Holder - A payee or indorsee of a bill or note who is in possession of itorthebearerthereofentitledtoreceivethesumforwhichitcalls (Sec. 191, par. 7). Classes 1. HoldersInDueCourseonewhohastakentheinstrument under the conditions of Sec. 52 and holds the instrument free from personal defenses available to prior parties 2. SimpleHoldersOrHoldersNotInDueCourseOnewho becameaholderwithoutany,someoralloftherequisitesunder Sec. 52. He holds the instrument subject to the same defenses as ifitwerenon-negotiable.Hemayenforcetheinstrumentand receive payment therefore. 3. HoldersForValue Where value has at anytime been given for the instrument, the holder is deemed a holder for vale in respect to all parties who become such prior to that time (Sec.26, NIL).

Importance of the Classification Each class of holders has defenses which are available to one class and which may not be available to other classes (De Leon, supra). IfthereareNOdefenses,thedistinctionbetweenaHDCandone who is not a HDC is IMMATERIAL (Aquino, supra). Right to sue of Transferee of an unendorsed instrument Atransfereeofunendorsedinstrumentiscertainlynotaholderas definedunderSec.191andcannotbeconsideredaholderindue course.Nevertheless,ifthetransferorcouldsueinhisownname, then the transferee may also do so under the principle in assignment thattheassigneestepsintotheshoesoftheassignor(DeLeon, supra). Holder in Due Course (HDC)PersonaldefensescannotbesetupagainstaHDCbutreal defenses,whichattachtotheinstrumentitself,wouldbeavailable against all persons even as against a HDC. The fact that the instrument is non-negotiable is a sign of warning to a prospective purchaser and places him on guard and on in inquiry. If the payee satisfies the requirements of Section 52, that payee can be a HDC (Cely Yang v. Court of Appeals, G.R. No. 138074, August 15, 2003). Reason:Thepayeemaybeaholderinduecoursebecause Section191definesaholderasthepayeeorindorseeofabillor notewhoisinpossessionofitorthebearerthereof.Suchpayee may either have acquired the note from another holder or he did not deal directly with the maker thereof. Whileapayeemaybeaholderinduecourse,a draweedoesnot, by paying a bill, become a holder in due course under this section. Reason:Aholderreferstoonewhohastakentheinstrumentasit passesalonginthecourseofnegotiationtowardsthedraweeand notthedraweewho,ontheacceptanceandpaymentofthe instrument, thereby strips it of all negotiability and reduces it to mere voucher or proof of payment (Nat. Bank of Commerce v. Seattle Nat. Bank, 187 Pac. 342).

REQUISITES TO BECOME HOLDER IN DUE COURSE (COFI) I.That the instrument is complete and regular upon its face; 1. Complete Aninstrumentisincompletewhenitiswantinginanymaterial particularpropertobeinsertedinanegotiableinstrument withoutwhichthesamewillnotbecomplete(Sec.14).BUTif theomissionisnotanimportantparticular,suchomissionwill not deprive the holder of the right of a holder in due course. Reason:Thetakingofanincompleteinstrumentputsthe purchaseroninquiryastowhyitisincomplete.Ifhefailstodo so, he takes the instrument subject to all defenses. 2. Regular on its face Torendertheinstrumentirregularundersec52(a),the alterationmustbevisibleorapparentonthefaceofthe instrument, for if it is not apparent, the matter is governed solely bysection124whichrenderstheinstrumentvoid(DeLeon, supra). II. Thathehasbecomeaholderofitbeforeitwasoverdueand without notice that it had been previously dishonored, if such was the fact; 1. Before overdue A holder who takes an overdue instrument is put on inquiry although he is not actually aware of any existing defense of a prior party. (Aquino, supra). Onthedateofmaturity,theinstrumentisnotoverdueanda holderwhoacquirestheinstrumentonthatdateisaholderin duecoursebecausetheprincipaldebtorhasthewholedayto pay. Date of maturity a. The date of maturity is the time fixed therein. b. If it is payable on demand, the date of maturity is determined at the time of presentment (Sec. 173 & 143, NIL) c. Iftheinstrumentispayableontheoccurrenceofaspecified event which is certain to happen, the date of maturity is fixed by the happening of the event (Sec 4 [c], NIL). Anoverdueinstrumentmaystillbenegotiatedbuttheholder cannot be holder in due course. 