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Wednesday, April 23, 2014
When is a “Holder” considered a “Holder in Due Course” so as to be Allowed to Recover?
“In the case at bar as the payee acquired
the check under circumstances which should have put it to inquiry, why the
holder had the check and used it to pay his own personal account, the duty
devolved upon it, plaintiff-appellee, to prove that it actually acquired said
check in good faith. The stipulation of facts contains no statement of such
good faith, hence we are forced to the conclusion that plaintiff payee has not
proved that it acquired the check in good faith and may not be deemed a holder
in due course thereof.”
The case below discusses the rights of a holder of a
negotiable instrument, and his corresponding obligations when he comes into
possession of an instrument under circumstances that put, or should put a
reasonably prudent man to inquiry on the title of the person negotiating the
Brief Statement of Facts
In this case,
Plaintiff-appellee Ocampo Clinic (“Ocampo”) sued Defendants Anita and Hipolito
Gatchalian (each “Gatchalian,” collectively the “Gatchalians”) for recovery of
the value of a check in the amount of P600.00 representing payment made by
Manuel Gonzales (“Gonzales”), when the Gatchalians ordered a “stop payment” on
the said check it issued to Gonzales. Ocampo claims that it received the check
in payment of an indebtedness–hospital bills of the wife of Gonzales. The
Gatchalians, on the other hand, denies his claim counterclaiming that they
issued the check to Gonzales as a mere evidence of good faith in their intention
to purchase the car belonging to Ocampo, which Gonzales was selling, as
Ocampo’s agent, to the Gatchalians.
The Court held:
“Our resolution of this
issue leads us to a consideration of the last question presented by the
appellants, i.e., whether the plaintiff-appellee may be considered as a holder
in due course.
Section 52, Negotiable
Instruments Law, defines holder in due course, thus:
holder in due course is a holder who has taken the instrument under the
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 had 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.
The stipulation of facts
expressly states that plaintiff-appellee was not aware of the circumstances
under which the check was delivered to Manuel Gonzales, but we agree with the
defendants-appellants that the circumstances indicated by them in their briefs,
such as the fact that appellants had no obligation or liability to the Ocampo
Clinic; that the amount of the check did not correspond exactly with the
obligation of Matilde Gonzales to Dr. V. R. de Ocampo; and that the 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 — all these
circumstances should have put the plaintiff-appellee to inquiry as to the why
and wherefore of the possession of the check by Manuel Gonzales, and why he
used it to pay Matilde's account. It was payee's duty to ascertain from the
holder Manuel Gonzales what the nature of the latter's title to the check was
or the nature of his possession. Having failed in this respect, we must declare
that plaintiff-appellee was guilty of gross neglect in not finding out the
nature of the title and possession of Manuel Gonzales, amounting to legal
absence of good faith, and it may not be considered as a holder of the check in
good faith. To such effect is the consensus of authority.
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.
Paika v. Perry, 225 Mass. 563, 114 N.E. 830.
sufficient that the buyer of a note had notice or knowledge that the note was in some way tainted with
fraud. It is not
necessary that he should know the particulars or even the nature of the fraud,
since all that is required is knowledge of such facts that his action in taking
the note amounted bad faith. Ozark Motor Co. v. Horton (Mo. App.), 196 S.W. 395.
Accord. Davis v. First Nat. Bank, 26 Ariz. 621, 229 Pac. 391.
bonds stolen from the plaintiff were brought by the thief, a boy fifteen years
old, less than five feet tall, immature in appearance and bearing on his face
the stamp a degenerate, to the defendants' clerk for sale. The boy stated that
they belonged to his mother. The defendants paid the boy for the bonds without
any further inquiry. Held, the plaintiff could recover the value of the bonds. The term 'bad faith' does not
necessarily involve furtive motives, but means bad faith in a commercial sense.
The manner in which the defendants conducted their Liberty Loan department
provided an easy way for thieves to dispose of their plunder. It was a case of
"no questions asked." Although gross negligence does not of itself constitute bad faith, it
is evidence from which bad faith may be inferred. The circumstances
thrust the duty upon the defendants to make further inquiries and they had no
right to shut their eyes deliberately to obvious facts. Morris v. Muir, 111
Misc. Rep. 739, 181 N.Y. Supp. 913, affd. in memo., 191 App. Div. 947, 181 N.Y.
Supp. 945." (pp. 640-642, Brannan's Negotiable Instruments Law, 6th ed.).
