Negotiable Instruments

Law - Chapter 5
By: Atty. Richard M. Fulleros, CPA, MBA
 Holders – Chapter 5
• Rights of a holder
• Holder in due course
• Accommodation parties
• Rights of a holder in due course
• Shelter rule
• Consumer transactions
 Holder
• Means the payee, or indorsee of a bill or note who is in possession of it or
the bearer thereof.
 Rights of a holder
Chan Wan vs. Tan Kim GR No. L-15380
Facts:          Eleven checks payable to “cash or bearer” and drawn by defendant Tan upon the Equitable
Banking Corporation, were all presented for payment by Chan Wan to the drawee bank, but they “were all
dishonored and returned to him unpaid due to insufficient funds and/or causes attributable to the drawer.”
The drawer in drawing the check engaged that “on due presentment, the check would be paid, and that if it be
dishonored . . . he will pay the amount thereof to the holder”.
On the backs of the checks, endorsements which apparently show they had been deposited with the China
Banking Corporation and were, by the latter, presented to the drawee bank for collection.
The court declined to order payment for two principal reasons: (a) plaintiff failed to prove he was a holder in
due course, and (b) the checks being crossed checks should not have been deposited instead with the bank
mentioned in the crossing.
 Cha Wan vs. Tan Kim - cont.
Issue: WON a holder who is not a holder in due course may recover on the
checks?
Held: YES. The Negotiable Instruments Law does not provide that a holder who
is not a holder in due course, may not in any case, recover on the instrument. If B
purchases an overdue negotiable promissory note signed by A, he is not a holder
in due course; but he may recover from A, if the latter has no valid excuse for
refusing payment. The only disadvantage of holder who is not a holder in due
course is that the negotiable instrument is subject to defense as if it were non-
negotiable.
 Atrium Mgmt. Corp. vs. CA GR No. 109491
Facts: Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de Leon, treasurer, and
the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry
and Co., Inc., in turn, endorsed the four checks to Atrium for valuable consideration. Enrique Tan of E.T. Henry
approached Atrium for financial assistance, offering to discount four RCBC checks in the total amount of P2
million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be
allowed to confirm with Hi-Cement the fact that the checks represented payment for petroleum products which
E.T. Henry delivered to Hi-Cement. Upon presentment for payment, the drawee bank dishonored all four checks
for the common reason “payment stopped”. As a result thereof, Atrium filed an action for collection of the
proceeds of 4 PDC in the total amount of 2M with RTC Manila. Judgment was rendered in favor of Atrium
ordering Lourdes and Rafael de Leon, E.T. Henry and Co., and Hi-Cement to pay Atrium the said amount plus
interest and attorneys fees. CA absolved Hi-cement Corporation from liability. It also ruled that since Lourdes
was not authorized to issue the subjects checks in favor of E.T. Henry Inc., the said act was ultra vires.
Issue: Whether the issuance of the questioned checks was an ultra vires act;

Ruling: Yes.
• An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and
therefore beyond the power conferred upon it by law. The term “ultra
vires” is “distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be validated.
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer
and Chairman of Hi-Cement were authorized to issue the checks. However,
Ms. de Leon was negligent when she signed the confirmation letter
requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the
rediscounting of the crossed checks issued in favor of E.T. Henry. She was
aware that the checks were strictly endorsed for deposit only to the payee’s
account and not to be further negotiated. What is more, the confirmation
letter contained a clause that was not true, that is, “that the checks issued to
E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T.
Henry”. Her negligence resulted in damage to the corporation. Hence, Ms.
de Leon may be held personally liable therefor.
 Enumerate the rights of a holder of an
instrument
• Sue on the inst. On his own name
• Received payment upon presentments
• In due course, the instrument is discharged
 Holder in due course
• Section 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.
 Video
• https://youtu.be/yUXjKk-Aq-A
 Based on the video, what is your
understanding of a holder in due course?
That it is complete and regular upon its
face
 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
That he took it in good faith and for value
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
 Patrimonio vs. Gutierez GR No. 187769
FACTS: The petitioner and the respondent Gutierrez entered into a business venture under the name
of Slam Dunk Corporation, a production outfit that produced mini-concerts and shows related to
basketball.
Patrimonio pre-signed several checks to answer for the expenses of Slam Dunk. Although signed,
these checks had no payee’s name, date or amount. The blank checks were entrusted to Gutierrez with
the specific instruction not to fill them out without previous notification to and approval by the
petitioner.
Without the petitioner’s knowledge and consent, Gutierrez went to Marasigan to secure a loan in the
amount of P200,000.00 on the excuse that the petitioner needed the money for the construction of his
house. In addition to the payment of the principal, Gutierrez assured Marasigan that he would be paid
an interest of 5% per month.
 Patrimonio vs. Guttierez cont.
Marasigan acceded to Gutierrez’ request and gave him P200,000.00. Gutierrez simultaneously delivered to
Marasigan one of the blank checks the petitioner pre-signed with Pilipinas Bank with the blank portions filled out
with the words “Cash” “Two Hundred Thousand Pesos Only”, and the amount of “P200,000.00.”
Marasigan deposited the check but it was dishonored for the reason “ACCOUNT CLOSED.” It was later revealed
that petitioner’s account with the bank had been closed.
Marasigan sought recovery from Gutierrez, to no avail. He thereafter sent several demand letters to the petitioner
asking for the payment of P200,000.00, but his demands likewise went unheeded. Consequently, he filed a criminal
case for violation of B.P. 22 against the petitioner.
RTC— in favor of Marasigan. It found that the petitioner, in issuing the pre-signed blank checks, had the intention of
issuing a negotiable instrument, albeit with specific instructions to Gutierrez not to negotiate or issue the check
without his approval. RTC declared Marasigan as a holder in due course and accordingly dismissed the petitioner’s
complaint for declaration of nullity of the loan. It ordered the petitioner to pay Marasigan the face value of the check
with a right to claim reimbursement from Gutierrez. CA— affirmed the RTC ruling
 Issue
• Whether or not Marasigan is a holder in due course thus may hold
Patrimonio liable
 Held

