G.R. No.
158262 July 21, 2008 fees, liquidated damages, replevin bond premium, expenses in the seizure of the vehicle,
SPS. PEDRO AND FLORENCIA VIOLAGO, Petitioners,
vs.
BA FINANCE CORPORATION and AVELINO VIOLAGO, Respondents.
The Facts
Sometime in 1983, Avelino Violago, President of Violago Motor Sales Corporation
(VMSC), offered to sell a car to his cousin, Pedro F. Violago, and the latter’s wife,
Florencia. Avelino explained that he needed to sell a vehicle to increase the sales quota
of VMSC, and that the spouses would just have to pay a down payment of PhP 60,500
while the balance would be financed by respondent BA Finance. The spouses would pay
the monthly installments to BA Finance while Avelino would take care of the documentation
and approval of financing of the car. Under these terms, the spouses then agreed to
purchase a Toyota Cressida Model 1983 from VMSC.
On August 4, 1983, the spouses and Avelino signed a promissory note under which they
bound themselves to pay jointly and severally to the order of VMSC the amount of PhP
209,601 in 36 monthly installments of PhP 5,822.25 a month, the first installment to be due
and payable on September 16, 1983. Avelino prepared a Disclosure Statement of
Loan/Credit Transportation which showed the net purchase price of the vehicle, down
payment, balance, and finance charges. In turn, the spouses executed a chattel mortgage
over the car in favor of VMSC as security for the amount of PhP 209,601. VMSC, through
Avelino, endorsed the promissory note to BA Finance without recourse. After receiving
the amount of PhP 209,601, VMSC executed a Deed of Assignment of its rights and
interests under the promissory note and chattel mortgage in favor of BA Finance.
Meanwhile, the spouses remitted the amount of PhP 60,500 to VMSC through Avelino.
The sales invoice was filed with the Land Transportation Office (LTO)-Baliwag Branch,
which issued Certificate of Registration No. 0137032 in the name of Pedro on August 8,
1983. The spouses were unaware that the same car had already been sold in 1982 to
Esmeraldo Violago, another cousin of Avelino, and registered in Esmeraldo’s name.
Despite the spouses’ demand for the car and Avelino’s repeated assurances, there was
no delivery of the vehicle. Since VMSC failed to deliver the car, Pedro did not pay any
monthly amortization to BA Finance.
On March 1, 1984, BA Finance filed with the Regional Trial Court (RTC), Branch 116 in
Pasay City a complaint for Replevin with Damages against the spouses. The complaint
prayed for the delivery of the vehicle in favor of BA Finance or, if delivery cannot be
effected, for the payment of PhP 199,049.41 plus penalty at the rate of 3% per month from
February 15, 1984 until fully paid. BA Finance also asked for the payment of attorney’s
and costs of suit. The RTC issued an Order of Replevin on March 28, 1984.
In the meantime, Esmeraldo conveyed the vehicle to Jose V. Olvido who was then issued
Certificate of Registration No. 0014830-4 by the LTO-Cebu City Branch on April 29, 1985.
On May 8, 1987, Jose executed a Chattel Mortgage over the vehicle in favor of Generoso
Lopez as security for a loan covered by a promissory note in the amount of PhP 260,664.
This promissory note was later endorsed to BA Finance, Cebu City branch.7
On January 28, 1992, the spouses filed their Answer before the RTC, alleging the
following: they never received the vehicle from VMSC; the vehicle was previously sold to
Esmeraldo; BA Finance was not a holder in due course under Section 59 of the Negotiable
Instruments Law (NIL); and the recourse of BA Finance should be against VMSC. On
February 25, 1995, the Violago spouses, with prior leave of court, filed a Third Party
Complaint against Avelino praying that he be held liable to them in the event that they be
held liable to BA Finance, as well as for damages. In his Motion to Dismiss and Answer,
Avelino contended that he was not a party to the transaction personally, but VMSC.
Avelino’s motion was denied and the third party complaint against him was entertained by
the trial court. Subsequently, the spouses belabored to prove that they affixed their
signatures on the promissory note and chattel mortgage in favor of VMSC in blank.
The RTC rendered a Decision on March 5, 1994, finding for BA Finance but against the
Violago spouses. The RTC, however, declared that they are entitled to be indemnified by
Avelino. The
The Ruling of the CA
Petitioners-spouses and Avelino appealed to the CA. The spouses argued that the
promissory note is a negotiable instrument; hence, the trial court should have applied the
NIL and not the Civil Code. The spouses also asserted that since VMSC was not the owner
of the vehicle at the time of sale, the sale was null and void for the failure in the "cause or
consideration" of the promissory note, which in this case was the sale and delivery of the
vehicle. The spouses also alleged that BA Finance was not a holder in due course of the
note since it knew, through its Cebu City branch, that the car was never delivered to the
spouses. On the other hand, Avelino prayed for the dismissal of the complaint against him
because he was not a party to the transaction, and for an order to the spouses to pay him
moral damages and costs of suit.
The appellate court ruled that the promissory note was a negotiable instrument and that
BA Finance was a holder in due course, applying Secs. 8, 24, and 52 of the NIL. The CA
faulted petitioners for failing to implead VMSC, the seller of the vehicle and creditor in the
promissory note, as a party in their Third Party Complaint. Citing Salas v. Court of
Appeals, the appellate court reasoned that since VMSC is an indispensable party, any
judgment will not bind it or be enforced against it. The absence of VMSC rendered the
proceedings in the RTC and the judgment in the Third Party Complaint "null and void, not
only as to the absent party but also to the present parties, namely the Defendants-
Appellants (petitioners herein) and the Third-Party-Defendant-Appellant (Avelino
Violago)." The CA set aside the trial court’s order holding Avelino liable for damages to the
spouses without prejudice to the action of the spouses against VMSC and Avelino in a
separate action.
Issue: Whether or not the holder of an invalid negotiable promissory note may be
considered a holder in due course
Ruling:
The ruling of the appellate court is set aside insofar as it dismissed, without prejudice, the
third party complaint of petitioners against Avelino thereby effectively absolving Avelino
from any liability under the third party complaint.
