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[ch3-A] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V.

Quevedo [Ch3-A]
CHAPTER III: HOLDER IN DUE COURSE 22 there was an agreement that Note A was to be put
up as collateral and in part consideration for the
[Cases cited in Campos]
ELGIN NAT’L BANK V GOECKE (1920) extension of Note C. Thus, it is argued by the
~joey~ accommodation parties that mere delivery of Note A,
without agreement for further extension of time or
BPI V ALFRED BEARWIN & CO. (1928)
FACTS other agreement for Note C, does not make the bank a
~ricky~
-Elgin National Brewing Company executed two bona fide holder for value. This contention is without
demand notes, one for $3K (Note A) and the other for merit. See ratio
NATURE
$2500 (Note B), each payable to the maker’s order and Dispositive Judgment affirmed.
Appeal by Anselmo Diaz against the CFI of Iloilo’s order
indorsed in blank ink by it & by 5 accommodation
for him to satisfy 2 promissory notes he issued in favor
indorsers, including Frank A. Goecke, the company
of Alfred Berwin & Co.
manager. The accommodation indorsers signed on MERCHANTS’ NAT’L BANK OF ST. PAUL V
representation that the proceeds were to be used to STA. MARIA SUGAR CO. (1914)
FACTS
pay for supplies for the brewery. ~chriscaps~
-The Bank of the Philippine Islands (BPI) filed a
-Both notes were diverted by Goecke from their
collection suit against Alfred Berwin & Co (ABC). Diaz,
intended purpose. Note A was indorsed to Elgin FACTS
ABC’s debtor, was given notice, when the preliminary
National Bank as collateral security for a note (Note C) -Sta. Maria gave netotiable note payable to order of
attachment was ordered, not to deliver the payment of
earlier executed by Goecke as maker, the last renewal American Hoist & Derrick Co (payee).
his debt to ABC. The CFI of Iloilo rendered judgment in
of which was made on Nov. 22, 1912 for 6 months. -Payee deposited the note in Merchants’ Natl Bank, w/c
favor of BPI.
Note B was indorsed to the same bank as payment for gave depositor credit representing the principal &
-To effect the execution of the judgment, BPI prayed
5 other notes earlier executed by the brewing company accrued interest ($2,427.36).
that Diaz be summoned to testify concerning the credit
as maker and purchased by the bank. The bank did not -After this, there were subsequent deposits and
of ABC against him. Diaz acknowledged his
know of the diversion of the two demand notes from withdrawals. The smallest balance during this period
indebtedness in the sum of P20,000, the balance of
their intended purpose. was $6,294.04.
credit for a greater amount. The P20,000 was
-Brewing company defaulted. Bank sued all 5 -Discounting bank had no knowledge of claimed
evidenced by two promissory notes he issued in favor
accommodation indorsers. defense of maker until receipt of its letter.
of ABC.
-TC ruled in favor of the bank. Appellate court affirmed. -The Bank sued the maker. Maker (Sta. Maria) claimed
-It does not appear, however, from the record whether
that the Bank is not a holder for value and not a holder
such promissory notes are still in the hands of ABC. It
ISSUE in due course.
was not known whether ABC is still the holder in due
WON the accommodation indorsers are liable to the
course of the promissory notes or whether it had
bank notwithstanding the diversion of the proceeds of ISSUE
already been alienated.
the notes WON the Bank is a holder in due course
ISSUE
HELD: YES HELD: YES
WON Diaz may be compelled to pay Alfred Berwin &
Ratio An indorsee of a negotiable note who has taken -Until 1 month after plaintiff had discounted the
Co., or the sheriff as a credit in favor of said
it, before its maturity, as collateral security for a pre- instrument, it had no knowledge or suspicion of any
corporation.
existing debt and without any express agreement, is infirmity.
deemed a holder for a valuable consideration, and that -Mere discounting of the note and placing the amount
HELD: NO.
he holds it free from latent defenses on the part of the of said discount to the credit of the holder would not
Reasoning Diaz cannot be compelled to pay the
maker. then have constituted a transfer for value because the
amount of the said promissory notes to any person
Reasoning bank would have parted with nothing, there would have
save the holder of such documents in due course, for
-The accommodation indorsers are liable to the bank on been a mere bookkeeping entry. But if the sum had
said person is the one entitled to receive it. To compel
the notes, although the bank at the time of taking the subsequently been checked out, then value would have
Diaz to pay ABC would be to expose him to the
instruments knew that they were only accommodation passed.
situation in which, having paid the amount of the
parties, if the bank is a holder for value, as the notes -We should agree with opinion of Justice Brewer: The
promissory notes without settling the same, a holder in
were indorsed to it before maturity and without notice first debits are to be charged against the first credits. It
due course may appear and within all reason demand
for their restricted use and purpose. follows therefore, that the bank was a bona fide holder
its full payment.
-As for Note B, it is clear that the bank is a holder for for value.
- The fact that he was given notice when the
value. The consideration paid by the bank for this note
preliminary attachment was ordered does not change
was the cancellation and surrender by it of the 5 other
the situation because the debt was secured by
notes executed by the brewing company. NAT’L BANK OF COMMERCE V MORGAN (1921)
negotiable instruments. Notwithstanding such notice, it
-Note A was not delivered to the bank and accepted by ~edel~
was beyond Diaz’s power to prevent ABC from
it as security until Dec. 10, 1912. There is no proof in
negotiating the promissory notes.
the record that at the time Note C was renewed on Nov. FACTS
Disposition Order revoked.
[ch3-B] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-B]
-Nat’l Hay Company (NHC) deposited with NBC a draft the debt due it by the depositor. And they added that action in taking the instrument amounted to bad faith.
and a bill of lading. this holding cannot be of serious detriment to banks The purchaser of a negotiable instrument owes no duty
-Said items were received by the NBC and were then while a contrary view might result in furnishing a to the former holders to actively inquire into the title of
credited to the account of NHC. weapon to the negotiator of notes and bills against the party in possession, and that circumstances of
-Eventually, the draft with the bill of lading attached their creditors or persons having a right or equity in or suspicion and gross negligence are not of themselves
was forwarded by NBC to the First National Bank of against the instruments negotiated. bad faith, but only evidence tending to establish it.
Birmingham (FNBB) for collection and remittance to -All the other cases cited by NBC (ie. FOX v. Bank of -There is no doubt, upon this record, that Ward &
NBC and the amount of the draft was paid by the Kansas, Dreilling v. First National Bank etc) were held Fryberg purchased this check for value, in due course
drawee to FNBB. to be contrary to the Court’s decision and to NBC’s of trade, and without actual knowledge of the infirmity
-Prior to remittance (of the proceeds of the draft) by the contention as well. of the title of the holder. It is equally clear that there
FNBB to NBC, Morgan (a creditor of the NHC) instituted (*Basically, NBC cannot be considered as a holder in was no bad faith in the transaction. The result is, they
attachment proceedings against NHC and service was due course (as per Sec.52(3)) or as a purchaser for acquired a perfect title to the check by their purchase,
sought to be perfected by the process of garnishment value in this case since NBC credited the amount of the and had the right to collect it; and at the same time, in
directed to FNBB. draft to the deposit account of NHC and NBC failed to consequence of the same facts, Davis lost his title, and
-FNBB, in response to the garnishment, admitted that it show that the amount credited was absorbed by is not entitle to recover its proceeds from the bank.
held in its possession the proceeds of the draft but said existing debts or subsequently checked out. Here, NHC Disposition Judgment of the circuit court is reversed,
that NBC had the right to claim said fund. NBC then laid had a balance on deposit in excess of the amount of and the suit dismissed.
claim to the fund. the draft continuously from the negotiation till the
-Morgan won at the circuit court. Hence, this appeal by garnishment. TF, NBC didn’t show that they have given
NBC. value for the instrument ergo NBC not a DE OCAMPO V GATCHALIAN (1961)
holder/purchaser for value.) ~ina~
ISSUE
WON NBC received the draft as a mere collecting agent FACTS
or as purchaser/ WON NBC is a holder for value UNAKA NAT’L BANK V BUTLER (1904) -Anita Gatchalian was looking for a car to buy. Her
~jaja~ friend Emil Fajardo brought Manuel Gonzales to her
HELD house because Manuel had a car to show her. Manuel
-NBC was a mere collector. TF, NBC was not a holder for FACTS said he was duly authorized by Ocampo Clinic to sell
value. FNBB was ordered to pay the proceeds of the -Harris drew a check for $15.25 on the Unaka National the car. Anita liked the car. Anita told Manuel to bring
draft to Morgan. Bank payable to the order of Butler and delivered the the car together with the registration the next day, so
-(*Campos’ note: The ruling in this case represents the check to the payee for value. The payee indorsed the that Anita's husband can inspect it also. Manuel said
minority view that as long as the balance in the check in blank and negotiated it to Davis who on the that the owner would most likely not allow him to bring
depositor’s account equals or exceeds the amount of next day lost it on the highway, At the request of the the registration unless there's a showing that the party
the instrument deposited, the instrument cannot be indorsee, Davis, the drawer ordered payment stopped interested in the purchase of the car is ready and
considered withdrawn for the purpose of treating the by notice to the drawee bank. The stop order was willing to pay for it. So Anita issued a check for P600 in
bank as holder for value (as per sec.26 NIL.)) overlooked and the check was paid by the drawee to Ocampo's name.
