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
 mistake
 absence of failure of consideration (Sec. 28)
 minority and other forms of incapacity to contract
(Sec. 22)
 lack of authority of an agent (Sec. 19)
 Infirmities -wrong in the instrument itself (NOT lacking in
the contract)
 wrong date inserted where the instrument is
expressed to be payable at a fixed period after sight is
undated (Sec. 13)
 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
 filling up and negotiating w/o authority an
incomplete and undelivered instrument (Sec. 15)
 Lack of valid and intentional delivery of a
mechanically complete instrument (Sec. 16)
 Agent signing per procuration beyond the scope of
his authority (Sec. 21)
 Ultra vires acts of a corp.

 Forgery (Sec. 23)
 Material Alteration (Sec. 124. and 125)
 Intoxication according to a better authority
 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)
 Acquisition of the instrument by
 fraud
 force, duress or fear
 unlawful means
 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
 Negotiation of the instrument
 in breach of faith
  under circumstances that amount to  He may receive payment and if payment is in due
fraud course, the insturment is discharged

Sec. 56. What constitutes notice of defect. - To constitutes  he hold the instrument
notice of an infirmity in the instrument or defect in the title of
the person negotiating the same, the person to whom it is  free from any defect of title of prior parties,
negotiated must have had and

1. actual knowledge of the infirmity or defect, or  free from defenses available to prior parties
among themselves, and

2. knowledge of such facts that his action in taking the  NOTE: excludes legal/real/absolute
instrument amounted to bad faith. - consists in guilty defenses -attach to the instruemnt itself and can be set
knowledge or wilful ignorance showing vicious or evil mind up against the whole world INCLUDING holder in due
course

*Sec. 57. Rights of holder in due course. - A holder in due  Examples of real defenses:
course holds the instrument
1. free from any defect of title of prior parties, and 1. Alteration (BUT holder in due
course may enforce it according to orig. tenor)
2. free from defenses available to prior parties among
themselves, and 2. Want of delivery of incomplete
instrument (Defense avail to parties PRIOR to
3. may enforce payment of the instrument for the full delivery)
amount thereof against all parties liable thereon.
3. Duress amounting to forgery
(NOTE: if not amounting to forgery only equitable
 Rights of a holder in due course: defense)

4. fraud in factum or fraud in

 He may sue on the instrument in his own name esse contractus (As opposed to fraud in
 inducement which does NOT prevent the making
of the contract)  Other possible defense:

5. minority  blank signature -amounts to forgery = real

defense
6. marriage in case of wife
(subject to ex under civil code)  bankruptcy or insolvency - may be the primarily
liable (NO defense may file against assignee or trustee)
7. Insanity where the insane or negotiator
person has a guardian appointed by court
 counterclaim and set-offs (personal defense NOT
8. Ultra vires act of corp where avail against holder in due course)
corp. is absolutely prohibited by charter or state
from issuing commercial paper (NOTE: must be  discharge personal defense NOT avail against
issuance for any particular purpose is prohibited) holder in due course)

9. Want of authority of agent  lack of revenue stamp -obsolete

10. Execution of instrument Sec. 58. When subject to original defense. - In the hands of
between public enemies any holder other than a holder in due course, a negotiable
instrument is subject to the same defenses as if it were non-
11. Illegality of contract where it negotiable. But a holder
is the contract or instrument itself which is 1. who derives his title through a holder in due course, and
expressly made illegal by statute
2. who is not himself a party to any fraud or
12. Mistake (as to invalidate or illegality affecting the instrument,
vitiate consent)
has all the rights of such former holder in respect of all parties
13. Forgery prior to the latter.
Sec. 59. Who is deemed holder in due course. - Every holder is
 He may enforce payment of the instrument for the deemed prima facie to be a holder in due course; but when it is
full amount thereof against all parties liable thereon 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