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NEGOTIATION: III. HOLDER IN DUE COURSE, Miles City Bank v. Askin, If the…

- - - - A. WHAT CONSTITUTES VALUE
        
        B. BANK CREDIT FOR VALUE
        
        C. WHAT CONSTITUTES A
        HOLDER FOR VALUE?
        
        D. WHERE HOLDER HAS A LIEN ON INSTRUMENT
        
        E. BURDEN OF PROOF
        
        ABSENCE/FAILURE OF CONSIDERATION IS A DEFENSE AGAINST HNIDC
        Section 28 goes further and provides that "absence or failure of consideration is a matter of defense as against any person not a holder in due course."
        Whether or not the words "for value received" appear in an instrument is immaterial. In their absence, the presumption fills in the gap.
        
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        Sec. 24. Presumption of consideration. - 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.
        
        Sec. 27. When lien on instrument constitutes holder for value. — 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.
        
        IF INST LESS THAN DEBT SECURED,
        PLEDGEE CAN RECOVER ALL
        If a negotiable instrument is given as a collateral for a debt, the holder has a lien on the instrument. 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 become such prior to that time.
        
        IF INST IS MORE THAN DEBT SECURED, PLEDGEE CAN RECOVER ALL,
        BUT EXCESS IS HELD IN TRUST
        If the debt secured by the instrument is less than the sum for which the instrument is issued, and there are no existing defenses, the pledgee can still recover all, but the excess over the debt he holds in trust for whomsoever is entitled to it.
        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 since this would be against the general rule against splitting the cause of action under Section 32, the pledgee is allowed to recover all, holding the excess merely as a trustee.
        
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        Sec. 26. What constitutes holder for value. - 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 become such prior to that time.
        
        THOUGH INST PREVIOUSLY NOT FOR VALUE, SUBSEQUENT HFV IS SUCH TO PRIOR PARTIES
        If A issues a note to B, the payee, without consideration and B indorses it to C also without consideration, and C indorses it to D who gives value to C, D is a holder for value not only as regards C, but also as regards A and B.
        IF INST IS PREVIOUSLY FOR VALUE,
        DONEE IS HFV TO PRIOR PARTIES
        EXCEPT TO IMMEDIATE DONOR-INDORSER
        Likewise, if A signs a note in favor of B without consideration and B negotiates it to C for value, and C in turn negotiates it to D by way of gift, D is a holder for value within the meaning of this section, as against A and B, but not as against C.
        
        HFV CAN RECOVER BUT OPEN TO DEFENSES AGAINST PAYEE
        The mere fact that the present holder paid nothing for a note or is not a holder for value does not preclude recovery, but only lets in all defenses, if any, that might be urged against the original payee.
        
        BANK = HFV WHEN
        DEPOSITOR WITHDRAWS AMOUNT
        When the holder of a check deposits it with his bank (assuming it is not the drawee bank) and the bank credits it to his account, is the bank at this stage a holder for value?
        The bank becomes a holder for value only when the depositor withdraws the amount of the deposited instrument. And where such withdrawal takes place before maturity and before the bank receives notice of any defense on the instrument, the bank is a holder in due course against whom such defense would be unavailable.
        
        MAJORITY VIEW:
        FIRST MONEY IN, FIRST MONEY PAID OUT
        But how can one determine whether the funds represented by the deposited instrument have been withdrawn? This question becomes significant where there has been a continuous flow of deposits and withdrawals by the depositor.
        Most courts follow the rule that the first money in is presumed to be the first money paid out.
        
        MINORITY VIEW:
        DEPOSITOR'S ACCOUNT EQUALS/EXCEEDS AMOUNT OF INST DEPOSITED = NOT WITHDRAWN
        A minority of the courts have ruled that as long as the balance in the depositor's account equals or exceeds the amount of the instrument deposited, the latter cannot be considered as withdrawn for the purpose of treating the bank as a holder for value. 5 So far, there has been no decision by our Supreme Court on this issue.
        
        ???
        Most courts hold that it is not on the theory that the bank has parted with nothing and that the crediting is a mere bookkeeping entry.
        
        VALUE = CONSIDERATION
        One of the requisites for due course holding is that the holder took the instrument for value. Section 25 tells us what constitutes value. And Section 191 provides that "value means valuable consideration." "Value" and "consideration" therefore are generally convertible terms.
        
