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Bills - Week 3 - Ch. III Holder in Due Course - Coggle Diagram
Bills - Week 3 - Ch. III Holder in Due Course
A. Holder in Due Course (52)
B. Rights of a HDC (57,58)
C. Holder for Value
C1. Definition of Value (24,25)
C2. Bank Credit for Value
- If a holder of a check deposits it with his bank (non-drawee bank) and the bank credits it to his account, the bank is not automatically a holder for value.
C3. What Constitutes a Holder for Value (26)
-Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect
to all parties who became such prior to that time.
C4. Holder has a lien on the Instrument (27)
- Where the holder has a lien on the instrument, arising either from CONTRACT or by IMPLICATION OF LAW, he is deemed a holder for value to the extent of his lien.
C5. Burden of Proof (24)
- Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.
Presumption
- Under the NIL, it is presumed that every instrument was issued for valuable consideration. But, rebuttable presumption.
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Situation Contemplated
- A negotiable instrument is given as collateral for a debt.
Effect of Excess
- The creditor may recover the full amount of the instrument, but, any excess they hold in trust for whoever is entitled to it.
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So long as there is value, the holder is a holder for value against all prior indorsees.
When Holder
- The bank becomes a holder for value only when the depositor withdraws the amount of the deposited instrument and, the withdrawal is before the maturity and, before bank receives notice of any instrument.
When Withdrawn
- Either first money in, first money out or, so long as the balance equals or exceeds the amount of the instrument, no withdrawal.
Definition (25)
- Value is any consideration sufficient to support a simple contract. An antecedent or preexisting debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.
Presumption of Consideration (24)
- Every negotiable instrument 'is deemed prima facie to have been issued for valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.
Value/Consideration (191)
- Value means valuable consideration. Thus, both terms are generally convertible. But, consideration is more proper when payee sues the maker or payee v. drawer. But, value is more appropriate if holder against any party with whom they did not deal with.
Amount
- Value need not be full value for the instrument. So long as there is intent to transfer the full amount represented by the instrument.
Partial Payment
- Distinct from insufficiency of the amount. Partial payment contemplates
Holder for Value
- So long as intent at the time of the issuance of the instrument is controlling. Even if subsequent
Effect of Prescription of Obligation
- Even if obligation that served as the consideration prescribed, still a holder for value.
Collateral
- He is a holder for value only to the extent of his lien and should, therefore, be entitled only to the amount of the debt. But, holds excess in trust.
D. Holder in Good Faith (55, 56)
When Title defective (55)
- The title of a person who negotiates an instrument is defective when he (a) obtained the instrument, or (b) any signature thereto by:
Fraud,
Duress,
Force and Fear
Other unlawful means - If notice that the instrument has been stolen
For an illegal consideration,
When he negotiates it in breach of faith,
Under such circumstances as amount to a fraud.
Notice of Defect (56)
- To constitutes notice of an infirmity in the instrument or defect in the title of the person negotiating, the person to whom it is negotiated must have had:
ACTUAL
- knowledge of the infirmity or defect, or
FACTS
- knowledge of such facts that his action in taking the instrument amounted to bad faith
Notice
- must be ACTUAL notice. Thus, gross negligence alone insufficient to cause defect in the title. There must be notice of the defect + gross negligence in failing to inquire.
Bad Faith
- Sufficient to establish that the defendant had notice that there was something wrong with the title of his assignor, not necessarily of the particular wrong committed.
Distinguished from Mere Suspicion (De Ocampo v. Gatchalian) -
If the holder had actual knowledge of suspicious circumstances, coupled with the means of readily informing himself of the facts and he willfully abstained from making inquiries, his intentional ignorance may amount to bad faith
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Crossed Checks
- NIL does not mention crossed checks, but the SC has taken cognizance of the practice that a (CROSSED) check with two parallel lines in the upper left hand corner means that it could only be deposited and may not be converted into cash.
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Time of Notice
- Knowledge or chargeable notice of any defect, at the time of taking of an instrument, which destroys the status of a holder as a holder in due course, opens all defenses otherwise cut off against him and not merely that relating to the defect of which he had notice.