The promissory note signed by petitioners reads:
209,601.00 Makati, Metro Manila, Philippines, August 4, 1983
For value received, I/we, jointly and severally, promise to pay to the order of VIOLAGO
MOTOR SALES CORPORATION, its office, the principal sum of TWO HUNDRED NINE
THOUSAND SIX HUNDRED ONE ONLY Pesos (P209,601.00), Philippines Currency, with
interest at the rate stipulated herein below, in installments as follows:
Thirty Six (36) successive monthly installments of P5,822.25, the first installment to be
paid on 9-16-83, and the succeeding monthly installments on the 16th day of each and
every succeeding month thereafter until the account is fully paid, provided that the penalty
charge of three (3%) per cent per month or a fraction thereof shall be added on each
unpaid installment from maturity thereof until fully paid.
xxxx

In addressing the threshold issue of whether BA Finance is a holder in due course of the Notice of demand, presentment, dishonor and protest are hereby waived.
promissory note, we must determine whether the note is a negotiable instrument and,
hence, covered by the NIL. In their appeal to the CA, petitioners argued that the promissory
note is a negotiable instrument and that the provisions of the NIL, not the Civil Code, should (Sgd.) (Sgd.)
be applied. In the present petition, however, petitioners claim that Article 1318 of the Civil PEDRO F. VIOLAGO FLORENCIA R. VIOLAGO
Code14 should be applied since their consent was vitiated by fraud, and, thus, the
763 Constancia St., Sampaloc, Manila same
promissory note does not carry any legal effect despite its negotiation. Either way, the
(Address) (Address)
petitioners’ arguments deserve no merit.
(Sgd.) (Sgd.)
The promissory note is clearly negotiable. The appellate court was correct in finding all the Marivic Avaria Jesus Tuazon
requisites of a negotiable instrument present. The NIL provides:
(WITNESS) (WITNESS)
Section 1. Form of Negotiable Instruments. – An instrument to be negotiable must conform
to the following requirements: PAY TO THE ORDER OF BA FINANCE CORPORATION

(a) It must be in writing and signed by the maker or drawer; WITHOUT RECOURSE

(b) Must contain an unconditional promise or order to pay a sum certain in money; VIOLAGO MOTOR SALES CORPORATION

(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
By: (Sgd.)
AVELINO A. VIOLAGO, Pres. 15
The promissory note clearly satisfies the requirements of a negotiable instrument under
the NIL. It is in writing; signed by the Violago spouses; has an unconditional promise to
pay a certain amount, i.e., PhP 209,601, on specific dates in the future which could be
determined from the terms of the note; made payable to the order of VMSC; and names defense of non-delivery of the object and nullity of the sale against the corporation. The
the drawees with certainty. The indorsement by VMSC to BA Finance appears likewise to NIL considers every negotiable instrument prima facie to have been issued for a valuable
be valid and regular. consideration.20 In Salas, we held that a party holding an instrument may enforce payment
of the instrument for the full amount thereof. As such, the maker cannot set up the defense
The more important issue now is whether or not BA Finance is a holder in due course. The of nullity of the contract of sale.21 Thus, petitioners are liable to respondent corporation for
resolution of this issue will determine whether petitioners’ defense of fraud and nullity of the payment of the amount stated in the instrument.
the sale could validly be raised against respondent corporation. Sec. 52 of the NIL
provides: WHEREFORE, the CA’s August 20, 2002 Decision and May 15, 2003 Resolution in CA-
G.R. CV No. 48489 are SET ASIDE insofar as they dismissed without prejudice the third
Section 52. What constitutes a holder in due course.––A holder in due course is a holder party complaint of petitioners-spouses Pedro and Florencia Violago against respondent
who has taken the instrument under the following conditions: Avelino Violago. The March 5, 1994 Decision of the RTC
is REINSTATED and AFFIRMED. Costs against Avelino Violago.
(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; Parties:

(d) That at the time it was negotiated to him he had no notice of any infirmity in the Maker: Violago
instrument or defect in the title of the person negotiating it.
Payee: Avelino
The law presumes that a holder of a negotiable instrument is a holder thereof in due
course. 16 In this case, the CA is correct in finding that BA Finance meets all the foregoing Indorsed to BA Finance
requisites:

In the present recourse, on its face, (a) the "Promissory Note", Exhibit "A", is complete
and regular; (b) the "Promissory Note" was endorsed by the VMSC in favor of the
Appellee; (c) the Appellee, when it accepted the Note, acted in good faith and for value;
(d) the Appellee was never informed, before and at the time the "Promissory Note" was
endorsed to the Appellee, that the vehicle sold to the Defendants-Appellants was not
delivered to the latter and that VMSC had already previously sold the vehicle to Esmeraldo
Violago. Although Jose Olvido mortgaged the vehicle to Generoso Lopez, who assigned
his rights to the BA Finance Corporation (Cebu Branch), the same occurred only on May
8, 1987, much later than August 4, 1983, when VMSC assigned its rights over the "Chattel
Mortgage" by the Defendants-Appellants to the Appellee. Hence, Appellee was a holder
in due course.17

In the hands of one other than a holder in due course, a negotiable instrument is subject
to the same defenses as if it were non-negotiable.18 A holder in due course, however, holds
the instrument free from any defect of title of prior parties and from defenses available to
prior parties among themselves, and may enforce payment of the instrument for the full
amount thereof.19 Since BA Finance is a holder in due course, petitioners cannot raise the
G.R. No. 72593 April 30, 1987
CONSOLIDATED PLYWOOD INDUSTRIES, INC., HENRY WEE, and RODOLFO T.
VERGARA, petitioners,
vs.
IFC LEASING AND ACCEPTANCE CORPORATION, respondent.
Carpio, Villaraza & Cruz Law Offices for petitioners.
Europa, Dacanay & Tolentino for respondent.
Facts:
The petitioner is a corporation engaged in the logging business. It had for its program of
logging activities for the year 1978 the opening of additional roads, and simultaneous logging
operations along the route of said roads, in its logging concession area at Baganga, Manay,
and Caraga, Davao Oriental. For this purpose, it needed two (2) additional units of tractors.
Atlantic Gulf & Pacific Company of Manila, through its sister company and marketing arm,
Industrial Products Marketing (the "seller-assignor"), a corporation dealing in tractors and
other heavy equipment business, offered to sell to petitioner-corporation two (2) "Used" Allis
Crawler Tractors.
