H O LDE RS

REQUISITES TO BECOME HOLDER IN DUE COURSE (COFI)

Holder - A payee or indorsee of a bill or note who is in possession of

it or the bearer thereof entitled to receive the sum for which it calls
(Sec. 191, par. 7).
Classes
1. Holders In Due Course one who has taken the instrument
under the conditions of Sec. 52 and holds the instrument free from
personal defenses available to prior parties
2. Simple Holders Or Holders Not In Due Course One who
became a holder without any, some or all of the requisites under
Sec. 52. He holds the instrument subject to the same defenses as
if it were non-negotiable. He may enforce the instrument and
receive payment therefore.
3. Holders For Value Where value has at anytime been given for
the instrument, the holder is deemed a holder for vale in respect to
all parties who become such prior to that time (Sec.26, NIL).
Importance of the Classification
Each class of holders has defenses which are available to one class
and which may not be available to other classes (De Leon, supra).
If there are NO defenses, the distinction between a HDC and one
who is not a HDC is IMMATERIAL (Aquino, supra).
Right to sue of Transferee of an unendorsed instrument
A transferee of unendorsed instrument is certainly not a holder as
defined under Sec. 191 and cannot be considered a holder in due
course. Nevertheless, if the transferor could sue in his own name,
then the transferee may also do so under the principle in assignment
that the assignee steps into the shoes of the assignor (De Leon,
supra).
Holder in Due Course (HDC)
Personal defenses cannot be set up against a HDC but real
defenses, which attach to the instrument itself, would be available
against all persons even as against a HDC.
The fact that the instrument is non-negotiable is a sign of warning to
a prospective purchaser and places him on guard and on in inquiry.
If the payee satisfies the requirements of Section 52, that payee can
be a HDC (Cely Yang v. Court of Appeals, G.R. No. 138074, August
15, 2003).
Reason: The payee may be a holder in due course because
Section 191 defines a holder as the payee or indorsee of a bill or
note who is in possession of it or the bearer thereof. Such payee
may either have acquired the note from another holder or he did not
deal directly with the maker thereof.
While a payee may be a holder in due course, a drawee does not,
by paying a bill, become a holder in due course under this section.
Reason: A holder refers to one who has taken the instrument as it
passes along in the course of negotiation towards the drawee and
not the drawee who, on the acceptance and payment of the
instrument, thereby strips it of all negotiability and reduces it to mere
voucher or proof of payment (Nat. Bank of Commerce v. Seattle Nat.
Bank, 187 Pac. 342).

I. That the instrument is complete and regular upon its face;

1. Complete
An instrument is incomplete when it is wanting in any material
particular proper to be inserted in a negotiable instrument
without which the same will not be complete (Sec. 14). BUT if
the omission is not an important particular, such omission will
not deprive the holder of the right of a holder in due course.
Reason: The taking of an incomplete instrument puts the
purchaser on inquiry as to why it is incomplete. If he fails to do
so, he takes the instrument subject to all defenses.
2. Regular on its face
To render the instrument irregular under sec 52(a), the
alteration 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 (De Leon,
supra).
II. That he has become a holder of it before it was overdue and
without notice that it had been previously dishonored, if such
was the fact;
1. Before overdue
A holder who takes an overdue instrument is put on inquiry
although he is not actually aware of any existing defense of a
prior party. (Aquino, supra).
On the date of maturity, the instrument is not overdue and a
holder who acquires the instrument on that date is a holder in
due course because the principal debtor has the whole day to
pay.
Date of maturity
a. The date of maturity is the time fixed therein.
b. If it is payable on demand, the date of maturity is determined
at the time of presentment (Sec. 173 & 143, NIL)
c. If the instrument is payable on the occurrence of a specified
event which is certain to happen, the date of maturity is fixed
by the happening of the event (Sec 4 [c], NIL).
An overdue instrument may still be negotiated but the holder
cannot be holder in due course.
2. Without notice of dishonor
An instrument may be dishonored by:
1. Non-acceptance (Sec. 149, NIL)
2. Non-payment (Sec. 83, NIL)
While dishonor by non-payment can only take place at the time
of maturity, dishonor by non-acceptance of bill may occur even
before the date of maturity. (see full discussions on dishonor)
A dishonored instrument may still be negotiated and the holder
WITHOUT NOTICE can be holder in due course.

