Академический Документы
Профессиональный Документы
Культура Документы
Examples:
Fraud in factum Jose Cruz obtains the signature of Juan Santos by misleading the
latter into believing that what was signed was only for an autograph. There wa
s no intention to circulate a negotiable instrument.
Duress forced to sign or make a negotiable instrument.
Impersonation there must be an intention that the impersonator is the one who sh
ould receive the instrument.
Case 1:
A -> B -> C-> D-> E (holder in due course)
B forges A s signature (Pay to B or order)
1. Can E run after A? No, because of the forgery defense.
2. Can E run after B? Yes, because he is the forger.
3. Can E run after C or D? Yes, because, as indorsers, they have a warranty.
Case 2:
A -> B -> C-> D-> E (holder in due course)
A herein makes a note which says: Pay to B or order
D forges C s signature (D made it appear that C indorsed the note)
1. Can E run after A or B? No, because E has no title.
2. Can E run after C? No, because of the forgery defense.
3. Can E run after D? Yes, because of the warranty as indorser.
Case 3:
A -> B -> C-> D-> E (holder in due course)
A herein makes a note which says: Pay to B or bearer
D forges C s signature (D made it appear that C indorsed the note)
1. Can E run after A? Yes, but if E was not a holder in due course, A can claim
want of delivery of a complete instrument as a defense under Section 16 NIL.
2. Can E run after B? No, because E has no title.
3. Can E run after C? No, because of the defense of forgery.
4. Can E run after D? Yes, because D is the forger/warranty of indorser.
The forgery of the indorsement is immaterial since the instrument is payable to
bearer which makes it negotiable by mere delivery.
However, if there was an indorsement (although unnecessary), the holder can run
after prior parties if he can trace his title to such prior parties. There shou
ld be no break. In Case 3, E can trace only up to D because there was a break w
hen the forgery was committed.
20 November 2001
Prefatory Remarks: examples of forged signatures. Photocopied sample passed arou
nd.
II. Bill of Exchange
A. Drawer
1. Order
a. Accepted
b. Not Accepted
2. Bearer
a. Accepted
b. Not Accepted
Hypothetical Cases
CASE 1: B FORGED THE SIGNATURE OF A, AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO
B OR ORDER. B INDORSED IT TO C, C TO D, D TO E. E PRESENTED TO X, X ACCEPTED AND
PAID.
Q. Can X debit the account of A?
A. No because there is no warranty of ___, because the signature is forged.
Q. Can X get back the money paid to E?
A. No, under Section 62, which is based on the old ruling of Pryce v. Nei
ll. The drawee cannot get back the money from the payee. Under Section 62, the a
cceptor by accepting admits the genuineness of the signature of the drawer. That
is why when you open an account you submit specimen signature.
Q. What is the remedy of X?
A. To run after B, the forger. Sue for reimbursement.
CASE 2: B FORGED THE SIGNATURE OF A, AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO
B OR ORDER. B INDORSED IT TO C, C TO D, D TO E. E PRESENTED TO X, X DISHONORED I
T.
Q. Can E run after A?
A. No, because the signature is forged.
Q. Can E run after X?
A. No, because the drawee is not liable unless he accepts.
Q. Can E run after B? C? D?
A. Yes, because as indorsers B, C, and D warrant that the instrument is genuine
in all respects what it purports to be.
CASE 3: B FORGED THE SIGNATURE OF A, AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO
B OR BEARER. B INDORSED IT TO C, C TO D, D TO E. E PRESENTED TO X, X ACCEPTED AN
D PAID
Q. Can X debit A s account?
A. No because the signature is forged
Q. Can X get back the money from E?
A. No because under Section 62, he admits that the signature of drawer is genuin
e.
Q. What is X s remedy?
A. To run after B.
CASE 4: B FORGED THE SIGNATURE OF A, AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO
B OR BEARER. B INDORSED IT TO C, C TO D, D TO E. E PRESENTED TO X, X DISHONORED
IT.
Q. Can E run after A?
A. No because signature is forged.
Q. Can E sue X?
A. No because the drawee is not liable unless he accepts.
Q. Can E run after B, C and D?
A. Yes, because as indorsers B, C and D warrant the genuineness of the instrumen
t in all respects what it purports to be.
CASE 5: A DRAWS A BILL OF EXCHANGE PAYABLE TO B OR ORDER. B INDORSED IT TO C. D
STOLE IT AND FORGED THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO X,
X ACCEPTED AND PAID.
Q. Can X debit the account of A?
A. No because A ordered it pay to B or order. C did not order X to pay to D. Thi
s is a forged indorsement.
Q. Can X get back the money from E?
A. Yes, because X only admits that the signature of the drawer is genuine. He do
es not admit the signature of the indorsers are genuine. And since this is payab
le to order, a valid indorsement is needed for D to acquire title. But since the
indorsement of C is forged, D did not acquire valid title. So E must return th
e money to X.
Q. Can E run after A?
A. No, because the indorsement of C is forged. He did not acquire title.
Q. Can E run after B? C?
A. No, because it is a forged indorsement.
Q. Can E run after D?
A. Yes, because as indorser D warrants that the instrument is genuine in all res
pects what it purports to be.
CASE 6: A ISSUES A BILL OF EXCHANGE PAYABLE TO B OR ORDER. B INDORSES IT TO C. D
STOLE IT AND FORGED THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO X
, X DISHONORED IT.
Q. Can X debit the account of A?
A. No, X did not pay anything.
Q. Can E hold X liable?
A. No, because X is not liable unless he accepts.
Q. Can E run after A? B? C?
A. No, because forged indorsement
Q. Can E run after D?
A. Yes, because as indorser D warrants that the instrument is genuine in all res
pects what it purports to be.
CASE 7: A ISSUED A BILL OF EXCHANGE PAYABLE TO B OR BEARER. B INDORSES IT TO C.
D STOLE IT AND FORGED THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO
X, X ACCEPTED AND PAID.
Q. Can X debit the account of A?
A. Yes, because it is a bearer instrument. The instruction of A to X is pay to th
e bearer.
Q. Can X get back the money from E?
A. No, because E is the bearer.
Q. What is C s remedy?
A. Run after D, the thief who stole the bill of exchange.
CASE 8: A ISSUED A BILL OF EXCHANGE PAYABLE TO B OR BEARER. B INDORSES IT TO C.
D STOLE IT AND FORGED THE INDORSEMENT OF C AND INDORSED IT TO E. E PRESENTED TO
X, X DISHONORED IT.
Q. Can X debit the account of A?
A. No, X did not pay anything.
Q. Can E sue X for payment?
A. No, X did not accept.
Q. Can E run after A?
A. It depends whether E is a holder in due course. Because the defense of
A is want of delivery of a complete instrument, which can be raised against som
eone who is not a holder in due course, but it cannot be raised against a holder
in due course.
Q. Can E run after D?
A. Yes, because D is indorser.
Q. Can E run after C?
A. No, because C s signature is forged.
Q. Can E run after B?
A. No, because E cannot trace his title to the indorsement of B.
CASE 9: B FORGED THE SIGNATURE OF A ON A PROMISSORY NOTE (OR BILL OF EXCHANGE) P
AYABLE TO B OR ORDER. B INDORSES IT TO C. D STOLE IT AND FORGED THE INDORSEMENT
OF C AND INDORSED IT TO E.
Q. Can E collect from A?
A. No, because A s signature is forged.
Q. Can E collect from C?
A. No, because signature is forged
Q. Can E collect from B?
A. No, because indorsement is forged
Q. Can E run after D?
A. Yes, because D warrants that the instrument is genuine in all respects what i
t purports to be.
CASE 10: B FORGED THE SIGNATURE OF A ON A BILL OF EXCHANGE PAYABLE TO B OR BEARE
R. B INDORSES IT TO C. D STOLE IT, FORGED THE INDORSEMENT OF C AND INDORSED IT T
O E.
Q. Can E run after A?
A. No, because A s signature is forged, it is not operative, it is not binding.
Q. Can E run after D?
A. Yes, because D is liable as indorser.
Q. Can E run after C?
A. No, because C s signature is forged.
Q. Can E run after B?
A. No, because E cannot trace his title to B, because of the forged indorsement
of C.
CASE 11: B FORGED THE SIGNATURE OF A ON A BILL OF EXCHANGE PAYABLE TO B OR ORDER
. B INDORSED TO C. D STOLE IT, FORGED THE INDORSEMENT OF C AND INDORSED IT TO E
. E PRESENTED TO X, X ACCEPTED AND PAID.
Q. Can X debit the account of A?
A. No, because the signature is forged.
Q. Can X get back the money from E?
A. Yes, because there is a forged indorsement. Remember the drawee when he accep
ts, admits the signature of the drawer is genuine, but not the signature of the
indorser. And since it is payable to order, the genuine indorsement of C is need
ed to ___ title. So he can get back the money from E.
Q. Can E run after A?
A. No, because signature is forged
Q. Can E run after C? B?
A. No, because signature is forged
Q. Can E run after D?
A. Yes, because the indorser warrants that the instrument is genuine in all resp
ects what it purports to be.
CASE 12: B FORGED THE SIGNATURE OF A ON A BILL OF EXCHANGE PAYABLE TO B OR ORDER
. B INDORSED TO C. D STOLE IT AND FORGED THE INDORSEMENT OF C AND INDORSED IT TO
E. E PRESENTED TO X, X DISHONORED IT.
Q. Can X debit the account of A?
A. No, X has not paid anything.
Q. Can E sue X for payment?
A. No, X did not accept, drawee not liable unless he accepts
Q. Can E run after A?
A. No, the signature is forged.
Q. Can E run after C?
A. No, the signature is forged.
Q. Can E run after B?
A. No, forged indorsement.
Q. Can E run after D?
A. Yes, because as indorser D warrants that the instrument is genuine in all res
pects what it purports to be.
CASE 13: B FORGED THE SIGNATURE OF A AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO
B OR BEARER. B INDORSED TO C. D STOLE IT, FORGED THE INDORSEMENT OF C AND INDORS
ED IT TO E. E PRESENTED TO X, X ACCEPTED AND PAID.
Q. Can X debit the account of A?
A. No, forged signature
Q. Can X get back the money from E?
A. No because when X accepted it he admitted the genuineness of the signature o
f A. And a forged indorsement is not needed for E to acquire title, when it is p
ayable to bearer. So the forged indorsement is immaterial to the title of E.
