Charles Fossum vs Fernandez Hermanos et al

G.R. No. L-19461 – 44 Phil. 713 – Mercantile Law – Negotiable Instruments Law – Presumption as to who is a “Holder in Due Course” 

In 1919, the Fernandez Hermanos (FH) contracted with the American Iron Products Company, Inc. (AIP), for the latter to build a shaft for one of the ships managed by FH. In consideration thereof, a time draft with the Philippine National Bank (PNB), a negotiable instrument, was executed by FH in the amount of $2, payable in 60 days. But later, FH dishonored the draft because AIP was not able to comply with the specifications of the shaft ordered by FH.

Nevertheless, Charles Fossum, the agent of AIP here in the Philippines and the person with whom FH was transacting with, was able to obtain the draft from the bank without consideration (for free). Fossum then instituted an action against FH to recover the amount covered by the draft.

Fossum maintains that he is a holder in due course; that he inherited that status from the previous holder (PNB, named payee in the draft); that as such, he is entitled to payment.

ISSUE: Whether or not Fossum is  a holder in due course.

HELD: No. In the first place, Fossum, as an agent of AIP, is well aware that the draft is unenforceable because it has no consideration, the shaft being substandard. AIP did not comply with its obligation thus the draft was dishonored – and Fossum was well aware of this as part of the original party.

Under Sec. 59 of the Negotiable Instruments Law, there is indeed a presumption that every holder is a holder in due course, this covers a payee or an indorsee (for bearer instruments, the bearer). This presumption does not apply to Fossum because he was not a payee nor an indorsee. He’s not an indorsee because the bank merely delivered the draft to him and the delivery was even without consideration.

But if the presumption was previously applied to PNB, wasn’t that acquired by Fossum?

No. The presumption only covers the present holder, and not the previous holder. When a holder delivers/indorses the instrument, he loses that presumption. It will then become incumbent upon the person who received the instrument to prove that the previous holder is a holder in due course especially in this case when the current holder, Fossum, cannot be granted the presumption in Sec. 59, which is merely prima facie by the way, because of the fact that he was an original party fully notified of the failure of the consideration.

At any rate, PNB itself is not a holder in due course due to the timely dishonor of the draft by FH.

Further even assuming PNB is a holder in due course, there is a well-known rule of law that if the original payee of a note unenforceable for lack of consideration repurchases (in this case, the draft was not even repurchased, it was merely delivered back) the instrument after transferring it to a holder in due course, the paper again becomes subject in the payee’s hands to the same defenses to which it would have been subject if the paper had never passed through the hands of a holder in due course. The same is true where the instrument is re-transferred to an agent of the payee.

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