III. That he has taken it in good faith and for value;

1. Good faith
Although good faith on the part of the holder is presumed, such
presumption is destroyed if the payee or the indorsee acquired
possession of the instrument under circumstances that should
have put him to inquiry as to the title of the holder who
negotiated the instrument. The burden now is on the part of the
holder to show that notwithstanding the suspicious
circumstances, it acquired the check in actual good faith (De
Ocampo vs. Gatchalian, et al., G.R. No. L-15126, November 30,
1961).
Good faith refers to the indorsee or transferee, not to the
indorser or transferor of the instrument.
Bad faith means that the indorsee or transferee must have
knowledge of facts which render it dishonest for him to take a
particular piece of negotiable paper.
Proof of bad faith - it is not necessary to show knowledge of
exact truth. It is sufficient that such knowledge tends to show
that there was something wrong with the transaction (De Leon,
supra).
2. For Value
Every NI is deemed prima facie to have been issued for a
valuable consideration. Every person whose signature
appears thereon is presumed to have become a party thereto
for value (Sec. 24, NIL).
Consideration is not relevant to the negotiability of an
instrument but is significant on the question of whether or not
one is a holder in due course.
Value - Any consideration sufficient to support a simple contract
(Sec. 25, NIL).
1. An antecedent or pre-existing debt;
2. Value previously given (Sec. 25, NIL);
3. Lien arising from contract or by operation of law but the holder
is deemed a holder for value to the extent of his lien (Sec. 27,
NIL).
It is not necessary that the consideration should be adequate
(Art. 1355 of NCC), but consideration founded on love and
affection or upon gratitude is good consideration but does NOT
constitute such valuable consideration as is sufficient of itself to
support the obligation of a bill or a note.
IV. That at the time of its negotiation to him, he has had no notice
of any infirmity in the instrument or defect in the title of the
person negotiating it (Sec. 52, NIL).
Notice of Defect
The person to whom it is negotiated must have had actual or
chargeable knowledge of the infirmity or defect, or knowledge of
such facts that his action in taking the instrument amounted to bad
faith. (Sec.56, NIL).
Under Sec. 54 and 56, negligence in itself is not sufficient to
constitute notice since it is not equivalent of either actual
knowledge or bad faith.

If the holder had actual knowledge of suspicious circumstances,

coupled with the means of readily informing himself of the facts
and he willfully abstained from making ignorance, his intentional
ignorance may amount to bad faith (De Leon, supra).
Effects of notice of defect:
1. It destroys the status of holder as a holder in due course
2. The holder is open to all defenses and not merely those relating
to defect of which he had notice (Sec. 58).
Defective Title
The title of a person who negotiates the instrument is defective when
he obtained the instrument or any signature thereto by
1. Fraud;
2. Force, duress or fear;
3. Other unlawful means;
4. For an illegal consideration.
Or when he negotiates it in
5. Breach of faith; or under
6. Such circumstances that amount to fraud (Sec. 55, NIL).
Infirmities must include things that are wrong with the instrument
itself as distinguished from those things that are lacking in the
contracts on the instruments. Such infirmities are to be found in
situations arising under Sec. 13, 14, 15, 16, 21, and 23 of the NIL.
Where the transferee receives notice of 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 therefor paid by
him (Sec. 54, NIL).
Rights of a HDC (SPPF)
1. May sue on the instrument in his own name (even when he holds
the instrument merely in a representative capacity such as a
holder for collection only or a pledgee of a note)
2. May receive payment and if payment is in due course, the
instrument is discharged;
3. Holds the instrument free from any defect of title of prior parties
and free from personal defenses available to parties among
themselves;
4. May enforce payment of the instrument for the full amount thereof
against all parties liable thereon (Sec. 51 & 57, NIL).
Exceptions:
a. When the holder is a holder for value only to the extent of his
lien - HDC only to that extent (Sec. 27, NIL);
b. When the holder acquired 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 - HDC only to the extent of the amount paid (Sec.54,
NIL);
c. In case of alteration as to amount - HDC may enforce payment
only according to its original tenor (Sec. 124, NIL).
Every holder of a negotiable instrument is deemed prima facie a
holder in due course (Sec. 59, NIL). However, this presumption
arises only in favor of a person who is a holder as defined in Sec.
191 of the NIL.