Q. What is X s remedy?
A. To run after B who forged the bill of exchange.
CASE 14: B FORGED THE SIGNATURE OF A AS DRAWER ON A BILL OF EXCHANGE PAYABLE TO
B OR BEARER. B INDORSED TO C. D STOLE IT, FORGED THE INDORSEMENT OF C AND INDORS
ED IT TO E. E PRESENTED TO X, X DISHONORED IT.
Q. Can X debit the account of A?
A. No, X has not paid anything.
Q. Can E sue X for payment?
A. No, X has not accepted.
Q. Can E run after A as drawer?
A. No, A s signature is forged.
Q. Can E run after C?
A. No, signature is forged.
Q. Can E run after B?
A. No, E cannot trace his title to the indorsement of B.
Q. Can E run after D?
A. Yes, because as indorser D warrants that the instrument is genuine in all res
pects what it purports to be.
Exceptions to general rules
This ___ points out that there are exceptions to these general rules because of
estoppel.
1. In a case of father whose son forged his signature. And when the drawee ban
k asked the father, Did you issue this check? He said, Yes. He will be in estoppel;
he cannot tell the bank You must reinstate that amount to my account. Because he t
old the bank it was genuine, he is in estoppel.
2. Or the drawer may be asked to bear the loss because of unreasonable delay in
informing the drawee about the forgery. The bank is suppose to send to the drawe
r regularly a statement showing the deposit and the drawers of his account. The
bank also refers the cancelled check to the drawer. But the drawer has the oblig
ation owing to the drawee to examine the bank statement to reconcile it with his
own record. Also to examine the checks to see if the signatures are genuine his s
ignature and the signatures of the indorsers. But if there was delay, and becaus
e of the delay the bank was prejudiced, then the loss will be shifted to the dra
wer.
When will the bank be prejudiced? If the bank would have recovered the money
if the drawer had notified promptly the bank of the forgery. For instance, the
forger had not yet withdrawn the money from the bank the money was still intact and
had the bank been notified promptly, it could have frozen the account. But if at
the time it sent the bank statements and cancelled checks, the forger had alrea
dy withdrawn the money and disappeared, then the __ will not prejudice it, becau
se even if it had been promptly notified it should no longer recover the money.
Slatter (?) & Co. Case (negligence in the delivery). Slatter & Co., a New Yo
rk stock broker, had two customers who happened to have the same name H.E. Richard
s, one in Oklahama, the other in Texas. The one in Texas ordered the company to
sell his shares and to send the proceeds from the sale. The company complied, bu
t in sending the check which was payable to H.E. Richards it erroneously sent it t
o H.E. Richards in Oklahoma. This fellow deposited the check in his account, and
later withdrew the money. Now the company is suing the bank to get back the mon
ey. The court said, No. The bank had no way of knowing that the company sent it t
o the wrong H.E. Richards. So this was due to you own negligence, so must bear t
he loss.
CASES ON FORGERY
CALINOG v PNB
? Fr. Calinog was maintaining a current account with PNB
? a certain Andrea was able to encash a check issued by him
? when he received the bank statement, there was a discrepancy of P1 500
? when he confronted the bank, the bank refused to return the amount
? SC: Fr. Calinog s signature was forged; therefore, the bank was liable to him
PNB v QUIMPO
? Gozon was a depositor of PNB
? he went to the bank with his friend Santos
? Santos was in the car while Gozon transacted business with the bank
? when Santos saw that Gozon left his check book, he took a check and filled it
up for P5 000; forged the signature of Gozon; encashed the check
? Gozon sued PNB; PNB claims that Gozon s negligence was the proximate cause
? SC: The bank should know the signature of the drawer. Gozon cannot be conside
red negligent because he had no reason to suspect that his friend would steal hi
s check. The mere fact that a negotiable instrument is stolen from you does not
constitute negligence.
MWSS v CA
? MWSS was using its own personalized checks printed by its own printer and not
the official PNB checks
? 23 checks with forged signatures of MWSS officers were presented with PNB over
a period of 3 months; PNB paid the checks
? when MWSS discovered the forgery, it sued PNB for the return of the money
? SC: MWSS was guilty of negligence. It was allowed to have its checks printed
by a by a private printing press. It failed to adopt security measures in the p
rinting of the checks. It did not reconcile the bank statements with its record
s.
PRICE v NEAL
? Price was the drawee in 2 bills of exchange
? he indorsed said bills to Neal
? the drawer s signature turned out to be forged
? Price sued Neal to get back the money on the theory of payment by mistake
? SC: Price cannot recover. As the drawee, it was his obligation to verify the
signature of the drawer. He was guilty of negligence, so he must bear the loss.
PNB v CA
? Lim deposited in his current account with PCI a check issued by GSIS in favor
of Pulido who in turn indorsed to it to Go; Go indorsed it to Lim
? PCI as collecting bank presented the check to PNB; PNB honored the check
? when the forgery was discovered, PNB returned the money to GSIS and sued PCI
? SC: PNB cannot get back the money from PCI. Under Section 62 of the NIL, the
acceptor admits the genuineness of the signature of the drawer and that applies
also to payment because payment implies and presupposes acceptance.
SECURITY BANK v TRIUMPH LUMBER
? Triumph Lumber was maintaining a current account with Security Bank
? when robbers broke into the office, Triumph discovered that some check books w
ere missing; it did not inform the bank
? checks were forged and presented to the bank; the bank honored them
? SC: A drawer who discovered the loss of its check book and did not notify the
bank of the loss should bear the loss caused by the subsequent payment of the ch
ecks in which the signature of the drawer had been forged.
GEMPESAW v CA
? Gempesaw maintained a current account with PBC
? she used checks to pay the suppliers of the grocery stores she owned
? her bookkeeper was the one who prepared the checks and she merely signed them
? she never examined the sales invoices which supported the payments nor the ban
k statements for the canceled check
? in 2 years, the bookkeeper was able to steal about P1 M; the payees never rece
ived the checks
? Gempesaw sued PBC
? SC: GENERAL RULE: A bank which pays a check on a forged instrument cannot debi
t the account of the drawer.
EXCEPTION: Where over a period of 2 years, a depositor signed checks prepa
red by her bookkeeper without ascertaining the correctness of their amounts, did
not examine the bank statements and canceled checks, and discovered later on th
at the signatures of the payees were forgeries, the loss should be divided equal
ly between the depositor and the drawee bank, since her negligence resulted in t
he payment of the checks.
PROVINCE OF TARLAC
? the province of Tarlac maintained an account with PNB
? it was operating a hospital and to fund its operations, checks were drawn paya
ble to the Chief of the hospital; the cashier received the checks
? after the cashier retired, he continued to receive checks; he forged the indor
sements
? the cashier deposited the forged checks with Associated Bank
? the province sued PNB; PNB filed a 3rd party complaint against AB
? SC: PNB cannot debit Tarlac s account because the Chief s signature was forged. H
owever, PNB can demand reimbursement from AB. Nevertheless, Tarlac should bear
of the loss for its negligence. (Tarlac and AB liable proportionally)
MELLICOR/HSBC v PNB (???)
JAI ALAI v BPI (no discussion)
ASSOCIATED BANK
? Reyes was engaged in the business of selling RTWs to department stores
? the department stores issued cross checks payable to her account only; however
, she never received them
? when she followed up, she discovered that the checks were deposited by a certa
in Sayson who was able to withdraw the money
? SC: Reyes could sue the stores for payment and they can in turn sue the collec
ting banks for paying the checks; the banks can ran after AB. BUT to avoid circ
uity, Reyes can sue AB directly
MANILA LIGHTER TRANSPORTATION v CA
? the corporation sent its collector to collect payments from its customers
? collector forged indorsements on 49 checks; indorsed to X and Y
? X and Y deposited the checks with China Bank
? when China Bank presented them for payment, the drawee bank paid
? MLT sued China Bank
? SC: MLT should bear the loss. Where the indorsement of the payee of several ch
ecks were forged by an employee of the payee and the checks were deposited in a
bank account and the collecting bank allowed withdrawals after the checks had be
en cleared, the payee cannot recover from the collecting bank, where the payee w
as guilty of negligence by allowing a condition in which its employees could app
ropriate the checks and falsify the indorsement.
CLEARING
? all checks have a magnetic ink recognition to identify upon which bank it is d
rawn
? once a check reaches the clearing house, the computer will automatically credi
t bank X account & debit bank Y account
? this is merely tentative because the check will be delivered to bank Y and ban
k Y has 24 hours within which to accept the check from the time it received the
same
? if bank Y rejects it, the check will be returned to the clearing house and the
computer will reverse the entries: it will debit bank X account & credit bank Y
account
? if bank Y accepts it, the check is cleared and the amount will be credited to
bank X
? the drawee bank can collect from the collecting bank if the indorsement is for
ged
? however, if the check is not returned to the collecting bank within 24 hours,
the drawee bank is barred from setting up forgery; he is deemed to have accepted
the check. This is applicable to cases involving forgery of indorsement and al
teration of amount.
? PING-PONG OF CHECKS: Collecting bank presents to drawee bank --> drawee
bank rejects the check and returns it to collecting bank
? if the drawee bank returns the check to collecting bank, the collecting bank c
annot return it (it is allowed to return only once-otherwise, it will be fined),
unless the depositor redeposits (allowed to deposit 2x)
? the drawee bank has appropriate prescriptive period to run after collecting ba
nk after discovery of fraud --> 24 hours
? RULES AS INTERPRETED BY CLEARING HOUSE:
1. If the drawee bank fails to return the check, it is barred from requesting th
e bank to reverse the entries
2. The drawee bank can sue but the money remains with the collecting bank
3. If the drawee bank returns the check within 24 hours --> it can sue and money
remains with drawee bank
FOUR BASIC RULES IN FORGERY
1. A party whose signature was forged is not liable unless he is in estoppel
2. A person negotiating an instrument after forgery is liable because of his wa
rranties
3. A HIDC acquires good title if forged indorsement is not necessary for his
title as in the case of forged indorsement in a bearer instrument.
4. A drawee who pays/accepts a bill with a forged signature of a drawer canno
t get back the payment
November 22, 2001 Thursday
SECTION 24
Every NI is deemed to be issued for a valuable consideration.
Travel Inc. case
There was this fellow bringing in passengers to a travel agency buying tickets.