Financing company not a holder in good faith as to buyer
Effect of purchase at a discount
Effect of notice before full payment (54)
- Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid by him.
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Discount
- Does not of itself, constitute bad faith. Discounts are usually given due to the issuer's financial status.
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When Applicable
- Commonly in installment sales. there, the buyer issues a note payable to the seller and to cover the purchase price. Pursuant to a previous arrangement with the seller, a finance company pays the full price of the property sold and the note is indorsed to it by the seller, subrogating it to the right to collect the price from the buyer.
In such cases, then tendency of the courts is to protect the buyer against the finance company in the event that the goods sold were defective.
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Defects in the Title
- Situations which are personal or equitable defenses as well as equities of ownership where there is a breach of faith in negotiation.
Distinguished from Infirmity
- include things that are wrong with the instrument itself as distinguished from those things that are lacking in the contracts on the instrument. Infirmities usually refer to defects of title (NIL 12-16), 21, 23, 124-125.
Modes of Defects
- The title of a person negotiation can be defective in two modes.
In the Acquisition
- Obtained the instrument/signature through fraud/duress/force/fear/unlawful means/illegal consideration
In the Negotiation
- When he negotiates the instrument in breach of faith or in circumstances as to amount to fraud. The latter can cover duress, force or fear which overcome the signer's will.
Purpose
- To prevent a person who takes an instrument with notice that his transferor is not acting honestly from becoming a holder in due course. Sec. 55 deals with honesty of the negotiator, Sec. 52 deals with honesty of the taker.
Determination of Bad Faith
- Three Pronged Test
SUSPICIOUS CIRCUMSTANCES
- The general principle that a purchaser who has knowledge of certain facts is put on inquiry does not operate to its full extent in the law of negotiable instruments. Thus, negligence in tracking down a suspicious circumstance which would put a prudent man on inquiry is not of itself sufficient to prevent recovery (unlike law on sales). However, where the suspicious circumstances is so cogent and obvious, to remain passive would amount to bad faith.
DEFECTS
- If a transferee has actual suspicion and fails to investigate the matter, he is not a purchaser in good faith. To be in bad faith, it is not necessary that the purchaser knew the nitty gritty of the fraud, it being sufficient that he had notice that there was something wrong about his assignor’s acquisition of title.
KNOWLEDGE
- Bad faith may under certain circumstances be imputed from knowledge of the purchaser of other suspicious transactions of the transferor. For example, if the purchaser knew that the payee had previously sold to other parties worthless chattels similar to those sold to him is admissible to show bad faith.
Remember (3) Prong
W/N there is an Infirmity or Defect
W/N actual knowledge -->
W/N suspicious circumstances that prompted inquiry - If no inquiry, not holder
For Fraud -
Holder in Good Faith
- Holder who in the presence of suspicious circumstances, made inquiry. In the absence or circumstances, any person who took
SHELTER PRINCIPLE
- A holder who derives title to the instrument through a holder in due course has all the rights of the latter even though he himself satisfies none of the requirements of due course holding.
The present holder is HNDC
The immediate indorser must be a HDC
The present holder must not be a party to the fraud or illegality
Shelter is not a holder in course, but has the rights of an HDC.
E. Complete & regular (124)
F. Holder at or after maturity & without notice of dishonor (53)
Requisites
-
Become a holder of the instrument before it is overdue, and
without notice that it has been previously dishonored if such was the fact.
Dishonor - may be either:
Non-Acceptance - can refer only to a bill of exchange and this takes place when the drawee refuses to accept the order of the drawer as stated in the bill.
Non-Payment - occurs at the time of maturity when the party primarily liable fails to pay the instrument at the date of maturity. An instrument is not overdue on the day of its maturity.
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Effect of Notice of Dishonor
- It can still be transferred since an instrument continues to be negotiable until discharged or restrictively indorsed. However, holders after maturity are NOT holders in due coruise. Mere assignees.
H. Effect of Postdating/Antedating (NIL 12)
- Does not necessarily invalidate the instrument.
