Chan Wan v Tan Kim

Facts:
Eleven checks payable to "cash or bearer" and drawn by defendant Tan upon the Equitable
Banking Corporation, were all presented for payment by Chan Wan to the drawee bank, but they
"were all dishonored and returned to him unpaid due to insufficient funds and/or causes
attributable to the drawer." The drawer in drawing the check engaged that "on due presentment,
the check would be paid, and that if it be dishonored . . . he will pay the amount thereof to
the holder". On the backs of the checks, endorsements which apparently show they had been
deposited with the China Banking Corporation and were, by the latter, presented to the drawee
bank for collection.
The court declined to order payment for two principal reasons: (a) plaintiff failed to prove he was
a holder in due course, and (b) the checks being crossed checks should not have been deposited
instead with the bank mentioned in the crossing.

ISSUE: WON a holder who is not a holder in due course may recover on the checks?

HELD: YES. The Negotiable Instruments Law does not provide that a holder, who is not a holder
in due course, may not in any case, recover on the instrument. If B purchases an overdue
negotiable promissory note signed by A, he is not a holder in due course; but he may recover
from A, if the latter has no valid excuse for refusing payment. The only disadvantage of
holder who is not a holder in due course is that the negotiable instrument is subject to
defense as if it were non- negotiable

Atrium v CA
Facts:
Hi-Cement Corp. issued checks in favor of E.T. Henry and Co. Inc., as payee. The latter, in turn,
endorsed the checks to Atrium for valuable consideration. But upon presentment for payment,
the drawee bank dishonored the checks for the common reason "payment stopped" which
prompted petitioner to institute this action.
The trial court rendered a decision ordering E.T. Henry and Co., Inc. and Hi-Cement to pay
petitioner Atrium, jointly and severally, the amount corresponding to the value of the checks. CA,
however, absolved & ruled, inter alia, that Lourdes de Leon of Hi-Cement was not authorized to
issue the subject checks in favor of E.T. Henry, Inc.
ISSUE: WON petitioner Atrium is a holder in due course?

HELD: NO. To emphasize, the checks were crossed checks and specifically indorsed for
deposit to payee's (E.T. Henry) account only. Atrium was aware of the fact that the checks
were all for deposit only to payee's account. Clearly, then, Atrium could not be considered a
holder in due course.
The SC, however, held that it does not follow as a legal proposition that simply because
petitioner Atrium was not a holder in due course for having taken the instruments in question
with notice that the same was for deposit only to the account of payee E.T. Henry that it was
altogether precluded from recovering on the instrument. The Negotiable Instruments Law
does not provide that a holder not in due course cannot recover on the instrument. The
disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is
subject to defenses as if it were non-negotiable. One such defense is absence or failure of
consideration.

Mesina v CA
Facts:
Jose Go purchased from Associated Bank a cashier's check for P800,000.00. Unfortunately, he
left said check on the top of the desk of the bank manager when he left the bank. The bank
manager entrusted the check for safekeeping to a bank official, a certain Albert Uy. While Uy
went to the men's room, the check was stolen by his visitor in the person of Alexander Lim.
Upon discovering that the check was lost, Jose Go accomplished a "STOP PAYMENT" order.
Two days later, Associated Bank received the lost check for clearing from Prudential Bank.
After dishonoring the same check twice, Associated Bank received summons and copy of a
complaint for damages of Marcelo Mesina who was in possession of the lost check and is
demanding payment. Petitioner claims that a cashier's check cannot be countermanded in the
hands of a holder in due course.

ISSUE: WON petitioner can collect on the stolen check on the ground that he is a holder in due
course?

HELD: No. Petitioner failed to substantiate his claim that he is a holder in due course and
for consideration or value as shown by the established facts of the case. Admittedly,
petitioner became the holder of the cashier's check as endorsed by Alexander Lim who stole the
check. He refused to say how and why it was passed to him. He had therefore notice of the
defect of his title over the check from the start. The holder of a cashier's check who is not a
holder in due course cannot enforce such check against the issuing bank which dishonors the
same. A person who became the holder of a cashier's check as endorsed by the person who stole
it and who refused to say how and why it was passed to him is not a holder in due course.