To pay for the tickets, he issued a check w/c bounced. The travel agency sued hi
m on the basis of the check. CA dismissed the complaint and said the plaintiff h
as the burden of proof to show how much is the worth of the tickets actually pur
chased from the travel agency and said that there was conflicting and the plaint
iff failed to proved by preponderance the value of the ticket purchased.
SC: Plaintiff sued on the basis of the dishonored check therefore it is presumed
that the check was issued for a valuable consideration and plaintiff need not p
rove the amount of consideration issued for the check. The burden was on the def
endant to prove the face value of the check is not the consideration.
Villaluz case
The accused was being prosecuted for issuing a bouncing check. SC said that sinc
e consideration was presumed drawer should be ordered to pay its value because h
e failed to prove that there was no consideration.
SECTION 25
In civil law, a consideration may consist an obligation to give like to deliver
a car, ring; to do, to sing in a concert; not to do like in a contract, you may
have a provision where somebody selling his business that there be a stipulation
that for the next 5 years the seller will not engage in a competing line of bus
iness. The law says that a pre-existing debt constitutes value. In civil law, re
member that donation is a contract and consideration may be love, affection, gen
erosity, kindness. Sometimes someone may give something out of hatred.
SECTION 26
If A issued a P/N in favor of B but actually B didn t give him any consideration.
B then indorses it to C who pays for it and now C negotiates it to D. D is consi
dered a holder for value w/ respect to A, B, C because C gave value and A and B
were parties before who became bound before the value was given.
SECTION 27
This is common in labor cases. The arbiter decided the case in favor of the empl
oyee and employer wants to appeal. The er will post a bond. Surety Co. will requ
ire collateral but they will not accept real estate. They would insist it would
be cash, money market placement, time deposit, T-bills because this is a very ri
sky undertaking about 95% they will be held liable. They would want collateral w
hich would be easily converted to cash. If here is an er w/ a certificate of tim
e deposit w/c is negotiable for P1M and the judgment in favor of the ee is P0.5M
so that collateral the surety co. is asking for is PO.5M but what they have is
the negotiable certificate of time deposit, so they would give it as collateral
to the extent of P0.5M. So surety co. can be considered a holder for value up to
P0.5M only because that was the only amount it will be entitled to recover in c
ase it is held liable to the ee.
SECTION 28
Absence of consideration is a matter of defense against a person not a HIDC
Jose Cruz issued a check for a ring but it turned out to be fake but the check w
as indorsed to a HIDC. The drawer cannot raise that defense.
Partial failure of consideration is a defense pro tanto ..
Somebody issue a check to pay for 2 tons of molasses but the seller delivered on
ly 1 ton. Check bounced. If he is sued, he can raise the defense that there is p
artial failure of consideration. Only 1 ton was delivered. He should only be mad
e liable to the extent of of the face value of the check.
Cornell case
Want of consideration between the drawer and acceptor is a defense against the p
ayee. If the drawee accepted the B/E and the holder returned on the date of matu
rity to demand payment, the acceptor cannot raise the defense that the drawer do
esn t have sufficient funds therefore I cannot pay you. Under sec. 62, the drawee,
by accepting the instrument admits the authority of the drawer to draw the inst
rument. That means he admits either the drawer has sufficient funds with him or
they have an arrangement wherein to advance his own funds.
SECTION 29
In the play Merchant of Venice, A signed a P/N as accommodation maker because B wa
nted to borrow money from S but his credit standing was poor. So A signed the P
/N as accommodation maker and the stipulation was that should he fail to pay S c
an extract 1 lb. of flesh. Because A could not pay, S now was demanding his 1 lb
. of flesh.
w/o receiving value therefor
He didn t receive any share of the proceeds of the P/N. This is common when you ha
ve a co-signer in a P/N. Take the case of a surety co. Some banks would require
a surety co. to co-sign the P/N of the maker. If maker doesn t pay, they just run
after the surety co.. Surety co will co-sign but it will charge a fee because it
is lending its credit. Still it is an accommodation party because it will not r
eceive anything from the proceeds of the P/N but it will be paid a consideration
for acting as surety. The same way you have that Phil. Exchange Foreign Loan Gu
aranty Corp. before. These people borrowing abroad that govt. formed corp. would
bind itself solidarily but then it would charge a guaranty fee. It s an accommoda
tion maker. So the accommodation party cannot raise the defense that he didn t rec
eive any consideration.
Clark v. Sellner
The consideration that supports the obligation of the accommodation party is the
consideration that supports the obligation of the party accommodated. There nee
d not be an independent consideration for the obligation of the surety. You find
that in civil law.
Prudencio v. CA (Jack doesn t agree with this)
Concepcion and Tamayo Construction had a project with the govt. They obtained a
loan from PNB as working capital. This is common in the construction business. P
NB required CT to assign the proceeds of the contract to PNB. It wanted to be su
re it got paid. It was not satisfied with that. It asked Prudencio spouses to si
gn as co-makers and they mortgaged their property as security to the loan. CT di
dn t have sufficient working capital. They could not pay their suppliers and worke
rs so they pleaded w/ PNB to release a portion of the proceeds of the payment ma
de by the owner of the project so it could pay its suppliers and workers. But CT
didn t have much working capital so they eventually abandoned the project. PNB no
w was forced to foreclose the property of PS. PS filed case to stop foreclosure
and the cancellation of the mortgage.
SC: PS were accommodation makers and for the holder of a NI to be able to collec
t from accommodation party, holder must meet all requirements of HIDC except for
the fact the holder is aware for want of consideration on the accommodation par
ty for the accommodation party did not receive any consideration. PNB didn t meet
those requirements. One of the requirements of a HIDC is that it acted in GF. PN
B didn t act in GF. Why? PS agreed to co-sign because they learned that proceeds o
f the contract were assigned to PNB so they felt they were safe. But what happen
ed was PNB released a portion of the money. So it acted in BF, thus not meeting
requirements of a HIDC thus can t recover
JACK: WRONG!
1) Sec. 29 doesn t say HIDC but holder for value
2) Sec. 52 says to be a HIDC party must have acted in GF a time he took the inst
. SC was talking about something that happened long after PNB to the P/N.
3) Partial release of proceeds cannot make PNB in BF. Probably they have made an
error of judgment. They acted in GF. Had they not released any money, no questi
on CT would be able to pay its suppliers and workers and the project would grind
to a halt. These laborers are paid on a weekly basis. If you don t pay them that
week, they disappear. Probably that was the intention of PNB because if they did
n t release, definitely CT will default. They were hoping by releasing some, it wo
uld be able to keep going and finish the project but apparently that was not the
case.
Jose v. CA
Jose was claiming a certain property belonging to the client of Atty. Beltran. T
here was a settlement. She agreed to give up his claims for a certain amount and
to facilitate the settlement Atty. Beltran signed a check to pay Jose. Whose c
heck was that? It was the check of the company of which he was president. So he
and the VP co-signed the check representing the amount to be paid to Jose to giv
e up her claim against the property of client of Atty. Beltran. When Jose tried
to collect on the check. Check bounced for lack f funds. She now sued corp. head
ed by Atty. Beltran.
SC: NO, the issuance of the check was ultra vires. No biz purpose so far corp.
is concerned. Remember, as a general rule, a corp. cannot be a surety for the o
bligation another because it has no business purpose. When Atty. Beltran and the
VP signed that check, in behalf of corp. they were exceeding their authority as
agents of corp. The rule is that when the agent exceeds its authority it become
s personally liable. It is Atty. Beltran who should be sued and held personally
liable.
People v. Maniego
Milagros Pamintuan issued a postdated check and asked disbursing officer of AFP
to exchange it w/ cash. Maniego the sister was asked to sign as accommodation in
dorser. When check fell due, it bounced for lack of funds. Criminal case was fil
ed against Pamintuan and Maniego. P jumped bail and disappeared and Maniego was
acquitted by the TC. TC said it has not been shown that he acted w/ conspiracy w
/ Pamintuan. but TC held her civilly liable. She appealed. She said that since
she was acquitted TC should not have held her civilly liable.
SC: No it is true that you didn t incur criminal liability beech it was not shown
that you conspired with P however before it was exchanged for cash by the disbur
sing officer of AFP you were acting as accommodation indorser and an accommodati
on indorser is liable when check bounces.
SECTION 30
That s why I told you in some decisions one penned by Justice Martin and on
e penned by Justice Romero where holder of check w/ a forged indorsement was ord
ered to return the money. SC said that under sec 66 the general indorser warrant
s the instrument what it purports to be. That is wrong. That is not negotiation
because the holder did not transfer the check to the drawee. That was presentmen
t for payment. The holder signs the check at the back to acknowledge receipt of
payment and not form purpose of transferring title.
Now if the instrument is payable to order, to negotiate sign at the back
then deliver. If it s payable to bearer, mere delivery is sufficient. But if the p
arty indorses and delivers it, that is also negotiation.
Caltex case
This is where Angel dela Cruz who had a deposit with Security Bank with a certif
ication. This is to certify that bearer has so much of deposit repayable to the d
epositor. He pledged that to Caltex as collateral for his credit line. Then he t
old SB that it got lost and asked for a replacement and gave it as a collateral
for a loan w/c he got from SB. He disappeared. Dispute is who had a better right
to the proceeds of the cert. Caltex said this was pledged to us.
SC: This is a NI. But there are no provisions in NIL governing pledge of NI. So
we should fall back on NIL. NIL says for a pledge of a NI to bind 3rd parties p
ledge must appear in a public instrument and the pledgor must indorse the instru
ment. These requirements were not complied w/. Pledge was not notarized. and De
la cruz didn t indorse certificate. SB had better right.
SECTION 31
To negotiate, to indorse, one mist write on the instrument or a paper attached t
o it (allonge). That is sufficient, it works as an indorsement because by operat
ion of law that is what happens. Just like in your sale. The seller by simply s
igning the deed of sale warrants that the thing he sells is free from hidden def
ects and he also warrants against eviction even though the contract is silent. H
is mere act of signing the law imposes those liabilities upon him.
SECTION 32
Indorsement must be of entire instrument
Exception: If instrument is paid in part, for example when it is paid on instal
lments. 1st installment has been paid then it can be indorsed w/ respect to the
balance. The law requires that there must be indorsement of entire instrument be
cause we said NI are intended to circulate and it would be very difficult to ne
gotiate that further if you could have partial indorsemenst. You have a check
for 100K and payee will indorse 50K of that. who keeps the check. The indorsee
now will indorse 30K of that to another party. That another party will indorse
15K of that. It s very very difficult. That s why law prohibits that. Now if a pa
rtial indorsement is made, the effect of that will be an assignment not negotiat
ion so personal defenses can be raised. Law also prohibits transfer to 2 or mor
e indorsees. For instance you have a check for 100K to Jose Cruz 50K and Man
uel Santos 50K.
