ENFOQUE HISTÓRICO Y TENDENCIAS DE LAS RELACIONES

reacquires from a holder in due course, the instrument becomes subject to the same defenses to which it would have been subject as if the paper had never

LEXSOCIETAS 64 passed through the hands of a holder in due course. The same is true where the

instrument is retransferred to the agent of a person not a holder in due course. REAL AND PERSONAL DEFENSES

Agbayani: The defenses referred to in Section 57, from which the holder in due

course is free, are equitable (personal) defenses only, not legal (real) defenses, which latter class of defenses can be set up against a holder in due course. Personal defenses are those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him, though holding legal title, to enforce it against the defendant, but which are not available against bona fide purchases for value without notice. They can be set up against persons not holders in due course but not against holders in due course. They are called personal defenses because they are available only against that person or a subsequent holder who stands in privity with him.

In real defenses, the right sought to be enforced has never existed or ceased to exist. It is a defense against everybody. The case of the real defense is presented where (1) the contract was void, not voidable only, as to the defendant in its inception, as where:

1) his signature was forged or unauthorized; 2) he was legally incapable of making the contract;

3) his signature was secured by misrepresentation of the kind of paper he was signing;

4) the contract was void under an invalidating statute;

or (2) the contract has lost its vitality by the occurrence of a subsequent event by: 1) material alteration without defendant’s consent;

2) lapse of time or

3) discharge by payment in due course; 4) bankcruptcy proceedings or otherwise.

An instrument subject to real defense cannot be enforced against the person to whom the legal defense is available but it can be enforced against those to whom such a defense is not available.

Where the action is against joint makers, a defense belong personally to one of them will not be available to the other co-makers; but where the defense of the defendant goes to the merits of the case defeating plaintiff’s right to recover, it is available to the benefit of the other defendant. The last statement seems to mean defenses which are derived from the nature of the obligation.

Personal Defenses Real Defenses

1) absence or failure of consideration

2) want of delivery of complete 1) forgery 2) want of delivery of incomplete

instrument

3) insertion of wrong date when necessary

4) filling up of a blank contrary to authority given or not within reasonable time

5) fraud in inducement

6) acquisition of instrument by force, duress, fear, fraud, mistake, intoxication, unlawful means or for an illegal consideration 7) negotiation in breach of faith or

under circumstances amounting to fraud

8) ultra vires acts of corporations 9) want of authority of agent where

he has apparent authority

10) insanity where there is no notice of insanity on the part of the one contracting with insane person 11) form or consideration is illegal

instrument

3) duress amounting to forgery 4) fraud in factum or fraud in esse

contractus

5) minority

6) marriage in case of a wife

7) insanity where the insane person has a guardian appointed by court 8) ultra vires act of corporation where there is an absolute prohibition

9) want of authority of agent 10) execution between public enemies 11) illegality of contract

Campos: It should be kept in mind that the question of whether a holder is a

holder in due course or not is significant only when there is an existing defense between prior parties.

Sebastian: Alteration is neither a real or personal defense. It is better to say

neither than to say it is both. Niether means it can be real or personal, or something totally different.

The defesne of minority can only be used by the minor and other indorsers may not claim minority of the indorser. But if there was misrepresentation of the minor’s age, the minor will be held liable.

Between the parties to the underlying transaction, illegality of the underlying transaction is a real defense. But as to remote parties, the instrument is valid. A holder unaware of the nature of the note may be a holder in due course.

If the illegality of the instrument is by virtue of a statutory provision, it is a real defense. Otherwise, it is only a personal defense.

PRESUMPTION IN FAVOR OF HOLDER IN DUE COURSE

Sec. 59. Who is deemed holder in due course. - 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

LEXSOCIETAS 65 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. 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.

Agbayani: The presumption expressed in this section arises only in favor of a

person who 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. However, when the instrument is not payable to the holder thereof or to bearer, there is said to be a defect in the title of the holder and the rule that possessor of the instrument is prima facie a holder in due course does not apply. Furthermore, the presumption does not apply in favor of a person who is no longer in possession of the instrument.