De Ocampo v Gatchalian
Facts:
Herein defendants issued a check amounting to P600 to one Manuel Gonzales, who represented
himself as authorized by the owner of the car, Ocampo Clinic, which will be shown to the
owner as evidence of defendants’ good faith in the intention to purchase the said car.
Without knowledge of this transaction, plaintiff received from Gonzales the subject check for
the payment of the hospitalization of his wife.
On the failure of Gonzales to appear the day following, to bring the car and its certificate of
registration and to return the check on the following day as previously agreed upon, defendant
Gatchalian issued a "Stop Payment Order" on the check, with the drawee bank. The CFI of
Manila then ordered defendants to pay the plaintiff the sum of P600 with legal interest until paid.
In this action, defendants seek to recover the value of the check, contending that plaintiff is not a
holder in due course.

ISSUE: WON plaintiff is a holder in due course?

HELD: No. Under the Negotiable Instruments Law, Section 52 (c) provides that a holder in due
course is one who takes the instrument "in good faith and for value;" Section 59, "that every
holder is deemed prima facie to be a holder in due course;" and Section 52 (d), that in order that
one may be a holder in due course it is necessary that "at the time the instrument was negotiated
to him "he had no notice of any . . . defect in the title of the person negotiating it;" and lastly
Section 59, that every holder is deemed prima facie to be a holder in due course.
In the case at bar the rule that a possessor of the instrument is prima facie a holder in due course
does not apply because there was a defect in the title of the holder (Manuel Gonzales), because
the instrument is not payable to him or to bearer. On the other hand, the stipulation of facts
indicated by the appellants in their brief, like the fact that the drawer had no account with the
payee; that the holder did not show or tell the payee why he had the check in his possession and
why he was using it for the payment of his own personal account — show that holder's title
was defective or suspicious, to say the least. As holder's title was defective or suspicious, it
cannot be stated that the payee acquired the check without knowledge of said defect in holder's
title, and for this reason the presumption that it is a holder in due course or that it acquired the
instrument in good faith does not exist. And having presented no evidence that it acquired the
check in good faith, it (payee) cannot be considered as a holder in due course.
In other words, under the circumstances of the case, instead of the presumption that payee was a
holder in good faith, the fact is that it acquired possession of the instrument under circumstances
that should have put it to inquiry as to the title of the holder who negotiated the check to it. The
burden was, therefore, placed upon it to show that notwithstanding the suspicious
circumstances, it acquired the check in actual good faith. In the case at bar as the payee
acquired the check under circumstances which should have put it to inquiry, why the holder had
the check and used it to pay his own personal account, the duty devolved upon it,
plaintiff-appellee, to prove that it actually acquired said check in good faith. The stipulation of
facts contains no statement of such good faith, hence, plaintiff payee has not proved that it
acquired the check in good faith and may not be deemed a holder in due course thereof. It was
payee's duty to ascertain from the holder Manuel Gonzales what the nature of the latter's title to
the check was or the nature of his possession. Having failed in this respect, we must declare
that plaintiff-appellee was guilty of gross neglect in not finding out the nature of the title
and possession of Manuel Gonzales, amounting to legal absence of good faith, and it may not
be considered as a holder of the check in good faith. To such effect is the consensus of authority.