SECTION 33
There are other kinds of indorsement: joint, successive, facultative, irregular.
facultative waives demand and notice of dishonor.
This classification is not mutually exclusive. You can have indorsement w/c is t
he combination of these. You can have an indorsement w/c is conditional and facu
ltative.
SECTION 34
SPECIAL- specifies person to whom it is being indorsed. Like if co-payee writes
at the back to Jose Cruz, then signs it. That s special indorsement. And to nego
tiate further Jose Cruz must indorse if payable to bearer. If payable to bearer
it can be negotiated further by mere delivery.
BLANK- does not name any person. The co-payee just signs at the back. That becom
e payable to bearer under Sec. 9 so it may be negotiated further by mere deliv
ery.
SECTION 35
A holder may convert a blank indorsement into special by writing over signature
of the indorser in blank any contract consistent with the character of indorsem
ent. Because if an order instrument is indorsed in blank it becomes payable to
bearer. Holder may be afraid if he loses that the finder may be able to collect
payment because it is payable to bearer. To protect himself, he can insert his
name to change blank to special so instrument will not be payable to bearer and
therefor his indorsement will be needed to negotiate that further. But the con
tract must be consistent with the blank indorsement . It cannot add there notic
e of dishonor waived .
SECTION 36
Restrictive Indorsement
CONSIDERATION
TRANSFER
NEGOTIABILITY OF TITLE
DEFENSE
PRESUMED
X/(a) ---prohibits
since
defthere
AVAILABLE
that could
further
is transfer
have
negotiation
been
titleraised
of vs.
instrument
indorser cant be raised vs. indorsee si
ncesince
/X(b)-since
because
he isindorsee
constitutes
title
an HIDC
indorsee
does
the
merely
merely
agentagent
not transfer
of the
agentwhatever
ofindorser
indorser
defenses that could have been raised vs.
indorser,
(c ) vestscantitle
be in
raised
the indorsee
v. indorseein trust for or to the use of some other person
s
X/ since
becausetitle
titletransfers
transfers
SECTION 38
Such indorsement does not affect negotiability but if it is dishonored because o
f insolvency of maker or acceptor the indorser will not be liable especially if
instrument will fall due after a long period of time like 5 yrs. Indorser may be
reluctant to indorse that as a general indorser bec if the maker does not pay I
will be solidarly liable and I m not willing to take that risk. 5 yrs is too long
a time. I don t know what will happen to him 5 yrs form now. Now however indorse
r is not completely out of the woods bec. under sec. 65 he has certain warrantie
s. He warrants that the instrument is genuine in all respects what it purports
to be. If there s a forgery or material alteration, he s liable. He warrants that he
has good title to it ; that all prior parties has capacity to k; that he is no
t aware of anything that will make instrument valueless. So if he knows maker is
actually insolvent, he is liable.
SECTION 39
If indorsement is conditional, maker or acceptor is given the choice. He may di
sregard the condition and pay on the date of maturity or abide with the conditio
n and refuse to pay and wait and see if condition will be fulfilled. He can dis
regard bec. he bound himself to pay unconditionally and you cannot change the co
ntract w/o his consent so you can say disregard condition because you can say I
am very solvent now but I don t know what will happen in the future so I would rat
her get it over w/ and settle this obligation now. If he pays and disregards con
dition and later condition not fulfilled, holder cannot run after the acceptor:
why did u pay? Bec he has been discharged and law allows him to disregard. Remed
y of conditional indorser is to run after indorsee to get back the money.
SECTION 40
I signed P/N payable to bearer. If payee indorses that by special indorsement to
Jose Cruz, JC can negotiate further by mere delivery. Why? bec he cannot change
my contract. I bound myself to pay to the bearer. Payee cannot change my contra
ct and make that instrument payable to order. I made that payable to bearer bec
I don t want to assume the risk of forge indorsement. That s why I agreed to pay bea
rer. Bec if I made that payable to order and it turns out that there was a forg
ed indorsement I pay the wrong person. Person entitled can run after me. If you
pay the wrong person that person has no title. His title is based on a forged in
dorsement you are still liable. I don t want to take the risk. Other parties canno
t change my contract bec I don t want to take that risk. Now that if that person i
ndorses it. So if bearer inst. A-B-C-D. B indorses it to C by special indorsemen
t but C merely delivered it to D w/o indorsement D cannot run after B bec. C di
dn t indorse it to him so D cannot raise his title to B
SECTION 41
General Rule: If instrument is payable to 2 or more payees like if payable to Mr
. and Mrs. Antonio Cruz, they must both indorse.
Exceptions: if 1 has POA form another or if they are partners. Theory in partner
ship, there s mutual agency.
November 26, 2001
By Herbert Francisco
SECTION 48
Under Section 48, the holder may at any time strike out any indorsement w
hich is not necessary to his title. The indorser whose indorsement is struck ou
t, and all indorsers subsequent to him, are thereby relieved from liability on t
he instrument. For example,
A B C D
E
Because this is payable to order and therefore, the indorsement of B is n
eeded in order to negotiate that because it s payable to the order of B. But if t
his were payable to bearer, then all the indorsements can be crossed out. Now, t
he effect of striking out the indorsement is that the indorsers whose signature
was cancelled and all the indorsers subsequent to him would be relieved from lia
bility. So that if E strikes out the indorsement of C, C will be relieved from
liability and also D. Why? Because D has been prejudiced. Striking out of the s
ignature of C deprived him of his right of recourse against C. Since he has bee
n prejudiced because he could no longer run after C, the law will relieve him al
so.
SECTION 49
Now under Section 49, if the holder of an instrument transfers it without
indorsing it, the transferee acquires only such title as the transferor had. S
o, it would be like assignment. So whatever defenses could been raised against
the transferor can be raised against the transferee. However, the transferee can
compel the transferor to indorse the instrument. But for purposes of determini
ng whether or not he is a holder in due course, the negotiation will deemed to h
ave taken effect when the indorsement was actually made. So, if let s say when th
e instrument was transferred, this PN was transferred, E was not aware that actu
ally this was issued for a fake ring, but at the time he was able to get the ins
orsement, he was now aware of that, he will not be a HDC, because at the time he
got the signature, he was aware of the failure of consideration.
SECTION 50
Now under Section 50, if an instrument is negotiated back to a prior part
y, he may further negotiate it, but he cannot enforce it against any intervening
party to whom he is personally liable.
A B C D
E
So here if this is indorsed to B, under this provision, B can negotiate i
t further but B in case A refuses to pay, he cannot run after C,D, E. Why? Beca
use they in turn can run after him, so there will be compensation. His liabilit
y to them will be offset by their liability to him because while they are liable
to him, in turn, he liable to them. SO he will run after C,D,E and in turn, th
ey will run after him. So, since there will be compensation of liabilities, he
cannot run after them. But you see the law is based on the premise that there w
ill be compensation that s why he is precluded from running after them. So if he
can run after them, but they cannot run after him, this will not apply, so he ca
n run after them. For instance, he indorsed this, qualified indorsement, withou
t recourse, but C, D,E are general indorses, well he can run after them because
they cannot run after him. And the reason of the law which is based on the assu
mption that there will be offsetting of liabilities will not apply, that s why now
, he can run after them.
SECTION 51
Section 51 talks of the rights of a holder. A holder may sue in his own
name and payment to him in due course will discharge the instrument. Payment is
in due course if it was made at or after maturity to the holder in good faith a
nd without notice that his title is defective.
SECTION 52
Section 52 deals with an important provision Holder in Due Course. Well,
Section 52 lays down the requisites to be considered a holder in due course (1)
The inst must be complete and regular upon its face; (2) He must have become a
holder before it was overdue and without notice that it had been previously dis
honored, is such was the fact; (3) He took it in good faith and for value; (4)
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.
Subsection (d) is an elaboration of Subsection (c). It explains the mean
ing of taking the instrument in good faith. In other words, that the party who
took it had no notice of any infirmity in the instrument or defect in the title
of the person negotiating it.
Then, section 55 elaborates on subsection (d). It explains when the titl
e is defective. Section 56 also elaborates on that. It says when there is noti
ce of defect. If the holder took it on the day it was due, he s still a HDC becau
se its not yet overdue.
Now, instruments payable in installments. If an installment was not paid
and he was aware of that, there is no acceleration clause, he will not be a HDC
with respect to the installment that was already overdue but he will be a HDC w
ith respect to the installment which are not yet due. If there s an acceleration
clause and it is automatic and he was aware that there was a default, then he wi
ll not be a HDC because he is aware that the entire amount is already overdue bu
t if he is not aware, then he will be a HDC with respect to the installments whi
ch are not yet overdue on the face of the inst.
Now, the acceleration clause is optional if the holder did not exercise i
t, and so the this holder who is a HDC will respect the installments which are n
ot yet overdue. But if it was exercise and he aware of that, then he knows that
the entire inst is overdue so he will not be a HDC for any amount. But if he w
as not aware that it was exercised, the optional accelration clause was exercise
d, then he will be a HDC with respect to the installments which on the face of t
he instrument are not yet due. But he will not be a HDC with respect to the ins
tallment which is already overdue.
To be considered as someone who is not a HDC, it is not enough that the p
arty is negligent. Negligence is when one is not in good faith. He must know t
hat there is something wrong with the inst. He need not know what exactly is wr
ong but so long as he knows that something is wrong then he is no longer a HDC.
This is just like libel where the writer will be liable if he wrote something d
erogatory knowing it was false or with reckless disregard of its falsehood. Tha
t s why if he knows something is wrong but he went ahead and took the inst, he did
not investigate, he will not be a HDC. Because as I said, he need not know wha
t exactly was wrong as long as he knows something wrong. Bec. If he knowingly ch
ose to be ignorant, he cannot claim to be a HDC. That is not good faith. In ot
her words, the final analysis test, is : Did he take it? Was it honest for him
to take the instrument under the circumstances?
That s why if somebody in the middle of the night, offers to negotiate to y
ou a P100,000 check for 20% of its face value. He said, this is due next week b
ut I just need money very badly. Be suspicious when something is offered for su
ch a trifling amount then that is a warning sign something is wrong.
We ve had a number of cases involving the question of whether or not a pers
on is a holder in due course.