2. Without notice of dishonor An instrument may be dishonored by: 1. Non-acceptance(Sec. 149, NIL) 2. Non-payment (Sec. 83, NIL) While dishonor by non-payment can only take place at the time ofmaturity,dishonorbynon-acceptanceofbillmayoccureven before the date of maturity. (see full discussions on dishonor) Adishonoredinstrumentmaystillbenegotiatedandtheholder WITHOUT NOTICE can be holder in due course. HOLDERS III.That he has taken it in good faith and for value; 1. Good faith Although good faith on the part of the holder is presumed, such presumptionisdestroyedifthepayeeortheindorseeacquired possessionoftheinstrumentundercircumstancesthatshould haveputhimtoinquiryastothetitleoftheholderwho negotiated the instrument. The burden now is on the part of the holdertoshowthatnotwithstandingthesuspicious circumstances,itacquiredthecheckinactualgoodfaith(De Ocampo vs. Gatchalian, et al., G.R. No. L-15126, November 30, 1961). Goodfaithreferstotheindorseeortransferee,nottothe indorser or transferor of the instrument. Badfaithmeansthattheindorseeortransfereemusthave knowledgeoffactswhichrenderitdishonestforhimtotakea particular piece of negotiable paper. Proofofbadfaith-itisnotnecessarytoshowknowledgeof exacttruth.Itissufficientthatsuchknowledgetendstoshow thattherewassomethingwrongwiththetransaction(DeLeon, supra). 2. For Value EveryNIisdeemedprimafacietohavebeenissuedfora valuableconsideration.Everypersonwhosesignature appearsthereonispresumedtohavebecomeapartythereto for value (Sec. 24, NIL). Considerationisnotrelevanttothenegotiabilityofan instrumentbutissignificantonthequestionofwhetherornot one is a holder in due course. Value - Any consideration sufficient to support a simple contract (Sec. 25, NIL). 1. An antecedent or pre-existing debt; 2. Value previously given (Sec. 25, NIL); 3. Lien arising from contract or by operation of law but the holder is deemed a holder for value to the extent of his lien (Sec. 27, NIL). Itisnotnecessarythattheconsiderationshouldbeadequate (Art.1355ofNCC),butconsiderationfoundedonloveand affectionorupongratitudeisgoodconsiderationbutdoesNOT constitute such valuable consideration as is sufficient of itself to support the obligation of a bill or a note. IV.That at the time of its negotiation to him, he has had no notice ofanyinfirmityintheinstrumentordefectinthetitleofthe person negotiating it (Sec. 52, NIL). Notice of DefectThepersontowhomitisnegotiatedmusthavehadactualor chargeableknowledgeoftheinfirmityordefect,orknowledgeof such facts that his action in taking the instrument amounted to bad faith. (Sec.56, NIL). UnderSec.54and56,negligenceinitselfisnotsufficientto constitutenoticesinceitisnotequivalentofeitheractual knowledge or bad faith. Iftheholderhadactualknowledgeofsuspiciouscircumstances, coupledwiththemeansofreadilyinforminghimselfofthefacts andhewillfullyabstainedfrommakingignorance,hisintentional ignorance may amount to bad faith (De Leon, supra). Effects of notice of defect: 1. It destroys the status of holder as a holder in due course 2. The holder is open to all defenses and not merely those relating to defect of which he had notice (Sec. 58). Defective Title The title of a person who negotiates the instrument is defective when he obtained the instrument or any signature thereto by 1. Fraud; 2. Force, duress or fear; 3. Other unlawful means;4. For an illegal consideration. Or when he negotiates it in 5. Breach of faith; or under 6. Such circumstances that amount to fraud (Sec. 55, NIL). Infirmitiesmustincludethingsthatarewrongwiththeinstrument itselfasdistinguishedfromthosethingsthatarelackinginthe contractsontheinstruments.Suchinfirmitiesaretobefoundin situations arising under Sec. 13, 14, 15, 16, 21, and 23 of the NIL. Wherethetransfereereceivesnoticeofinfirmityintheinstrumentor defectinthetitleofthepersonnegotiatingthesamebeforehehas 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 therefor paid by him (Sec. 54, NIL). Rights of a HDC (SPPF)1. May sue on the instrument in his own name (even when he holds theinstrumentmerelyinarepresentativecapacitysuchasa holder for collection only or a pledgee of a note) 2. Mayreceivepaymentandifpaymentisinduecourse,the instrument is discharged; 3. Holdstheinstrumentfreefromanydefectoftitleofpriorparties andfreefrompersonaldefensesavailabletopartiesamong themselves;4. May enforce payment of the instrument for the full amount thereof against all parties liable thereon (Sec. 51 & 57, NIL). Exceptions: a. Whentheholderisaholderforvalueonlytotheextentofhis lien - HDC only to that extent (Sec. 27, NIL); b. Whentheholderacquirednoticeofanyinfirmityinthe instrumentordefectinthetitleofthepersonnegotiatingthe samebeforehehaspaidthefullamountagreedtobepaid therefor-HDConlytotheextentoftheamountpaid(Sec.54, NIL); c. In case of alteration as to amount - HDC may enforce payment only according to its original tenor (Sec. 124, NIL). Everyholderofanegotiableinstrumentisdeemedprimafaciea holderinduecourse(Sec.59,NIL).However,thispresumption arisesonlyinfavorofapersonwhoisaholderasdefinedinSec. 