a. That it is complete and regular on its face.

Complete means that the instrument is not wanting in any material particular, while Regular
means that there is no visible or apparent alteration on the face of the instrument;

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.
Before it is overdue means before maturity. An overdue instrument is still negotiable
although it is subject to defenses existing at the time of transfer. A negotiable
instrument in circulation past its maturity date carries strong indication that it has been
dishonored. An overdue instrument puts all persons on notice that it might not have
been paid because of a valid defense to such payment

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

Good faith means that he has no knowledge of the facts which render it dishonest for him to
take the negotiable paper BUT the knowledge required is not that necessary to show exact
truth but such that tends to show that there was something wrong with the transaction.
Good faith is the holder’s well founded or honest belief that the person from whom he
received the instrument was the owner thereof, with the right to transfer it (Duran v
IAC, G.R. No. L-64159, September 10, 1985). Value may be some right, interest,
profit or benefit to the party who makes the contract or some forbearance, detriment,
loan, responsibility, etc. to the other (BPI v. Roxas, G.R. No. 157833, October 15,
2007).

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.
The title of the person negotiating it is defective when he obtains (OR ACQUIRES) the
instrument or any signature thereto by FRAUD, DURESS, OR FORCE OR FEAR OR OTHER
UNLAWFUL MEANS, OR FOR AN ILLEGAL CONSIDERATION- OR- when he NEGOTIATES the
instrument in BREACH OF FAITH (Example: negotiation after he has been paid) or
CIRCUMSTANCES AMOUNTING TO FRAUD (Example: negotiation with knowledge that it will
not be paid)

The person to whom it is negotiated must have had actual knowledge of such facts or
knowledge of other facts that his action in taking the instrument amounted to bad faith
(NIL, Sec. 56). Presence or absence of defect or infirmity must be determined at the
time the instrument was negotiated to the holder.

Under Section 59, there is a prima facie presumption that every holder is a holder in due course BUT the
burden of proof shifts when it is shown that the title of the person negotiating the instrument is defective
BUT it does not apply to a party who became bound on the instrument prior to the acquisition of defective
title.

PERSONAL DEFENSES - are those which grow out of the agreement or conduct of a particular person in
regard to the instrument which renders it inequitable for him, though holding the legal title, to enforce it
against the party sought to be made liable but which are not available against a holder in due course. (see
Sec. 55). They are called “personal defenses” because they are available only against that person or
subsequent holder who stands in privity with him. (Ogden, op.cit., p. 309). In other words, they can be used
only between original parties or immediate parties or against one who is not a holder in due course.

REAL DEFENSES- they are those available against all parties, both immediate and remote, including holders
in due course. They are such because they attach to the instrument itself.

y. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party
or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the
obligation of a party.

Instances that constitute material alteration Any alteration which changes: 1. Date NOTE: The change in the date of
indorsement is not material where the date is not necessary to fix the maturity of the instrument. 2. Sum payable,
either for principal or interest 3. The time or place of payment 4. Number or the relations of the parties 5. Currency in
which payment is to be made 6. Adds a place of payment where no place is specified 7. Any other change or addition
which alters the effect of the instrument (NIL, Sec. 125)

EFFECT OF MATERIAL ALTERATION

Material alteration of a negotiable instrument, without the assent of all parties liable thereon, has the following
effects: 1. Avoids the instrument except against: a. A party who has made the alteration; b. A party who authorized or
assented to the alteration; or c. The indorsers who indorsed subsequent to the alteration because of their warranties
(2001 Bar) 2. If negotiated to an HIDC: a. He may enforce the payment thereof according to its original tenor against
the person not a party to the alteration. b. He may also enforce payment thereof against the party responsible for the
alteration for the altered amount. 3. If negotiated to a holder not an HIDC: a. He cannot enforce payment against the
person not a party prior to the alteration. b. He may, however enforce payment according to the altered tenor from
the person who caused the alteration and from the indorsers (NIL, Sec. 12).