Well you have that case of Gatchalian. Well, Anita Gatchalian wanted to
be a second-hand car and Manuel Gonzales said he knew somebody who was selling h
is car but this owner wants to deal only with serious buyers. He does not want
to waste his time with curiosity seekers. Therefore, to satisfy the owner that
you are serious, you must show the color of your money. So he asked Gatchalian
to issue a check and he said that he will return with a certificate of registrat
ion. He never showed up. It was a crossed check. And what did Gonzales do wit
h it, he used it to pay for the medical expenses of his wife, for the hospitaliz
ation expenses of his wife. And since the amount of the check was greater than
the hospital bill of his wife, sinuklian pa siya ng hospital. So when Gonzales
did not return, Gatchalian stopped the payment of the check. So the hospital, O
campo Clinic, sued him. Gatchalian said that was issued for the payment of the
a car and Gonzales never returned. So there was failure of consideration. But
the clinic said, we are a HDC, so you cannot invoke that. The Court said no be
cause, the court said when a check is crossed, the crossed check can only be dep
osited. That serves as a warning sign that it was issued for a specific purpose
and therefore, to be a HDC, you must make inquiries for what purposes was it is
sued, the nature of the tile of the payee. If one does not make that inquiry, t
hen he cannot claim to be a HDC.
Then you have the case of Banco Atlantico. Banco Atlantico is one of the
biggest banks in Spain. An employee of the Philippine embassy deposited in thi
s bank her paychecks. They were being paid in dollars but the checks were drawn
against the branch of PNB in New York. He told Banco Atlantico not to present
the checks for payment right away. The bank allowed her to withdraw money altho
ugh the checks have not yet been cleared. When they eventually presented the ch
ecks, PNB dishonored them bec. the amount have been altered by raising the amoun
ts. Banco Atlantico sued. The Court said Banco Atlantico was not a HDC because
It agreed to take the checks and not to present them for payment immediately a
lthough they were already due and the payee told them do not present that for pa
yment right away. And then they also allowed the payee to withdraw the money ri
ght away although the checks have not yet been cleared.
Then you have this case of Mesina. This Jose Go bought a cashier s check p
ayable to his order. But he negligently left the check. And another customer w
ho saw it, stole the check. When Jose Go realized that he had left the check, h
e asked the bank to stop payment. Now, the customer who stole it, Alexander Lim
, indorsed the check to Marcelo Mesina, who then demanded payment. When the ban
k refused, he sued the bank. The Court said he could not recover since he was n
ot a HDC. The Court said he refused to explain how and why the check was indors
ed to him. The Court said he had notice that there was a defect in the title of
Alexander Lim. I think the better reasoning here is that the indorsement was f
orged. Remember that the payee of the check was Jose Go and the one who indorse
d it to Mesina was Alexander Lim. The indorsement was a forgery. But the Court
invoked instead Section 52.
Then you have this case of State Investment House v. IAC. New Sikatuna W
ood Industries wanted to borrow money from the Chua spouses. But the Chua spous
es had no money. The Chua spouses said we will give you post-dated checks, thre
e of them and they were all crossed. But this is on condition that on the date
of maturity they will have enough funds in the bank. But New Sikatuna did not w
ait for the maturity. It indorsed the check to State Investment House at a disc
ount. Well, State Investment House deposited the checks. They bounced, so they
sued the Chua spouses. The Court said State Investment House was not a HDC. Th
e checks were crossed. That is a warning sign that these checks were issued for
a definite purpose so they should inquire what was the purpose for which these
checks were issued and what was the nature of the tile of New Sikatuna Wood Indu
stries. Since they did not make these inquiries, they are not a HDC, just like
the Gatchalian case.
In fact, that was also reiterated in that case of Bataan. Bataan Cigars c
igarette factory, a cigarette manufacturer bought tobacco from a supplier and is
sued to him crossed checks. He never delivered the tobacco, so Bataan Cigars ci
garette factory stopped payment. Now the supplier indorsed the checks to State
Investment House. SO when State Investment House presented it, payment was stop
ped because Bataan Cigars never got the tobacco so they stopped payment. State
Investment House was claiming it was a HDC. The Court said the checks were all
crossed. That was a warning sign. You should have inquired what was the nature
of the tile of the payee and for what purpose was this check issued.
Then you have this case of Stelco Marketing Corporation. Stelco Marketin
g Corporation is a distributor of steel bars. It sold steel bars to RYL Constru
ction who did not pay. RYL Construction asked Steelwell for financial help. So
, Steelwell Corporation issued a check on the understanding that his will be use
d only to guarantee your obligation but not to pay for your obligation. But RYL
Cons. gave the check instead to Armstrong Industries, sister company of Stelco
Marketing with Armstrong Indsutries for the manufacturer of steel bars where Ste
lco Marketing was the one selling the steel bars. Now, the evidence does not sh
ow why they gave the check to Armestrong Industries, the manufacturer of the ste
el bars from Stelco Marketing. The check was dishonored for lack of funds. Aft
er it had been dishonored, it came into the possession of Stelco Marketing. The
evidence does not indicate how it came to the possession of Stelco Marketing.
Stelco Marketing now sued Steelwell Corporation, the drawer. The Court said it
cannot recover, it was not a HDC. First, the payee was RYL Construction and the
check was not indorsed to it it was payable to order. Secondly, when they took
it, they were aware that it had been previously dishonored because there was a
stamp at the back by the drawee bank. DAIF Drawn Against Insufficient Bank. Be
cause when the bank dishonors that, it will stamp at the back notice of dishonor
and it will state there the grounds DAIF, Drawn Against Insufficient Funds.
Then you have this case of Salas. This has been asked in the bar exams.
Salas bought a car from Violago motors and to pay for it, she obtained a loan f
rom Filinvest. In accordance with the usual practice, she executed a PN in favo
r of Violago motors. Violago motors then indorsed the PN to Filinvest. Salas n
ow refused to pay Filinvest because she said, there s a discrepancy between the en
gine number and the chassis number as indicated in the certificate of registrati
on and the sales invoice and the actual number engine number and chassis number.
According to the Court, assuming there is such a discrepancy, she cannot refus
e to pay because Filinvest was a HDC and therefor, she cannot invoke those defec
ts as a ground for not paying the PN.
Then there s this case of State Investment House v. CA. Corazon Victoriano
delivered some pieces of jewelry to Nora Mulic to be sold on commission and Mul
ic issued two (2) checks to Victoriano as security for the expected proceeds fro
m the sale of the jewelry. Well, she was not able to sell the pieces of jewelry
so she returned them to Victoriano but before she returned them, Vicotriano, me
anwhile, rediscounted the checks with State Investment House. So indorsed the c
hecks to State Investment House. When State Investment House presented the chec
ks for payment, they were dishonored for lack of funds, because Mulic did not fu
nd the checks anymore because she had returned the pieces of jewelry. So State
investment House sued Mulic. Her defense was that she was not liable because th
e pieces of jewelry were returned to Victoriano. The Court said that since Stat
e Investment House was a HDC, Mulic could not invoke absence of consideration be
tween her and Victoriano as a defense.
And then you have this Escarte case. Leticia Escarte issued six (6) post
-dated checks to Carmelita Matias. Matias said she would rediscount the checks
and deposit the proceeds in the account of Escarte to pay for the checks. But s
he did not do that. Since she did not deposit the proceeds from rediscounting th
e checks, Escarte topped the payment of the checks. So, when the checks were pr
esented, they were dishonored because of the stop-payment order. So, Matias wen
t back to Escarte and pleaded with her to replace the checks and she assured her
that she had some money coming from a jewelry transaction. She said, this time
, I will make sure that I will deposit enough funds to pay for these checks. An
d Escarte was cajoled into issuing the replacement checks. But Matias did not d
eposit the money she promised and so the replacement checks were dishonored for
lack of funds. So when she was sued, Escarte invoked the defense of lack of con
sideration. However, the Court said that since the indorsee was a HDC, she coul
d not invoke want of consideration between her and Matias as a defense for not p
aying.
Then, this was asked in the bar exams, May a payee be a HDC? Well, the bet
ter view is YES, the payee may be a holder in due course from the basis of defin
ition. Because Section 191 defines a holder as the payee or indorsee of a bill
or note who is in possession of it or the bearer thereof. Since by definition,
a holder includes the payee. So if the payee satisfies the requirements of Sect
ion 52, that payee can be a HDC.
SECTION 53
Now Section 53 says if an instrument payable on demand is negotiated an u
nreasonable length of time after its issuance, the holder is not a HDC. In dete
rmining what is a reasonable time, that is mentioned in the law, Section 193 you
consider the nature of the instrument, customs and the facts of each particular
case.
SECTION 54
Now under Section 54, if a transferee receives notice of any infirmity be
fore he has paid the full amount agreed, he will be deemed a HDC only to the ext
ent of the amount paid by him. For instance, here is somebody who is the payee
of a post-dated check for over P100,000. And he told a friend, Jose Cruz, this i
s due next month but I need money very badly now. I cannot wait for next month
to get the P100,000. So, I am offering to negotiate this to you at a discount.
You pay me P80,000. I m willing to indorse this to you. So, Jose Cruz said, well,
I don t have P80,000 now. I ll give you P40,000. Come back three (3) days later.
I will give you the balance. The following day, he found out that was issued fo
r a fake ring. But then he gave the P40,000 just the same. The check was prese
nted. It was dishonored because there was a stop-payment order. So, he now sue
s the drawer. Can he collect? Partially, YES. How much? P50,000. Because the
agreement was that he will pay P80,000 for the P100,000 check. So the consider
ation corresponds to the face value on a ratio of 4:5. For every P5 of the face
value, he will give P4 as consideration. So in determining whether he is a HDC
, there should be a proportionate of the amount he paid with the face value of t
he check.
SECTION 55
Now Section 55 elaborates on Section 52(d). When is the title defective
- The title is defective when the party obtained by fraud, duress, force and
fear, other unlawful means or illegal consideration, or when he negotiates in br
each of faith or under circumstances amounting to fraud. So he negotiated it by
fraud, like he negotiated it for payment for a fake ring. Duress, check as ran
som money. Unlawful means, like it was stolen. Illegal consideration it was is
sued to pay for marijuana.
I mentioned to you before the case of Ford. Ford, Phil. was going to pay
the BIR for the sales tax on the sale of cars it manufactured. It asked one of
its employees, Godofredo Rivera to pay the tax. So, Ford, Phil. issued a check
payable to the order of the Commissioner of Internal Revenue drawn against Citi
bank and it was a crossed-check and it was indicated there for payee s account only .