Reasoning In this case, NBC insists that it was a Ward & Fryberg, merchants who, within a week after -The next day, Manuel didn't come. Instead, he went to
purchaser for value and that NHC’s account had never the check’s issuance to the payee, had taken the check Ocampo Clinic and paid for her wife's outstanding
been overdrawn and it had balance to its credit in in payment of goods sold to “a customer who was balance of P441.75 with the clinic. He was given
excess of the draft, continuously from the day the said unknown to them but who was supposed by them to be P158.25 cash as sukli. Meanwhile, when Manuel didn't
draft was received until the day of the garnishment. the owner.” The original payee, Butler, for the use of come, Anita got suspicious and gave the bank a stop
-The Court, however, denied their contention and held his indorsee Davis, the loser of the check, sued the payment order on the check. Ocampo was not aware of
that the case of Fredonia v. Tommei was not in conflict drawee bank. the arrangement between Manuel and Anita at the time
with their holding. In said case, White’s account had Manuel gave it to him as payment for wife's bills.
been fully checked out and that the proceeds of the ISSUE -Ocampo went after Anita. Ocampo won. Anita
note had been fully exhausted, just as in the case at WON Ward & Fryberg purchased the check for value, in appealed. She contends that the check is not a
bar, if the proof showed that the NHC had checked out due of course of trade, and without actual knowledge of negotiable instrument and that Ocampo is not a holder
its entire balance at any time between the deposit of the infirmity in the title of the holder in due course.
the draft and the notice of garnishment. But as had
been held, the NHC here had a standing balance to its HELD ISSUES
credit with the NBC throughout this period in excess of YES. To constitute notice of an infirmity in an 1. WON original payee of the check can become a
the draft. instrument, or defect of the title of the person holder in due course
-Furthermore, the Court thinks that their position is negotiating the same, the person to whom it is 2. WON there was valid negotiation of the check
more just and equitable in view of the fact that a bank negotiated must have had actual knowledge of the (basically, WON Ocampo had NO NOTICE of defect of
has the right to apply all unchecked deposits against infirmity or defect, or knowledge of such facts that his holder's title)
[ch3-C] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-C]
3. WON Ocampo is a holder in due course loan was subject to the condition "if and when the
deposits were made to back up the checks". FACTS
HELD -New Sikatuna sold 11 checks including the said 3 -Consolidated, a corporation engaged in the logging
1. YES. Sec 191 of NIL defines HOLDER as the payee or checks at a discount to State Investment House. State business, needed 2 units of tractors for its projects.
indorsee of a bill or note, who is in possession of it, or Investment tried to deposit said checks but the same -Atlantic Gulf & Pacific Company of Manila knew of the
the bearer thereof. While Sec 52 defines a HDC as a were dishonored by reason of "insufficient funds", "stop need and thus offered 2 used tractors to petitioner
HOLDER who has taken the instrument under the 4 payment" and "account closed", respectively. through its sister company and marketing arm,
conditions. Therefore, a payee can be a HDC. -State House Investment filed an action for collection Industrial Products Marketing (the "seller-assignor").
against Spouses Chua. RTC ruled against the spouses. -Petitioner inspected the tractors while seller-assignor
2. YES. The check payable to Ocampo was entrusted to IAC REVERSED. Hence, this petition. assured petitioner-corporation that the "used" Allis
Manuel. The latter then was the agent of Anita. When Crawler Tractors which were being offered were fit for
the agent (Manuel) of drawer (anita) negotiated the ISSUE the job, and gave the corresponding warranty of ninety
check with the intention of getting its value from WON State Investment House is a holder in due course (90) days performance of the machines and availability
Ocampo, negotitation took place through no fault of and therefore not subject to the defense of the drawer of parts.
Ocampo, unless it can be shown that Ocampo should (Spouses Chua) against the payee (New Sikatuna) due -With said assurance and warranty, and relying on the
be considered as having notice of the defect in the to absence of consideration seller-assignor's skill and judgment, petitioner-
possession of holder Manuel. corporation through petitioners Wee and Vergara,
HELD president and vice-president, respectively, agreed to
3. NO. Ocampo can't be a HDC because although he NO. IAC correctly relied on the HELD in Ocampo v. purchase on installment said two (2) units of "Used"
had no notice of defect in title, he must also have taken Gatchalian as regards the effects of crossing a check: Allis Crawler Tractors. It also paid the down payment of
the instrument in good faith. These facts should have the check may not be encashed but only deposited in Two Hundred Ten Thousand Pesos (P210,000.00).
put him on guard and inquired into the title of Manuel: the bank; the check may be negotiated only once—to -Seller-assignor issued the sales invoice for the two (2)
a. Anita had no obligation or liability to Ocampo Clinic; one who has an account with a bank; and the act of units of tractors. At the same time, the deed of sale
b. the amount on the check didn't correspond exactly crossing the check serves as a warning to the holder with chattel mortgage with promissory note was
to Manuel's utang; and that the check has been issued for a definite purpose executed. Simultaneously with the execution of the
c. the check had two parallel lines in the upper left so that he must inquire if he has received the check deed of sale with chattel mortgage with promissory
hand corner, which in practice means that the check pursuant to that purpose, otherwise he is not a note, the seller-assignor, by means of a deed of
was for deposit only and cant be converted into cash. holder in due course. assignment, assigned its rights and interest in the
-It would've been easy for Ocampo to inquire because -State Investment House's failure to inquire from the chattel mortgage in favor of the respondent (IFC
he knew Anita's husband. His failure to do so is gross holder, New Sikatuna, the purpose for which the Leasing).
neglect in not finding out the nature of the title and 3 checks were crossed, despite the warning of -Barely fourteen (14) days had elapsed after their
possession of Manuel, which amounts to legal absence the crossing, prevents State Investment from delivery when one of the tractors broke down and after
of good faith. He therefore cannot be considered a being considered in good faith and thus it is NOT another nine (9) days, the other tractor likewise broke
holder in good faith. Sec 52 requires the holder to be in a holder in due course. down.
good faith to be considered a HDC. Therefore, Ocampo -Since it is not a holder in due course, it is subject to -Vergara informed seller-assignor and asked for prompt
cannot be a HDC. personal defenses, such as lack of consideration action. The seller-assignor sent to the jobsite its
-The presumption in Sec 59 that every holder is a HDC between Spouses Chua and New Sikatuna. Under the mechanics to conduct the necessary repairs, but the
cannot apply in this case because there were facts, the checks were postdated and issued only as a tractors did not come out to be what they should be
suspicious circumstances that should have put the loan to New Sikatuna, is and when deposits were made after the repairs were undertaken because the units
person in to inquiry as to the title of the holder who to back up the checks. No such deposits were made, were no longer serviceable.
negotiated the instrument to him. The test is of the hence no loan was ever made. The 3 checks were -Since the tractors were no longer serviceable, Wee
reasonable prudent man and good faith. without consideration. asked the seller-assignor to pull out the units and have
-although State Investment is not a holder in due them reconditioned, and thereafter to offer them for
course, it doesn't mean that it could not recover on the sale. The proceeds were to be given to the respondent
STATE INVESTMENT HOUSE V IAC, SPS. CHUA checks. The only disadvantage is that it is subject to and the excess, if any, to be divided between the seller-
(1989) defenses as if the instruments were non-negotiable. assignor and petitioner-corporation which offered to
~chrislao~ bear one-half (1/2) of the reconditioning cost.
-No response was received by the petitioner-
FACTS CONSOLIDATED PLYWOOD INDUSTRIES, INC V corporation and despite several follow-up calls, the
-New Sikatuna Wood Industries (New Sikatuna, for IFC LEASING AND ACCEPTANCE CORP (1987) seller-assignor did nothing with regard to the request.
brevity) entered into a contract of loan with Chua. ~apple~ -IFC filed a complaint against Consolidated for the
Chua's wife issued three postdated crossed checks amount of the PN.
(valued at almost 300K) payable to New Sikatuna. This NATURE -TC and IAC granted the complaint.
Petition for review on certiorari of a decision of the IAC
[ch3-D] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-D]
ISSUE the general buying public against unscrupulous dealers ever existed between her and VMS and therefore none
WON the respondent is a holder in due course in personal property... (Mutual Finance Co. v. Martin) had been assigned in favor of private respondent.
-The respondent, a financing company which actively -It is not necessary to implead VMS as a party to the
HELD: No. participated in the sale on installment of the subject case because VMS was earlier sued by her for "breach
(first of all, the instrument here was determined as not two Allis Crawler tractors, cannot be regarded as a of contract with damages" before RTC Olongapo City.
being a negotiable instrument because of the lack of holder in due course of said note. It follows that the Such court originally ordered Salas to pay the
the words of negotiability... nevertheless, the court respondent's rights under the promissory note involved remaining balance of the motor vehicle installments;
discussed why the respondent cannot be considered a in this case are subject to all defenses that the this was later reversed by the same court ordering VMS
holder in the course had the instrument been petitioners have against the seller-assignor, Industrial instead to return to Salas the sum of P17,855.70. Such
negotiable) Products Marketing. For Section 58 of the Negotiable decision is still pending consideration in the CA.