I. Effect of qualified, conditional & restrictive indorsements
J. Payee as holder in due course
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Qualified
- status of a holder as a holder in due course is not affected by his taking under a qualified indorsement. If there should be any such defect and the holder under a qualified indorsement did not know about it and took the instrument for value, in good faith and before it was overdue, he would be free from any defense based on such defect.
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Restrictive
- Depends on the form of restriction.
Restriction Prohibits Further Negotiation - Indorsee holder in due course, but subsequent indorsement cant make indorsees HDCs.
Indorsee as Agent
- Subject to the title of the principal. If principal not HDC, then agents not HDC.
Title for Use of Another
- Differing views. negotiability of an instrument is affected only to such extent as the restrictive indorsement warrants, here, restrictive can be HDC. Alternatively, A few cases have held that under Section 47, NIL, a restrictive indorsee for the benefit of a third party cannot be a holder in due course as regards defenses to which the restrictive indorser was subject.
Definitions
-
Antedated
- an instrument bears a date earlier than the date of its actual issuance.
Postdate
- If it contains a date later than the date of its issuance
When Invalidated
- The antedating/postdating was done through an illegal or fraudulent purpose.
Effect of Incompleteness
- If a purchaser takes prior to completion or contemporaneously with the act of completion, he is not a holder in due course.
Deficiencies that do not affect the Completeness of an Instrument -
STAMPS
- Those without the required revenue stamps
BLANK
- where it was executed in blank but is subsequently filled up and issued to the first holder who has no knowledge of the execution in blank
When Incomplete
-
PAYABLE
- payable “within-days after date”
NO YEAR
- where it specifies the date but not the year of maturity
NO PAYEE
- where it is blank as to the payee
BAD FAITH
- If the first holder knew that the instrument was executed in blank, the holder will be considered in bad faith
When Irregular
- Any alteration which is apparent on the instrument, even if it was authorized or assented to by all the parties concerned renders the instrument irregular, pursuant to Section 124, NIL.
Effect (124)
- If instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized, or assented to the alteration and subsequent indorsers.
Exception
- If materially altered instrument is int he hands of a holde rin due coruse not party to the alteration, he may enforce payment.
Apparent & Material Alteration
- the holder deprived of the rights of a holder in due course, but the instrument is entirely void, and is a real defense against enforcement.
Exception to Alteration Rule
- Does not discharge the instrument as against:
A party who has made the alteration
A party who authorized or assented to the alteration
Indorsers who indorsed subsequent to the alteration
What Constitutes Material Alteration
- Any alteration that changes the following:
DATE
The sum payable, either for principal or interest;
The time or place of payment:
The number or the relations of the parties;
The medium or currency in which payment is to be made;
Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.
Completeness AND Regularity
- While apparently distinct, they deal with the same question. The only difference being that Section 52(a), NIL deals with matters evidencing bad faith which are to be found on the instrument, while Sections 52(c) and 52(c), NIL deal with issues of bad faith where the evidence lies on the extrinsic circumstances.
The taking of an incomplete instrument lets in all defenses and equities.
A holder who takes an instrument irregular on its face is not a HDC not just with respect to the irregularities, but also to those that have nothing to do with the irregularities.
NIL 52 - HDC if taken the instrument complete and regular on its face.
Rights (57) -
No Defects
- HDC holds instrument free from any defect of title of prior parties
No Defense
- Free from defenses available to prior parties among themselves
Enforcement
- HDC may enforce payment of the instrument for the full amount against all parties liable thereon.
When Subject to Defenses (58)
- If not a HDC, then a negotiable instrument is treated as a non-negotiable and subject to the same defenses.
Real Defenses
- Those that attach to the instrument itself are available even as against the holder in due course.
When Significant
- HDC relevant only when there is an existing defense between prior parties. If none, then instrument is completely valid and enforceable against prior parties.
Requisites
- Must take the instrument under the following conditions:
COMPLETE
- instrument is complete and regular upon its face;
NON-OVERDUE/DISHONOR
- That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact,
GOOD FAITH/VALUE
That he took it in good faith and for value;
NO INFIRMITY
- That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.