But what did Godofredo do. There was a syndicate. He indorsed this check to
a certain Cascua, who opened an account in Insular Bank of Asia and America and
deposited there another check for exactly the same amount. That other check had
no funds at all. But then the check deposited was supposed to be brought to th
e clearing house. But what happened, they switched the checks that worthless ch
eck was not brought to the clearing house. Instead what was brought was this ch
eck issued by Ford, Phil. They switched it on the way to the clearing house. B
ut in the records, they made it appear that what was brought was that worthless
check. The branch manager was involved in that conspiracy. So, Insular Bank br
ought the check to the clearing house and Citibank honored it. So they put now
in the record that the check which was deposited was cleared! It was not return
ed. That worthless check, as I said was switched. Now, he withdrew the money.
So when Ford found out about this, the BIR asked them to pay taxes all over aga
in. So, it now sued Insular bank of Asia and America and Citibank. The Court s
aid Insular Bank of Asia was liable because it did not acquire valid title to th
e check. This check was payable to the order of the Commissioner of Internal Re
venue and Godofredo Rivera had no authority to negotiate that. So, it was unlaw
ful for him to negotiate that check. Therefore, Insular Bank should be held lia
ble to Ford, Phil. But the Court said that Citibank was also negligent because
the presenting bank is supposed to stamp there at the bank All indorsements and/o
r lack of indorsements guaranteed . Well, the decision is quite muddled. One par
t says, the checks were not stamped and another part said there was a stamp but
there was no initial. The Court said that if Citibank had examined the checks,
they would have noticed that there is discrepancy which one portion says it was
not stamped but another portion says it was stamped but it was not initialed by
the bank teller who should have received it. The Court said Citibank and Insula
r Bank, you re both at fault, so you share the losses 50/50.
And then you have this old case of Asia Bank Corporation v. Ten Sen Guan(
?). Ten Sen Guan ordered from Snows limited, 10 cases of patis expensive linen.
And to collect payment, Snows Ltd. drew a bill of exchange. The drawee was Ten
Sen Guan, the buyer. Snows Ltd. indorsed the checks to Asia Banking Corporation
. When the crates arrived, they did not contain patis , they contained sack cloth.
The Court said that this is negotiation that amounts to fraud. Therefor, Asia
Banking Corporation could not acquire valid title and could not enforce the bil
l of exchange against Ten Sen Guan.
SECTION 56
Now, Section 56 elaborates on Section 52. It says when there is notice o
f defect, the person to whom it is negotiated must have actual knowledge of the
infirmity or defect or knowledge of such facts that his action in taking it amou
nts to bad faith. Negligence is not enough. They must know something is wrong.
They must either know exactly what is wrong or knowledge of such facts that th
eir actions amount to bad faith. They do not know what is wrong but they know s
omething is wrong and yet the holder still took the instrument. THE END.
November 27, 2001
Rexy
SECTION 57. Rights of a Holder in Due Course.- A holder in due course holds th
e instrument free from any defect of title of prior parties, and free from defen
ses available to prior parties among themselves, and may enforce payment of the
instrument for the full amount thereof against all parties liable thereon.
* May sue for payment in his own name, may receive payment
* Holds it free from personal defenses
* May enforce payment against all parties liable thereon.
Exception: when he cannot recover full payment, as found in Sections 37, 55 and
124
*
PERSONAL Defenses vs. REAL DEFENSES
No contract
s aDEFENSES
PERSONAL
REAL
There contract,
because but
DEFENSES one there
of theselements
a reasoniswhich
missing,
makesoritvoid
inequitable
because it
to is
enforce
agains
t public is
Contract
Examples: policy
absence
voidableof consideration, want of delivery of complete instrument, ac
void
quisition by force or illegal means, illegal consideration, negotiation in breac
h of faith,material
Examples: mistake,alteration,
ultravireswant
act of delivery
a corporation
of an incomplete instrument, for
gery, minority
Not available
Available against
against
HIDCHIDC
* But the fact that real defense is available even against HIDC does not mean th
at everyone can invoke it. Recall that an indorser who became a party after the
forgery cannot invoke forgery because of his warranty. He warrants that it is
genuine in all respects what it purports to be. Likewise, an acceptor warrants a
nd admits the authority of the drawer to draw the instrument.
* Under the Civil Code, gambling is a personal defense. So if an instrument is i
ssued to pay for a gambling debt and such is indorsed, the HIDC will be exempt f
rom that defense
SECTION 58. When subject to original defense In the hands of any holder other t
han a holder in due course, a negotiable instrument is subject to the same defen
ses as if it were non-negotiable. But 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.
* Personal defenses may be raised against someone who is not a HIDC, but it does
not mean that one who is not a HIDC cannot collect. It only means that persona
l defenses may be raised against him.
* 2nd Sentence - But the holder who derives his title from a holder in due course
* Example: A B C D E
A issued check for a ring he was buying from B. It turned out that the ring
was fake. The check was indorsed down the line to D who was a HIDC, then indor
sed it to E who was aware that the check was issued for a fake ring.
Under this provision, if the check bounces, A cannot raise the defense t
hat E knew that the check was issued for a fake ring. The purpose of the provis
ion is to protect a HIDC (in this example, to protect D.
* If the 2nd sentence were not there: If you are D, and you needed money very b
adly such that you can no longer wait for the instrument to mature, you have to
keep looking for someone who is a HIDC because no one who is aware of the defect
will take the check. So how does that prejudice D? Simple. Since he has to ke
ep looking for someone who is a HIDC, his choice of people to whom he can indors
e it is limited.
* If D is not a HIDC, he can t transfer that to E who is a HIDC, and then asks E t
o negotiate it back to him. That s bad faith. If you are not a HIDC, you can t imp
rove your hand by indorsing it to a HIDC then getting it back.
SECTION 59. Who is deemed a holder in due course.- Every holder is deemed prim
a 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 ho
lder 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 defect
ive title.
* This is an important presumption. The law realizes that one of the features of
a negotiable instrument is exemption from personal defenses.
* But the moment it is proven that the title of someone is defective, then the b
urden shall shift. He shall prove that he acquired it from a HIDC.
* FOSSUM v. FERNANDEZ-HERMANOS
Facts: Fernandez-Hermanos (FH) covered its vessel for fabrication. To co
ver for the cost of the fabrication, the company drew a bill of exchange that wa
s drawn against the account of FH. The bill was negotiated to a Asia Banking, t
hen to Fossum who was then aware that there was a failure of consideration (Jack
did not elaborate why there was a failure of consideration, basta meron). So Fo
ssum sued. FH refused to pay and raised a personal defense of failure of conside
ration. Fossum argued that he acquired the instrument from Asia Banking (a HIDC
), hence, he should be considered also as a HIDC.
Held: Fossum failed to prove that Asia Banking was a HIDC. The presumpt
ion under Section 59 does not apply because Asia Banking is not a holder anymore
.
* Last sentence- But the last-mentioned rule does not apply
Example: A B C D- E
If D swindled C, then D indorsed to E, when E runs after A, he is not req
uired to prove that he s a HIDC because A became bound before the defective title
occurred.
SECTION 60. Liability of maker The maker of a negotiable instrument, by making
it, engages that he will pay it according to its tenor, and admits the existence
of the payee and his then capacity to indorse.
* Reason: an instrument is intended to be negotiated, and unless the payee exis
ts and is capacitated to enter into a contract, the instrument cannot be negotia
ted
* ARANETA v. PEREZ
Facts: P executed a promissory note in favor of A. P failed to pay. A sued
him. P s defense: I used the money that I borrowed from A to pay for the medical e
xpenses for my daughter. My daughter is the beneficiary of a trust being adminis
tered by A. Because of the trust, A should have paid for the medical expenses, s
o I don t have to pay him
Held: P s argument is untenable. He signed the promissory note. There is an
absolute and unconditional promise to pay. So he must pay according to the ten
or thereof. What he did with the money is not the concern of the payee.
SECTION 61. Liability of the drawer - The drawer by drawing the instrument adm
its the existence of the payee and his then capacity to indorse; and engages tha
t, on due presentment, the instrument will be accepted or paid, or both, accordi
ng to its tenor, and that if it be dishonored and the necessary proceedings on d
ishonor be duly taken, he will pay the amount thereof to the holder or to any su
bsequent indorser who may be compelled to pay it. But the drawer may insert in t
he instrument an express stipulation negativing or limiting his own liability to
the holder.
* A drawer is liable to holder and any of the prior indorsers who will be compel
led to pay. The drawes can negate liability by putting without recourse , then he c
an t be liable.
* The drawee is not liable unless he accepts. Before the bill is accepted. The o
nly parties primarily liable are the maker and the acceptor. The drawer s liabili
ty is only secondary (liable only if instrument is dishonored)
* CEBU INTERNATIONAL FINANCE CORP v. CA
Facts: A check was drawn against BPI. When presented for payment, BPI debit
ed the account of the drawer, but it did not deliver the money to the holder (th
ere were certain questions about some anomalies, so BPI withheld payment pending
investigation). The holder runs after the drawer.
Drawer s argument: I m not liable. Bank already debited my account.
Held: No, D is still liable. As drawer, you warranted that it will be paid
. And if not, that you ll make good the check.
SECTION 62. Liability of acceptor. The acceptor, by accepting the instrument, e
ngages that he will pay it according to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capac
ity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
* What if the bill of exchange is issued for P4,000, and the holder amended it t
o the amount of P40,000 and negotiated it. The person to whom it was negotiated
presented it for acceptance. Drawee accepted it. For how much can the bill of
exchange be enforced against the acceptor, P4,000 or P40,000?
1st view: P40,000 because that is the tenor of acceptance.
2nd view: P4,000. If you look at Section 132, acceptance is assent to the o
rder of drawer, and the order of drawer in this case is to pay P4,000 only. Acc
eptance is inseparably linked to the order of the drawer, and consent presuppose
s knowledge. In fact, under Section 124, even in the case of a HIDC, if there s a
lteration, he can only enforce it for the original amount.
The second view seems to be the BETTER VIEW.
* Acceptor admits the existence of the drawer because unless he admits, the bill
of exchange cannot exist. He admits the authority of the drawer to draw the in
strument.
* Acceptor admits the existence of the payee because the instrument is intended
to circulate. Unless he admits such matters, the instrument cannot be circulate
d.