In order to ascertain the extent of work to which the tractors were to be exposed, and to
determine the capability of the "Used" tractors being offered, petitioner-corporation
requested the seller-assignor to inspect the job site. After conducting said inspection, the
seller-assignor assured petitioner-corporation that the "Used" Allis Crawler Tractors which
were being offered were fit for the job, and gave the corresponding warranty of ninety (90)
days performance of the machines and availability of parts.
With said assurance and warranty, and relying on the seller-assignor's skill and judgment,
petitioner-corporation through petitioners Wee and Vergara, president and vice-president,
respectively, agreed to purchase on installment said two (2) units of "Used" Allis Crawler
Tractors. It also paid the down payment of Two Hundred Ten Thousand Pesos (P210,000.00).
On April 5, 1978, the seller-assignor issued the sales invoice for the two 2) units of tractors.
At the same time, the deed of sale with chattel mortgage with promissory note was executed.
Simultaneously with the execution of the deed of sale with chattel mortgage with promissory
note, the seller-assignor, by means of a deed of assignment, assigned its rights and interest in
the chattel mortgage in favor of the respondent.
Immediately thereafter, the seller-assignor delivered said two (2) units of "Used" tractors to
the petitioner-corporation's job site and as agreed, the seller-assignor stationed its own
mechanics to supervise the operations of the machines.
Barely fourteen (14) days had elapsed after their delivery when one of the tractors broke
down and after another nine (9) days, the other tractor likewise broke down (t.s.n., May 28,
1980, pp. 68-69).
On April 25, 1978, petitioner Rodolfo T. Vergara formally advised the seller-assignor of the
fact that the tractors broke down and requested for the seller-assignor's usual prompt
attention under the warranty
Because of the breaking down of the tractors, the road building and simultaneous logging
operations of petitioner-corporation were delayed and petitioner Vergara advised the seller-
assignor that the payments of the installments as listed in the promissory note would likewise
be delayed until the seller-assignor completely fulfills its obligation under its warranty.
Since the tractors were no longer serviceable, on April 7, 1979, petitioner Wee asked the
seller-assignor to pull out the units and have them reconditioned, and thereafter to offer
them for sale. The proceeds were to be given to the respondent and the excess, if any, to be
divided between the seller-assignor and petitioner-corporation which offered to bear one-
half (1/2) of the reconditioning cost.
No response to this letter, was received by the petitioner-corporation and despite several
follow-up calls, the seller-assignor did nothing with regard to the request, until the complaint
in this case was filed by the respondent against the petitioners, the corporation, Wee, and
Vergara.
The complaint was filed by the respondent against the petitioners for the recovery of the
principal sum of One Million Ninety Three Thousand Seven Hundred Eighty Nine Pesos &
71/100 (P1,093,789.71), accrued interest of One Hundred Fifty One Thousand Six Hundred
Eighteen Pesos & 86/100 (P151,618.86) as of August 15, 1979, accruing interest thereafter at
the rate of twelve (12%) percent per annum, attorney's fees of Two Hundred Forty Nine
The lower court rendered judgment ordering Consolidated Plywood, et al to pay jointly and
severally.
Petitioners appealed to CA. CA held that it is a negotiable instrument which was discounted
or sold to the IFC Leasing and Acceptance Corporation for P800,000.00 considering the
following. it is in writing and signed by the maker; it contains an unconditional promise to pay
a certain sum of money payable at a fixed or determinable future time; it is payable to order
(Sec. 1, NIL); the promissory note was negotiated when it was transferred and delivered by
IPM to the appellee and duly endorsed to the latter (Sec. 30, NIL); it was taken in the
conditions that the note was complete and regular upon its face before the same was overdue
and without notice, that it had been previously dishonored and that the note is in good faith
and for value without notice of any infirmity or defect in the title of IPM (Sec. 52, NIL); that
IFC Leasing and Acceptance Corporation held 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 against all parties liable
thereon (Sec. 57, NIL); the appellants engaged that they would pay the note according to its
tenor, and admit the existence of the payee IPM and its capacity to endorse (Sec. 60, NIL).
Issue: Whether or not the promissory note in question is a negotiable instrument so as to bar
completely all the available defenses of the petitioner against the respondent-assignee.
Ruling:
The Supreme Court held that the promissory note in question is not a negotiable instrument.
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS
MARKETING, the sum of ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY
NINE PESOS & 71/100 only (P 1,093,789.71), Philippine Currency, the said principal sum, to be
payable in 24 monthly installments starting July 15, 1978 and every 15th of the month
thereafter until fully paid. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law requires that a
promissory note "must be payable to order or bearer, " it cannot be denied that the
promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiablility-i.e. must contain the so-called 'words
of negotiable, must be payable to 'order' or 'bearer'. These words serve as an expression of
consent that the instrument may be transferred. This consent is indispensable since a maker
assumes greater risk under a negotiable instrument than under a non-negotiable one. ...
xxx xxx xxx
When instrument is payable to order.
SEC. 8. WHEN PAYABLE TO ORDER. — The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. . . .
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to order. There
must always be a specified person named in the instrument. It means that the bill or note is
to be paid to the person designated in the instrument or to any person to whom he has
indorsed and delivered the same. Without the words "or order" or"to the order of, "the
instrument is payable only to the person designated therein and is therefore non-negotiable.
Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a
negotiable instrument but will merely "step into the shoes" of the person designated in the
instrument and will thus be open to all defenses available against the latter." (Campos and
Campos, Notes and Selected Cases on Negotiable Instruments Law, Third Edition, page 38).
(Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable instrument, it
follows that the respondent can never be a holder in due course but remains a mere assignee
of the note in question. Thus, the petitioner may raise against the respondent all defenses
available to it as against the seller-assignor Industrial Products Marketing.
This being so, there was no need for the petitioner to implied the seller-assignor when it was
sued by the respondent-assignee because the petitioner's defenses apply to both or either of
either of them.
Secondly, even conceding for purposes of discussion that the promissory note in question is
a negotiable instrument, the respondent cannot be a holder in due course for a more
significant reason.
