2. RIGHTS OF A HOLDER IN DUE COURSE

C. WHAT CONSTITUTES A
HOLDER FOR VALUE?

D. WHERE HOLDER HAS A LIEN ON INSTRUMENT

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

F. NOTICE OF ACCOMMODATION NOT NOTICE OF DEFECT

Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) 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.

Rights of an HDC

1. SUE - To sue on the instrument in his own name
2. PAYMENT To receive payment on the instrument
3. FREE - Holds instrument free of any defect of title of prior parties
4. FREE - Free from defenses available to prior parties among themselves
5. ENFORCE - May enforce payment of instrument for full amount, against all parties liable

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.

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.

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.

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.

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.

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.

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.

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.

REAL DEFENSES
Real defenses, however, which attach to the instrument itself would be available even against a holder in due course.

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,

IF INST IS MORE THAN DEBT +
EXISTING DEFENSES AMONG PRIOR PARTIES + NO KNOWLEDGE,
THEN PLEDGEE = HIDC BUT HFV
ONLY TO THE AMOUNT OF LIEN
However, if the secured debt is less than the amount of the instrument but there are existing defenses among prior parties of which the pledgee had no knowledge, he is a holder in due course but since he is a holder for value only to the extent of his lien, he can recover only the amount of the debt

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.

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.

EFFECT OF FAILURE TO INQUIRE:
GUILTY OF GROSS NEGLIGENCE =
ABSENCE OF LEGAL GF
Failing in this duty, the holder is declared guilty of gross negligence amounting to legal absence of good faith, contrary to Sec. 52(c) of the NIL; thus, the holder is not a holder in due course.
(Bataan Cigar and Cigarette Factory, Inc. v. CA)

HOLDER CAN STILL RECOVER AMOUNT;
HE IS JUST SUBJECT TO DEFENSES
BUT this does not mean that the Holder could not recover from the checks. The instrument is only subject to defenses as if it were non-negotiable
(Bataan Cigar and Cigarette Factory, Inc. v. CA)

KNOWLEDGE IT WAS SPECIFICALLY INDORSED FOR DEPOSIT ONLY TO PAYEE'S ACCOUNT
One cannot be a holder in due course if from the start, they knew that the checks were specifically indorsed for deposit to only the payee’s account. However, they may still recover the amount on the instrument, but would only be subject to the defenses as if the note were non-negotiable

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.... "

Consolidated v. Salas
Although in a recent case of Consolidated Plywood Industries Inc., et. al. u. IFC Leasing and Acceptance Corporation, the Supreme Court cited with approval the above view.

BUT in the later case of Salas u. Court of Appeals, et al, , it did not apply the said rule.

DISCOUNT PURCHASER = GOOD FAITH
The purchase of an instrument at a discount does not of itself, constitute bad faith.

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.

NOTICE AFTER PARTIAL PAYMENT = HIDC
But where he receives such notice after he has partially paid the instrument, he is a holder in due course as to such amount paid by him.

NOTICE BEFORE PAYING RESIDUE = NOT HIDC; SUBJECT TO DEFENSES AGAINST RESIDUE
Should he pay the remainder despite the notice he cannot thereafter recover such amount from the maker because to that extent, he will be subject to the defenses which the maker may have.

PURCHASER NOT PUT INTO INQUIRY BY

1. PUBLIC RECORDS' NOTICE OF DEFENSE
2. LIS PENDENS
   Just as a purchaser of a negotiable instrument is not put on inquiry, neither he is charged with notice of defenses or equities disclosed by public records, nor is he affected by the doctrine of lis pendens.
   

NOTICE TO AN AGENT IS NOTICE TO THE PRINCIPAL
However, notice to an agent is chargeable against the principal.

An accommodation party is actually a surety for the principal debtor, the accommodated party to whom the name is lent.

6. HOLDER AT OR AFTER MATURITY & WITHOUT NOTICE OF DISHONOR

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:

ALTERATION = VOID
Sec. 124. Alteration of instrument; effect of. -
Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided..

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.