The above considerations
would seem sufficient to justify our ruling that plaintiff-appellee should not
be allowed to recover the value of the check. Let us now examine the express
provisions of the Negotiable Instruments Law pertinent to the matter to find if
our ruling conforms thereto. Section 52 (c) provides that a holder in due course
is one who takes the instrument "in good faith and for value;"
Section 59, "that every holder is deemed prima facie to be a holder in due
course;" and Section 52 (d), that in order that one may be a holder in due
course it is necessary that "at the time the instrument was negotiated to
him "he had no notice of any . . . defect in the title of the person
negotiating it;" and lastly Section 59, that every holder is deemed
prima facie to be a holder in due course.
In the case at bar the
rule that 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.
On the other hand, the stipulation of facts indicated by the appellants in
their brief, like the fact that the drawer had no account with the payee; that
the holder did not show or tell the payee why he had the check in his
possession and why he was using it for the payment of his own personal account —
show that holder's title was defective or suspicious, to say the least. As
holder's title was defective or suspicious, it cannot be stated that the payee
acquired the check without knowledge of said defect in holder's 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. And having presented no
evidence that it acquired the check in good faith, it (payee) cannot be
considered as a holder in due course. In other words, under the circumstances
of the case, instead of the presumption that payee was a holder in good faith,
the fact is that it acquired possession of the instrument under circumstances
that should have put it to inquiry as to the title of the holder who negotiated
the check to it. The burden was, therefore, placed upon it to show that
notwithstanding the suspicious circumstances, it acquired the check in actual
The rule applicable to
the case at bar is that described in the case of Howard National Bank v.
Wilson, et al., 96 Vt. 438, 120 At. 889, 894, where the Supreme Court of
Vermont made the following disquisition:
to the Negotiable Instruments Act, two distinct lines of cases had developed in
this country. The first had its origin in Gill v. Cubitt, 3 B. & C. 466, 10
E. L. 215, where the rule was distinctly laid down by the court of King's Bench
that the purchaser of negotiable paper must exercise reasonable prudence and
caution, and that, if the circumstances were such as ought to have excited the
suspicion of a prudent and careful man, and he made no inquiry, he did not
stand in the legal position of a bona fide holder. The rule was adopted by the
courts of this country generally and seem to have become a fixed rule in the
law of negotiable paper. Later in Goodman v. Harvey, 4 A. & E. 870, 31 E.
C. L. 381, the English court abandoned its former position and adopted the rule
that nothing short of actual bad faith or fraud in the purchaser would deprive
him of the character of a bona fide purchaser and let in defenses existing
between prior parties, that no circumstances of suspicion merely, or want of
proper caution in the purchaser, would have this effect, and that even gross
negligence would have no effect, except as evidence tending to establish bad
faith or fraud. Some of the American courts adhered to the earlier rule, while
others followed the change inaugurated in Goodman v. Harvey. The question was
before this court in Roth v. Colvin, 32 Vt. 125, and, on full consideration of
the question, a rule was adopted in harmony with that announced in Gill v.
Cubitt, which has been adhered to in subsequent cases, including those cited
above. Stated briefly, one line of cases including our own had adopted the test
of the reasonably prudent man and the other that of actual good faith. It would
seem that it was the intent of the Negotiable Instruments Act to harmonize this
disagreement by adopting the latter test. That such is the view generally
accepted by the courts appears from a recent review of the cases concerning
what constitutes notice of defect. Brannan on Neg. Ins. Law, 187-201. To
effectuate the general purpose of the act to make uniform the Negotiable
Instruments Law of those states which should enact it, we are constrained to hold (contrary to the rule
adopted in our former decisions) that negligence on the part of the plaintiff,
or suspicious circumstances sufficient to put a prudent man on inquiry, will
not of themselves prevent a recovery, but are to be considered merely as
evidence bearing on the question of bad faith. See G. L. 3113, 3172, where such a course is required
in construing other uniform acts.
comes to this then: When the case has taken such shape that the plaintiff is
called upon to prove himself a holder in due course to be entitled to recover,
he is required to establish the conditions entitling him to standing as such,
including good faith in taking the instrument. It devolves upon him to disclose
the facts and circumstances attending the transfer, from which good or bad
faith in the transaction may be inferred.
In the case at bar as
the payee acquired the check under circumstances which should have put it to
inquiry, why the holder had the check and used it to pay his own personal
account, the duty devolved upon it, plaintiff-appellee, to prove that it
actually acquired said check in good faith. The stipulation of facts contains
no statement of such good faith, hence we are forced to the conclusion that
plaintiff payee has not proved that it acquired the check in good faith and may
not be deemed a holder in due course thereof.
For the foregoing
considerations, the decision appealed from should be, as it is hereby,
reversed, and the defendants are absolved from the complaint. With costs
Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and De Leon, JJ.,
concur. Bengzon, C.J., concurs in the result.
R. De Ocampo & Co. vs. Anita Gatchalian, et al.,G.R. No. L-15126 November 30, 1961