* The drawer does not admit the signature of the indorser.
SECTION 63. When a person deemed indorser. A person placing his signature upon
an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indo
rser unless he clearly indicates by appropriate words his intention to be bound
in some other capacity.
* If a person places upon the instrument the words I guarantee the identity of th
e payee liable only if the payee is an impostor.
* In case of doubt, the person shall be presumed to be an indorser, because amon
g the parties to the instrument, the indorser has the least liabilities. Doubts
are always resolved against the assumption of liabilities.
SECTION 64. Liability of irregular indorser. Where a person, not otherwise a pa
rty to an instrument, places thereon his signature in blank before delivery, he
is liable as indorser, in accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is liabl
e to the payee and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or drawer, or is
payable to bearer, he is liable to all parties subsequent to the maker or drawer
.
(c) If he signs for the accommodation of the payee, he is liable to all part
ies subsequent to the payee.
* Irregular indorser someone who is not a party to the instrument, but signs the
same before delivery
* Example: A ---- B ---- C ----D ---- E (instrument is payable to B)
X indorsed it. X is an irregular indorser because normally, you will see the sig
nature of B as the 1st signature. X is liable to B, C, D, E.
* If payable to order, maker, drawer or bearer, he shall be liable to all partie
s subsequent thereto.
* If he signed as an accommodation payee, he shall be liable to all parties subs
equent to the payee.
* Irregular indorser must not be a party because he is signing as an accommodati
on party to improve the credit standing. If he is already a party, it will not
improve the credit standing of that instrument because he is already bound.
* If he signs after delivery, he shall be liable as an indorser (Sections 17 (f)
, 63)
SECTION 65. Warranty where negotiation by delivery and so forth. Every person n
egotiating an instrument by delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to b
e;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of
the instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor of n
o holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person negot
iating public or corporation securities other than bills and notes.
* So if there s forgery/ alteration or it was acquired by swindling or fraud, ther
e is a BREACH OF WARRANTY
* If a prior party was a minor or insane, there s a breach
* and he has no knowledge of fact that will impair the validity If the maker is act
ually insolvent, but the indorser is not aware of that no breach. But if he is
aware there s breach.
* Unlike a general indorser, a qualified indorser does not warrant that the inst
rument shall be paid. He is liable only if the maker or the acceptor is insolve
nt and he is aware of that.
* According to the last paragraph, if negotiation is by delivery, the warranty s
hall extend only to the immediate transferee. If C merely delivered to D (beare
r instrument), C will be liable to D only, but not to E.
Principle: similar to the principle underlying the Statute of Frauds. U
nder the Statute of Frauds, an undertaking to answer for a debt of another must
be in writing to be enforceable. The undertaking of B and C to answer will not
extend to E because it is not in writing.
SECTION 66. Liability of general indorser. Every indorser who indorses without
qualification, warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of th
e next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and subsis
ting;
And, in addition, he engages that, on due presentment, it shall be accept
ed or paid, or both, as the case may be, according to its tenor, and that if it
be dishonored and the necessary proceedings on dishonor be duly taken, he will p
ay the amount thereof to the holder, or to any subsequent indorser who may be co
mpelled to pay it.
* Warrants the same matters mentioned in Section 65. The only difference is the
last subsection valid and subsisting
* If maker is insolvent, even if the general indorser is not aware, he will be l
iable
* The general indorser engages that the instrument shall be paid or accepted and
paid. If not, he will pay provided that the necessary measures are taken.
* Case of HARAM (?)
Facts: Holder deposited a check with a chartered bank (CB), drawn against t
he Bank in NY. He was able to withdraw money although the check was not yet cle
ared. When the CB presented the check to the bank in NY, it was dishonored on
the ground that the signature was forged. CB asked the holder to return the mon
ey. Holder refused, so CB sued. The holder argued that CB failed to prove that
the signature was forged.
Held: All that the CB has to prove is that it was not paid. When the holde
r deposited the check with CB, he indorsed it. He warranted that it will be paid
. Hence, holder should pay, whether or not the reason given by the drawee for t
he dishonor is false.
* Where the signature of an indorser was forged, the payee must reimburse the dr
awee because of Section 66. But according to Jack, that is not correct. Payee
did not transfer title to the drawee bank. Payee presented it for payment, and
not for indorsement. Payee s signature at the back was to acknowledge payment and
not to indorse.
* There is a dispute as to whether the warranties apply only to HIDC. The wordin
g of the law refers only to all HIDC. But according to Jack, the better view is
that espoused by Prof. Brannam, that is, the warrantues under Section 66 should
apply even to a holder who is not in due course.
Reasons:
1) Does not say HIDC exclusively
2) To limit warranties to HIDC will result in absurdity, because under Section 6
5, there s no such provision. Under Sec. 65, warranties of a qualified indorser a
pply even to someone who is not a HIDC. Hence, a qualified indorsee will be bet
ter off than a general indorsee because a qualified indorsee can run after a qua
lified indorser, whereas a general indorsee cannot run after a general indorser.
SEC 70. - Effect of want of demand on principal debtor. Presentment for payment
is not necessary in order to charge the person primarily liable on the instrumen
t; but if the instrument is, by its terms, payable at a special place, and he is
able and willing to pay it there at maturity, such ability and willingness are
equivalent to a tender of payment upon his part. But except as herein otherwise
provided, presentment for payment is necessary in order to charge the drawer and
indorsers.
Meaning of presentment for payment:
* Production of a BOE to the drawee for his acceptance, or to the drawee or acce
ptor for payment or the production of a PN to the party liable for the payment o
f the same
Presentment for Payment consists of:
1. Personal demand for payment at proper place;
2. With the bill or note in readiness to exhibit it if required, and to receive
payment and surrender it if the debtor is willing to pay
* Mere informal talk not accompanied by presentment not sufficient
* Demand on phone not sufficient unless maker waives exhibition (implied or expr
ess)
Presentment not necessary to charge persons primarily liable:
* Not needed for acceptors and makers
* Presentment for payment is not the operative act which makes an acceptor liabl
e, before he accepts, the drawee is a stranger to the bill but from the moment o
f his acceptance, he becomes bound a s a party primarily liable, he is bound by
the tenor of his acceptance and he cannot claim as against the payee that he had
a previous agreement w/ the drawer modifying the terms of the acceptance
Payable at a special place:
* Does not mean that the instrument is payable at a specified city
payable at PNB
* The rule is the same, i.e, no need to present for payment, the only difference
is that if the acceptor/maker is able and willing to pay at PNB at maturity, it
is equivalent to a tender of payment on the part of the acceptor and the holder
loses his right to recover interest due subsequent to maturity and costs of col
lection, but he can still hold the acceptor liable
Rule applicable to demand notes:
* The same rule applies to instruments payable on demand
Presentment necessary to charge persons secondarily liable:
* Otherwise they are charged except as otherwise provided*
Lito -- Paul -- Jong -- Patricia -- Karl
Pia (drawee)
- if Karl does not make presentment to Pia-- Lito, Paul, Jong and Patricia are d
ischarged, but he can still go after Pia since there is no need to present payme
nt to her to hold her liable (kiss na lang)
* Sec 71 read in connection w/ the last sentence of Sec 70 simply means that the
instrument must be presented for payment on the date and period therein mention
ed to charge the persons secondarily liable such as drawers and indorsers. Instr
ument must be presented on date of maturity, if it is payable on a fixed date.
- or w/in a reasonable time after issue if its a PN, or w/in a reasonable time a
fter last negotiation, if its a BOE otherwise drawers and indorsers are discharg
ed.
Necessary steps to charge persons secondarily liable in BOE (drawer and indorser
s):
* if one step is omitted, persons secondarily liable are discharged
1. In the 3 cases required by law, presentment for acceptance to the drawee or n
egotiation w/in a reasonable time after acquisition (Sec 143 and 144 ) unless e
xcused (Sec 148 ). In other cases aside from the 3 three, there is need for pre
sentment for acceptance.
2. If the bill is dishonored by non acceptance, (a) notice of dishonor by non ac
ceptance must be given to persons secondarily liable (Sec 80 ) unless excused (
Sec 117 ) and, in case of foreign bills, (b) protest for dishonor by non accep
tance must be made (Sec 152 ) unless excused (Sec 159 and 117 ).
3. If the bill is dishonored by non payment, (a) notice of dishonor by non payme
nt must also be given to person secondarily liable (Sec 80 ) unless excused and
, in case of foreign bills, (b) protest for dishonor by non acceptance must be m
ade (Sec 152 ) unless excused.
Necessary steps to charge persons secondarily liable on PN (indorsers):
* Same effect
1. Presentment for payment must be made w/in the period required (Sec 71 ) to th
e person primarily liable unless excused (Sec 82 ); and
2. is the note is dishonored by nonpayment, notice of dishonor must be given to
the persons secondarily liable (Sec 80 ) unless excused (Sec 117 ).
Necessary steps to charge persons secondarily liable in other cases:
1. Protest for non payment by drawee is necessary to charge an acceptor for hono
r ( Sec 165 and 167 ) or a referee in case of need (Sec 167 ) and
2. Protest for non payment by the acceptor for honor is also required.
Sec. 71. Presentment where instrument is not payable on demand and where
payable on demand. Where the instrument is not payable on demand, presentment m
ust be made on the day it falls due. Where it is payable on demand, presentment
must be made within a reasonable time after its issue, except that in the case o
f a bill of exchange, presentment for payment will be sufficient if made within
a reasonable time after the last negotiation thereof.
When payable at a fixed or determined future time:
* Note that it depends whether the instrument is payable on demand or not
* If not payable on demand, it must be made on the date of maturity, a presentme
nt before maturity is not proper
When payable on demand in case of notes:
* Here it depends on whether its a note or a bill
* If a note it must be made w/in a reasonable time after issue
When payable on demand in case of bills:
* It must be presented for payment w/in a reasonable time from last negotiation
* The last nego means the last transfer for value, and subsequent transfers betw
een banks for purposes of collection are not negotiations w/in this section
* The requirement of reasonable time starts to run from the last taking for valu
e
What constitutes reasonable time:
* See Sec 193 and 52
* Take into consideration-- the nature of the instrument; usage of trade of the
instrument and the facts of the case
Sec. 72. What constitutes a sufficient presentment. Presentment for paym
ent, to be sufficient, must be made
(a) By the holder, or by some person authorized to receive payment on his be
half;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is absent or
inaccessible, to any person found at the place where the presentment is made.