No.
Section 52(c) of the NIL states that a holder in due course is one who takes the instrument
“in good faith and for value.” It also provides in Section 52(d) that in order that one may be
a holder in due course, it is necessary 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.
Acquisition in good faith means taking without knowledge or notice of equities of any sort
which could beset up against a prior holder of the instrument. It means that he does not
have any knowledge of fact which would render it dishonest for him to take a negotiable
paper. The absence of the defense, when the instrument was taken, is the essential element
of good faith.
 Held
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 not necessary to prove that
the defendant knew the exact fraud that was practiced upon the plaintiff by the
defendant’s assignor, it being 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. In the present
case, Marasigan’s knowledge that the petitioner is not a party or a privy to the
contract of loan, and correspondingly had no obligation or liability to him,
renders him dishonest, hence, in bad faith.
 Held
Section 14 of the Negotiable Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on a blank
paper delivered by the... person making the signature in order that the paper may be converted into a negotiable
instrument operates as a prima facie authority to fill it up as such for any amount. In order, however, that any such
instrument when completed may be enforced against any person who became a... party thereto prior to its completion, it
must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument,
after completion, is negotiated to a holder in due course, it is valid and effectual for all... purposes in his hands, and he
may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.
This provision applies to an incomplete but delivered instrument. Under this rule, if the maker or drawer delivers a pre-
signed blank paper to another person for the purpose of converting it into a negotiable instrument, that person is deemed
to have prima facie authority... to fill it up. It merely requires that the instrument be in the possession of a person other
than the drawer or maker and from such possession, together with the fact that the instrument is wanting in a material
particular, the law presumes agency to fill up the... blanks.
 De Ocampo vs. Gatchalian GR No. L-15126
FACTS:
Anita C. Gatchalian was looking for a car for the use of her husband and the family and Manuel Gonzales who was
accompanied by Emil Fajardo (personally known to Anita) offered her a car. Manuel Gonzales represented to
defendant Anita that he was duly authorized by Ocampo Clinic, the owner of the car, to look for a buyer and
negotiate for and accomplish the sale, but which facts were not known to Ocampo. Anita requested Manuel to
bring the car the day following together with the certificate of registration of the car so that her husband would
be able to see same. Manuel Gonzales told her that unless there is a showing that the party interested in the
purchase is ready he cannot bring the certificate of registration. Anita gave him a check which will be shown to the
owner as evidence of buyer's Good Faith in the intention to purchase, it being for safekeeping only of Manuel and
to be returned. For the hospitalization of the wife of Manuel, he paid the check to Ocampo clinic. The next day:
Manual did not appear so Anita issued a stop payment order.
 De Ocampo vs. Gatchalian – Cont.

Gatchalian filed a case. Manuel contends that the check is not a negotiable instrument, under the facts and
circumstances stated in the stipulation of facts - no delivery (Section 16, Negotiable Instruments Law) because only
for safekeeping (conditional delivery). Manuel likewise contend that Ocampo is not a holder in due course because
there was no negotiation prior to acquiring the check, and that the check is not a personal check of Manuel 
ISSUES: 
W/N Ocampo is a holder in due course - NO

W/N prima facie holder in due course applies - NO

•
•
HELD:
Held
NO Sec. 191 holder - payee or indorsee of a bill or note, who is in possession of it, or the bearer

• Sec. 52

• holder in due course - holder who has taken the instrument under the ff conditions:

• That it is complete and regular on its face

• That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, it such was the fact.