-A mere perusal of the Deed of Sale with Chattel Instruments Law provides that "in the hands of any *Respondent’s Comment
Mortgage with Promissory Note, the Deed of holder other than a holder in due course, a negotiable -Issues and allegations are a mere rehash of those
Assignment and the Disclosure of Loan/Credit instrument is subject to the same defenses as if it were presented and already passed upon by the CA;
Transaction shows that said documents evidencing the non-negotiable. ... " judgment in the "breach of contract" suit cannot be
sale on installment of the tractors were all executed on Disposition Petition granted invoked as an authority as it is still pending in CA.
the same day by and among the buyer, which is herein -Petitioner's liability on the promissory note, the due
petitioner Consolidated Plywood Industries, Inc.; the execution and genuineness of which she never denied
seller-assignor which is the Industrial Products under oath is, under the foregoing factual milieu, as
Marketing; and the assignee-financing company, which SALAS V CA, Filinvest Finance And Leasing Corp inevitable as it is clearly established.
is the respondent. (1990)
-Therefore, the respondent had actual knowledge of the ~rach~ ISSUE
fact that the seller-assignor's right to collect the 1. WON the promissory note is a negotiable instrument
purchase price was not unconditional, and that it was NATURE (which will bar completely all the available defenses of
subject to the condition that the tractors sold were not Petition for review on certiorari Salas against Filinvest)
defective. 2. WON Filinvest is a holder in due course
-The respondent knew that when the tractors turned FACTS
out to be defective, it would be subject to the defense -Petitioner Juanita Salas bought a motor vehicle from HELD
of failure of consideration and cannot recover the the Violago Motor Sales Corporation (VMS) for 1. YES
purchase price from the petitioners. P58,138.20 as evidenced by a promissory note. This Ratio The instrument in order to be considered
-Even assuming for the sake of argument that the note was subsequently endorsed to the respondent negotiable must contain the so-called "words of
promissory note is negotiable, the respondent, which Filinvest Finance & Leasing Corporation which financed negotiability i.e., must be payable to "order" or
took the same with actual knowledge of the foregoing the purchase. "bearer". Under Sec 8 of the Negotiable Instruments
facts so that its action in taking the instrument -Salas defaulted in her installments allegedly due to a Law, there are only two ways by which an instrument
amounted to bad faith, is not a holder in due course, discrepancy in the engine and chassis numbers of the may be made payable to order. There must always be a
and therefore, subject to all defenses which the vehicle delivered to her and those indicated in the sales specified person named in the instrument and the bill
petitioners may raise against the seller-assignor. invoice, certificate of registration and deed of chattel or note is to be paid to the person designated in the
-We subscribe to the view of Campos and Campos that mortgage, which fact she discovered when the vehicle instrument or to any person to whom he has indorsed
a financing company is not a holder in good faith as to figured in an accident. and delivered the same. Without the words "or order or
the buyer. -Filinvest then filed a case for a sum of money against "to the order of", the instrument is payable only to the
-As against the argument that such a rule would Salas. RTC ruled in favor of Filinvest and ordered Salas person designated therein and is therefore non-
seriously affect "a certain mode of transacting business to pay the plaintiff the sum of P28,414.40 with interest negotiable. Any subsequent purchaser thereof will not
adopted throughout the State," a court in one case thereon at the rate of 14% from Oct 2, 1980 until the enjoy the advantages of being a holder of a negotiable
stated: It may be that our holding here will require said sum is fully paid. instrument, but will merely "step into the shoes" of the
some changes in business methods and will impose a -Both parties appealed to the CA. Imputing fraud, bad person designated in the instrument and will thus be
greater burden on the finance companies. We think the faith and misrepresentation against VMS for having open to all defenses available against the latter.
buyer-Mr. & Mrs. General Public-should have some delivered a different vehicle to petitioner, the latter Reasoning Requisites under the law have been
protection somewhere along the line. We believe the prayed for a reversal so that she may be absolved from complied with:
finance company is better able to bear the risk of the the contract. [a] it is in writing and signed by the maker Juanita
dealer's insolvency than the buyer and in a far better -CA merely modified ordering the defendant to pay the Salas;
position to protect his interests against unscrupulous plaintiff the sum of P54,908.30 at 14% per annum from [b] it contains an unconditional promise to pay the
and insolvent dealers... If this opinion imposes great Oct 2, 1980 until full payment. amount of P58,138.20;
burdens on finance companies it is a potent argument * Petitioner’s Arguments [c] it is payable at a fixed or determinable future time
in favor of a rule which will afford public protection to -In the light of the provision of the law on sales by which is "P1,614.95 monthly for 36 months due and
description which she alleges is applicable, no contract
[ch3-E] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-E]
payable on the 21 st day of each month starting March assignment of the contract of sale between OCMW and destroyed by reason of simultaneous assignment of a
21, 1980 thru and inclusive of Feb. 21, 1983;" Ermac was made in favor of CCC. conditional sales contract to the endorsee of the note;
[d] it is payable to Violago Motor Sales Corporation, or -before the assignment, Ermac obtained similar (3) the note is a separate and distinct instrument
order and as such, financing from CCC and CCC had some blank forms negotiable in form; OCMW is estopped from asserting
[e] the drawee is named or indicated with certainty. supplied to Ermac. One of these forms entitled failure of consideration because it knew the purpose
-It was negotiated by indorsement in writing on the “Industrial Conditional Sales Contract” is the agreement and legal effect of the note.
instrument itself payable to the Order of Filinvest between Ermac (to sell the press) and OCMW (to buy -Arguments of OCMW: (1) CCC did not acquire the
Finance and Leasing Corporation and it is an the press). instrument in good faith and for value and had notice of
indorsement of the entire instrument. -the said contract stated the ff. (re: deferred infirmities in the instrument and the defect in the title
**This is not a simple case of assignment of credit as payments): of Ermac; (2) the conditional sales contract and the
petitioner would have it appear, where the assignee “the balance shown to be due hereunder (evidenced by attached note must be construed as constituting a
merely steps into the shoes of, is open to all defenses my note of even date to your order) is payable in 12 single document. The sales contract is assignable but
available against and can enforce payment only to the equal consecutive installments of $355.09 each, the not negotiable, so subject to defenses…(3) CCC was an
same extent as, the assignor-vendor. first installment payable one month from date hereof. original party to the original transaction so it took title
Said note is a negotiable instrument separate and apart subject to all equities or defenses existing in its favor
2. YES from this contract, even though at the time of against Ermac.
Reasoning Filinvest had taken the instrument under execution it may be temporarily attached hereto by
the ff conditions: perforation or otherwise.” ISSUE
[a] it is complete and regular upon its face; -Latter part of the contract (in a detachable portion): WON CCC is a holder in due course (and so can recover
[b] it became the holder thereof before it was overdue, “This contract may be assigned and/or said note may from CCC – the maker)
and without notice that it had previously been be negotiated without notice to me and when assigned
dishonored; and/or negotiated shall be free from any defense, HELD: NO.
[c] it took the same in good faith and for value; and counterclaim or cross complaint by me.” Ratio. When a finance company actively participates in
[d] when it was negotiated to Filinvest, the latter had …a dotted or perforated line could be detached from it. a transaction of this type from its inception, counseling
no notice of any infirmity in the instrument or defect in At the time the president of OCMW signed the contract and aiding the future vendor-payee, it cannot be
the title of VMS Corporation. and note, he raised a question regarding the said regarded as a holder in due course of the note given in
-Filinvest also holds the instrument free from any portion below the line but was told that it was just “part the transaction and the defense of failure of
defect of title of prior parties, and free from defenses of the document”. consideration may properly be maintained.
available to prior parties among themselves, and may -OCMW paid $1,512.50 to Ermac. Ermac assigned the Reasoning. CCC supplied Ermac with the forms and
enforce payment of the instrument for the full amount contract and endorsed the note to CCC. CCC gave was twice consulted by telephone as to the impeding
thereof. This being so, Salas cannot set up against Ermac a check for $4,261 in return. At the time the deal. It knew all of the details of the transaction.
respondent the defense of nullity of the contract of sale contract was delivered to CCC, the note had not been Indeed, financing was applied for because Ermac did
between her and VMS. detached. Ermac deposited the check to its bank and not have the money to buy the machinery which OCMW
- Even assuming that there was deception made upon sent the said check to the supplier of the Ferracute desired to obtain. Throughout the entire transaction,
Salas, this issue cannot be resolved since VMS was press that would be sold to OCMW. However, when the CCC dealt chiefly with Ermac, the future payee, rather
never impleaded as a party. SC: “We can only extend check was presented by the supplier, it was than with OCMW, the future maker. CCC advanced
our sympathies to Salas in this unfortunate incident.” dishonored. The supplier did not deliver the Ferracute money to Ermac with the understanding that the
Disposition Assailed decision is hereby AFFIRMED. press. Ermac did not pay CCC. agreement and the note would be assigned or endorsed
-CCC filed complaint vs. OCMW and Ermac for the to it immediately. In a very real sense, the finance
$4,261 it paid for the assignment. Ermac did not pay. company was a moving force in the transaction from its
COMMERCIAL CREDIT CORP V OCMW demands $1,512.50 from Ermac and declaratory very inception and acted as a party to it. Moreover,
ORANGE COUNTY MACHINE WORKS (1950) relief from CCC. Commercial Credit knew the financial status of Ermac.
~cha~ -TC: for CCC against Ermac, for OCMW against CCC (So -OCMW never obtained the press for which it bargained
CCC had no claims against OCMW). CCC not a holder in and, as against CCC, there is no more obligation upon it
NATURE due course because (1) it knew at the time it paid to pay the note than there is to pay the installments
Appeal from judgment Ermac for the assignment that Ermac did not own the specified in the contract.
press it sells, and (2) knew that the press was not Disposition. Judgment affirmed.
FACTS delivered to OCMW.
-Orange County Machine Works (OCMW) was in the -Arguments of CCC: (1) the note is negotiable in form,
market for a Ferracute press. Ermac Company (Ermac) status not changed because of original physical HAM V MERITT (1912)
offered to sell to OCMW a Ferracute press for $5k attachment to, nor later detachment from, the sales ~monch~
(which Ermac would buy from a supplier). Commercial contract; does not lose status because it was given in
Credit Corp. (CCC) was asked to finance the connection with a conditional sales contract; (2) the FACTS
transaction, and CCC agreed to do so after an character of an otherwise negotiable note is not
[ch3-F] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-F]
-Eva Merritt executed a note for $300 to Southern
Hospital Assn. The latter assigned it before maturity to
Asa Brunson, who later sold it to E.C. Ham for $100.