Burden of Proof
The burden of proof to establish who is an HDC depends on the
circumstances.
General Rule: 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 HDC.
Exception: The holder has no burden of proving that he is holder in
due course in favor of a party who become bound on the instrument
prior to the acquisition of such defective title.
Where an instrument payable on demand is negotiated on an
unreasonable length of time after its issue, the holder is not
deemed holder in due course (Sec. 53, NIL).
Holder NOT In Due Course
One who became a holder of an instrument without any, some or all
of the requisites under Sec. 52 of the NIL.
General Rule: If a holder is not a holder in due course, he is subject
to the same defenses as if it were non-negotiable. In other words, a
holder not in due course is subject to both real and personal
defenses available to parties primarily or secondarily liable.
Exception (Shelter Rule): If he derives his title through a holder in
due course and if he is not a party to any fraud or illegality affecting
the instrument, he has all the rights of such former holder in respect
of all parties prior to the latter (Sec.58, NIL).
Exception to the Exception: The rule under Sec. 58 does not apply if
the holder was a previous holder NOT in due course who had
subsequently repurchase the instrument either personally or through
an agent.
Reason: A holder who is not a holder in due course cannot improve
his situation by reacquiring the instrument (Fossum v. Fernandez
G.R. No. L-20080 March 27, 1923).
Rights of a Holder NOT In Due Course:
1. He may sue on the instrument in his own name;
2. He may receive payment and if the payment is in due course, the
instrument is discharged;
3. He holds the instrument subject to the same defenses as if it were
non-negotiable.
Thus, prior parties can avail against him any defense available
among these prior parties and prevent the said holder from
collecting in whole or in part the amount stated in the instrument.
4. Invocation of the Shelter Rule when applicable.
Failure to Make Inquiry
General Rule: Failure to make inquiry after notice of the facts merely
sufficient to cause a person of ordinary prudence to make inquiry as
to an infirmity in the negotiable instrument and defect in the holders
title, is not evidence of bad faith as to bar him from recovery.
Reason: The law does not impose a duty on the part of every holder
to make inquiry before acquiring the instrument.

Exceptions:
1. Where a holders title is defective or suspicious that would compel
a reasonable man to investigate, it cannot be stated that the payee
acquired the instrument without the knowledge of said defect in the
holders title and for this reason the presumption that it is a holder
in due course or that it acquired the instrument in good faith does
not exist (De Ocampo v. Gatchalian, G.R. No. L-15126, November
30, 1961).
2. Holder to whom cashiers check is not indorsed in due course and
negotiated for value is not a holder in due course (Mesina v. IAC,
G.R. No. 70145, November 13, 1986).
The holder may not be considered a holder in due course because of
the instrument involved, as in the case where a person takes a
crossed check without making further inquiries. The act of crossing
a check serves as a warning to the holder that the check has been
issued for a definite purpose (Bataan Cigar and Cigarette Factory v.
CA, G.R. No. 93048, March 3, 1994).
Bills in Set
One composed of several parts, each part being numbered and
containing a reference to the other parts, the whole of the parts
constituting but one bill.
Purpose: It is usually availed of in cases where a bill had to be sent
to a distant place through some conveyance. If each part is sent by
different means of conveyances, the chance that at least one part of
the set would reach its destination would be greater.
Rights of holders where parts are negotiated separately:
1. If both are HDC, the holder whose title first accrues is considered
the true owner of the bill.
2. But the person who accepts or pays in due course shall not be
prejudiced (Sec. 179, NIL).
Obligations of holder who indorses 2 or more parts of the bill in
set:
1. The person shall be liable on every such part;
2. Every indorser subsequent to him is liable on the part he has
himself indorsed, as if such parts were separate bills (Sec. 180,
ibid).




Holder in due course

Not HDC

Compliance with requisites

All the circumstances under
section 52 of nil are present

One, or some or all of the

requisites or circumstances
under sec 52 is/are absent

Real Defenses
His rights can be defeated
by real defenses

His rights can be defeated

by real defenses

Personal Defenses
His rights cannot be
defeated
by
personal
defenses

His rights can be defeated

by personal defenses

Rights
He has right to enforce
payment, sue in his own
name, and negotiate the
instrument

He has right to enforce

payment, sue in his own
name, and negotiate the
instrument

Liability

Warranty
Liability to pay

Makes the parties liable to

pay the sum certain in
money stated in the
instrument.

Impose no direct obligation

to pay in the absence of
breach thereof. In case of
breach, the person who
breached the same may
either be liable or barred
from asserting a particular
defense.

Requisites to enforce liability

Conditioned
on
presentment and notice of
dishonor.

Does
not
require
presentment and notice of
dishonor.

When action must be brought

Action cannot be brought

until maturity of instrument.

May be brought at any time;

the breach may even occur
at the time of transfer
(Campos
and
LopezCampos,Negotiable
Instruments Law, 1994 ed).