The evidence presented in the instant case shows that prior to the sale on installment of the
tractors, there was an arrangement between the seller-assignor, Industrial Products
Marketing, and the respondent whereby the latter would pay the seller-assignor the entire
purchase price and the seller-assignor, in turn, would assign its rights to the respondent which
acquired the right to collect the price from the buyer, herein petitioner Consolidated Plywood
Industries, Inc.
A mere perusal of the Deed of Sale with Chattel Mortgage with Promissory Note, the Deed of
Assignment and the Disclosure of Loan/Credit Transaction shows that said documents
evidencing the sale on installment of the tractors were all executed on the same day by and
among the buyer, which is herein petitioner Consolidated Plywood Industries, Inc.; the seller-
assignor which is the Industrial Products Marketing; and the assignee-financing company,
which is the respondent. Therefore, the respondent had actual knowledge of the fact that the
seller-assignor's right to collect the purchase price was not unconditional, and that it was
subject to the condition that the tractors -sold were not defective. The respondent knew that
when the tractors turned out to be defective, it would be subject to the defense of failure of
consideration and cannot recover the purchase price from the petitioners. Even assuming for
the sake of argument that the promissory note is negotiable, the respondent, which took the
same with actual knowledge of the foregoing facts so that its action in taking the instrument
amounted to bad faith, is not a holder in due course. As such, the respondent is subject to all
defenses which the petitioners may raise against the seller-assignor. Any other interpretation
would be most inequitous to the unfortunate buyer who is not only saddled with two useless
tractors but must also face a lawsuit from the assignee for the entire purchase price and all
its incidents without being able to raise valid defenses available as against the assignor.
Lastly, the respondent failed to present any evidence to prove that it had no knowledge of
any fact, which would justify its act of taking the promissory note as not amounting to bad
faith.
Sections 52 and 56 of the Negotiable Instruments Law provide that: negotiating it.
xxx xxx xxx
SEC. 52. WHAT CONSTITUTES A HOLDER IN DUE COURSE. — A holder in due course is a holder
who has taken the instrument under the following conditions:
xxx xxx xxx
xxx xxx xxx
(c) That he took it in good faith and for value
(d) That the time it was negotiated by him he had no notice of any infirmity in the instrument
of deffect in the title of the person negotiating it
xxx xxx xxx
SEC. 56. WHAT CONSTITUTES NOTICE OF DEFFECT. — To constitute notice of an infirmity in
the instrument or defect in the title of the person negotiating the same, the person to whom
it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of
such facts that his action in taking the instrument amounts to bad faith. (Emphasis supplied)
We subscribe to the view of Campos and Campos that a financing company is not a holder in
good faith as to the buyer, to wit:
In installment sales, the buyer usually issues a note payable to the seller to cover the purchase
price. Many times, in pursuance of a previous arrangement with the seller, a finance company
pays the full price and the note is indorsed to it, subrogating it to the right to collect the price
from the buyer, with interest. With the increasing frequency of installment buying in this
country, it is most probable that the tendency of the courts in the United States to protect
the buyer against the finance company, the finance company will be subject to the defense
of failure of consideration and cannot recover the purchase price from the buyer. As against
the argument that such a rule would seriously affect "a certain mode of transacting business
adopted throughout the State," a court in one case stated:
It may be that our holding here will require some changes in business methods and will
impose a greater burden on the finance companies. We think the buyer-Mr. & Mrs. General
Public-should have some protection somewhere along the line. We believe the finance
company is better able to bear the risk of the dealer's insolvency than the buyer and in a far
better position to protect his interests against unscrupulous and insolvent dealers. . . .
If this opinion imposes great burdens on finance companies it is a potent argument in favor
of a rule which win afford public protection to the general buying public against unscrupulous
dealers in personal property. . . . (Mutual Finance Co. v. Martin, 63 So. 2d 649, 44 ALR 2d 1
[1953]) (Campos and Campos, Notes and Selected Cases on Negotiable Instruments Law, Third
Edition, p. 128).
In the case of Commercial Credit Corporation v. Orange Country Machine Works (34 Cal. 2d
766) involving similar facts, it was held that in a very real sense, the finance company was a
moving force in the transaction from its very inception and acted as a party to it. When a
finance company actively participates in a transaction of this type from its inception, it cannot
be regarded as a holder in due course of the note given in the transaction.
In like manner, therefore, even assuming that the subject promissory note is negotiable, the
respondent, a financing company which actively participated in the sale on installment of the
subject two Allis Crawler tractors, cannot be regarded as a holder in due course of said note.
It follows that the respondent's rights under the promissory note involved in this case are
subject to all defenses that the petitioners have against the seller-assignor, Industrial Products
Marketing. For Section 58 of the Negotiable Instruments Law provides that "in the hands of
any holder other than a holder in due course, a negotiable instrument is subject to the same
defenses as if it were non-negotiable. ... "
Prescinding from the foregoing and setting aside other peripheral issues, we find that both
the trial and respondent appellate court erred in holding the promissory note in question to
be negotiable. Such a ruling does not only violate the law and applicable jurisprudence, but
would result in unjust enrichment on the part of both the assigner- assignor and respondent
assignee at the expense of the petitioner-corporation which rightfully rescinded an
inequitable contract. We note, however, that since the seller-assignor has not been
impleaded herein, there is no obstacle for the respondent to file a civil Suit and litigate its
claims against the seller- assignor in the rather unlikely possibility that it so desires,
G.R. No. 101163 January 11, 1993 On 26 May 1988, the trial court dismissed the Complaint as well as the Third-Party Complaint,
and ordered STATE to pay MOULIC P3,000.00 for attorney's fees.
STATE INVESTMENT HOUSE, INC., petitioner,
vs. STATE elevated the order of dismissal to the Court of Appeals, but the appellate court affirmed
COURT OF APPEALS and NORA B. MOULIC, respondents. the trial court on the ground that the Notice of Dishonor to MOULIC was made beyond the
period prescribed by the Negotiable Instruments Law and that even if STATE did serve such
Escober, Alon & Associates for petitioner.
notice on MOULIC within the reglementary period it would be of no consequence as the
Martin D. Pantaleon for private respondents. checks should never have been presented for payment. The sale of the jewelry was never
effected; the checks, therefore, ceased to serve their purpose as security for the jewelry.