1. OVERDUE
2. 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:

1. NON-ACCEPTANCE
2. NON-PAYMENT
   An instrument may be dishonored either by non-acceptance or by non-payment.

STALE CHECKS

1. PAYABLE ON DEMAND
   +
2. 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

1. NATURE
2. USAGE OF TRADE/BUSINESS WITH RESPECT TO SUCH INSTRUMENT
3. 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."

DATE OF MATURITY DETERMINES REGARDLESS OF ACCELERATION CLAUSE
With respect to instruments with a fixed maturity but subject to acceleration, either automatically or at the option of the holder, the ultimate date of maturity is the date of maturity for the purpose of determining whether a purchaser is a holder in due course, unless such purchaser had knowledge of the earlier maturity at the time he acquired title.

UNDATED INDORSEMENT =
NEGOTIATED BEFORE OVERDUE
(PRIMA FACIE)
Under Section 45, the negotiation of an instrument through an undated indorsement establishes prima facie that it was negotiated before it was overdue, and one who denies that the holder of such instrument is a holder in due course has the burden of proving his allegation.

PURCHASER AFTER MATURITY = NOT HIDC, BUT INST IS STILL NEGOTIABLE
The fact that a purchaser after maturity is not a holder in due course should not however be misunderstood to mean that the instrument is void in his hands or that the same can no longer be negotiated.

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.

PAID = MONEY OR NOT MONEY
The term "paid" in Section 54 includes any performance by the purchaser of the instrument, whether such performance consists in the payment of money, the giving of credit, the assumption of obligations, the rendition of services, the transfer of title to property or the performance of any other promise.

However, it applies only where the obligation incurred by the holder of the note or bill is such that, on discovering the infirmity thereof, he is relieved from all further legal obligation to make further payment.

DOES NOT APPLY TO A PROMISE
It does not apply where the holder has given for the instrument a promise which he must perform, in which case he would be in the same position as one who had paid money or property at the time of the transfer. To illustrate:

A issues a note payable to the order of B.

B wants to borrow money from C who is willing to lend him only if B gets X to sign with him a note in favor of C.

X agrees to do so on the condition that B indorse to him A's note as collateral.

So B indorses A's note to X.

When A's note falls due, A refuses to pay X on the ground that B was guilty of fraud in procuring the note.

Subsequently, X's and B's note in favor of C falls due and since B has defaulted, X has to pay the full amount to C.

Naturally, X wants now to recoup his loss by demanding payment again from A of the first note.

A invokes Section 54.

X cannot be covered by this section because when he signed the note in favor of C, he had become unconditionally obligated to the latter to pay the note when due and cannot be released from such obligation by the mere fact that the collateral he got from B turned out to be a result of fraud.

At the time X received notice of the fraud, he had already given full value for A's note.

He had become a holder in due course of A's note at the time it was negotiated to him by B.

He can thus recover from A.

To illustrate: A wants to borrow money from B, who is willing to lend him if C signs a note with A in favor of B. C, if he agrees to do so, is an accommodation co-maker.

A purchaser of a negotiable paper is a not a holder in due course if he takes

1. Prior to completion
   OR
2. 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.

1. WITH DATE BUT WITHOUT YEAR OF MATURITY
2. BLANK AS TO PAYEE
   Neither is it complete where it specifies the date but not the year of maturity, or

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.

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.

NATURE = FUNCTION OF INST
With respect to the nature of the instrument, it is the function of the instrument which must be noted in determining whether reasonable time has elapsed or not.

DEMAND NOTES CIRCULATE LONGER THAN CHECKS
As a general rule demand notes are intended to circulate longer than checks.

FACTS OF PARTICULAR CASE VARY EACH CASE
The "facts of the particular case" will obviously vary in each case.

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.

1. The present holder is HNDC
2. The immediate indorser must be a HDC
3. The present holder must not be a party to the fraud or illegality (irregularity)

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.

Sec. 124. Alteration of instrument; effect of. - Where a negotiable 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.

But when an instrument has been materially altered and is in the hands of a holder in due course not a party to the alteration, he may enforce payment thereof according to its original tenor.

Sec. 125. What constitutes a material alteration. - Any alteration which changes:chanroblesvirtuallawlibrary
(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment:chanroblesvirtuallawlibrary

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made;

(f) 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.