Yang v CA
Facts:
Cely Yang and Prem Chandiramani were to exchange dollar drafts and checks with the difference
to be divided equally as their profit. Chandiramani did not appear at the rendezvous and Ranigo,
Yang’s representative, allegedly lost the two cashier’s checks and the dollar draft bought by
petitioner. Ranigo reported the alleged loss of the checks and the dollar draft to Liong. Liong,
in turn, informed Yang, and the loss was then reported to the police. The checks and the dollar
draft were not lost because Chandiramani was able to get hold of said instruments, without
delivering the exchange consideration consisting of the PCIB manager’s check and the Hang
Seng Bank dollar draft. Yang requested FEBTC and Equitable to stop payment on the
instruments she believed to be lost. Both banks complied with her request, but upon the
representation of PCIB, FEBTC subsequently lifted the stop payment order on FEBTC Dollar
Draft No. 4771. Yang lodged a Complaint for injunction and damages against Equitable,
Chandiramani, and David (payee of the subject checks). The Court rendered judgment in favor of
defendant Fernando David against the plaintiff Cely Yang and declaring the former entitled to the
proceeds of the two (2) cashier’s checks.

ISSUE: WON Fernando David is a holder in due course?

HELD: Yes. Petitioner fails to point any circumstance which should have put David on
inquiry as to the why and wherefore of the possession of the checks by Chandiramani.
David was not privy to the transaction between petitioner and Chandiramani. Instead,
Chandiramani and David had a separate dealing in which it was precisely Chandiramani’s duty to
deliver the checks to David as payee. The evidence shows that Chandiramani performed said task
to the letter. Petitioner admits that David took the step of asking the manager of his bank to
verify from FEBTC and Equitable as to the genuineness of the checks and only accepted
the same after being assured that there was nothing wrong with said checks. At that time,
David was not aware of any "stop payment" order.
Under these circumstances, David thus had no obligation to ascertain from Chandiramani
what the nature of the latter’s title to the checks was, if any, or the nature of his possession.
Thus, we cannot hold him guilty of gross neglect amounting to legal absence of good faith,
absent any showing that there was something amiss about Chandiramani’s acquisition or
possession of the checks. David did not close his eyes deliberately to the nature or the particulars
of a fraud allegedly committed by Chandiramani upon the petitioner, absent any knowledge on
his part that the action in taking the instruments amounted to bad faith. Moreover, the factual
circumstances in D e O c a m p o and in B a t a a n Cig a r are not present in this case. For
here, there is no dispute that the crossed checks were delivered and duly deposited by David,
the payee named therein, in his bank account. In other words, the purpose behind the
crossing of the checks was satisfied by the payee.

STELCO v CA
Facts:
Stelco Marketing Corporation is engaged in the distribution and sale to the public of structural
steel bars. On 7 different occasions in September and October 1980, it sold to RYL
Construction, Inc. quantities of steel bars of various sizes and rolls of G.I. wire. These bars and
wire were delivered at different places at the indication of RYL Construction, Inc. The aggregate
price for the purchases was P126,859.61. Although the corresponding invoices issued by
STELCO stipulated that RYL would pay "COD" (cash on delivery), the latter made no
payments for the construction materials thus ordered and delivered despite insistent
demands for payment by the former.
On April 4, 1981, RYL gave to Armstrong Industries — described by STELCO as its "sister
corporation" and "manufacturing arm" — a check drawn against Metrobank in the amount of
P126,129.86, numbered 765380 and dated 4 April 1981. That check was a company check of
another corporation, Steelweld Corporation of the Philippines, signed by its President, Peter
Rafael Limson, and its Vice-President, Artemio Torres. The check was issued by Limson at the
behest of his friend, Romeo Y. Lim, President of RYL. Romeo Lim had asked Limson for
financial assistance, and the latter had agreed to give Lim a check only by way of
accommodation, "only as guaranty but not to pay for anything." Why the check was made out in
the amount of P126,129.86 is not explained. The check was actually issued in said amount of
P126,129.86, and as already stated, was given by R.Y. Lim to Armstrong, Industries, in
payment of an obligation. When the latter deposited the check at its bank, it was dishonored
because "drawn against insufficient funds."
When so deposited, the check bore two (2) indorsements, that of "RYL Construction," followed
by that of "Armstrong Industries." On account of the dishonor of Metrobank Check 765380, and
on complaint of Armstrong Industries (through a Mr. Young), Rafael Limson and Artemio
Torres were charged in the Regional Trial Court of Manila with a violation of Batas
Pambansa Bilang 22. They were acquitted in a decision rendered on 28 June 1984 "on the
ground that the check in question was not issued by the drawer 'to apply on account for value,' it
being merely for accommodation purposes." That judgment however conditioned the acquittal
with the pronouncement that "this is not however to release Steelweld Corporation from its
liability under Sec. 29 of the Negotiable Instruments Law for having issued it for the
accommodation of Romeo Lim." Eleven months later — and some 4 years after issuance of the
check — in May, 1985, STELCO filed with the Regional Trial Court of Caloocan City a civil
complaint against both RYL and STEELWELD for the recovery of the value of the steel bars and
wire sold to and delivered to RYL in the amount of P126,129.86, plus 18% interest from 20
August 1980 and 25% of the total amount sought to be recovered as and by way of attorney's
fees. A preliminary attachment was issued by the trial court on the basis of the averments of the
complaint but was shortly dissolved upon the filing of a counter-bond by STEELWELD. RYL
could no longer be located and could not be served with summons. It never appeared. Only
STEELWELD filed an answer, under date of 16 July 1985. Judgment was rendered on 26 June
1986. The judgment sentenced Steelweld to pay to Stelco the amount of P126,129.86 with legal
rate of interest from 9 May 1985, when the case was instituted until fully paid, plus another sum
equivalent to 25% of the total amount due as and for attorney's fees. STELCO's motion for
reconsideration was denied by the Appellate Tribunal's resolution dated 13 November 1990.
STELCO appealed.