        WHEN PAYEE SUES MAKER/DRAWER OR
        INDORSEE SUES IMMEDIATE INDORSEE,
        CONSIDERATION IS MORE APT
        However, they may have different implications. When the payee of a note sues the maker, or the payee of a bill sues the drawer, or an indorse sues his immediate indorser, the word "consideration" is the more proper term to use. But where a holder sues any party to the instrument with whom he himself has not dealt, the term "value" is more appropriate.
        
        DONEES CANNOT BE HIDC
        A negotiable instrument may be given as a gift to the indorsee or transferee. In such cases whatever defenses can be set up against the transferor can also be set up against the transferee. But where the holder gave valuable consideration for the note and the other requisites of Section 52 are present, he will be free from such defenses.
        
        VALUE NEED NOT BE FULL,
        ONLY INTENDED TO BE FULL
        Value need not be full and a holder will be one for value even if he gave less than the face value of the instrument, provided that intention of the transferor is to transfer the full amount represented by the instrument.
        
        Sec. 25. Value, what constitutes. —
        Value is any consideration sufficient to support a simple contract.
        An antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.
        
        Sec. 24. Presumption of consideration. -
        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.
      - HOLDER IN GOOD FAITH
        
        A. NOTICE; BAD FAITH; EFFECT SUSPICIOUS CIRCUMSTANCES
        (INCOMPLETE CASE + COMMENTARY)
        
        B. FINANCING COMPANY NOT A HOLDER IN GOOD FAITH AS TO BUYER
        
        C. EFFECT OF PURCHASE AT A DISCOUNT (GOOD FAITH, GENERALLY)
        
        D. EFFECT OF NOTICE BEFORE FULL PAYMENT
        
        E. CONSTRUCTIVE NOTICE NOT SUFFICIENT
        
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        NOTICE OF DEFENSES BEFORE PAYING IN WHOLE OR IN PART = NOT HIDC
        Notice of defenses to a purchaser before he has acquired title and before he has paid any portion of the purchase price is fully operative to prevent him from being a holder in due course.
        
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        SEC. 54. NOTICE BEFORE FULL AMOUNT PAID.-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 theretofore paid by him,
        
        DISCOUNT PURCHASER = GOOD FAITH
        The purchase of an instrument at a discount does not of itself, constitute bad faith.
        
        HEAVY DISCOUNT
        However, if the instrument is purchased at a heavy discount, this fact together with other facts, may be taken into account in deciding the issue of purchase in good faith.
        
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        INFLUENCED BY FINANCIAL CONDITION OF ISSUER
        This is so because in most cases a purchaser at a discount is influenced by the financial condition of the issuer of the instrument rather than by the possibility that it was obtained subject to a defense.
        
        INSTALLMENT SALES = USUALLY, BUYER ISSUES NOTE PAYABLE TO SELLER TO COVER PURCHASE PRICE
        In installment sales, the buyer usually issues a note payable to the seller to cover the purchase price.
        This is specially true in the sale of appliances, cars, machinery and other valuable personal property.
        
        FINANCE COMPANY BUYS FULL PRICE AND BECOMES INDORSEE, SUBJECT TO DEFENSES OF BUYER (ASSIGNMENT)
        Many times, 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, the tendency of the courts is to protect the buyer against the finance company in the event that the goods sold turn out to be defective.
        The finance company will be subject to the defense of failure of consideration and cannot recover the purchase price from 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 protection to the general buying ,public against unscrupulous dealers in personal property.... "
        
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        GR: One who receives from an officer of a corporation the notes or securities of such corporation, in payment of, or as security for, a personal debt of such officer, does so at his own peril.
        Prima facie the act is unlawful, and, unless actually authorized, the purchaser will be deemed to have taken them with notice of the rights of the corporation
        Wilson v. Metropolitan R. Co
        
        NOTICE OF DEFECT OF ASSIGNOR'S TITLE IS SUFFICIENT TOR PROVE BAD FAITH
        In order to show that the defendant had knowledge of such facts that his action in taking the instrument amounted to bad faith, it is sufficient to show that the defendant had notice that there was something wrong about his assignor's acquisition of title, although he did not have notice of the particular wrong that was committed.
        
        GROSS NEGLIGENCE CAN BE EVIDENCE OF BAD FAITH
        Although gross negligence does not of itself constitute bad faith, it is evidence from which bad faith may be inferred.
        
