sec. 49])

  2. payment to him in due course discharges the instrument.


  • When is there payment in due course:

  1. at or after maturity of the instrument


  2. to the holder

  3. in GF w/o 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:  (CR-BOW-GV-NO)
(a) That it is complete and regular upon its face;
  • Examples of NOT complete and regular on its face:

    • w/o year of maturity

    • bill w/ no drawee

    • altered check

    • indorsed by only one of two payees

    • payable on or before ______ - blank unfilled

  • Examples of complete and regular on its face:

    • omission is immaterial (i.e. serial number)

    • unapparent alteration

    • payee's name is stricken out but another is inserted in writing



(b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact;
  •  As to acceleration instruments

    • 1 installment or interest is unpaid = overdue = NOT holder in due course

  • As to interest

    • GR: if interest is overdue = holder in due course

    • EX: principal is to become due upon default of payment of interest (acceleration) = overdue = NOT holder in due course

(c) That he took it in good faith and for value;
  •  GF = 

    • lack of notice of defect or infirmity

    • holder is w/o knowledge or notice of any sort which could be set up against a prior holder of the instrument

      • basis is purpose NOT negligence EX if suspicious circumstance failed to inquire

  • GR: Inadequacy of price = VALID

  • EX: proof of fraud, mistake or undue influence

    • trifling price = impression of fraud

(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. (elaboration of [c])
  • Defects of Title (Sec. 55) 

  • Defenses

    1. mistake

    2. absence of failure of consideration (Sec. 28)

    3. minority and other forms of incapacity to contract (Sec. 22)

    4. lack of authority of an agent (Sec. 19)

  • Infirmities -wrong in the instrument itself (NOT lacking in the contract)

    1. wrong date inserted where the instrument is expressed to be payable at a fixed period after sight is undated (Sec. 13)

    2. filling up of a blank instrument NOT strictly in accordance w/ the authority given or not w/in reasonable time, where it was delivered wanting in a material particular

    3. filling up and negotiating w/o authority an incomplete and undelivered instrument (Sec. 15)

    4. Lack of valid and intentional delivery of a mechanically complete instrument (Sec. 16)

    5. Agent signing per procuration beyond the scope of his authority (Sec. 21)

      1. Ultra vires acts of a corp.

    6. Forgery (Sec. 23)

    7. Material Alteration (Sec. 124. and 125)

    8. Intoxication according to a better authority

    9. Insanity where there is no notice of insanity on the part of the one contracting w/ the insane person

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.

  • GR: Presumption holder is in due course


  • EX:Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue (subjective) -for checks: 6 months = stale


Sec. 54. Notice before full amount is 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 therefore paid by him.

*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.
 
  • Defects of Title in general = Equitable or Personal Defenses - may result from: (relate to Sec. 52 (d) for holder in due course) 

    1. Acquisition of the instrument by

      1. fraud

      2. force, duress or fear

      3. unlawful means

      4. illegal consideration

      • NOTE: If promissory note: can only be raised against immediate parties; If bill: drawer can raise against acceptor, a party against acceptor and between immediate party

    1. Negotiation of the instrument 

      1. in breach of faith

      2. under circumstances that amount to fraud

Sec. 56. What constitutes notice of defect. - To constitutes 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

  1. actual knowledge of the infirmity or defect, or 


  2. knowledge of such facts that his action in taking the instrument amounted to bad faith. - consists in guilty knowledge or wilful ignorance showing vicious or evil mind

*Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument 
  1. free from any defect of title of prior parties, and 

  2. free from defenses available to prior parties among themselves, and 

  3. may enforce payment of the instrument for the full amount thereof against all parties liable thereon.  


  • Rights of a holder in due course:

    1. He may sue on the instrument in his own name

    2. He may receive payment and if payment is in due course, the insturment is discharged

    3. he hold the instrument 

      1. free from any defect of title of prior parties, and 

      2. free from defenses available to prior parties among themselves, and 

      • NOTE: excludes legal/real/absolute defenses -attach to the instruemnt itself and can be set up against the whole world INCLUDING holder in due course 

        • Examples of real defenses:

          1. Alteration (BUT holder in due course may enforce it according to orig. tenor)

          2. Want of delivery of incomplete instrument (Defense avail to parties PRIOR to delivery)

          3. Duress amounting to forgery (NOTE: if not amounting to forgery only equitable defense)

          4. fraud in factum or fraud in esse contractus (As opposed to fraud in inducement which does NOT prevent the making of the contract)

          5. minority

          6. marriage in case of wife (subject to ex under civil code)

          7. Insanity where the insane person has a guardian appointed by court

          8. Ultra vires act of corp where corp. is absolutely prohibited by charter or state from issuing commercial paper (NOTE: must be issuance for any particular purpose is prohibited)

          9. Want of authority of agent

          10. Execution of instrument between public enemies

          11. Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute

          12. Mistake (as to invalidate or vitiate consent)

          13. Forgery

    4. He may enforce payment of the instrument for the full amount thereof against all parties liable thereon

  • Other possible defense:

    1. blank signature -amounts to forgery = real defense

    2. bankruptcy or insolvency - may be the primarily liable (NO defense may file against assignee or trustee) or negotiator

    3. counterclaim and set-offs (personal defense NOT avail against holder in due course)

    4. discharge personal defense NOT avail against holder in due course)

    5. lack of revenue stamp -obsolete

Sec. 58. When subject to original defense. - 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 
  1. who derives his title through a holder in due course, and 

  2. 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 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 rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.
  • GR: presumed holder in due course

  • EX: title is defective or suspicious