The liability to a holder in due course of the drawer of checks issued to another merely as
security, and the right of a real estate mortgagee after extrajudicial foreclosure to recover the Issue: Whether or not STATE was a holder of the checks in due course.
balance of the obligation.

Facts:
In this regard, Sec. 52 of the Negotiable Instruments Law provides —
Private respondent Nora B. Moulic issued to Corazon Victoriano, as security for pieces of
Sec. 52. What constitutes a holder in due course. — A holder in due course is a holder who
jewelry to be sold on commission, two (2) post-dated Equitable Banking Corporation checks
has taken the instrument under the following conditions: (a) That it is complete and regular
in the amount of Fifty Thousand Pesos (P50,000.00) each, one dated 30 August 1979 and the
upon its face; (b) That he became the holder of it before it was overdue, and without notice
other, 30 September 1979. Thereafter, the payee negotiated the checks to petitioner State
that it was previously dishonored, if such was the fact; (c) That he took it in good faith and for
Investment House. Inc. (STATE).
value; (d) That at the time it was negotiated to him he had no notice of any infirmity in the
MOULIC failed to sell the pieces of jewelry, so she returned them to the payee before maturity instrument or defect in the title of the person negotiating it.
of the checks. The checks, however, could no longer be retrieved as they had already been
Culled from the foregoing, a prima facie presumption exists that the holder of a negotiable
negotiated. Consequently, before their maturity dates, MOULIC withdrew her funds from the
instrument is a holder in due course. Consequently, the burden of proving that STATE is not a
drawee bank.
holder in due course lies in the person who disputes the presumption. In this regard, MOULIC
Upon presentment for payment, the checks were dishonored for insufficiency of funds. On 20 failed.
December 1979, STATE allegedly notified MOULIC of the dishonor of the checks and
The evidence clearly shows that: (a) on their faces the post-dated checks were complete and
requested that it be paid in cash instead, although MOULIC avers that no such notice was
regular: (b) petitioner bought these checks from the payee, Corazon Victoriano, before their
given her.
due dates;3 (c) petitioner took these checks in good faith and for value, albeit at a discounted
On 6 October 1983, STATE sued to recover the value of the checks plus attorney's fees and price; and, (d) petitioner was never informed nor made aware that these checks were merely
expenses of litigation. issued to payee as security and not for value.

In her Answer, MOULIC contends that she incurred no obligation on the checks because the Consequently, STATE is indeed a holder in due course. As such, it holds the instruments free
jewelry was never sold and the checks were negotiated without her knowledge and consent. from any defect of title of prior parties, and from defenses available to prior parties among
She also instituted a Third-Party Complaint against Corazon Victoriano, who later assumed themselves; STATE may, therefore, enforce full payment of the checks.4
full responsibility for the checks.
MOULIC cannot set up against STATE the defense that there was failure or absence of Sec. 114. When notice need not be given to drawer. — Notice of dishonor is not required to
consideration. MOULIC can only invoke this defense against STATE if it was privy to the be given to the drawer in the following cases: (a) Where the drawer and the drawee are the
purpose for which they were issued and therefore is not a holder in due course. same person; (b) When the drawee is a fictitious person or a person not having capacity to
contract; (c) When the drawer is the person to whom the instrument is presented for
That the post-dated checks were merely issued as security is not a ground for the discharge
payment: (d) Where the drawer has no right to expect or require that the drawee or acceptor
of the instrument as against a holder in due course. For the only grounds are those outlined
will honor the instrument; (e) Where the drawer had countermanded payment.
in Sec. 119 of the Negotiable Instruments Law:
Indeed, MOULIC'S actuations leave much to be desired. She did not retrieve the checks when
Sec. 119. Instrument; how discharged. — A negotiable instrument is discharged: (a) By
she returned the jewelry. She simply withdrew her funds from her drawee bank and
payment in due course by or on behalf of the principal debtor; (b) By payment in due course
transferred them to another to protect herself. After withdrawing her funds, she could not
by the party accommodated, where the instrument is made or accepted for his
have expected her checks to be honored. In other words, she was responsible for the dishonor
accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act
of her checks, hence, there was no need to serve her Notice of Dishonor, which is simply
which will discharge a simple contract for the payment of money; (e) When the principal
bringing to the knowledge of the drawer or indorser of the instrument, either verbally or by
debtor becomes the holder of the instrument at or after maturity in his own right.
writing, the fact that a specified instrument, upon proper proceedings taken, has not been
Obviously, MOULIC may only invoke paragraphs (c) and (d) as possible grounds for the accepted or has not been paid, and that the party notified is expected to pay it.8
discharge of the instrument. But, the intentional cancellation contemplated under paragraph
In addition, the Negotiable Instruments Law was enacted for the purpose of facilitating, not
(c) is that cancellation effected by destroying the instrument either by tearing it up,5 burning
hindering or hampering transactions in commercial paper. Thus, the said statute should not
it,6 or writing the word "cancelled" on the instrument. The act of destroying the instrument
be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the
must also be made by the holder of the instrument intentionally. Since MOULIC failed to get
necessities in a single case.9
back possession of the post-dated checks, the intentional cancellation of the said checks is
altogether impossible. The drawing and negotiation of a check have certain effects aside from the transfer of title or
the incurring of liability in regard to the instrument by the transferor. The holder who takes
On the other hand, the acts which will discharge a simple contract for the payment of money
the negotiated paper makes a contract with the parties on the face of the instrument. There
under paragraph (d) are determined by other existing legislations since Sec. 119 does not
is an implied representation that funds or credit are available for the payment of the
specify what these acts are, e.g., Art. 1231 of the Civil Code7 which enumerates the modes of
instrument in the bank upon which it is drawn.10 Consequently, the withdrawal of the money
extinguishing obligations. Again, none of the modes outlined therein is applicable in the
from the drawee bank to avoid liability on the checks cannot prejudice the rights of holders
instant case as Sec. 119 contemplates of a situation where the holder of the instrument is the
in due course. In the instant case, such withdrawal renders the drawer, Nora B. Moulic, liable
creditor while its drawer is the debtor. In the present action, the payee, Corazon Victoriano,
to STATE, a holder in due course of the checks.
was no longer MOULIC's creditor at the time the jewelry was returned.