EFFECT OF A MATERIAL ALTERATION

 Under Section 124, 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.
 CONSEQUENTLY, the
 EFFECTS OF AN ALTERATION OF THE INSTRUMENT are:

(1) Alteration by a party. – The effect of a material alteration by the holder is to discharge the
instrument and all prior parties thereto who did not give their consent to such alteration. Since no
distinction is made, it does not matter whether it is favorable or unfavorable to the party making the
alteration.

The law however makes certain exceptions as to the effect of material alteration. It does not discharge the
instrument as against:
(a) a party who has made the alteration, and
(b) a party who authorized or assented to the alteration, and
(c) indorsers who indorsed subsequent to the alteration.

EXAMPLE:
M makes a promissory note for P3,000.00 payable to P or order. P negotiates the note to A who,
with the consent of P, raises the amount to P8,000.00 and thereafter indorses it to B, B to C, and C to D,
under circumstances which make D not a holder in due course.

The note is discharged as against M; hence, D cannot enforce it as against M even for the original
tenor. A, however, would be liable to D for P8, 000.00 as he is the party who himself made the alteration
although D is not a holder in due course. Moreover, as indorser, A warrants that the instrument is genuine
and in all respects what it purports to be. (Secs. 65 and 66.)
P would also be liable to D for P8, 000.00 as he authorized the alteration
B and C are liable to D because they are subsequent indorsers.

(2) Alteration by a stranger. – When the material alteration of the instrument is made by a stranger, it
is called spoliation.

(3) Right of holder in due course. – A material alteration avoids the instrument in the hands of one who
is not a holder in due course as against any prior party who has not assented to the alteration. But if an
altered instrument is negotiated to a holder in due course, he may enforce payment thereof according to its
original tenor regardless of whether the alteration was innocent or fraudulent. (see Sec. 62.)

EXAMPLE:
In the example given, if D were a holder in due course, he could enforce the instrument against M
for P3, 000.00, its original tenor. (see Sec. 14.) Of course, D can recover from P, A, B, or C P8, 000.00 should
M dishonor the instrument.

WHEN ALTERATION IS MATERIAL

Section 125 defines what will constitute a material alteration. It is any alteration which changes

(a) The date;

(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(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.

a: Baby cannot enforce the note against Larry since she is not a holder in due course because Larry could interpose
the real and personal defenses to defeat the claim of Baby. However, because of the shelter principle in Negotiable
Instruments Law, Baby could be elevated to a status of a holder in due course since a person not holder in due course
steps in the shoes of the prior party. Therefore, Baby could enforce the note against Larry the same way as Devi could
enforce it.
Sec.  59.  Who  is  deemed  holder  in  due  course.  -  Every  holder  is deemed  prima  facie  to  be  a 
holder  in  due  course;  but  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 holder in due course. But the last-mentioned rule does not apply in
favor of a party who became bound on the instrument prior to the acquisition of such defective title.
 

IN WHOSE FAVOR PRESUMPTION ARISES

•      In order to be a holder, he must be in possession  of the note or the bearer thereof 

WHEN PRESUMPTION ACCRUES

•      It  is  presumed  that  the  holder  acquired  the  note  under  all  the circumstances required under Section
52
•      Before the presumption arises, he must prove that he is the holder of the  instrument,  that  is,  that  he  is 
the  indorsee  in  possession  of  the instrument, as it is payable to order
 

WHEN BURDEN IS SHIFTED

•      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  under  whom  he  claims,  acquired  the  title  as  holder  in  due
course
 
THE PRESUMPTION IS NOT APPLICABLE WHEN  THE HOLDER’S TITLE WAS DEFECTIVE OR
SUSPICIOUS 

CHAPTER 5

A person placing his signature upon an instrument otherwise than as maker or acceptor is deemed to be an indorser,
unless he clearly indicates by appropriate words his intention to be bound in some other capacity (NIL, Sec. 63).