ISSUE NO. 1 WON the fourth condition, i.e. as to notice, for a holder in due course is applicable
to an accommodation party?

HELD: "A holder in due course," says the law, "is a holder who has taken the instrument
under the following conditions: (a) That it is complete and regular upon its face; (b) That he
became the holder of it before it was overdue, and without notice that it had been previously
dishonored, if such was the fact; (c) That he took it in good faith and for value; (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 persons negotiating it."
As regards an accommodation party (such as STEELWELD), the fourth condition, i.e., lack
of notice of any infirmity in the instrument or defect in title of the persons negotiating it, has no
application. This is because Section 29 of the law above quoted preserves the right of recourse
of a "holder for value" against the accommodation party notwithstanding that "such holder, at the
time of taking the instrument, knew him to be only an accommodation party."
ISSUE NO.2: WON STELCO ever became a holder in due course of Check 765380, a bearer
instrument within the contemplation of the Negotiable Instruments Law?

HELD: NO. It never did. There is no evidence whatever that STELCO's possession of Check
765380 ever dated back to any time before the instrument's presentment and dishonor. There is
no evidence whatsoever that the check was ever given to it, or indorsed to it in any manner or
form in payment of an obligation or as security for an obligation, or for any other purpose before
it was presented for payment. On the contrary, STELCO never became a holder for value and
that "(n)owhere in the check itself does the name of Stelco Marketing appear as payee,
indorsee or depositor thereof."
What the record shows is that: (1) the STEELWELD company check in question was given
by its president to R.Y. Lim; (2) it was given only by way of accommodation, to be "used as
collateral for another obligation;" (3) in breach of the agreement, however, R.Y. Lim
indorsed the check to Armstrong in payment of an obligation; (4) Armstrong deposited the
check to its account, after indorsing it; (5) the check was dishonored.
The record does not show any intervention or participation by STELCO in any manner or
form whatsoever in these transactions, or any communication of any sort between STEELWELD
and STELCO, or between either of them and Armstrong Industries, at any time before the
dishonor of the check. The record does show that after the check had been deposited and
dishonored, STELCO came into possession of it in some way, and was able, several years after
the dishonor of the check, to give it in evidence at the trial of the civil case it had instituted
against the drawers of the check (Limson and Torres) and RYL.
Possession of a negotiable instrument after presentment and dishonor, or payment, is utterly
inconsequential; it does not make the possessor a holder for value within the meaning of the law;
it gives rise to no liability on the part of the maker or drawer and indorsers. It is clear from the
relevant circumstances that STELCO cannot be deemed a holder of the check for value. It does
not meet two of the essential requisites prescribed by the statute. It did not become "the holder
of it before it was overdue, and without notice that it had been previously dishonored," and
it did not take the check "in good faith and for value." Neither is there any evidence whatever
that Armstrong Industries, to whom R.Y. Lim negotiated the check, accepted the instrument and
attempted to encash it in behalf, and as agent of STELCO. On the contrary, the indications are
that Armstrong was really the intended payee of the check and was the party actually injured
by its dishonor; it was after all its representative (a Mr. Young) who instituted the criminal
prosecution of the drawers, Limson and Torres, albeit unsuccessfully.