Before the presumption arises, he must prove that he is the holder of the instrument, that is, that he is the indorsee in possession of the instrument, as it is payable to order.

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 under whom he claims, acquired the title as holder in due course.

Asia Banking Corporation v Ten Sen Guan y Sobrinos – The reason for

this salutary rule given by the courts in innumerable decision is that the guilty maker or holder of an instrument vitiated by fraud or 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, and a presumption arises against the bona fides of the transfer. The law therefore requires the holder of such paper to manifest the most complete can do and show exactly the circumstances under which the paper was acquired.

But the shifting of the burden of proof to the holder where it is shown that there is a defect in the title of any person who negotiated it does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title.

LIABILITIES OF PARTIES

Campos: From the point of view of liability, parties to a negotiable instrument

are classified into: (1) primary party, and (2) secondary party. The parties primarily liable are (1) the maker of a promissory note and (2) the acceptor of a bill. The drawee is not a party liable on the instrument until and unless he accepts; in such case he becomes an acceptor, and is primarily liable on the bill. The parties secondarily liable are: (1) the indorser of both a note and a bill, and (2) the drawer of a bill.

The main difference between a primary party and a secondary party is that the former is unconditionally liable when the latter is conditionally liable. Being unconditionally liable, the primary party is duty bound to pay the holder at the date of maturity, whether or not the holder demands payment from him, and he is not relieved from liability even if the instrument should become overdue due to the failure of the holder to make such demand. On the other hand, a party secondarily liable is not bound to pay unless the following conditions have been fulfilled: due presentment or demand to the primary party for payment or acceptance, its dishonor by such party, and the taking of proceedings required by law after dishonor – i.e., notice of dishonor to the secondary party and, in cases of foreign bills of exchange, protest of the bill.

Sebastian: Parties who are primarily laible on an instrument are the maker and

the acceptor. It must be noted that a drawee is not even liable on the instrument. Parties who are secondarily liable on an instrument are the drawer and indorsers. LIABILITY OF MAKER

Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse.

Agbayani: The engagement of the maker is to pay absolutely the note according

to its tenor. The maker’s liability is primarily and unconditional. And one who has signed a maker is presumed to have acted with care and to have signed the document in question with full knowledge of its contents unless, of course, fraud is proved.

Maker must pay according to terms of the note.

Aside from engaging to pay the instrument according to its tenor, the maker also admits the existence of the payee and his then capacity to indorse. Thus, without expressly stating it in the note, the maker, by merely signing his name in a note as such, without more, represents to the world that the payee is an existing person with the then capacity to indorse. The maker consequently is precluded from

LEXSOCIETAS 66 setting up the following defenses: (1) that the payee is a fictitious person because,

by making the note, he admits that the payee exists; and (2) that the payee was insane, a minor, or a corporation acting ultra vires because, by making the note, he admits the then capacity of the payee to indorse.

Campos: Under Section 60, a maker is undoubtedly a party primarily liable as

defined in Section 192, for he engages to pay the note according to its tenor, subject to no condition whatever.

The term maker applies only to the promissory note. By executing a note, a maker warrants that the payee as named in the instrument is existing. He cannot therefore deny his liability on the ground that no such payee in fact exists. Thus, he cannot be heard to question, for example, the corporate existence of the payee.

Sebastian: The maker is liable to pay according to its tenor because the maker

wrote it, that is why he will pay the instrument according to its tenor. He is the primary obligor and it is incumbent upon him to honor his commitment.

When the instrument after it has been issued by the maker is materially altered, the commitment to pay according to its tenor will not apply to the note because it is no longer the tenor of his obligation.

A maker must admit the existence of a payee and his capacity to indorse so he cannot deny his liability on the ground that no such payee in fact exists. A negotiable instrument is substitute for money andsomething acceptable to strangers to the underlying transaction of the instrument. Therefore, each step of the way, the person negotiating is making representation with respect to prior transactions. On each step, someone assures the holder that the instrument is good. By the last holder, he will have every protection available from the indorsers to the maker. In effect, the maker is saying that “I pass the instrument to the payee and he can pass it to you; and when he passes it to you, I am willing to pay.”