Under the facts of this case, STATE could not expect payment as MOULIC left no funds with
Correspondingly, MOULIC may not unilaterally discharge herself from her liability by the mere
the drawee bank to meet her obligation on the checks,11 so that Notice of Dishonor would be
expediency of withdrawing her funds from the drawee bank. She is thus liable as she has no
futile.
legal basis to excuse herself from liability on her checks to a holder in due course.
In fine, MOULIC, as drawer, is liable for the value of the checks she issued to the holder in due
Moreover, the fact that STATE failed to give Notice of Dishonor to MOULIC is of no moment.
course, STATE, without prejudice to any action for recompense she may pursue against the
The need for such notice is not absolute; there are exceptions under Sec. 114 of the
VICTORIANOs as Third-Party Defendants who had already been declared as in default.
Negotiable Instruments Law:
WHEREFORE, the petition is GRANTED. The decision appealed from is REVERSED and a new
one entered declaring private respondent NORA B. MOULIC liable to petitioner STATE
INVESTMENT HOUSE, INC., for the value of EBC Checks Nos. 30089658 and 30089660 in the
total amount of P100,000.00, P3,000.00 as attorney's fees, and the costs of suit, without
prejudice to any action for recompense she may pursue against the VICTORIANOs as Third-
Party Defendants.

Costs against private respondent.

SO ORDERED.
G.R. No. L-15126 November 30, 1961
VICENTE R. DE OCAMPO & CO., plaintiff-appellee,
vs.
ANITA GATCHALIAN, ET AL., defendants-appellants.
Vicente Formoso, Jr. for plaintiff-appellee.
Reyes and Pangalañgan for defendants-appellants.
Facts:
That on or about 8 September 1953, in the evening, defendant Anita C. Gatchalian
who was then interested in looking for a car for the use of her husband and the family, was
shown and offered a car by Manuel Gonzales who was accompanied by Emil Fajardo, the latter
being personally known to defendant Anita C. Gatchalian;
That Manuel Gonzales represented to defend Anita C. Gatchalian that he was duly
authorized by the owner of the car, Ocampo Clinic, to look for a buyer of said car and to
negotiate for and accomplish said sale, but which facts were not known to plaintiff;
That defendant Anita C. Gatchalian, finding the price of the car quoted by Manuel
Gonzales to her satisfaction, requested Manuel Gonzales to bring the car the day following
together with the certificate of registration of the car, so that her husband would be able to
see same; that on this request of defendant Anita C. Gatchalian, Manuel Gonzales advised her
that the owner of the car will not be willing to give the certificate of registration unless there
is a showing that the party interested in the purchase of said car is ready and willing to make
such purchase and that for this purpose Manuel Gonzales requested defendant Anita C.
Gatchalian to give him (Manuel Gonzales) a check which will be shown to the owner as
evidence of buyer's good faith in the intention to purchase the said car, the said check to be
for safekeeping only of Manuel Gonzales and to be returned to defendant Anita C. Gatchalian
the following day when Manuel Gonzales brings the car and the certificate of registration, but
which facts were not known to plaintiff;
That relying on these representations of Manuel Gonzales and with his assurance that
said check will be only for safekeeping and which will be returned to said defendant the
following day when the car and its certificate of registration will be brought by Manuel
Gonzales to defendants, but which facts were not known to plaintiff, defendant Anita C.
Gatchalian drew and issued a check; that Manuel Gonzales executed and issued a receipt for
said check;
That on the failure of Manuel Gonzales to appear the day following and on his failure
to bring the car and its certificate of registration and to return the check, on the following day
as previously agreed upon, defendant Anita C. Gatchalian issued a "Stop Payment Order" on
the check, with the drawee bank. Said "Stop Payment Order" was issued without previous
notice on plaintiff not being know to defendant, Anita C. Gatchalian and who furthermore had
no reason to know check was given to plaintiff;
That defendants, both or either of them, did not know personally Manuel Gonzales
or any member of his family at any time prior to September 1953, but that defendant Hipolito
Gatchalian is personally acquainted with V. R. de Ocampo;
That Manuel Gonzales having received the check from defendant Anita C. Gatchalian
under the representations and conditions herein above specified, delivered the same to the
Ocampo Clinic, in payment of the fees and expenses arising from the hospitalization of his
wife;
That plaintiff for and in consideration of fees and expenses of hospitalization and the
release of the wife of Manuel Gonzales from its hospital, accepted said check, applying
P441.75 thereof to payment of said fees and expenses and delivering to Manuel Gonzales the
amount of P158.25 representing the balance on the amount of the said check;
That the acts of acceptance of the check and application of its proceeds in the manner
specified above were made without previous inquiry by plaintiff from defendants:
That plaintiff filed or caused to be filed with the Office of the City Fiscal of Manila, a
complaint for estafa against Manuel Gonzales based on and arising from the acts of said
Manuel Gonzales in paying his obligations with plaintiff and receiving the cash balance of the
check, and that said complaint was subsequently dropped;
In their appeal defendants-appellants contend that the check is not a negotiable
instrument, under the facts and circumstances stated in the stipulation of facts, and that
plaintiff is not a holder in due course. In support of the first contention, it is argued that
defendant Gatchalian had no intention to transfer her property in the instrument as it was for
safekeeping merely and, therefore, there was no delivery required by law (Section 16,
Negotiable Instruments Law); that assuming for the sake of argument that delivery was not
for safekeeping merely, delivery was conditional and the condition was not fulfilled.
In support of the contention that plaintiff-appellee is not a holder in due course, the
appellant argues that plaintiff-appellee cannot be a holder in due course because there was
no negotiation prior to plaintiff-appellee's acquiring the possession of the check; that a holder
in due course presupposes a prior party from whose hands negotiation proceeded, and in the
case at bar, plaintiff-appellee is the payee, the maker and the payee being original parties. It
is also claimed that the plaintiff-appellee is not a holder in due course because it acquired the
check with notice of defect in the title of the holder, Manuel Gonzales, and because under
the circumstances stated in the stipulation of facts there were circumstances that brought
suspicion about Gonzales' possession and negotiation, which circumstances should have
placed the plaintiff-appellee under the duty, to inquire into the title of the holder. The
circumstances are as follows:
The check is not a personal check of Manuel Gonzales. Plaintiff could have inquired
why a person would use the check of another to pay his own debt. Furthermore, plaintiff had
the "means of knowledge" inasmuch as defendant Hipolito Gatchalian is personally
acquainted with V. R. de Ocampo .