SALAS VS. CA
Facts:
Juanita Salas (Petitioner) bought a motor vehicle from the Violago Motor Sales Corporation
(VMS) as evidenced by a promissory note. This note was subsequently endorsed to Filinvest
Finance & Leasing Corporation (private respondent) which financed the purchase. Petitioner
defaulted in her installments allegedly due to a discrepancy in the engine and chassis numbers of
the vehicle delivered to her and those indicated in the sales invoice, certificate of registration and
deed of chattel mortgage, which fact she discovered when the vehicle figured in an accident. This
failure to pay prompted private respondent to initiate an action for a sum of money against
petitioner before the Regional Trial Court.

ISSUE: WON private respondent is a holder in due course?

HELD: YES. The Promissory Note was negotiated by indorsement in writing on the
instrument itself payable to the Order of Filinvest Finance and Leasing Corporation and it
is an indorsement of the entire instrument. Under the circumstances, there appears to be no
question that Filinvest is a holder in due course, having taken the instrument under the
following conditions: [a] it is complete and regular upon its face; [b] it became the holder
thereof before it was overdue, and without notice that it had previously been dishonored; [c] it
took the same in good faith and for value; and [d] when it was negotiated to Filinvest, the latter
had no notice of any infirmity in the instrument or defect in the title of VMS Corporation.
Accordingly, respondent corporation holds the instrument free from any defect of title of prior
parties, and free from defenses available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof. This being so, petitioner cannot set up
against respondent the defense of nullity of the contract of sale between her and VMS.

STATE INVESTMENT HOUSE VS. CA

Facts:
New Sikatuna Wood Industries, Inc. requested for a loan from Chua. The latter agreed to grant
the same subject to the condition that the former should wait until December 1980 when he
would have the money. In view of this agreement, private respondent Chua issued three (3)
"crossed checks" payable to New Sikatuna Wood Industries, Inc. all postdated December 22,
1980. Subsequently, New Sikatuna entered into an agreement with herein petitioner State
Investment House, Inc. whereby New Sikatuna assigned and discounted with petitioner eleven
(11) postdated checks including the aforementioned three (3) postdated checks issued by Chua.
The checks, however, were dishonored by reason of "insufficient funds", "stop payment" and
"account closed", respectively. Petitioner claims that despite demands on Chua to make good
said checks, the latter failed to pay the same necessitating the former to file an action for
collection. When the CA reversed the trial court ruling favoring State Investment House, the
latter elevated the issue before the SC.
ISSUE: WON petitioner is a holder in due course as to entitle it to proceed against private
respondents Chua for the amount stated in the dishonored checks?

