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

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

ISSUE
WON Ham was a holder in due course

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

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

ISSUE
WON plaintiff bank is a holder in due course

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