-Ham sued Merritt to recover from the note. Merritt
claims it was obtained from her thru fraud. Ham claims
that he had no notice of such fraud and was therefore a
holder in due course.

ISSUE
WON Ham was a holder in due course

HELD: YES
Ratio A large discount does not, by itself, constitute
notice of fraud.
Reasoning
-The court said that while it can be seen that from
Merritt’s testimony that the note was obtained from her
fraudulently, there was no evidence to show that Ham
had notice of such.
-The fact that the note was sold to Ham for only $100
does not constitute as notice of fraud. Such fact,
standing alone, does not deprive him of protection from
the law. However, the court also notes that such large
discount could be of great weight if was supported by
some other evidence.
Disposition Judgment reversed
[ch3-G] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-G]
PENNOYER V DUBOIS STATE BANK (1926) the note and mortgage to Swanson as custodian. reasonable impart notice to plaintiff of an irregularity in
~kiyo~ Swanson subsequently assigned the note and mortgage the check.
to Augustanna. Augustanna had no actual knowledge -Alterations and erasures of written instruments were
FACTS that the note and mortgage had therefore been presumed to have been made at or prior to the time of
-The Wyoming Live Stock Loan Company sold shares of assigned to Foster. Swanson became bankrupt. Foster their execution. However, when an alteration or erasure
its capital stock by fraud to Pennoyer, paid for by the sued Augustanna. appears suspicious on its face, it demands explanation.
latter’s two notes payable to the order of the seller, -The ruling of the TC evidence a presumption by the
dated June 21, 1920 and payable 6 months later. On HELD court that plaintiff was a holder in due course. It should
July 22, the payee negotiated them to Dubois which -Doctrine of constructive notice does not apply to have been considered that Clark was not a depositor in
paid with its own notes, certificate of deposit (COD), Foster. Augustanna had no actual knowledge of the plaintiff bank and had no account there; that the check
payable to Wyoming 9 months from date. On Dec. 31, assignment to Foster. Augustanna was a purchaser of was written in pencil; that the teller who cashed the
Wyoming negotiated the COD to the First National Bank the note not the mortgage. It is well-settled rule that check was not acquainted with the defendant or his
of Cody (FNBC), as collateral security for a loan. After where a mortgage given to secure a negotiable PN, the signature and he was ignorant of the nature of Clark's
execution and issuance, the maker learned of the note imparts its negotiable character to the mortgagee, business, associations, background or financial
fraud, and refused to pay upon maturity. Dubois had no and both are bought within the purview of the statutes, responsibility; the insistence of Clark in obtaining the
notice of the defense of fraud at the time of issuance, and the mortgage is a mere incident to the note, and cash immediately; and the apparent alterations of the
but did at the time it discharged the COD by payment. an indorsement of the note automatically assigns the check.
Dubois sued Pennoyer. Pennoyer claimed Dubois was mortgage, and the attempted assignment of the -TC erred in refusing evidence offered to prove that in
not a holder in due course; hence the latter’s personal mortgage without the transfer of the debt it secures is cashing the check as it did plaintiff bank departed from
defense of fraud was available. a nullity. the usual course of business adopted and usually
-The doctrine of constructive notice is applicable only to adhered to by the plaintiff.
HELD person who is dealing with the land itself, which is not -For these reasons, Court held that the evidence was
-Pennoyer cites Sec. 54 arguing that the Dubois was a the case here. insufficient to sustain the verdict and judgment, which
holder in due course as it had notice of fraud before it are contrary to law, and a new trial must be had to
paid anything on the COD. Dubois is unaffected by the present the decisive issues.
statute if, when it acquired the notes, “it paid the full MILES CITY BANK V ASKIN (1947) Dispositive The judgment is reversed, and the cause
amount thereof”. When Dubois gave the COD for the ~giulia~ remanded for new trial
notes , it took the notes for “value”; if it was under an
obligation to pay the COD when due, its right to FACTS
protection as a holder in due course was the same as if -George Askin paid his losses in a game of black jack to
it had paid in money. It may be argued that upon notice JW Clark by 2 checks, one for $150 and another for
of fraud, Dubois may have protected itself by enjoining $1,000. Each were signed by Askin as drawer, payable
transfer or impounding the COD. The Court believes to Clark's order and drawn on the Bank of Baker,
that since Pennoyer put the notes into circulation and Montana. Askin signed his own name and inserted the BRONSON V STETSON (1930)
contended they were procured by fraud, bringing numerals in lead pencil, and Clark filled the remaining ~ajang~
proceedings for such a purpose was his duty. To avoid blanks.
the effects of Sec. 54, Dubois was required to prove -Later, Askin was sued on one of the checks (the date FACTS
that the COD had been negotiated and that it had paid was changed), but at the time it was negotiated, it -Bronson’s agent, Mears, effected the exchange of
or had become liable to pay someone other than the called for $5,000. The court found that a casual Bronson’s land in Flint with a farm. Mears, fraudulently
payee. Dubois’ evidence was sufficient to establish that examination of the check disclosed that it had been represented that there was an $800 mortgage on the
the FNBC, to whom the COD was paid, was the indorsee changed after having been written. The words and land, which he said, Bronson should assume. So
and holder which is a prima facie showing that it is a figures showing the amount are written with a different Bronson made a note made of even date for $800
holder in due course. pencil than the balance of the writing. There were payable in three years and secured by a mortgage.
obvious signs of erasure of the words and figures The name of the payee and the mortgagee were left
FOSTER V AGUSTANNA COLL. & THEOLOGICAL originally occupying such spaces. blank. It was agreed that Mears was authorized to fill
SEMINARY OF ROCK ISLAND, ILL. (1932) -The jury found for the plaintiff. Defendant appealed. the blanks with the name of Union Trust Savings Bank.
~athe~ -Mears received the papers, and turned them over to
HELD defendant Mrs. Stetson. Instead of writing the name of
FACTS -The ultimate question of WON plaintiff was a holder in the bank as payee, Mears wrote Mrs. Stetson’s name.
-Hopkins executed and delivered to Aurelius-Swanson due course must be determined by the just, such Mrs. Stetson asked him if he had a right to do so, and
(payee) their negotiable instrument secured by determination to be based upon its findings as to he said he had coz he was a notary public. So Mrs.
mortgage. Swanson assigned the note and mortgage whether, (1) the clerk was, in fact materially altered Stetson paid Mears $800.
to Foster not by indorsement but by assignment in a subsequent to its execution and delivery, and (2) if so, There is no question that the papers were fraudulently
separate instrument duly recorded. Foster redelivered was such alteration so manifest and visible as to obtained by Mears and that Mrs. Stetson knew that the
[ch3-H] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-H]
name on the note was just written by Mears at the time obligation in its contracts with the producers, including exceed the delay in the payment of other installments
she paid him the money. the makers of the three notes. that have been paid in the past.
-The co-operative defaulted in payment to Bliss. Bliss -The rule set forth in the majority opinion that a
ISSUE sued the makers on their notes. purchaser of an installment note who has knowledge
WON Mrs. Stetson is a holder in due course free from all that a past due installment was unpaid when he
equities and defenses that could be set up against her ISSUE acquired the note “is put on inquiry and there may be
and could thus collect from Bronson. WON Bliss was a holder in due course. some defenses against it and… cannot be a holder in
due course” cannot be reconciled with the provisions of
HELD HELD the Uniform Negotiable Instruments Act.
NO. At first glance, it can be said that Mrs. Stetson is a -The transferee of an installment note is not a holder in
holder in due course. Mears was given parol authority due course as to any part of the note when the transfer
to fill in the blank. He exceeded his authority in writing has been made after the maturity of one or more but BARBOUR V FINKE (1924)
the name of the Mrs. Stetson. Mears had apparent less than all of the installments. ~tito romy~
authority and Mrs. Stetson was ignorant of the -On the issue of WON Bliss had notice of the co-
limitation. operative’s failure to pay the first installment, the NATURE
-It has been held that the one who entrusts an findings are unsatisfactory. Petition for Certiorari
incomplete instrument to another is bound by anyone -On the issue of the co-operative’s defense of failure of
who relies in good faith on the genuineness of the consideration (its failure to perform its obligations FACTS
instrument although the person entrusted with under the contracts), Court said that it is a good -In January 11, 1915, Finke issued a negotiable note for
completing and delivering the instrument exceeded his defense to an action on an instrument by one not a $3,000 payable on or before ten years from the date of
authority. holder in due course the note. The stated interest rate was six percent per
-However, the court turns with reluctance from this. -The Court ordered the case to be retried upon the annum payable annually on January 11 of each year.