• That he took it in good faith and for value.

• 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 circumstances

• The amount of the check did not correspond exactly with the obligation of Matilde Gonzales to Dr. V. R. de Ocampo

• Check had two parallel lines in the upper left hand corner, which practice means that the check could only be deposited but may not be converted into cash

• It was payee's duty to ascertain from the holder Manuel what the nature of his title to the check was or the nature of his possession. - failure: guilty of gross neglect and legal absence of GF

• In order to show that the defendant had 'knowledge of such facts that his action in taking the instrument amounted to BF it is not necessary to prove that the defendant knew the exact fraud

• It is sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with fraud

• 2. NO

• Sec. 59

• every holder is deemed prima facie to be a holder in due course

• a possessor of the instrument is prima facie a holder in due course does not apply because there was a defect in the title of the holder (Manuel Gonzales) because the instrument is not payable to him
or to bearer.

• suspicious circumstance
 Crossed check
• A person who takes a crossed check without further inquiring about the
instrument is not a holder in due course. The act of crossing a check
serves as a warning that the check or instrument is issued for a definite
purpose and for a specific person.
 Demand instruments
• Section 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.
 Holder for value
• Value is a consideration sufficient to support a simple contract
 Accommodation parties
• Section 29 Liability of accommodation party. - An accommodation
party is one who has signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value therefor, and for the
purpose of lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be only an
accommodation party.
Prudencio vs. CA GR No. L-34539
 Stelco Marketing vs. CA GR No. 96160
• FACTS:
• Petitioner was engaged in the distribution and sale of structural steel bars.  RYL bought on several occasion large quantities of steel bars but the same were never paid for despite several
demands by petitioner.
 
On a relevant date, RYL gave to Armstrong Industries a check in payment of  its  obligations.    The  check  was  drawn  by  Steelweld  Corporation—allegedly  the  owner  of  RYL 
persuaded  the  president  of  Steelweld  to accommodate the former in its obligation.  The check, when deposited was thereafter  dishonored  due  to  insufficient  funds.    A  case 
ensued  for violations of BP22 but the case was dismissed as the check was held to be for accommodation purposes only.
 
Thereafter  a  complaint  was  filed  by  petitioner  against  RYL  and  Steelweld for  the  recovery  of  sum  of  money  in  payment  of  the  steel  bars  ordered.  RYL was nowhere to be
found that is why the proceedings commenced as against  Steelweld  only.    The  trial  court  decided  in  favor  of  petitioner  but this was reversed by the CA.
 
HELD:
• Petitioner contends that the acquittal of Lim and Tianson didn't operate to release Steelweld from its liability as an accommodation party.  Noteworthy is that neither said pronouncement
nor any other part of the judgment of acquittal  declared  it  liable  to  petitioner.    To  be  sure,  as  regards  an accommodation  party,  the  condition  of  lack  of  notice  of  any 
infirmity  or defect in title of the persons negotiating it is of no application since the law preserves   the   right   of   recourse   of   a   holder  for   value   against   an accommodation
party notwithstanding knowledge that at the time of taking the instrument, knew him only as an accommodation party.   
 
Further, there is no evidence to show that petitioner possessed the check before  the  instrument’s  presentment  and  dishonor.    In  what  transpired during the transactions involving the
check, evidence and facts show that there was any participation or intervention on the part of petitioner.  What the  record  shows  is  that  only  after  the  check  was  deposited  and
dishonored, petitioner came into possession of it in some way and was able to give it in evidence at the trial of the civil case it has instituted against the drawers of the check. 
 Presumption
• There is a prima facie presumption that every holder is a holder in due
course and it is up to the person who is resisting the claim to prove that
the holder is not a holder in due course.
 Rights of holders in due course
• Personal Defense -

• Real defense -  Include those common law defenses outside those covered in Section 55
•      These include mistake, absence and failure of consideration covered in Section 28, minority and other forms of incapacity, lack
of authority of an agent

• Not holder in due course - 1.    He may sue 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 subject to the same defenses as if it were non-negotiable 
4.    But a holder not in due course who derives his title from a holder in  due  course  and  who  isn’t  a  party  himself  to  any 
fraud  or illegality affecting the instrument, has all the rights of such former holder in respect of parties prior to the latter
 
