G.R. No. 19461. March 28, 1923

Prior to the date of the making of the contract which gave rise to this
litigation the plaintiff, Charles A. Fossum, was the resident agent in Manila of
the American Iron Products Company, Inc., a concern engaged in business in New
York City; and on February 10, 1920, the said Fossum, acting as agent of that
company, procured an order from Fernandez Hermanos, a general commercial
partnership engaged in business in the Philippine Islands, to deliver to said
firm a tail shaft, to be installed on the ship Romulus, then operated by
Fernandez Hermanos, as managers of La Compañia Maritima. It was stipulated that
said tail shaft would be in accordance with the specifications contained in a
blueprint which had been placed in the hands of Fossum on or about December 18,
1919; and it was further understood that the shaft should be shipped from New
York upon some steamer sailing in March or April of the year 1920.

Considerable delay seems to have been encountered in the matter of the
manufacture and shipment of the shaft; but in the autumn of 1920 it was
dispatched to Manila, having arrived in January, 1921. Meanwhile the American
Iron Products Company, Inc., had drawn a time draft, at sixty days, upon
Fernandez Hermanos, for the purchase price of the shaft, the same being in the
amount of $2,250, and payable to the Philippine National Bank. In due course the
draft was presented to Fernandez Hermanos for acceptance, and was accepted by
said firm on December 15, 1920, according to its tenor.

Upon inspection after arrival in Manila the shaft was found not to be in
conformity with the specifications and was incapable of use for the purpose for
which it had been intended. Upon discovering this, Fernandez Hermanos refused to
pay the draft, and it remained for a time dishonored in the hands of the
Philippine National Bank in Manila. Later the bank indorsed the draft in blank,
without consideration, and delivered it to the plaintiff, Charles A. Fossum, who
thereupon instituted the present action on the instrument against the acceptor,
Fernandez Hermanos, and the two individuals named as defendants in the
complaint, in the character of members of said partnership.

On the foregoing statement it is evident that the consideration for the draft
in question and for the acceptance placed thereon by Fernandez Hermanos, has
completely failed; and no action whatever can be maintained on the instrument by
the American Iron Products Company, Inc., or by any other person against whom
the defense of failure of consideration is available. In recognition of this
fact, and considering that the plaintiff Fossum, in whose name the action is
brought, was the individual who had acted for the American Iron Products
Company, Inc., in the making of the contract, the trial court held that the
action could not be maintained and absolved the defendants from the complaint.
From this judgment the plaintiff appealed.

We are of the opinion that the trial judge has committed no error. To begin
with, the plaintiff himself is far from being a holder of this draft in due
course. In the first place, he was himself a party to the contract which
supplied the consideration for the draft, albeit he there acted in a
representative capacity. In the second place, he procured the instrument to be
indorsed by the bank and delivered to himself without the payment of value,
after it was overdue, and with full notice that, as between the original
parties, the consideration had completely failed. Under these circumstances
recovery on this draft by the plaintiff by virtue of any merit in his own
position is out of the question. His attorney, however, calls attention to the
familiar rule that a person who is not himself a holder in due course may yet
recover against the person primarily liable where it appears that such holder
derives his title through a holder in due course.

The difficulty of the plaintiff’s position from this point of view is that
there is not a line of proof in the record tending to show as a fact that the
bank itself was ever a holder of this draft in due course. In this connection it
was incumbent on the plaintiff to show, as an independent matter of fact, that
the person under whom the plaintiff claims, i. e., the bank, was a holder in due
course; and upon this point the plaintiff can have no assistance from the
presumption, expressed in section 59 of the Negotiable Instruments Law, to the
effect that every holder is deemed prima facie to be a holder in due
course. The presumption expressed in that section arises only in favor of a
person who is a holder in the sense defined in section 191 of the same Law, that
is, a payee or indorsee who is in possession of the draft, or the bearer
thereof. Under this definition, in order to be a holder, one must be in
possession of the note or the bearer thereof. (Night & Day Bank vs.
Rosenbaum, 191 Mo. App., 559, 574.) If this action had been instituted by the
bank itself, the presumption that the bank was a holder in due course would have
arisen from the tenor of the draft and the fact that it was in the bank’s
possession; but when the instrument passed out of the possession of the bank and
into the possession of the present plaintiff, no presumption arises as to the
character in, which the bank held the paper. The bank’s relation to the
instrument became past history when it delivered the document to the plaintiff;
and it was incumbent upon the plaintiff in this action to show that the bank had
in fact acquired the instrument for value and under such conditions as would
constitute it a holder in due course. In the entire absence of proof on this
point, the action must fail.