Harrington Nat. Nank v. Beslin ruled that, “in order issue of notice of non-payment of first installment at The note was likewise secured by a real estate
however that any such instrument may be enforced, it the time of transfer and that judgment be made mortgage.
must be filled up strictly in accordance with the according to the views expressed. -In March, 1918, the note was endorsed and the
authority given and within reasonable time.” mortgage was assigned to Barbour. At the time of the
Thus, Mrs. Stetson cannot be held to be a holder in due TRAYNOR, dissent: endorsement, a notation on the note stated that
course. TC reversed. -It is unnecessary to remand the case since the finding interest thereon was up to October 1, 1917. Barbour at
and evidence show that Bliss took the notes without some point filed an action for the foreclosure of the
notice that the first installment had not been paid. mortgage. The lower court ruled for Barbour. But Finke
BLISS V CALIFORNIA CO-OP PRODUCERS (1947) -A holder cannot be a holder in due course as to alleged that Barbour is not a holder in due course
~glaisa~ installments that were overdue when he acquired the based on the fact that the non-payment of interest
note, but that he can be a holder in due course as to amounted to a dishonor of the note and that Barbour
future installments, which are not overdue unless their had notice of this as the same is clearly indicated on
FACTS maturity dates have been accelerated. the note via the notation. Such being the case, Barbour
-The California Co-op Producers was organized to -The mere fact that one or more installments of an is subject to any defense Finke might have against the
process and ship agricultural products through the use installment note are unpaid when the note is original.
of the shipping terminal facilities. Growers of negotiated does not convey knowledge to the
agricultural products were to be solicited to use the transferee of a defense against the note; nor does it ISSUE
facilities of the corporation in the marketing of their reveal such knowledge of circumstances that it can be WON Barbour was a holder in due course of both the
products. Marketing contracts were entered into by the said that the holder of the note shut his eyes to the note and mortgage
cooperative with many producers. facts and in bad faith sought to avoid the knowledge of
-Agricultural producers executed non-bearing a defense. HELD
negotiable notes, payable to the co-operative, in ten -A notice of default in the payment of an installment of YES
annual installments, with no acceleration clause. The principal disconnected from other facts does not Ratio The mere fact that interest due is unpaid, the
co-operative agreed to furnish facilities. prevent the transferee from being a holder in due principal not being due, does not render the note
-Shidler, Winchester and Galbreath each executed one course. dishonored. It is also a settled rule of the jurisdiction
of the notes. The three makers defaulted in the -The inquiry may reveal that default is fully explained that a mortgage is merely an accident to the note
payment of the first installment. by circumstances and it constitutes no warning that the which it secures. Hence the transfer of the debt
-Later, while the note is still unpaid, the co-operative maker has defense with regard to installments to secured by the mortgage carries with it the security. As
negotiated the notes to Bliss to secure payment of the mature in the future. Thus, it may appear that prompt Barbour is a holder in due course of the note, she is
co-operative’s note, held by Bliss. payment has been waived and that the delay with also a holder in due course of the mortgage.
-The co-operative, by reason of insolvency and regard to one or more past due installments does not -The court just stated that this conclusion is in accord
bankruptcy, was unable to continue to perform its with the great weight of authority and is in accord with
[ch3-I] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-I]
the spirit and intent of the NIL (there was no discussion inserting that of a bank in Pocatello, Idaho, (2) by of IBS, thus IBS may not be considered as a holder in
on how the conclusion is in accord with the spirit…) changing the interest rate from 6% to 7% p.a., and (3) due course to such note. On the other hand, IBS insists
Dispositive Judgment affirmed. by adding a recital that the note (issued by Hooper) that the note was not overdue when received by it,
was deposited as collateral security for the renewal relying on the provision “ where an instrument is
note. He then transferred the note to the Pocatello issued, accepted, or indorsed when it is overdue, it is,
LE DUE V FIRST NAT’L BANK OF KASSON (1883) Bank for $30,000. In Oct. 11, 1920, the Pocatello Bank as regards the person so issuing, accepting, or
~owen~ sold the 2 notes to Idaho State Bank (plaintiff). indorsing it, payable on demand.”
-Idaho State Bank (ISB) now claims as holder of the -the interpretation of the above-quoted provision can
FACTS note (made by Hooper) from Hooper and Wright, the only mean one thing: see the ratio above.
-Payee of a draft indorsed it to Edison, against whom same note being the collateral to the renewal note. -citing the Harvard Law Review: “the instrument takes
the drawer, the defendant bank, had an offset. Edison a new lease of life with respect to an indorser after
indorsed the draft to Jordan on March 8, 1882 – 4 ISSUE maturity, and his equitable defenses are not let in until
months and 23 days after the draft became due. 1. WON Idaho State Bank may claim on the renewal a reasonable time after he indorses, although the paper
note made by Wright is apparently overdue. … A contract after maturity has
ISSUE 2. WON Idaho State Bank may claim on the note made a special maturity of its own, i.e. a reasonable time
WON the draft is overdue and dishonored by Hooper from Wright as an indorser after execution, and bona fide purchasers within that
time will be protected from all equities of the party who
HELD HELD signed, even equitable defenses.”
YES 1. NO, but this does not mean that Wright is freed from -in this case, when Wright indorsed the note after its
Ratio Indorsers subsequent to Edison took it subject to the principal obligation which gave rise to the renewal maturity, he gave the note a second maturity date as
the same offset to which it was subject in his hands. note. to him, namely, a reasonable time, after the transfer.
Reasoning On alterations on the renewal note made by Wright ISB became such holder within that reasonable time,
-The term “overdue” in a demand bill of exchange (as Ratio When a mere inspection of the instrument shows and as regards Wright, IBS received the note free from
in this case) is applied when a bill has come into the that it has been altered, a purchaser is not a holder in any equities of Wright founded upon the mere fact that
hands of the indorser so long after its issue as to due course because such note is not regular on its face the note appeared to be overdue.
charge him with notice of dishonor, and thus subject it Reasoning – ISB is not a holder in due course of the Disposition Wright is liable to IBS, must honor the
in his hands to the defenses which the drawer had altered renewal note. It follows then that such note was note (since he indorsed it after the maturity, thus
against it in the hands of the assignor. avoided in the hands of ISB effectively made the note “on demand” as between
-General rule is that a bill, note or check, payable on Obiter: it is further alleged by Wright (as a defendant) him and IBS).
demand, must be presented for payment within that not only is IBS precluded from recovery on the
reasonable time, having in view ordinary business altered renewal note, but that such alteration absolved
usages and the purposes which paper of that class is him ultimately of the principal obligation for which the DUNN V O’KEEFEE (1816)
intended to subserve. But, without any explanation of renewal note was given ~dahlia~
the reason, this draft which is outstanding nearly 5 -the court rejected this contention and said that
months after its date, the trial court is fully justified in although the alteration was indeed material and FACTS
holding it overdue and dishonored when Jordan took it, intentionally made, there is no finding that Wright’s J and T Dunn drew a bill of exchange on Ricketts,
so as to charge it in his hands, or the hands of those renewal note was altered with fraudulent intention. Thorne, George & Co. dated June 19, 1813 and due July
who hold under him, with any defense or set-off which While a material alteration of a note is a defense to an 19,1913 for £1000 payable to the order of J. Sinclair
the drawer had against it in the hands of Edison. action on the instrument itself, in order that such an and issued to the payee for value. On June 20, 1813,
alteration may be a bar to recovery on the original the payee presented the bill to the drawee for
debt, it must appear that the alteration was made with acceptance but the bill was then dishonored by non-
IDAHO STATE BANK V HOOPER SUGAR CO (1929) fraudulent intent. Thus, Wright remains liable on the acceptance . No notice of dishonor by non-acceptance
~maia~ original obligation to ISB independent of the altered was given to the drawer. Subsequently and on July
renewal note. 13,1913, the payee negotiated the bill to the plaintiff
FACTS Hooper Sugar made a note payable to Wright Mary O'Keefe, who had no knowledge of the prior
for $30,000 (note details: issued on Sept. 5, 1919, 2. YES dishonor by non-acceptance . The drawee again
payable in 6 mos.). Wright then indorsed the note in Ratio When Wright indorsed the note and delivered it dishonored the bill. The indorsee immediately gave
blank on Sept. 2, 1920 (1 year after). On the same to NCBSL after its maturity date, such note as to Wright notice of dishonor to the drawer. The indorsee sued the
date, he renewed a personal note that was held by became a demand note. As a demand note it did not drawer. There was judgment for the plaintiff.
National City Bank of Salt Lake (NCBSL), also for become overdue as to Wright until a reasonable length
$30,000. Wright also forwarded the note made by of time after it was indorsed by him. ISSUE
Hooper to NCBSL but allegedly for a different purpose Reasoning Next in issue is the liability of Wright as an WON the drawer is liable to the indorsee(who had no
-However, the cashier of NCBSL altered the renewal indorser of the note made by Hooper. Wright posits that knowledge of the prior dishonor) given that the payee
note (1) by erasing the name of his bank as payee and the note was overdue at the time it reached the hands did not give the drawer a notice of dishonor.
[ch3-J] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-J]
1. NO. The check is a negotiable instrument. It is full -On the day the note was given, the defendant called at
HELD and complete on its face as it satisfies the the plaintiff ank on business which was transacted with
When party holding a bill of exchange receives notice requirements of the law for an instrument to be Elliot in the director’s room. In the course of the
of its dishonor, he is bound to communicate this to the negotiable. It is worthy to note that the law does not interview Elliot procured the defendant to sign a note
drawer. But a bill of exchange is NOT a void security in require an instrument to be dated. It is settled that the for his (Elliot’s) accommodation. No question is made
the hands of an innocent indorsee who has no instrument is not rendered invalid by its antedating or but that they were false and fraudlent. The note was
knowledge that the bill has ever been dishonored postdating provided that it is not done for an illegal or executed and Elliot took it out into the bank and
because a former holder has omitted to give notice to fraudulent purpose. directed the assistant cashier to make a cashier’s
the drawer that the bill has ever been refused check in favor of the defendant for the amount of the
acceptance.The drawer is liable to the innocent 2. NO. The plaintiff indorsee was not as a matter of law note. Elliot returned with the check which the
indorsee. He issued it in an imperfect state and cannot put into inquiry by reason of the check’s being defendant indorsed in blank and delivered to Elliott.
justly complain of the neglect of any indorsee who negotiated prior to day of its date. The law itself does The latter deposited the check to the credit of the
takes the bill in his state, having no knowledge of any not proscribe postdating of the check. It is noteworthy lumber company in the Waterbury Bank on Sept 20.
circumstance to vitiate it, and looking merely at the that the drawing of a postdated check is an everyday The movement of these checks was so timed that want
names upon it. occurrence in the commercial world and the uniform of funds did not appear on the books of either bank.
understanding of the parties is that, when a check is Elliot paid the interest on the note indorsed January 1,
postdated, it is payable on the day it purports to be 1920. he died in the latter part of January 1920, when
TRIPHONOFF V SWEENEY (1913) drawn even though it be negotiated beforehand. for the first time, so far as appeared, it was discovered
~bry_sj~ that he was insolvent.
