2. If an amount has been paid – he can be
considered holder in due course only to the extent of the amount theretofore paid by him. What is the meaning of defective
title? What constitute a defective title?
Section 55 of NIL:
A title is defective when the instrument, or any signature thereto is obtained:
1.by fraud, duress, or force and fear, or 2.other unlawful means, or
3.for an illegal consideration, or
4.when he negotiates it in breach of faith, or 5.under such circumstances as amount to a fraud It covers personal or equitable defenses.
What is the objective of Section 55 in
connection with Section 56? To prevent one from becoming a holder in due course who takes the instrument with notice that his transferor is not acting honestly.
To require a thoroughly honest and fair transaction to continue one a holder in due course.
To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.
What other things to be considered
under Section 56? 1. Mere negligence to make injuries is not sufficient. 2. Knowledge of the infirmity amounts to bad
faith.
What is the effect of notice of defect? 1. Destroys the status of a holder as a holder in due course.
2. Opens all defenses What are the rights of holder in due
course? Section 57:
The following are the rights of a holder in due course:
1.He may sue on the instrument on his own name;
2.He may receive payment and if the payment is in due course, the instrument is discharged; 3.He holds the instrument free from any defect of
title prior parties;
4.He may enforce payment of the instrument for the full amount Hereof against all parties liable thereon.
What is the importance and
foundation of due course holding? 1.A holder in due course acquires a right better than any of his predecessors because he takes the instruments free most of defenses available to prior parties among themselves.
2.Protection for those who holds the instrument in due course – Estoppel.
What defenses are available for a holder in due course? How about for holder not in due course?
Real defenses are available against all persons even as against a holder in due course.
A holder not in due course – subject to all defenses, whether personal or real. (Why?
non-negotiable paper. What are the different types of
defenses? 1. Real or absolute defenses2. Personal or equitable defenses Differentiate Real and Personal
Defenses. Real defenses are Real Defenses Personal Defenses those that are
available against all parties, both
immediate and
remote, including the holder in due course. They are real because they are attached to the res, that is, the instrument itself regardless of the merits or demerits of the holder or the conduct or agreement of the parties to it. Note: It cannot be enforced by the holder because there is not contract to enforce. Applied to “only” to the person who has made or drawn the instrument.
Usually applied in VOID contracts or
instruments.
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 the legal title, to
enforce it against the party sought to be made liable but which are not available
against a holder in due course.
They are called personal defenses because they are available only against that person or
subsequent holder who stands in privity with him.
In other words, they can be used only between ORIGINAL PARTIES or immediate parties, or against one who is NOT A HOLDER IN DUE COURSE Examples: 1. Incapacity as far as the incapacitated person is concerned. 2. Want of delivery of incomplete Examples:
1.Filing the wrong date 2.Filling up of blanks
not in accordance with the authority given and within reasonable time.
instrument 3. Forgery 4. Illegality of contract when declared by law. 5. Duress amounting to forgery (signature) 6. Fraud in factum or fraud in esse contractus 7. Fraudulent alteration by the holder 8. Prescription 9. Discharge at or after maturity 10. Other infirmities appearing on the face of the instrument 3.Want of delivery of complete instrument. 4.Absence or failure of consideration
5.Simple fraud or fraud of inducement
6.Acquisition of instrument (not signature) by duress or force and fear 7.Usury
Differentiate Immediate, Remote,
and Prior Parties. M – P – A – B
Immediate parties: in direct contractual relations to each other.
• M makes and delivers his promissory note to P and P endorses it to A, and A to B. M and P are immediate parties.
• Pero kapag may intermediary, (example, may inutusan si P to deliver it to M, let say si X), M and P are not immediate parties. M – P – A – B
Remote parties: is one who takes title to an
instrument by negotiation from either the original payee or any subsequent holder.
• M and B • M and A • P and B
M – P – A – B Prior parties:
• M, P and A are prior parties with respect to B
What defenses available to the following persons, if the flow of negotiation is this: M – P – A – B?
A holder in due course is free from personal “defenses available to prior parties among themselves”
M and P - Real P and A - Real A and B – Real
M and A – the prior party can set up real defenses but if A is not a holder in due course, the
instrument is subject to ALL defenses.
In such a case, A is a mere assignee and the general rules on contract would apply.
What defenses available to a holder not in due course?
What are their rights?
Only those defenses available under ordinary contracts.
A holder not in due course has the following rights:
1. He may sue on the instrument on its own name 2. He may receive payment and if the payment is
in due course, the instrument is discharged Example: B purchases from A an overdue promissory note signed by M, B is not a holder in due course, but B may recover from M or A, if both has no valid excuse for refusing
payment.
3. He is entitled to the instrument but holds it subject to the same defenses as if it were non- negotiable
4. He has all the rights of the holder in due course from whom he derives his title in respect of all the parties prior to such holder, provided he is not a party to any fraud.
