Page 1 of 3

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

CHARLES A. FOSSUM, plaintiff-appellant, 
vs.
FERNANDEZ HERMANOS, a general partnership, and JOSE F. FERNANDEZ Y CASTRO and RAMON
FERNANDEZ Y CASTRO, members of the said partnership of FERNANDEZ HERMANOS, defendants-appellees.

Chas. E. Tenney for appellant.

STREET, J.:

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
Compañ ía Marítima. 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 fact 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 circumstance 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
 Page 2 of 3

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 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
Instrument Law, to the effect that every holder is deemed prima facie to be a holder in due course. The
presumption expressed in that section arise 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 to 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 repurchase
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 Instrument 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
 Page 3 of 3

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 to
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.

Separate Opinions

MALCOLM, J., dissenting:

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 Instrument 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 Instrument 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.