        NOTICE OF THE PARTICULAR WRONG COMMITTED IS NOT REQUIRED
        
        CIRCUMSTANCES MAY THRUST UPON HOLDERS TO MAKE FURTHER INCQUIRIES
        The circumstances thrust the duty upon the holders to make further inquiries and they had no right to shut their eyes deliberately to obvious facts.
        Morris v. Muir, 111 Misc. Rep. 739
        
        CROSSING OF CHECK SHOULD PROMPT THE HOLDER TO INQUIRE
        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.
        
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        TAKING NOTE AS SECURITY = STILL HIDC
        An indorsee of a negotiable note who has taken it, before its maturity, as collateral security for a pre-existing debt and without any express agreement, is deemed a holder for a valuable consideration, and that he holds it free from latent defenses on the part of the maker.
        (Atrium Mgt Corp v. CA)
        
        Sir:
        Holder with Notice = Holder in Good faith
        Here in the PH, it is combined
        (Usually combined. HWN falls under Sec. 52)
        
        SIR: HOW TO EXAM
        
        look at defects of instrument
        
        check actual notice or knowledge on part of holder
        
        check if there are suspicious circumstances
        
        yes, no inquiry = not HGF
        -yes, inquiry = HGF
        
        COMPLETE & REGULAR
        
        HOLDER AT OR AFTER MATURITY & WITHOUT NOTICE OF DISHONOR
        
        OVERDUE
        
        PREVIOUSLY DISHONORED
        Under Section 52(b), a holder in order to be a holder in due course must become a holder of the instrument before it is overdue and without notice that it has been previously dishonored if such was the fact.
        
        HOW DISHONORED:
        
        NON-ACCEPTANCE
        
        NON-PAYMENT
        An instrument may be dishonored either by non-acceptance or by non-payment.
        
        DISHONOR BY NON-PAYMENT =
        WHEN MAKER/ACCEPTOR FAILS TO PAY ON MATURITY
        On the other hand, dishonor by non-payment occurs at the time of maturity when the party primarily liable, i.e., the maker of a note, or the acceptor of a bill, fails to pay the instrument at the date of maturity.
        In this connection, it should be noted that an instrument is not overdue on the day of its maturity. ·. If the instrument is payable "after sight," the date of maturity is fixed by the date of presentment.
        If the instrument is payable on the occurrence of a specified event certain to happen, the date of maturity is fixed by the happening of the event.
        
        DISHONOR BY NON-ACCEPTANCE ONLY HAPPENS WITH BOE
        Dishonor by 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.
        
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        OVERDUE = STRONG INDICATION OF DISHONOR
        The fact that the instrument is overdue is a strong indication that it was dishonored and the law puts the potential holder on inquiry as to whether it was dishonored and the reason therefor.
        
        STALE CHECKS
        
        PAYABLE ON DEMAND
        +
        
        NEGOTIATED AN UNREASONABLE LENGTH OF TIME AFTER ISSUE
        NOT HIDC
        Sec. 53. When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course.
        
        SUCH IS OVERDUE
        If the purchase of a demand instrument is made outside of the reasonable time after issue, the purchase is one of an overdue instrument.
        
        REASONABLE TIME DEPENDS ON
        
        NATURE
        
        USAGE OF TRADE/BUSINESS WITH RESPECT TO SUCH INSTRUMENT
        
        FACTS OF PARTICULAR CASE
        As to what constitutes a reasonable time, Section 193 provides that "regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instrument and the facts of the particular case."
        
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        Under Section 52 (a) in order that a holder may be considered a holder in due course, he must have taken the instrument complete and regular on its face.
        
        FIRST HOLDER WHO DOES NOT KNOW OF PRIOR EXECUTION IN BLANK
        Where the instrument is executed in blank and is subsequently filled up and issued to the first holder who has no knowledge of the execution in blank, the holder is a holder in due course.
        
        IRREGULAR ON ITS FACE =
        SUBJECT TO DEFENSES EVEN THOSE NOT RELATED TO IRREGULARLITY
        A similar rule has been adopted with respect to irregular instruments. A purchaser who takes an instrument irregular on its face is not a holder in due course and is subject not only to defenses and equities related to the irregularity involved, but also to those which have nothing to do with such irregularity.
        
