G.R. No. 19461 ; March 28, 1923
CHARLES A. FOSSUM, plaintiff-appellant, vs. FERNANDEZ HERMANOS, ET AL., defendants-appellees.

FACTS

Charles A. Fossum, as agent for the American Iron Products Company, Inc., secured an order from Fernandez Hermanos for a tail shaft. The shaft, upon arrival, was non-conforming and unusable. The seller drew a time draft for the price, which Fernandez Hermanos accepted. After discovering the defect, Fernandez Hermanos refused payment. The Philippine National Bank, the payee, later endorsed the draft without consideration and delivered it to Fossum, who then sued Fernandez Hermanos on the instrument.

ISSUE

Whether Fossum, as the endorsee of the dishonored draft, can enforce payment against the acceptor, Fernandez Hermanos, despite the complete failure of consideration for the draft.

RULING

No. The Supreme Court affirmed the dismissal of the complaint. Fossum is not a holder in due course because he was a party to the original contract (as agent), acquired the draft after it was overdue, without paying value, and with full knowledge of the failure of consideration. Furthermore, the presumption that a holder is a holder in due course under the Negotiable Instruments Law does not apply to Fossum, as he was not in possession of the instrument as a holder when the suit was filed; he had to prove affirmatively that his endorser (the bank) was a holder in due course, which he failed to do. As an agent privy to the transaction, he stands in no better position than his principal, who could not enforce the draft due to the failure of consideration. The subsequent assignment of his interest to the bank during the appeal did not alter the result, as it was not shown the bank was an innocent purchaser for value.