HOWARD NAT’L BANK V WILSON (1923) -Defendant insists that the plaintiff, being the payee of
FACTS ~mel~ the note, is not a holder in due course as a matter of
-J.W. Sweeney Construction Company drew its check on law.
the US National Bank of Portland Oregon for USD NATURE
2,294.74 payable to the order of DAN MALCHEFF. Action by Howard National Bank against Graham Wilson ISSUE
The check was drawn and delivered on or about March and another. 1. WON plaintiff (being the payee) is a holder in due
25, 1911 but was POSTDATED APRIL 15, 1911. course
-Malcheff negotiated it to TRIPHONOFF before April 15, FACTS 2. WON plaintiff took the check in good faith
1911 who took it for value and in good faith. J.W. -Elliot was acting president of the bank and had general
SWEENEY CONSTRUCTION (the drawer) stopped oversight and management of its affairs. He was also HELD:
payment for the check on the ground that Malcheff (the interested in a lumber business conducted as the W. E. 1. YES
named payee), an employee of the drawer, obtained Elliot Lumber Company and acted as its treasurer. -That a payee is capable of being a holder in due
the check by means of false and forged estimates of -He had 2 check accounts with the plaintiff bank, one course at common law has been held almost without
work done by him for the drawer. The check was his personal account and the other an account as dissent. This view is confirmed by the definition of
DISHONORED UPON PRESENTMENT about APRIL 17, Treasurer of the lumber company. He also had an “negotiation” found in Sec 30 of the act, which provides
1911. account as treasurer of the lumber company with the that an instrument is negotiated when it is transferred
-Triphonoff (INDORSER) sued the drawer J.W. SWEENEY. Waterbury Savings Bank. from person to another in such a manner as to
The latter argued that Triphonoff should have been put -From July 6, 1919, to sept 18, 1919, his personal constitute the transferee the holder thereof. As said,
on notice of the infirmity in the instrument or defect in account with the plaintiff was overdrawn in increasing the remaining sentence of the section, “if payable to
the tile of MALCHEFF by the fact that the check was amounts until the overdraft amounted to $14,594.14. bearer, it is negotiated by delivery; if payable to order,
POSTDATED. Counsel for Sweeney goes as far as an arrangement was entered into by which the plaintiff it is negotiated by the indorsement of the holder
arguing that a postdated check is not a negotiable made a loan to the lumber company which was completed by delivery” was not intended to include
instrument if taken before the date on which demand deposited in its account with the plaintiff, and Elliot all the ways in which an instrument might be
can be made for payment but is simply an assignment transferred $14,750 from this to his personal account, negotiated, nor to restrict the comprehensive
of rights of the payee and opens the check to all leaving a balance to his credit of $155.86. terms of the preceding sentence.
equities and defenses. -On sept 15, Elliot had drawn a check on his personal
account for $10,000 which had not been returned to 2. YES
ISSUE the bank when this adjustment was made. To cover this -Evidence was uncontradicted that Elliot had authority
1. Whether or not the check in this case is NOT a check when returned, he drew a check to himself on and was accustomed to approve and direct loans as
negotiable instrument. the Waterbury Bank for a like amount, which he this loan was approved and directed, and that the
2. Whether or not postdating of the check amounts to a deposited in his personal account. This overdrew the defendant was a regular customer of the bank.
notice of the infirmity on the instrument as to disqualify lumber company’s account at the Waterbury Bank Assuming that the evidence had the tendency claimed
the holder from becoming a HIDC about $8,700. There was no evidence that anyone for it, we are at loss to see how, in the circumstances, it
other than Elliot knew of this situation at the time the can be thought that the cashier had any reason to
HELD note in question was given. suspect fraud in the inception of the note or any
[ch3-K] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-K]
wrongdoing in the transaction. The note was taken in -“But this rule is subject to the single exception that, if Machinery Co. (payee) for the purchase of stocks in the
usual course, for full value and without circumstances the note were invalid as between the maker and the said company. The note was accompanied by a written
calling for or warranting inquiry respecting the occasion payee, the payee could not himself, by purchase from a contract permitting Gleason to return the stock and
for giving it. This being so, it cannot be conceived how bona fide holder, become successor to his rights, it not receive back his note duly canceled provided he gives
a reasonable man could think that the note was taken being essential to such bona fide holder’s protection to the company prior notice of his intentions. Gleason
otherwise than in good faith. extend the principle so far” (Calvert’s Daniel 6th ed. gave notice to Peerless but the note was not returned.
Sec.805). And this exception is approved by the general -Why? Because Peerless had indorsed the P/N in
current of authority. blank before maturity (making the originally order
PIERCE V CARLTON (1922) -The exception, we think, extends to the agent who instrument into a bearer instrument) and left it with
~eva~ acts for such a payee in reacquisition of the instrument, Andale State Bank (bank) as security for money to be
or to one who aids and abets the payee in the fraud by advanced to it by the bank but the bank refused to
NATURE which the instrument is procured. make any advancement on the note until it was
From a Judgment for Defendants, Plaintiff Appeals -There are also decisions which seem to hold that the indorsed by Michael Lill. So Lill went to the bank and
exception referred to properly applies to one who, not wrote his name on the back of the note. The bank then
FACTS being a party or participant in the fraud, has purchased cashed the note. When the note matured Gleason
-the action is to recover the balance due on 3 such a note from the payee with knowledge or notice refused to pay. Upon the bank’s demand, Lill paid the
promissory notes, executed by MJ Carlton and others thereof, and reacquires the same from a bona fide note and received it without indorsement from the
payable to Crawford & Ceas, dated Feb.11,1913 and holder. bank.
payable June 1 of 1914,1915 and 1916, with an -There is doubt if our statute permits an interpretation -Lill then filed an action against Gleason in the district
aggregate amount $2100. which would apply to the facts presented in these last court, which ruled in favor of the latter and held that Lill
-on the afternoon of Feb. 11, the notes having been cases. The more natural meaning of the language used was not a holder in due course. Lill appeals.
indorsed in blank by the payees, Pierce bought said would apply the exception to the payee or other taking
notes for $1800, and without notice or knowledge of part in the fraud or illegality which rendered the ISSUE
any infirmity affecting the validity of said notes instrument invalid. 1. WON Lill is a holder in due course
-in Feb.1913 plaintiff sold and delivered said notes to -On the facts of the present record we are not called on 2. WON the note was discharged by Lill’s payment
his brother, Thos.B.Pierce, for $2100; said Pierce being to make definite decision on this question for the
also a purchaser for value without notice reason that his honor, in submitting the second issue, HELD
-June 1915, plaintiff bought the notes back from his that as to present plaintiff’s ownership in good faith of 1. YES.
brother for $2100 and indorsed to plaintiff without the notes, instructed the jury that if present plaintiff Sec. 58 NIL:
recourse (he didn’t want his brother to be involved in held the notes by indorsement for value from a bona xxx But a holder who derives his title through a
the controversy on the notes) fide holder, he was entitled to their verdict on the issue, holder in due course, and who is not himself a
-Defendants: there was allegation with evidence unless defendants has satisfied them by the greater party to any fraud or illegality affecting the
tending to show that said notes were procured by false weight of the evidence that plaintiff was a “participant instrument, has all the rights of such former
and fraudulent representations on the part of the in the fraudulent conduct which the note were holder in respect of all parties prior the latter.
payees, and that plaintiff, not only had full notice and secured.” -The order note, having been indorsed by the payee
knowledge of the fraud at the time he first acquired -It is recognized principle in this jurisdiction that a (Peerless) in blank, became payable to bearer and
said notes, but that he had actually aided and abetted verdict may be given significance and correctly negotiable by delivery (Sec. 34 NIL). Thus, when the
the payees in the fraudulent conduct and interpreted by reference to the pleadings, the facts in note was delivered to the bank, the bank became the
representations by which the note was procured. evidence, and the charge of the court. And the plaintiff holder thereof in due course. And when the bank
-judgment was rendered for the defendants having received the full benefit of the position, the delivered the note to Lill, Lill became the bearer and
refusal of the court to submit the question in the holder (Sec.191 NIL). Having derived his title from the
ISSUE precise terms of the issue as tendered is not erroneous. bank, which was a holder in due course, and not having
WON the court erred in the refusal to nonsuit for want Dispositive The facts in evidence are fully sufficient to been a party to any fraud or illegality affecting the
of any evidence to show participation in the alleged require that the issues be submitted to the jury, and instrument, Lill became possessed of all the rights of
fraud on part of plaintiff. that plaintiff’s motion to nonsuit was properly the bank against the maker (Sec.58 NIL).
overruled.
HELD: NO. 2. NO.
-The principle that one who acquires title from a holder The general rule is that payment by a party other than
in due course may recover, though he himself may LILL V GLEASON (1914) the principal debtor does not discharge parties prior to
have had notice of the infirmity when he acquired the ~jat~ the one making the payment, and the payment, instead
instrument from such holder, was recognized before of extinguishing the instrument, operates as a transfer
the enactment of this statute (Sec.3040 Negotiable FACTS of it to the party paying.