The maker Anita C. Gatchalian is a complete stranger to Manuel Gonzales and Dr. V.
R. de Ocampo .
The maker is not in any manner obligated to Ocampo Clinic nor to Manuel Gonzales.
The check could not have been intended to pay the hospital fees which amounted only to
P441.75. The check is in the amount of P600.00, which is in excess of the amount due plaintiff.
It was necessary for plaintiff to give Manuel Gonzales change in the sum P158.25 (Par.
10, Stipulation of Facts). Since Manuel Gonzales is the party obliged to pay, plaintiff should
have been more cautious and wary in accepting a piece of paper and disbursing cold cash.
The check is payable to bearer. Hence, any person who holds it should have been
subjected to inquiries. EVEN IN A BANK, CHECKS ARE NOT CASHED WITHOUT INQUIRY FROM
THE BEARER. The same inquiries should have been made by plaintiff.
Answering the first contention of appellant, counsel for plaintiff-appellee argues that
in accordance with the best authority on the Negotiable Instruments Law, plaintiff-appellee
may be considered as a holder in due course, citing Brannan's Negotiable Instruments Law,
6th edition, page 252. On this issue Brannan holds that a payee may be a holder in due course
and says that to this effect is the greater weight of authority, thus:
Whether the payee may be a holder in due course under the N. I. L., as he was at
common law, is a question upon which the courts are in serious conflict. There can be no
doubt that a proper interpretation of the act read as a whole leads to the conclusion that a
payee may be a holder in due course under any circumstance in which he meets the
requirements of Sec. 52.
The argument of Professor Brannan in an earlier edition of this work has never been
successfully answered and is here repeated.
Section 191 defines "holder" as the payee or indorsee of a bill or note, who is in possession of
it, or the bearer thereof. Sec. 52 defendants defines a holder in due course as "a holder who
has taken the instrument under the following conditions: 1. That it is complete and regular on
its face. 2. 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. 3. That he took it in good faith and for
value. 4. That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it."
Since "holder", as defined in sec. 191, includes a payee who is in possession the word
holder in the first clause of sec. 52 and in the second subsection may be replaced by the
definition in sec. 191 so as to read "a holder in due course is a payee or indorsee who is in
possession," etc. (Brannan's on Negotiable Instruments Law, 6th ed., p. 543).
Issue: Whether or not the plaintiff-appellee is a holder in due course. If it is such a holder in
due course, it is immaterial that it was the payee and an immediate party to the instrument.
Ruling:
Section 52, Negotiable Instruments Law, defines holder in due course, thus:
A holder in due course 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 person negotiating it.
The stipulation of facts expressly states that plaintiff-appellee was not aware of the
circumstances under which the check was delivered to Manuel Gonzales, but we agree with
the defendants-appellants that the circumstances indicated by them in their briefs, such as
the fact that appellants had no obligation or liability to the Ocampo Clinic; that the amount of
the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de
Ocampo; and that the check had two parallel lines in the upper left hand corner, which
practice means that the check could only be deposited but may not be converted into cash —
all these circumstances should have put the plaintiff-appellee to inquiry as to the why and
wherefore of the possession of the check by Manuel Gonzales, and why he used it to pay
Matilde's account. 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.
In order to show that the defendant had "knowledge of such facts that his action in
taking the instrument amounted to bad faith," it is not necessary to prove that the defendant
knew the exact fraud that was practiced upon the plaintiff by the defendant's assignor, it
being sufficient to show that the defendant had notice that there was something wrong about
his assignor's acquisition of title, although he did not have notice of the particular wrong that
was committed. Paika v. Perry, 225 Mass. 563, 114 N.E. 830.
It is sufficient that the buyer of a note had notice or knowledge that the note was in some
way tainted with fraud. It is not necessary that he should know the particulars or even the
nature of the fraud, since all that is required is knowledge of such facts that his action in taking
the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395. Accord.
Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.
Liberty bonds stolen from the plaintiff were brought by the thief, a boy fifteen years
old, less than five feet tall, immature in appearance and bearing on his face the stamp a
degenerate, to the defendants' clerk for sale. The boy stated that they belonged to his mother.
The defendants paid the boy for the bonds without any further inquiry. Held, the plaintiff
could recover the value of the bonds. The term 'bad faith' does not necessarily involve furtive
motives, but means bad faith in a commercial sense. The manner in which the defendants
conducted their Liberty Loan department provided an easy way for thieves to dispose of their
plunder. It was a case of "no questions asked." Although gross negligence does not of itself
constitute bad faith, it is evidence from which bad faith may be inferred. The circumstances
thrust the duty upon the defendants to make further inquiries and they had no right to shut
their eyes deliberately to obvious facts. Morris v. Muir, 111 Misc. Rep. 739, 181 N.Y. Supp.
913, affd. in memo., 191 App. Div. 947, 181 N.Y. Supp. 945." (pp. 640-642, Brannan's
Negotiable Instruments Law, 6th ed.).
The above considerations would seem sufficient to justify our ruling that plaintiff-
appellee should not be allowed to recover the value of the check. Let us now examine the
express provisions of the Negotiable Instruments Law pertinent to the matter to find if our
ruling conforms thereto. 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
we are forced to the conclusion that plaintiff payee has not proved that it acquired the check
in good faith and may not be deemed a holder in due course thereof.
For the foregoing considerations, the decision appealed from should be, as it is hereby,
reversed, and the defendants are absolved from the complaint. With costs against plaintiff-
appellee.
G.R. No. L-19461 March 28, 1923
CHARLES A. FOSSUM, plaintiff-appellant,
vs.
FERNANDEZ HERMANOS, a general partnership, and JOSE F. FERNANDEZ Y CASTRO and
RAMON FERNANDEZ Y CASTRO, members of the said partnership of FERNANDEZ
HERMANOS, defendants-appellees.
Chas. E. Tenney for appellant.
Ernesto Zaragoza and Jose Varela Calderon for appellees.