HELD: No. The Intermediate Appellate Court (now Court of Appeals), correctly elucidated that
the effects of crossing a check are: the check may not be encashed but only deposited in the
bank; the check may be negotiated only once to one who has an account with a bank; and the act
of crossing the check serves as a warning to the holder that the check has been issued for a
definite purpose so that he must inquire if he has received the check pursuant to that purpose,
otherwise he is not a holder in due course.
It results therefore that when State Investment House rediscounted the check knowing that it was
a crossed check he was knowingly violating the avowed intention of crossing the check.
Furthermore, his failure to inquire from the holder, party defendant New Sikatuna Wood
Industries, Inc., the purpose for which the three checks were cross despite the warning of the
crossing, prevents him from being considered in good faith and thus he is not a holder in due
course. Being not a holder in due course, plaintiff is subject to personal defenses, such as
lack of consideration between appellants and New Sikatuna Wood Industries. Note that
under the facts the checks were postdated and issued only as a loan to New Sikatuna Wood
Industries, Inc. if and when deposits were made to back up the checks. Such deposits were not
made, hence no loan was made, hence, the three checks are without consideration (Sec. 28,
Negotiable Instruments Law).

PRUDENCIO VS. CA
Facts:
In 1955, Concepcion and Tamayo Construction Enterprise had a contract with the Bureau of
Public Works. The firm needed fund to push through with the contract so it convinced spouses
Eulalio and Elisa Prudencio to mortgage their parcel of land with the Philippine National Bank
for P10,000.00. Prudencio, without consideration, agreed and so he mortgaged the land and
executed a promissory note for P10k in favor of PNB. Prudencio also authorized PNB to issue
the P10k check to the construction firm.
In December 1955, the firm executed a Deed of Assignment in favor of PNB which provides that
any payment from the Bureau of Public Works in consideration of work done (by the firm) so far
shall be paid directly to PNB – this will also ensure that the loan gets to be paid off before
maturity. Notwithstanding the provision in the Deed of Assignment, the Bureau of Public Works
asked PNB if it can make the payments instead to the firm because the firm needs the money to
buy construction materials to complete the project. Notwithstanding the provision of the Deed of
Assignment, PNB agreed. And so the loan matured without PNB actually receiving any payment
from the Bureau of Public Works. Prudencio, upon learning that no payment was made on
the loan, petitioned to have the mortgage cancelled (to save his property from foreclosure).
The trial court ruled against Prudencio; the Court of Appeals affirmed the trial court.

ISSUE: WON Prudencio should pay the promissory note to PNB?

HELD: No. PNB is not a holder in due course. Prudencio is an accommodation party for he
signed the promissory note as maker but he did not receive value or consideration therefor.
He expected the firm (accommodated party) to pay the loan – this obligation was shifted to the
Bureau of Public Works by way of the Deed of Assignment).
As a general rule, an accommodation party is liable on the instrument to a holder for
value/in due course, notwithstanding such holder at the time of taking the instrument knew
him to be only an accommodation party. The exception is that if the holder, in this case PNB,
is not a holder in due course. The court finds that PNB is not a holder in due course because it
has not acted in good faith when it waived the supposed payments from the Bureau of Public
Works contrary to the Deed of Assignment. Had the Deed been followed, the loan would have
been paid off at maturity.

STELCO v CA
(Wrt to subject to original defenses)
Held: STELCO came into possession of it in some way, and was able, several years after the
dishonor of the check, to give it in evidence at the trial of the civil case it had instituted against
the drawers of the check (Limson and Torres) and RYL. Possession of a negotiable instrument
after presentment and dishonor, or payment, is utterly inconsequential; it does not make the
possessor a holder for value within the meaning of the law; it gives rise to no liability on the part
of the maker or drawer and indorsers. It is clear from the relevant circumstances that
STELCO cannot be deemed a holder of the check for value. It does not meet two of the
essential requisites prescribed by the statute. It did not become "the holder of it before it was
overdue, and without notice that it had been previously dishonored," and it did not take the check
"in good faith and for value." Neither is there any evidence whatever that Armstrong Industries,
to whom R.Y. Lim negotiated the check, accepted the instrument and attempted to encash it
in behalf, and as agent of STELCO. On the contrary, the indications are that Armstrong
was really the intended payee of the check and was the party actually injured by its dishonor; it
was after all its representative (a Mr. Young) who instituted the criminal prosecution of the
drawers, Limson and Torres, albeit unsuccessfully.