Instruments ). -Nelson Gleason (maker) executed and delivered a *What is Lill’s status as a party to the note and what
negotiable P/N due on Sept.1, 1908, to Peerless are his rights as such?
[ch3-L] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-L]
Lill became a party to the note for the accommodation WON Fossum is a holder in due course, such that an respect to commercial paper growing out of the
of the payee (Peerless), and his original status insofar action can be maintained on the instrument transaction. To place him on any higher plane would be
as liability was concerned, was that of an indorser, incompatible with the fundamental conception
since he did not indicate an intention to be bound in HELD: NO underlying the relation of principal and agent.
some other capacity. As an indorser, he thus became -Fossum is far from being a holder in due course. He -if the original payee of a note unenforceable for lack of
secondarily liable to all parties subsequent to the was himself a party to the contract which supplied the consideration repurchases the instrument after
payee, in this instance to the bank. The contract of an consideration for the draft, albeit acting in a transferring it to a holder in due course, the paper
indorser for the accommodation of the payee is wholly representative capacity. Also, he procured the again becomes subject in the payee's hands to the
independent of that of the maker, and such indorser, instrument to be indorsed by the bank and delivered to same defenses to which it would have been subject if
upon making payment, succeeds to the title and rights himself without the payment of value, after it was the paper had never passed through the hands of a
of the holder as against the maker. overdue, and with full notice that, as between the holder in due course. The same is true where the
Disposition Judgment of district court REVERSED. original parties, the consideration had completely instrument is retransferred to an agent of the payee.
failed. Under these circumstances, recovery on the Disposition Decision affirmed
draft is out of the question.
FOSSUM V FERNANDEZ HERMANOS (1923) -He calls attention, however, to the familiar rule that a MALCOLM, J., dissenting:
~kooky~ person who is not himself a holder in due course may -Sec 58 of NIL provides: ". . . A holder who derives his
yet recover against the person primarily liable where it title through a holder in due course, and who is not
FACTS appears that such holder derives his title through a himself a party to any fraud or illegality affecting the
-Charles A. Fossum was the resident agent in Manila of holder in due course. instrument, has all the rights of such former holder in
the American Iron Products Company, Inc., engaged in -there is not a line of proof tending to show that the respect of all parties prior to the latter." Under the
business in New York City, while Fernandez Hermanos bank itself was ever a holder in due course. It was provisions of this section, Fossum is in exactly the same
is a general commercial partnership engaged in incumbent on Fossum to show that the bank was a situation as PNB would be. He is entitled to all the
business in the Philippines holder in due course, and can have no assistance from rights that pertain to PNB as holder in due course.
-on Feb 10, 1920, Fossum, acting as agent of AIPCI, the presumption expressed in sec 59 of NIL, to the -The absence or failure of consideration is not a
procured an order from Fernandez Hermanos, to deliver effect that every holder is deemed prima facie to be a defense against a holder in due course, although it is a
a tail shaft, to be installed on the ship Romulus. It was holder in due course. This presumption arises only in defense against a holder not in due course.
stipulated that the tail shaft would be in accordance favor of a person who is a holder in the sense defined in
with the specifications contained in a blueprint given to sec 191 of NIL, that is, a payee or indorsee who is in
Fossum on or about Dec 18, 1919; and it was further possession of the draft, or the bearer thereof. Under ASIA BANKING CORP V TEN SEN GUAN Y
understood that the shaft should be shipped from New this definition, in order to be a holder, one must be in SOBRINOS (1923)
York in March or April 1920. possession of the note or the bearer thereof. (Night & ~aida~
-The manufacture and shipment of the shaft was Day Bank vs. Rosenbaum) If this action had been
delayed considerably; it arrived in Jan 1921. Meanwhile instituted by the bank itself, the presumption that the FACTS
AIPCI had drawn a time draft for $2250, at 60 days, bank was a holder in due course would have arisen -Asia Banking is a foreign corporation licensed to
upon Fernandez Hermanos, for the price of the shaft, from the tenor of the draft and the fact that it was in engage in banking in Manila. Defendant is a duly
and payable to Philippine National Bank (PNB). It was the bank's possession; but when the instrument passed registered partnership indebted to Asia Banking in the
presented to Fernandez Hermanos, and was accepted out of the possession of the bank and into the sum of $10,475.51 for and on account of New York
by it on Dec 15, 1920, according to its tenor. possession of Fossum, no presumption arises as to the draft which was drawn by Snow’s Ltd. Asia Banking
-The shaft was found not to be in conformity with the character in which the bank held the paper. The bank's had demanded for payment from Ten Sen Guan but the
specifications and was incapable of use for its intended relation to the instrument became past history when it latter refused to do so.
purpose. Upon discovering this, Fernandez Hermanos delivered the document to Fossum; and it was -February 25, 1920 – Defendants ordered from Snow’s
refused to pay the draft, and it remained for a time incumbent upon him to show that the bank had in fact Ltd. 10 cases of mercerize batiste to be shipped from
dishonored in PNB Manila. Later the bank indorsed the acquired the instrument for value and under such New York freight prepaid to Manila.
draft in blank, without consideration, and delivered it conditions as would constitute it a holder in due course. -When the merchandise arrived in Manila, a draft drawn
to, Fossum, who then instituted this action against -Moreover, Fossum personally made the contract which by Snow’s Ltd. against the defendants for the amount
Fernandez Hermanos. constituted the consideration for the draft. He was alleged was presented for acceptance to the
-The TC held, and it is evident, that the consideration therefore a party in fact, if not in law, to the transaction defendants. This was done through Asia Banking, an
for the draft and for its acceptance by Fernandez giving origin to the instrument; and it is difficult to see agent of Snow’s Ltd. Snow’s Ltd. had negotiated the
Hermanos has completely failed; and no action how he could strip himself of the character to agent draft with Asia Banking’s counterpart in New York.
whatever can be maintained on the instrument by with respect to the origin of the contract and maintain -The delivery of the bill of lading and other documents
AIPCI, or by any other person against whom the this action in his own name where his principal could was refused by Asia Banking until Ten Sen Guan
defense of failure of consideration is available. not. An agent who actually makes a contract, and who accepted the draft.
has notice of all equities emanating therefrom, can -Ten Sen Guan accepted the draft and received delivery
ISSUE: stand on no better footing than his principal with of the bill of lading and made entry of the goods at
[ch3-M] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-M]
customs. -The plaintiff, Van Syckel purchased 3 promissory notes payee. The proof of the sigNATUREof the payee was a
-When the cases were opened, they were found to differing only in the amount from one Joseph Ginsberg. necessary part of the plaintiff’s case, unless the
contain burlap and not the batiste ordered by Ten Sen -The form and indorsement of the notes were precise fundamental rule of the common law has been changed
Guan. So Ten Sen Guan declined to receive the goods with the following: by the NIL.
and left them at customs. They then returned the bill “$2500 -There are no statutes changing the law of evidence in
of lading to Asia Banking and demanded that their Egg Harbor City, N. J., December 5, 1929. this respect. The NIL was intended as a codification of
acceptance of the draft be cancelled. Four months after date We Promise To Pay The the common law rules relating to negotiable
Order of Max Orocofsky at the Egg Harbor
- The lower court found for the defendant. Commercial Bank, Egg Harbor City, N.J., $2500 And
instruments, and is, for the most part, declaratory of
00 Cts Dollar With Defalcation for Value Received. the common law.
ISSUE Egg Harbor Coal & Lumber Co. -Sec 55 of NIL: “the title of a person who negotiated an
WON Ten Sen Guan is liable for the amount due Arthur Mueller (Signed) instrument is defective within the meaning of this Act
Pres. when he obtained the instrument, or any signature
HELD Kate Mueller (Signed) Pres. thereto, by fraud, duress, or force and fear, or other
NO, because Asia Banking is not a holder in due course. No. 37220 Due Date Apr. 5.” unlawful means, or for an illegal consideration, or when
-The evidence presented to prove that Asia Banking - Reverse side: he negotiates it in breach of faith, or under such
“ Max Orocofsky by J.G., pr. Att’y.
was a holder of the draft for value is not convincing. To (Signed)
circumstances as amount to a fraud.”
give an authentic account of the transaction, it should Without recourse -Sec. 59 should be read in the light of Section 55 and
have been established by competent evidence how C.S. Van Syckel, Att’y. (Signed)” the intervening Sections and should be taken to mean
Asia Banking acquired the draft. Asia Banking only that proof having been offered of the genuineness of
presented a local employee of the bank who testified as -Plaintiff claims that the notes were not paid and that the maker’s and payee’s signatures, the holder is
to the alleged meaning of certain entries made in the the amounts therein stated were due and owing. deemed to be a holder in due course, and the duty of
bank records. -The maker’s signature was admitted however, the proceeding to offer some proof of fraud or defect
-The trial court also found that the acceptance of the case is barren of any proof of the genuineness of the specified, in procuring essential signatures, is cast upon
draft by the defendants was conditional. It was also signature of the payee. the party alleging it, and, until such proof is offered,
found that the plaintiff released and discharged the -The lower court ruled in favor of the plaintiff: proofs there is no duty upon the holder to prove that he or
defendants from liability upon the draft because of showed that the plaintiff was holder of the instrument some person under whom he claims acquired the title
fraud. and that under Section 59 of the NIL, the duty was cast as holder in due course.