Facts:
Prior to the date of the making of the contract which gave rise to this litigation the plaintiff,
Charles A. Fossum, was the resident agent in Manila of the American Iron Products Company,
Inc., a concern engaged in business in New York City; and on February 10, 1920, the said
Fossum, acting as agent of that company, procured an order from Fernandez Hermanos, a
general commercial partnership engaged in business in the Philippine Islands, to deliver to
said firm a tail shaft, to be installed on the ship Romulus, then operated by Fernandez
Hermanos, as managers of La Compañía Marítima. It was stipulated that said tail shaft would
be in accordance with the specifications contained in a blueprint which had been placed in
the hands of Fossum on or about December 18, 1919; and it was further understood that the
shaft should be shipped from New York upon some steamer sailing in March or April of the
year 1920.
Considerable delay seems to have been encountered in the matter of the manufacture and
shipment of the shaft; but in the autumn of 1920 it was dispatched to Manila, having arrived
in January, 1921. Meanwhile the American Iron Products Company, Inc., had drawn a time
draft, at sixty days, upon Fernandez Hermanos, for the purchase price of the shaft, the same
being in the amount of $2,250, and payable to the Philippine National Bank. In due course the
draft was presented to Fernandez Hermanos for acceptance, and was accepted by said firm
on December 15, 1920, according to its tenor.
Upon inspection after arrival in Manila the shaft was found not to be in conformity with the
specifications and was incapable of use for the purpose for which it had been intended. Upon
discovering this, Fernandez Hermanos refused to pay the draft, and it remained for a time
dishonored in the hands of the Philippine National Bank in Manila. Later the bank indorsed
the draft in blank, without consideration, and delivered it to the plaintiff, Charles A. Fossum,
who thereupon instituted the present action on the instrument against the acceptor,
Fernandez Hermanos, and the two individuals named as defendants in the complaint, in the
character of members of said partnership.
On the foregoing statement it is evident that the consideration for the draft in question and
for the acceptance placed thereon by Fernandez Hermanos, has completely failed; and no
action whatever can be maintained on the instrument by the American Iron Products
Company, Inc., or by any other person against whom the defense of failure of consideration
is available. In recognition of this fact, and considering that the plaintiff Fossum, in whose
name the action is brought, was the individual who had acted for the American Iron Products
Company, Inc., in the making of the contract, the trial court held that the action could not be
maintained and absolved the defendants from the complaint. From this judgment the plaintiff
appealed.
We are of the opinion that the trial judge has committed no error. To begin with, the plaintiff
himself is far from being a holder of this draft in due course.
In the first place, he was himself a party to the contract which supplied the consideration for
the draft, albeit he there acted in a representative capacity. In the second place, 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 this draft by the
plaintiff by virtue of any merit in his own position is out of the question. His attorney,
however, calls attention 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.
The difficulty of the plaintiff's position from this point of view is that there is not a line of proof
in the record tending to show as a fact that the bank itself was ever a holder of this draft in
due course. In this connection it was incumbent on the plaintiff to show, as an independent
claims, i.e., the bank, was a holder in due course; and upon this point the plaintiff can have
no assistance from the presumption, expressed in section 59 of the Negotiable Instrument
Law, to the effect that every holder is deemed prima facie to be a holder in due course. The
presumption expressed in that section arise only in favor of a person who is a holder in the
sense defined in section 191 of the same Law, 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, 191 Mo.
App., 559, 574.) 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 the present plaintiff, 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 the plaintiff; and it was incumbent upon the
plaintiff in this action 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. In the entire absence of
proof on this point, the action must fail.
There is another circumstance which exerted a decisive influence on the mind of the trial
judge in deciding the case for the defendants. This is found in the fact that the plaintiff
personally made the contract which constituted the consideration for this 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 the plaintiff 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. Certainly 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.
We note that in the present case there is no proof that the plaintiff Fossum has ceased to be
the agent of the American Iron Products Company, Inc.; and in the absence of proof the
presumption must be that he still occupies the relation of agent to that company.
it is a well-known rule of law that if the original payee of a note unenforceable for lack of
consideration repurchase 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.
(Kost vs. Bender, 25 Mich., 515; Shade vs. Hayes, L. R. A. [1915D], 271; 8 C. J., 470.) The same
is true where the instrument is retransferred to an agent of the payee (Battersbee vs. Calkins,
128 Mich., 569).
of warranty and showed that the plaintiff knew of the defect in the separator at the time he
purchased the notes. It was held that the plaintiff could not recover, notwithstanding the fact
that the notes had passed through a bank, in whose hands they would not have been subject
to the defense which had been interposed (54 L. R. A., 678).
We find nothing in the Negotiable Instrument Law that would interfere with the application
of the doctrine applied in the cases above cited, for the rule that identifies the agent with the
principal, so far as the legal consequences of certain acts are concerned, is a rule of general
jurisprudence that must operate in conjunction with that Law. We consider the situation to
be the same in practical effect as if the action had been brought in the name of the American
Iron Products Company, Inc., itself; and the use of the name of Fossum strikes us as a mere
attempt at an evasion of the rule of law that would have been fatal to the success of an action
instituted by that company.
For the reasons stated the judgment appealed from must be affirmed, and it is so ordered,
with costs against the appellant.
**Under the shelter principle, a person who does not qualify as a holder in due course can,
nonetheless, acquire the rights and privileges of a holder in due course if he derives his title
to the instrument through a holder in due course. However, a person who previously held the
instrument cannot improve his position by later reacquiring it from a holder in due course if
the former holder was a party to fraud or illegal activity affecting the instrument or had notice
of a claim or defense against the instrument.

In Dollarhide vs. Hopkins (72 Ill. App., 509), the plaintiff, as agent of a corporation engaged in
manufacturing agricultural implements, sold to the defendant a separator for threshing small
grain, with a general warranty that the machine, properly handled, would thresh and clean
grain as well as any other separator of like size. The notes in suit were executed by the
defendant in payment of the separator, and were assigned to the plaintiff before maturity.
They were then indorsed by the plaintiff to a bank which became holder in due course; but
afterwards, and before the commencement of the action, the notes were retransferred by
the bank to the plaintiff. In an action upon the notes the defendant alleged and proved breach