Charles Fossum v Hermanos

Facts:
Herein petitioner was the resident agent in Manila of the American Iron Products Company, Inc.
(AIPCI), engaged in business in New York City, while Fernandez Hermanos is a general
commercial partnership engaged in business in the Philippines. Fossum, acting as agent of
AIPCI, procured an order from respondent to deliver a tail shaft, to be installed on the ship
Romulus . It was stipulated that the tail shaft would be in accordance with the specifications
contained in a blueprint given to Fossum and that the shaft should be shipped from New York in
March or April 1920. The manufacture and shipment of the shaft was delayed considerably.
Meanwhile AIPCI had drawn a time draft for $2250, at 60 days, upon Fernandez Hermanos,
for the price of the shaft, and payable to Philippine National Bank (PNB).
It was presented to Fernandez Hermanos for acceptance, and was accepted by the firm according
to its tenor. Subsequently, the shaft was found not to be in conformity with the specifications
and was incapable of use for its intended purpose. Upon discovering this, Fernandez
Hermanos refused to pay the draft, and it remained for a time dishonored in PNB Manila. Later
the bank indorsed the draft in blank, without consideration, and delivered it to Fossum,
who then instituted this action against Fernandez Hermanos.
The trial court held that the consideration for the draft and for its acceptance by Fernandez
Hermanos has completely failed and no action whatever can be maintained on the instrument by
AIPCI, or by any other person against whom the defense of failure of consideration is available.

ISSUE: WON Fossum is a holder in due course, such that an action can be maintained on the
instrument?

HELD: NO. Fossum is far from being a holder in due course. He was himself a party to the
contract which supplied the consideration for the draft, albeit acting in a representative capacity.
Also, he procured the instrument to be indorsed by the bank and delivered to himself
without the payment of value, after it was overdue, and with full notice that, as between the
original parties, the consideration had completely failed. Under these circumstances, recovery on
the draft is out of the question. He calls attention, however, to the familiar rule that a person
who is not himself a holder in due course may yet recover against the person primarily
liable where it appears that such holder derives his title through a holder in due course.(Shelter
Rule) There is not a line of proof tending to show that the bank itself was ever a holder in
due course. It was incumbent on Fossum to show that the bank was a holder in due course, and
can have no assistance from the presumption expressed in sec 59 of NIL, to the effect that every
holder is deemed prima facie to be a holder in due course. This presumption arises only in favor
of a person who is a holder in the sense defined in sec 191 of NIL, that is, a payee or indorsee
who is in possession of the draft, or the bearer thereof. Under this definition, in order to be a
holder, one must be in possession of the note or the bearer thereof. (Night & Day Bank vs.
Rosenbaum) If this action had been instituted by the bank itself, the presumption that the
bank was a holder in due course would have arisen from the tenor of the draft and the fact
that it was in the bank's possession; but when the instrument passed out of the possession of
the bank and into the possession of Fossum, no presumption arises as to the character in
which the bank held the paper. The bank's relation to the instrument became past history when
it delivered the document to Fossum; and it was incumbent upon him to show that the bank had
in fact acquired the instrument for value and under such conditions as would constitute it a
holder in due course.
Moreover, Fossum personally made the contract which constituted the consideration for the draft.
He was therefore a party in fact, if not in law, to the transaction giving origin to the
instrument; and it is difficult to see how he could strip himself of the character to agent with
respect to the origin of the contract and maintain this action in his own name where his principal
could not. An agent who actually makes a contract, and who has notice of all equities emanating
therefrom, can stand on no better footing than his principal with respect to commercial paper
growing out of the transaction. To place him on any higher plane would be incompatible with the
fundamental conception underlying the relation of principal and agent. If the original payee of a
note unenforceable for lack of consideration repurchases the instrument after transferring
it to a holder in due course, the paper again becomes subject in the payee's hands to the
same defenses to which it would have been subject if the paper had never passed through
the hands of a holder in due course. The same is true where the instrument is retransferred to
an agent of the payee.