Disposition Judgment affirmed. upon the defendant to show a defect as follows: “every -The Court does not think that it was intended that the
holder is deemed prima facie to be a holder in due presumption should arise under Section 59, without
STREET [concur] course; but when it is shown that the title of any person proof that the essential names on the front and back of
-It was fraud on the part of Snow’s Ltd. to negotiate the who has negotiated the instrument was defective, the an order instrument were signatures of the named
draft in question to the New York branch of Asia burden is on the holder to prove that he or some persons.
Banking. person under who he claims acquired the title as a
-This fraud having been set up in the defendant’s holder in due course; but the last mentioned rule does 2. NO. The court and the jury had no evidence before
answer and established by proof, it became incumbent not apply in favor of a party who became bound on the them that the signature upon the back of the note was
upon the plaintiff to prove that it occupies the position instrument prior to the acquisition of such defective the signature of the payee, or that the agent purporting
of bona fide purchaser of the draft for value and title." to sign the same was authorized so to do. It seems that
without notice. This requirement is not met by the -Defendant appealed. such proof would be necessary, in view of Sections 16,
presumption which the law raises in favor of the holder 19 and 33 of NIL before a presumption would arise of a
of a negotiable instrument arising from the mere ISSUES valid and intentional delivery.
possession of the instrument. The plaintiff must go 1. WON the defendant has the burden of proof of -Since note obligation do not arise save by the
further and prove that it is such a purchaser. showing defect in the instrument. signature of the maker, it would seem equally to follow
-The reason for this is that the guilty maker or holder of 2. WON plaintiff is a holder in due course. that the signature of the payee by way of indorsement
an instrument vitiated by fraud of illegality will is the foundation of the rights of holder in due course,
naturally seek to put it in the hands of some other HELD subsequent to the payee. Upon the proof of the
person in order to cut off the defense to which the 1. NO. genuineness of the necessary signatures the holder’s
instrument is subject. -At common law, one who sues upon a written contract rights arise as specified in Article 4 of the act, but in the
is obliged, in the absence of admission, to prove the absence of such proof there was nothing to indicate
sigNATUREof the defendants before the instrument that the instruments in suit had been negotiated, or
VAN SYCKEL V EGG HARBOR COAL & LUMBER CO. can be received in evidence. Similarly, the plaintiff, that the person possessed of the physical paper had
(1932) when not name in the contract, has always been title thereto, or the right to the proceeds thereof.
~lora~ required to show the right on which he stands. -A note payable to order is negotiated by the
-The notes were not payable to bearer, but were order indorsement of the holder completed by delivery.
FACTS notes, and title did not pass until indorsed by the
[ch3-N] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-N]
-In this case, the holder, prior to the indorsement was FARMERS’ STATE BANK V KOFFLER (1930) of any person who has negotiated the instrument was
Max Orocofsky. His signature was sufficient ~anton~ defective, the burden is on the holder to prove that he
indorsement. There was however, no proof of authority or some other person under whom he claims acquired
of the person purporting to act as agent to affix the NATURE the title as a holder in due course. But the last
signature. Action to recover on a check which payment was mentioned rule does not apply in favor of a party
Disposition Judgment Reversed. stopped by the drawer. who became bound on the instrument prior to
the acquisition of such defective title.
FACTS -Here there is no defect n the title so far as the maker
BEACON TRUST CO. V RYDER (1931) -September 15, 1928: Koffler (defendant) drew a check is concerned. The action is not brought against Davis to
~marge~ on the Farmer’s and merchant’s bank if New England in charge him as indorsee. It is brought against the
which he had an account, payable to the order of defendant as maker. Koffler became bound to on the
FACTS Kenneth Davis. instrument at the time he delivered it to Davis. Davis
-Promissory note for $20k dated March 18, 1929, -The consideration was $250, and the check was indorsed the instrument (at the time he delivered)
payable to Morris Rudnick six months after date, was intended for that amount. The sum payable was written and made it payable to bearer.
purportedly made by Robert L. Ryder. The same was in figures “$250.00,” but in the body it was expressed -Koffler has no defense against Davis. Koffler is
indorsed in blank by Charles W. Ryder “waiving in “Two Hundred and 50/100th Dollars” ($200.50). interposing a defense which might have been available
demand, notice and protest” and subsequently -Davis indorsed the check, and then the check was to Davis only.
indorsed in blank also by Morris Rudnick and “E.S. “lost or stolen.” -The check was in all aspects regular except for the
Company, Inc. Morris Rudnick, Treas.” Before its -October 1: the check was presented to the plaintiff discrepancy between the figures indicating the sum
maturity, said promissory note was delivered by bank, which cashed it in the usual course of business. payable and its statement in writing. There was nothing
Rudnick to plaintiff Beacon Trust Co. for discounting. The bank was acquainted neither with Davis nor the about it to challenge the attention of the plaintiff when
-On its due date, PN was protested for nonpayment. bearer who presented the check. it was cashed except this discrepancy.
Ryders were notified. -Davis and Koffler learned that the plaintiff had cashed -Plaintiff naturally assumed that the bearer was Davis.
-Ryders denied their signatures on the PN and allege the check. Koffler notified the drawee bank (Farmer’s When the check was presented, the bearer turned to
that there was no consideration and no delivery. They and Merchants’) not to pay the same. the desk for that purpose and made the indorsement.
also allege that there was fraudulent transfer and insist -The check was transmitted by plaintiff Farmers’ State -There was nothing suspicious which would charge the
that plaintiff prove that it is a HIDC. Bank in the usual course for collection and remittance, bank with notice of a defect in title or show lack of good
but the Farmer’s and Merchants’ refused to pay the faith.
ISSUE same pursuant to Koffler’s notification. -As to the amount, the one in words controls in
WON plaintiff may be compelled to prove it is a HIDC -In meantime, after Koffler learned that the Farmers instances of discrepancy, unless the words are
State Bank cashed the check, he gave Davis another ambiguous.
HELD one in lieu of the original.
NO. Defendant’s Claim 2. NO
GenRule: The holder of a negotiable instrument is -The instrument was complete and regular upon its face -Sec. 59 considered as a whole does not have the effect
deemed prima facie to be a HIDC. No further burden and had never previously been dishonored. of shifting to the plaintiff the burden of proving that he
rests upon him to prove that he or some other person -Farmers’ State Bank became the holder of it for value is the holder in due course of the note on which he sues
under whom he claims acquired the title as HIDC. and before it was overdue. merely by a showing on the part of the defendant
XCPT if it is shown that the title of some person who -The bearer of the check for whom the check was that the title to the instrument was defective as
has negotiated the instrument was defective (i.e., cashed had a defective title within Sec. 55 of the against some intermediate indorsee.
negotiation was “in breach of faith”). Negotiable Instruments Law (NIL). -The fraud in putting a note in circulation which will
-The burden of establishing that the payee’s title was -The title of the bearer who negotiated the instrument operate as a defense or charge the burden of proof
defective was on the Ryders. Failing to sustain this was defective, pursuant to Sec. 59 of the NIL. must be a fraud against the defendant.
burden [their testimonial evidence did not convince the -It is where the fraud is done as to the defendant
court], they cannot insist that Beacon Trust Co. prove ISSUE or maker, and not where it is done as to the
its prima facie case that it is a HIDC. 1. WON the bearer was a holder in due course. payee or some intermediate holder or party to
-Plaintiff Beacon Trust Co.’s right to charge the account 2. WON Farmers’ State Bank had the burden to prove it the paper.
of the payee was not necessarily inconsistent with it took the instrument in good faith. Disposition Amount is reduced to accord with the sum
being a HIDC. payable. Judgment is affirmed against Koffler.
-Indifference on the part of the plaintiff as to the HELD
outcome of the action would not tend to show that it 1. YES
was not a HIDC. Such indifference might result from a -Koffler disregarded the last sentence of Sec. 59 of the COMMERCIAL BANK OF LA FAYETTE & TRUST CO.
consciousness that there was a good indorser. NIL. V BARRY (1934)
Sec. 59.—Every holder is deemed prima facie to be ~jonas~
holder in due course; but when it is shown that the title
[ch3-O] Law 108: Negotiable Instruments First Semester AY 2008-09 Prof. Rogelio V. Quevedo [Ch3-O]
NATURE
Appeal from judgment of lower court

FACTS
-J.C. Barry, Trustee, executed demand notes payable to
the order of the Bank of Lafayette & Trust Company, of
which he was president. These notes were issued in
transactions whereby the bank purchased its own stock
from stockholders who wished to dispose of them. The
understanding was that Barry would not be personally
liable on the notes but that the notes would be paid out
of the proceeds of the resale and from dividends.
-The Bank of Lafayette & Trust Company sold all its
assets, including the Barry note for $8,711 being sued
on, to the plaintiff, the Commercial Bank of Lafayette &
Trust Company. The note was not indorsed by the
payee bank to the plaintiff bank.
-Plaintiff contends that it acquired the note for valuable
consideration before maturity, & hence is a holder
against whom prior equities will not avail. Thus, the
bank objected to the offer of any evidence by the
defendant in support of his defense.

ISSUE
WON plaintiff bank is a holder in due course

HELD
NO
Ratio There having been no negotiation of the note
sued on, because it was never indorsed by the payee; it
is immaterial whether plaintiff acquired the note prior
to its maturity. It follows that plaintiff cannot be
regarded as a holder in due course, & the instrument
sued on is subject to the same defenses as if it were
non-negotiable. The defense of want of consideration is
therefore available.
Reasoning At common law, under the law merchant, &
independently of the Negotiable Instruments Law, a
transferee of a note payable to order could not & did
not obtain a legal title thereto, except by endorsement
of the payee, and a holder without such endorsement
took it ‘subject to all the equities vested in prior
parties.’
Disposition Judgment appealed from is affirmed.