Are defenses subject to estoppel?
Why? Yes, real and personal defenses are subject to estoppel since the rules and principles governing estoppel generally are applied to commercial instruments.
Example: Forgery may be precluded by estoppel. Distinguished fraud in factum and
fraud in inducement Fraud in the execution or fraud in factum – it exists in those cases in which a person, without negligence, has signed an instrument which was in fact a negotiable instrument, but was deceived as to the character of the instrument and without knowledge of it.
A tells B that he need the signature of the latter for an autograph, but in fact, the paper was a negotiable instrument.
Fraud in the inducement or simple fraud – it is that which relates to the quality, quantity, value or character of the consideration of the
instrument. (Deceit in the its amount or its terms, not its character).
What defenses are available in fraud
in factum and fraud in inducement? Fraud in the execution or fraud in factum – Real defenses because there is no contract (but negligence is not included)
Fraud in the inducement or simple fraud – What are the rights of purchaser
from a holder in due course? If he acquires the instrument from a person not a holder in due course – the PURCHASER is like those of a transferee of a non-negotiable
instrument (he is NOT free from personal defenses)
If he acquires it from a holder in due course – the PURCHASER can have all the rights available to a holder in due course.
Example:
• P induced M in its favor • P indorsed it to A
• B indorsed it to C
Analogy: C is not a holder in due course but has all the rights (of a holder in due course) kasi he acquires the note from B who is a holder in due course. C is a holder in due course relative to M, P, and A.
• B indorsed it to P
P cannot recover because he is a party to the fraud. P is remitted to his original position kahit na B is a holder in due course.
• C indorsed it to D, who knows the defect but was not a party to the fraud.
D cannot recover from M, because he did not acquire his title from a holder in due course (C).
• Assuming C is a holder in due course, then A reacquires the note.
A cannot recover because he is remitted to its original position. This is not allowed under Section 55.
• B (holder in due course) negotiates it to C • B reacquires it from C
B will hold the instrument in due course, he is remitted to his original position as a holder in due course.
What are the liabilities of the maker? Section 60:
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.
What are the classifications of parties
according to their liabilities? 1.Primarily liablea. Maker of a promissory note b. Acceptor of a bill of exchange c. Certifier of a check
2.Secondarily liable a. Drawer of the bill
b. Indorser of a note or a bill 3.Not liable
a. Drawee until he accepts the instrument Distinguished primary party from
secondary party. Primarily liable – person who by the terms of the instrument is absolutely required to pay. Unconditionally bound.
Secondarily liable – conditionally bound to pay. Will pay the instrument only after certain
conditions have been fulfilled:
1. Due presentment for payment or acceptance to primary party. 2. Dishonor by such party
3. Taking of proceedings required by law after dishonor.
Note: maging primary liable sila kapag they sign the instrument (Section 68).
GENERALLY, the liability of the secondary parties ends when the primary party pays the full amount of the instrument.
What is the liability of the drawer? Section 61:
He will pay the amount of the instrument to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.
What is the liability of the acceptor? Section 62:
The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits:
a. The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and
b. The existence of the payee and his then capacity to indorse.
Who are deemed indorsers? Section 63:
A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity.
What is the liability of the irregular
endorser? Section 64:
Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules:
a. If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties.
b. If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer.
c. If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.
What are the warranty of
negotiations if done by delivery or indorsement?
Section 65:
Every person negotiating an instrument by delivery or by a qualified indorsement warrants:
a. That the instrument is genuine and in all respects what it purports to be;
b. That he has a good title to it;
c. That all prior parties had capacity to contract;
d. That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other than
the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person negotiating public or
corporation securities other than bills and notes. What is the liability of general
endorser? Section 66:
Every indorser who indorses without qualification, warrants to all subsequent holders in due course:
a. The matters and things mentioned in subdivisions (a), (b), and (c) of Section 65; b. That the instrument is, at the time of his
indorsement, valid and subsisting. And, in addition, he engages that, on due
presentment, it shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it.
Distinguish General Indorser from
Irregular Indorser. Makes either special or General Indorser Irregular Indorser blank indorsements. Blank indorsements only Indorses the
instrument after its delivery.
Indorses the
instrument before delivery to the payee. Liable only to
subsequent parties Liable to the payee and subsequent parties
What is the liability of indorser when the paper negotiable is done by delivery?
Section 67:
Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser
negotiation is done by negotiation? holders who make title through the indorsement If he indorses without qualification, he incurs liability of a general indorser (liable only to subsequent parties).
What order does a holder becomes
liable? Section 68:
As respect one another, indorsers are liable prima facie in the order in which they indorse; but
evidence is admissible to show that, as between or among themselves, they have agreed
otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.
What is the liability of the broker or
agent? Section 69:
Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent.
MIDTERM