There is another circumstance which exerted a decisive influence on the mind
of the trial judge in deciding the case for the defendants. This is found in the
fact that the plaintiff personally made the contract which constituted the
consideration for this draft. He was therefore a party in fact, if not in law,
to the transaction giving origin to the instrument; and it is difficult to see
how the plaintiff could strip himself of the character of agent with respect to
the origin of the contract and maintain this action in his own name where his
principal could not. Certainly an agent who actually makes a contract, and who
has notice of all equities emanating therefrom, can stand on no better footing
than his principal with respect to commercial paper growing out of the
transaction. To place him on any higher plane would be incompatible with the
fundamental conception underlying the relation of principal and agent. We note
that in the present case there is no proof that the plaintiff Fossum has ceased
to be the agent of the American Iron Products Company, Inc.; and in the absence
of proof the presumption must be that he still occupies the relation of agent to
that company.

It is a well-known rule of law that if the original payee of a note
unenforceable for lack of consideration repurchases 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. (Kost
vs. Bender, 25 Mich., 515; Shade vs. Hayes, L. R. A. [1915D], 271;
8 C. J., 470.) The same is true where the instrument is retransferred to an
agent of the payee (Battersbee vs. Calkins, 128 Mich., 569).

In Dollarhide vs. Hopkins (72 Ill. App., 509), the plaintiff, as agent
of a corporation engaged in manufacturing agricultural implements, sold to the
defendant a separator for threshing small grain, with a general warranty that
the machine, properly handled, would thresh and clean grain as well as any other
separator of like size. The notes in suit were executed by the defendant in
payment of the separator, and were assigned to the plaintiff before maturity.
They were then indorsed by the plaintiff to a bank which became holder in due
course; but afterwards, and before the commencement of the action, the notes
were retransferred by the bank to the plaintiff. In an action upon the notes the
defendant alleged and proved breach of warranty and showed that the plaintiff
knew of the defect in the separator at the time he purchased the notes. It was
held that the plaintiff could not recover, notwithstanding the fact that the
notes had passed through a bank, in whose hands they would not have been subject
to the defense which had been interposed (54 L. R. A., 678).

We find nothing in the Negotiable Instruments Law that would interfere with
the application of the doctrine applied in the cases above cited, for the rule
that identifies the agent with the principal, so far as the legal consequences
of certain acts are concerned, is a rule of general jurisprudence that must
operate in conjunction with that Law. We consider the situation to be the same
in practical effect as if the action had been brought in the name of the
American Iron Products Company, Inc., itself; and the use of the name of Fossum
strikes us as a mere attempt at an evasion of the rule of law that would have
been fatal to the success of an action instituted by that company.

It appears from statements of Mr. Fossum on the witness stand that the draft
in question was indorsed and delivered to him by the bank in order that suit
might be brought thereon in his name for the use and benefit of the bank, which
is said to be the real party in interest. In addition to this it appears that
during the pendency of the cause in this court on appeal a formal transfer, or
assignment, to the bank was made by Fossum of all his interest in the draft and
in the cause of action.

Assuming that the suggestion thus made is true, and that the bank is the real
party in interest, the result of the lawsuit in this court is not thereby
affected, since it has not been affirmatively shown that the bank is an innocent
purchaser for value. It is therefore unnecessary to discuss the bearing of this
circumstance on the second feature of the case discussed in this opinion.

For the reasons stated the judgment appealed from must be affirmed, and it is
so ordered, with costs against the appellant.

Araullo, C.J., Avanceña,
Villamor, Johns, and Romualdez, JJ., concur.
Ostrand, J.,
concurs in the result.

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MALCOLM, J.:

The bill of exchange mentioned in the majority opinion, and here in question,
was drawn by the American Iron Products Company, Inc., in New York, payable
sixty days after sight to the order of the Philippine National Bank, and
addressed to Fernandez Hermanos of Manila as drawee. The said bill of exchange
was accepted by Fernandez Hermanos, as appears from the following: “Accepted,
15th Dec., 1920, Due, 13 February, 1920, A/C Varadero de Manila. (Sgd.)
Fernandez Hermanos.” The Philippine National Bank later indorsed the bill of
exchange to Charles A. Fossum, as appears from the following: “Philippine
National Bank, Manila, P. I., (Sgd.) E. O. Kaufman.” Such are the facts.

Section 58 of the Negotiable Instruments Law provides: “* * * A holder who
derives his title through a holder in due course, and who is not himself a party
to any fraud or illegality affecting the instrument, has all the rights of such
former holder in respect of all parties prior to the latter.” Under the
provisions of this section, Fossum is in exactly the same situation as the
Philippine National Bank would be. Fossum is entitled to all the rights that
pertain to the Philippine National Bank as holder in due course. Such is the
law.

The absence or failure of consideration is not a defense against a holder in
due course, although it is a defense against a holder not in due course, as
clearly appears from the Negotiable Instruments Law. (Act No. 2031, secs. 28,
51, 52, 57, 58, 59.)

The plain provisions of the Negotiable Instruments Law
should not be ignored and they should be construed and applied in accordance
with the language of the Act and in accordance with precedents construing and
applying the Uniform Negotiable Instruments Law. Accordingly, I must
dissent.