Welcome to your Chapter 4 activity.

You must copy the content of this page and make a new page on
your Homework folder and name it 'Chapter 4 – Rights of the Holder'.  Your answers to the following will
be on that page. 

____ 

Explain or state briefly the rule or reason for your answers. 

(Note: Your score on this will be based on how you were able to understand the section supporting your
answer. You may elaborate or give specifics to add more substance to your answer in relation to the
instrument being tackled per item. Deadline: September 30, 2020) 

1. W, maker of a promissory note; X, payee, increased the amount and indorsed the note to Y,
a holder in due course, and from Y to Z who had notice of the fraud by X, and from Z to A
who had also notice of the defect.  Decide the rights of Z with respect to W, X, and Y, and
the rights of A with respect to all prior parties. 

Z is the holder in due course with respect to W, X and Y which Z acquire the title from Y who’s a
holder in due course. Under section 58, 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.

As for A, cannot recover from W since A did not acquire the title from a holder in due course and
may not be free from personal defenses due to the defect.

2. X secured without consideration in breach of faith the promissory note of W, and indorsed it
to Y, from Y to Z, from Z to A, the present holder. Is A required to show that he is a holder in
due course? What is the rule if the breach of faith was instead committed by Y against Z?

No, since the note is passed to the hands of A, he assumes the role of being the holder in due
course of the said note. A does not need to prove that he satisfies the conditions that is
enumerated in section 52. 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 whom he claims acquired the title as holder in due course (section 59). A has the right to
prove the contradiction if needed.

The assumption that A is the holder in due course is not destroyed because W was obliged in the
defective title (breach of faith) that is acquired by Y. Since X is also obliged to the defective title
not before Y, the assumption of the holder in due course does not arise in favor of A as far as X
is concerned if ever X proves that the title of Y is defective.
3. M, maker of promissory note for P10,000 in favor of X who indorsed it to Y.  State the right
of the Y if he received notice of defect in the title of X:

(a) before he has paid X;

Y is relieved from the obligation to make payment since the note is defective or notice of
infirmity (section 54)

(b) after he has paid X P6,000;

If Y paid 6,000 before discovering the defect, Y is considered a holder in due course only to the
extent of the amount paid by Y.

(c) Y nevertheless paid X P10,000 under (a);

Y would not be consider a holder in due course of the note since Y paid 10,000, equivalent to the
face of the note even if Y received a notice of infirmity.

(d) Y nevertheless paid X P9,000 under

Y is a holder of due course to the extent of the amount paid which is 9,000. Y is still considered a
holder in due course in this situation since the amount stipulated in the note is 10,000 and what
was paid with regards to the note was not the full amount but 9,000 of it.