191 of the NIL. Burden of Proof TheburdenofprooftoestablishwhoisanHDCdependsonthe circumstances. GeneralRule:When it is shown that the title of any person who has negotiated the instrument was defective, the burden is on the holder to prove that he or some person under whom he claims acquired the title as HDC. Exception:The holder has no burden of proving that he is holder in due course in favor of a party who become bound on the instrument prior to the acquisition of such defective title. Whereaninstrumentpayableondemandisnegotiatedonan unreasonablelengthoftimeafteritsissue,theholderisnot deemed holder in due course (Sec. 53, NIL). Holder NOT In Due CourseOne who became a holder of an instrument without any, some or all of the requisites under Sec. 52 of the NIL. GeneralRule:If a holder is not a holder in due course, he is subject tothesamedefensesasifitwerenon-negotiable.Inotherwords,a holdernotinduecourseissubjecttobothrealandpersonal defenses available to parties primarily or secondarily liable. Exception(ShelterRule):Ifhederiveshistitlethroughaholderin due course and if he isnot a party to any fraud or illegality affecting the instrument, he has all the rights of such former holder in respect of all parties prior to the latter (Sec.58, NIL). Exception to the Exception:The rule under Sec. 58 does not apply if theholderwasapreviousholderNOTinduecoursewhohad subsequently repurchase the instrument either personally or through an agent.Reason: A holder who is not a holder in due course cannot improve hissituationbyreacquiringtheinstrument(Fossumv.Fernandez G.R. No. L-20080 March 27, 1923). Rights of a Holder NOT In Due Course:1. He may sue on the instrument in 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. Thus,priorpartiescanavailagainsthimanydefenseavailable amongthesepriorpartiesandpreventthesaidholderfrom collecting in whole or in part the amount stated in the instrument. 4. Invocation of the Shelter Rule when applicable. Failure to Make InquiryGeneral Rule: Failure to make inquiry after notice of the facts merely sufficient to cause a person of ordinary prudence to make inquiry as to an infirmity in the negotiable instrument and defect in the holders title, is not evidence of bad faith as to bar him from recovery. Reason:The law does not impose a duty on the part of every holder to make inquiry before acquiring the instrument. Exceptions: 1. Where a holders title is defective or suspicious that would compel a reasonable man to investigate, it cannot be stated that the payee acquired the instrument without the knowledge of said defect in the holders title and for this reason the presumption that it is a holder in due course or that it acquired the instrument in good faith does not exist (De Ocampo v. Gatchalian, G.R. No. L-15126, November 30, 1961). 2. Holder to whom cashiers check is not indorsed in due course and negotiatedforvalueisnotaholderinduecourse (Mesina v. IAC, G.R. No. 70145, November 13, 1986). The holder may not be considered a holder in due course because of theinstrumentinvolved,asinthecasewhereapersontakesa crossedcheck without making further inquiries. The act of crossing acheckservesasawarningtotheholderthatthecheckhasbeen issuedforadefinitepurpose(BataanCigarandCigaretteFactoryv. CA, G.R. No. 93048, March 3, 1994). Bills in SetOnecomposedofseveralparts,eachpartbeingnumberedand containingareferencetotheotherparts,thewholeoftheparts constituting but one bill. Purpose:It is usually availed of in cases where a bill had to be sent to a distant place through some conveyance.If each part is sent by different means of conveyances, the chance that at least one part of the set would reach its destination would be greater. Rights of holders where parts are negotiated separately: 1. If both are HDC, the holder whose title first accrues is considered the true owner of the bill. 2. Butthepersonwhoacceptsorpaysinduecourseshallnotbe prejudiced (Sec. 179, NIL). Obligations of holder who indorses 2 or more parts of the bill in set: 1. The person shall be liable on every such part; 2. Everyindorsersubsequenttohimisliableontheparthehas himselfindorsed,asifsuchpartswereseparatebills(Sec.180, ibid). Holder in due courseNot HDC Compliance with requisites All the circumstances under section 52 of nil are present One, or some or all of the requisites or circumstances under sec 52 is/are absent Real Defenses Hisrightscanbedefeated by real defenses Hisrightscanbedefeated by real defenses Personal Defenses Hisrightscannotbe defeatedbypersonal defenses Hisrightscanbedefeated by personal defenses Rights Hehasrighttoenforce payment,sueinhisown name,andnegotiatethe instrument Hehasrighttoenforce payment,sueinhisown name,andnegotiatethe instrument LiabilityWarranty Liability to pay Makesthepartiesliableto paythesumcertainin moneystatedinthe instrument. Imposenodirectobligation topayintheabsenceof breachthereof.Incaseof breach,thepersonwho breachedthesamemay eitherbeliableorbarred fromassertingaparticular defense. Requisites to enforce liability Conditionedon presentmentandnoticeof dishonor. Doesnotrequire presentmentandnoticeof dishonor. When action must be brought Actioncannotbebrought until maturity of instrument. May be brought at any time; thebreachmayevenoccur atthetimeoftransfer (CamposandLopez-Campos,Negotiable Instruments Law, 1994 ed).