THE  HOLDER  ACQUIRING  FROM  A  HOLDER  IN  DUE  COURSE  HAS  THE BURDEN  OF  PROOF  TO  SHOW 
PREDECESSOR  IS  INDEED  A  HOLDER  IN DUE COURSE
 RCBC vs. Odrada GR No. 219037
Facts: Noel M. Odrada (Odrada) sold a second­hand Mitsubishi Montero (Montero) to Teodoro L. Lim (Lim) for
P1,510,000. Of the total consideration,... P610,000... was initially paid by Lim and the balance of P900,000... was
financed by petitioner RCBC Savings Bank (RCBC) through a car loan obtained by Lim. Unable to produce the
Montero's OR and CR, Lim requested RCBC to execute a letter addressed to Odrada informing the latter that his
application for a car loan had been approved. RCBC issued a letter that the balance of the loan would be delivered
to Odrada upon submission of the OR and CR. Following the letter and initial down payment, Odrada executed a
Deed of Absolute Sale on 9 April 2002 in favor of Lim and the latter took possession of the Montero. When RCBC
received the documents, RCBC issued two manager's checks... payable to Odrada Odrada deposited the manager's
checks with International Exchange Bank (Ibank). both times apparently upon Lim's instruction to RCBC.
Consequently, Odrada filed a collection suit... against Lim and RCBC
Lim alleged that the cancellation of the loan was at his instance, upon discovery of the misrepresentations by
Odrada about the Montero's roadworthiness.
 Issues
• Whether or not the drawee bank of a manager's check has the option of
refusing payment by interposing a personal defense of the purchaser of the
manager's check who delivered the check to a third party.
• if the holder of a manager's check is not a holder in due course, can the
drawee bank interpose a personal defense of the purchaser?
 Held
Yes on both issues
To be a holder in due course, the law requires that a party must have acquired the instrument in good faith
In the present case, Odrada attempted to deposit the manager's checks on 16 April 2002, a day after Lim had informed him
that there was a serious problem with the Montero. Instead of addressing the issue, Odrada decided to deposit the manager's
checks. Odrada's actions do not amount to good faith. Clearly, Odrada failed to make an inquiry even when the
circumstances strongly indicated that there arose, at the very least, a partial failure of consideration due to the hidden defects
of the Montero. Odrada's action in depositing the manager's checks despite knowledge of the Montero's defects amounted to
bad faith. Moreover, when Odrada redeposited the manager's checks on 19 April 2002, he was already formally notified by
RCBC the previous day of the cancellation of Lim's auto loan transaction. Following UCPB,... RCBC may refuse payment
by interposing a personal defense of Lim - that the title of Odrada had become defective when there arose a partial failure or
lack of consideration.
RCBC acted in good faith in following the instructions of Lim. The records show that Lim notified RCBC of the defective
condition of the Montero before Odrada presented the manager's checks
 Shelter rule
• https://youtu.be/-DeE_Sx8YcE
 In your own words
• Explain shelter rule - Under the shelter principle, a person who does not qualify as a holder in due course
can, nonetheless, acquire the rights and privileges of a holder in due course if he derives his title to the
instrument through a holder in due course. However, a person who previously held the instrument cannot
improve his position by later reacquiring it from a holder in due course if the former holder was a party to
fraud or illegal activity affecting the instrument or had notice of a claim or defense against the instrument.

• Give at least 5 examples of shelter rule - A HDC may gift the negotiable instrument to the transferee. In
this case, the transferee did not provide value for the instrument and does not qualify as a holder in due
course. The shelter rule will allow the transferee to receive all of the rights of the transferor (a holder in
due course) and receive the heightened protection. This rule makes the paper more marketable for the
holder in due course.
Charles Fossum vs. Fernandez GR No. 19461
• FACTS:
• Fernandez  Hermanos  placed  an  order  with  the  products  company  for  the manufacturing of a chain given a set
of specifications.  The chain was duly prepared  and  delivered.    A  draft  was  drawn  by  the  company  and  was
accepted  by  Fernandez  Hermanos.    Thereafter,  the  draft  was  negotiated with  Fossum  who  demanded payment 
on  the  instrument  but  was  refused by  Fernandez  on  alleged  failure  of  the  chain  delivered  to  satisfy  the
specifications given.
 
HELD:
• It devolved around Fernandez Hermanos to allege and prove its claim that which was delivered and received didn't
comply with the specifications and didn't answer the purposes for which it was intended.  It alleged that the chain 
didn't  meet  the  specifications  given  by  the  contract.    Nonetheless, there was failure to identify the so-called
defects of the chain.  It was uponFernandez Hermanos to show that indeed the chain was defective.  But as the trial
court found out, there was a failure of proof.