        ALTERATION
        The most common type of irregularity is an alteration which is apparent on the instrument. The effect of a material alteration is governed by Section 124 which provides:
        
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        ACTUAL KNOWLEDGE OF INCOMPLETENESS/IRREGULARITY REQUIRED
        But in dealing with Section 52 (c) and (d) and Section 56, the courts state that the general rule that the purchaser ia "put on inquiry" does not apply to negotiable paper because it would hamper the main function of such kind of instruments. It has been suggested that Section 52 {a) should be interpreted as subordinate to Section 52 (c) and (d), so that a purchaser will be deemed not a holder in due course only if the instrument is so incomplete or irregular that the purchaser must have had actual knowledge of such facts that his action in taking the instrument amounted to bad faith.
        
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        IF FIRST HOLDER DID KNOW OF PRIOR EXECUTION IN BLANK, HE IS NOT HIDC
        However, if the first holder takes the instrument complete in form with knowledge of the original execution in blank, he is not a holder in due course, although he actually took it as complete.
        
        INCOMPLETE
        Moreover, the taking of an incomplete instrument, according to the prevailing view, lets in all defenses and equities, whether or not connected with the execution in blank.
        
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        A purchaser of a negotiable paper is a not a holder in due course if he takes
        
        Prior to completion
        OR
        
        Contemporaneously with the act of completion,
        
        REVENUE STAMPS
        Mere failure to affix revenue stamps as required by law does not render the instrument incomplete.
        
        "WITHIN-DAYS AFTER DATE"
        An instrument payable "within-days after date" is not complete and regular on its face.
        
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        Sir: Irregularity does not pertain to alteration only. Alteration is merely the most common type of irregularity.
        As long as there is any irregularity on the instrument, this may impair the instrument.
        
        Sir & Class:
        "Complete and regular upon its face" only requires that the face of the instrument is complete and regular to the exclusion of external circumstances.
        For the Good Faith requirement, external circumstances prompting an inquiry are included.
        
        Sir: Different ink makes the irregularity apparent.
        However, if it is in the same ink, the Holder is still a HIDC even if the alteration alters the liability of the parties because the irregularity is NOT apparent.
        
        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 (not all) of the requirements of due course holding.
        The immediate indorsee is not a holder in due course but enjoys the rights of one.
        
        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 (irregularity)
        
        Sir: even though he himself satisfies not all* of the requirements of due course holding
        
        Notice of any defect will prevent the status of being HIDC, but such holder who had notice has the rights of a HIDC.
      - Sir: If the person has negotiated an instrument believing and intending that there was a valuable consideration, such as a debt, the indorsee is a holder for value.
      - Sir: For Holder For Value Use the cases cited in De Leon v. Rodriguez
    - - BETTER TITLE, FREE FROM
        DEFECT OF TITLE OF PRIOR PARTIES
        These provisions indicate the significance of due course holding. A holder in due course can acquire a better title than his predecessors because he takes the instrument free from any defect of title of prior parties. He is furthermore free from defenses available to prior parties among themselves.
        
        HOLDER NOT IN DUE COURSE = TRANSFEREE, SUBJECT TO ALL DEFENSES
        A holder not in due course, on the other hand, takes subject to all defenses because he is treated as a transferee of a non-negotiable paper.
        
        SUBSEQUENT HOLDERS MAY STILL BE HIDC;
        NEGOTIABILITY OF INST NOT AFFECTED
        The fact that a holder is not in due course will in no way affect the negotiability of the instrument. It only affects such holder's rights, and does not necessarily prevent subsequent holders from acquiring the status of due course holders.
        
        MATTERS ONLY WHEN DEFENSE EXISTS BETWEEN PRIOR PARTIES
        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. If there is no such defense and the instrument is completely valid, then it will not matter whether the holder lacks one or more of the requisites of Section 52.
        
        MAKER CAN'T REFUSE TO PAY
        MERELY BECAUSE OVERDUE
        For example, even if the holder took the instrument after maturity, the maker thereof cannot refuse to pay on that ground alone,
        
        UNLESS MAKER DEFENSE
        AGAINST ORIGINAL PAYEE
        unless he has a defense against the original payee, like fraud or failure of consideration.
        
        What if he is no longer the holder?
        
        REAL DEFENSES
        Real defenses, however, which attach to the instrument itself would be available even against a holder in due course.
        
        What are real defenses?
      - Sir: Rights of a holder, even if not in due course
        
        SUE
        
        PAYMENT