G.R. No.

L-42081
ISIDRO S. SANTOS vs. ARTURO P. REYES and AURELIO P. REYES

FACTS:

Herein defendants are brothers Arturo and Aurelio Reyes, who along with Hermogenes Mendoza are
optometrists and were partners in optometry business.

On December 24,1928, Mendoza applied for and obtained from Bureau of Lands a loan amounting to
300 pesos with interest of 9% per annum. Mendoza constituted a mortgage on a residential lot with
improvements which he bought by installment. To comply with this debt obligation and avoid possible
foreclosure of the mortgage, Mendoza requested money from defendant Arturo Reyes. On April 23,
1931, Mendoza executed a deed of sale in favor of defendants wherein it was made to appear that he
sold and transferred the parcel of land that was subject of the mortgage. It was likewise made to appear
in the said document that the land was subject to a mortgage lien in favor of the Bureau of Lands to
secure the payment of a debt. Said deed of sale was neither presented to the Bureau of Lands or to the
registry of deeds. Arturo Reyes also on said date, issued a promissory note in favor of Mendoza,
whereby for value received, he promised to pay Mendoza the sum of 300 pesos. Defendants also
executed another promissory note in favor of Mendoza, acknowledging that they were indebted to the
latter. It was admitted that the purpose of Mendoza in having the defendants sign the promissory notes
was to present such to a prospective buyer of the land and have the latter purchase it for a higher price.
It was further agreed upon that the profits be divided among themselves.

The mortgaged property remains to be under the name of Mendoza. And having failed to pay for his
debt, the Bureau of Lands instituted a case for the foreclosure of mortgage against Mendoza and
judgment was rendered against him. Months thereafter, Mendoza who was in dire need of money,
executed a document whereby in consideration of the sum of 1,000 pesos transferred to herein plaintiff
Isidro Santos all his rights, interest and participation in said promissory notes.

Now comes plaintiff Santos who filed a case against defendants to recover from the proceeds of the
promissory notes. The trial court however dismissed the case on the ground that Santos was not a
holder in due course. The court found merits on the defendant’s contention that the notes were fictitious
thus were executed without a valid consideration.

ISSUE: Whether or not the trial court was correct in finding the plaintiff not a holder in due course.

HELD:

The court decided in the affirmative. It was plaintiff himself who admitted that when the promissory
notes were transferred to him they were already 1 year overdue and that he was aware of it. In spite of
this, he bought said notes without first inquiring into the solvency of the makers thereof.
There is no doubt that as the plaintiff had purchased the two promissory notes in question without the
necessary endorsement on the part of the holder after payment thereof had already been one year
overdue, and without having made inquiries about the solvency of their makers, he cannot be
considered a holder in due course in accordance with the provisions of section 52 of the Negotiable
Instruments Law, and the defendants have a perfect right to set up, as they have done so against him,
the defense that said promissory notes lack valuable consideration and are fictitious, which defense
they could have set up had original holder Hermogenes Mendoza demanded payment of them.