Application of Sec 72:
* If the presentment does not comply w/ any of the these, it is not sufficient a
nd persons secondarily liable are discharged
Who makes presentment:
* By the holder or someone authorized to receive payment on his behalf
* Bank presenting a note for collection is sufficient
Time for making presentment
* At a reasonable hour on a business day
* Depends upon the general custom at the place of the transaction
* Cannot be made on a Sunday or Holiday (Sec 85 and 194)
Where presentment is made:
* See Sec 73 (susunod na!)
To whom presentment is made:
* To the maker if a note or to the acceptor if a bill, not the person secondaril
y liable
* Clerk found at the counting room of the acceptor is a competent party w/o spec
ial authority given him
Sec. 73. Place of presentment. Presentment for payment is made at the pr
oper place .
(a) Where a place of payment is specified in the instrument and it is there
presented;
(b) Where no place of payment is specified but the address of the person to
make payment is given in the instrument and it is there presented;
(c) Where no place of payment is specified and no address is given and the i
nstrument is presented at the usual place of business or residence of the person
to make payment;
(d) In any other case if presented to the person to make payment wherever he
can be found, or if presented at his last known place of business or residence.
Section 155
* Must be made on the day of its dishonor unless delay is excused
* If it has been noted in the notarial register, he may make the protest at anyt
ime
Section 158
* A protest for better security may be made if the acceptor has been adjudged ba
nkrupt or insolvent
* Section is merely permissive
* Purpose is to notify drawer/indorsers that the acceptor is insolvent therefore
he cannot pay, and that they should already make arrangements to pay
* If it is not done, they will still not be discharged
Section 159
* Protest is dispensed with under the same circumstances which would dispense wi
th giving a notice of dishonor
* Delay is also excused if caused by a fortuitous event beyond the control of th
e holder
Section 160
* When a bill is lost or destroyed or wrongly detained, protest may be made on a
copy of it
BILL IN SET
Section 178. Bills in set constitute one Bill. Where a bill is drawn in a set,
each part of the set being numbered and containing a reference to the other part
s, the whole of the parts constitutes on bill.
This is common in letters of credit. When the exporter of the good will
collect from the bank the proceeds of the letters of credit, for the goods he so
ld to an importer, he will draw a bill in set usually in 2 parts, e.g. first of
two parts and then second of two parts. They will be mailed usually one week apa
rt to provide for contingency that if one is lost, the other part can, most prob
ably, still be received and thus, there can still be collection. (it s the main i
dea behind bill in set: to provide for the contingency that one part is lost in
the event there is miscarriage in the mails).
Section 179. Right of Holders where different parts are negotiated. Where two o
r more parts of a set are negotiated to different holders in due course, the hol
der whose title first accrues is, as between such holders, the true owner of the
bill. But nothing in this section affects the right of a person who, in due co
urse, accepts or pays the parts first presented to him.
If bills in set are negotiated to holders in due course, the one whose ti
tle first accrues is the true owner. But, if the other party is able to get acc
eptance or payment first, then he is the one who will be able to collect. In ot
her words
C ------ E -------- G
A - Draws a Bill in Set payable to B
- Addressed to X D ------ F -------- H
A with a bill in set , addressed X that bill is payable to B. B indorsed one pa
rt to C and the other part to B. If the endorsement was first made to C, as bet
ween C and D, C will have a better right. However, if D was able to go to X f
irst and get the bill accepted, then D will be the one who will be entitled to c
ollect from X.
Section 180. Liability of holder who indorses two or more parts of a set to dif
ferent persons. Where the holder of a set indorses two or more parts to differe
nt person he is liable on every such part, and every indorser subsequent to him
is liable on the part he has himself indorsed, as if such parts were separate bi
lls.
The law says that if the holder of the bill in set indorses the parts to
different persons, he will be liable on each part and every endorser subsequent
to him, as if each part were separate bills. In the example, B will be liable t
o C and D as indorser. If ever C indorses it to E, and E indorses it to G, C an
d E will be liable to G as indorsers. D and F will be liable to H as indorsers.
Section 181. Acceptance of bills drawn in sets. The acceptance may be written o
n any part and it must be written on one part only. If the drawee accepts more
than one part and such accepted parts are negotiated to different holders in due
course, he is liable on every such part as if it were a separate bill.
Acceptance may be written on any part, and should be written on one part ONLY.
Now if the drawee ACCEPTS both parts, then he will be liable on both parts. Wel
l, that is his fault if he accepted both parts.
Section 182. Payment by acceptor of bills drawn in sets. When the acceptor of a
bill drawn in a set pays it without requiring the part bearing his acceptance t
o be delivered up to him, and the part at maturity is outstanding in the hands o
f a holder in due course, he is liable to the holder thereon.
If an acceptor of a bill drawn in set pays it without requiring the part,
bearing his acceptance, to be delivered to him, and that part is still out stan
ding at maturity and it falls in the hands of a holder in due course then he ( a
cceptor) can be held liable. It is his fault for paying the holder although th
e holder did not surrender to him the part which contains his acceptance.
Section 183. Effect of discharging one of a set. - Except as herein otherwise
provided, where any one part of a bill drawn in a set is discharged by payment
or otherwise, the whole bill is discharged.
Where any one part (of a bill in set) is discharge by payment, the whole
bill is discharged because the different parts constitute only one bill. So tha
t, if the acceptor pays, he cannot require the holder to produce all the parts.
Precisely the bill is in set for the contingency that one party may be lost so
that the holder can still collect in the event one part is lost.
Section 184. Promissory note, defined. A negotiable promissory note within the
meaning of this Act is an unconditional promise in writing made by one person t
o another, signed by the maker, engaging to pay on demand, or at a fixed or dete
rminable future time, a sum certain in money to order or bearer. Where a note i
s drawn to the maker s own order, it is not complete until indorsed by him.
Definition of a promissory note states that it is payable to the order of
the maker. It is not complete until he (maker)indorses it. This is because you
need 2 parties to a contract. If the maker and the payee are the same, you don t
have a contract. It the maker indorses it, he will be liable as maker and indo
rser.
The Agbayani book mentions certain types of promissory notes like certifi
cate of deposits... well, those will be negotiable if it complies with the requ
isites of the negotiable instruments law. Remember the case of Caltex. Angel
dela Cruz and the negotiable certificate of time deposit with Security Bank and
Trust. It says This is to certify that bearer has so much on deposit repayable
to the depositor.
Bonds are nice looking promissory notes that looks like a diploma. This
usually refers to promissory notes involving huge amounts which will have a long
maturity date. You ll be talking about hundreds of millions of dollars or pesos w
ith maturity date of 5 years. (This was why Mr. Villar got into trouble, rememb
er that he floated a dollar bond in Europe when the rate of exchange was 26:1.
Note that he needed to stay in power, otherwise the bank will close in.)
Due bills
* Wala naman yang mga due bills na yan! As I have said earlier, in the clearingho
use, they do not issue due bills. Instead, the computer will debit the accounts
of the collecting bank and the drawee bank.
Bank Notes
* Wala na rin iyan because in the old days these were used. If you were in posses
sion of that they will replace that in cash. This is just like what they use in
Hong Kong as money. The bills issued by HK Shanghai Bank and Chartered Bank, t
hese are bank notes, and because the bank will replace it with legal tender and
when you surrender it, people will freely accept them just like money.
* Today, these notes are prohibited (as stated in the Central Bank Act). One of
the phenomenons of WWII, each country had a central bank for monetary policies.
To be able to control the amount of cash, the government prohibited the use of
Bank notes as people would treat them as cash thus making it difficult to contr
ol the money in circulation. Control of money in circulation is important to be
able to respond to times of inflation or deflation. Although now, government c
annot control money as they used to because of credit cards. Even if banks redu
ce the money in circulation, people may still use their credit cards. (Tells the
story during the U.S. Recession where people purchase cars on credit, no intere
st, no down, no monthly installments - 3 zero scheme)
Section 185. Check defined. A check is a Bill of Exchange drawn on a bank payab
le on demand. Except as herein otherwise provided, the provisions of this Act a
pplicable to a bill of exchange payable on demand apply to a check.
Checks are spelled by the British people as cheque, it was called as such
because
* It is a special type of a Bill of Exchange. It s a bill of exchange (BOE) , dra
wn on a bank payable on demand. So, you don t need to present them for acceptance
, you present them for payment right away.
* This particular BOE had serial numbers, unlike ordinary BOE. To be able to ve
rify the identity of this particular type of BOE, you would CHECK the serial num
ber. Most commercial transactions are done through checks.
Provisions of the law on Bills of Exchange are also applicable to checks.
This is why AmJur says that the rule that - if the drawee retains a BOE for 24
hour that amounts to acceptance, is also applicable to checks. Therefore, if y
ou don t return the checks for 24 hours, you have deemed accepted it.
Agbayani Book mentions different types of checks:
Cashier s Check, Manager s Check.
* They are called as such because of the persons who usually draw these checks f
or the bank.
* In the headoffice, it is the cashier who signs it because it is where the cash
ier holds office. But in the branches, it is the manger who signs the check. T
he process for both is the same. It is the officer of the bank who issues the c
heck in behalf of the bank payable to the payee drawn against the bank. This is
why the SC says the drawer and the drawee are the same in these types of checks
, thus they are not presented for acceptance.
Certified Checks
* Hindi na nagse-certify ng cheque ang mga bangko ngayon if you go to the bank, th
ey will ask you to buy a cashier s of manager s check instead. This is probably bec
ause they are afraid of complications in the event the amount is altered right a
fter they certify the check.
* However, the Rules of Court states that in execution, the sheriff before levyi
ng, the debtor can pay through a CERTIFIED CHECK. And the co-chairman of the com
mittee which drafted that (ROC) is Justice Feria.
Memorandum Checks
* Those not intended for payment or encashed (when got goods for credit). It is
issued to evidence a loan and will be redeemed by the drawer in cash. PURPOSE:
EVIDENCE OF CREDIT. Not normally funded.
Traveler s check
* Not as popular today because of international credit cards. You can still buy
these traveler s checks in different denomination (i.e. $20, $50 etc). It was Ame
rican express who started this. You sign them above or elsewhere indicated. Wh
en you use the TC for payment abroad, you present your passport to show your ide
ntity that you are the person whose signature appears on the traveler s check and th
en you sign it. The previous signature will be used as a standard of the signat
ure you are affixing. Now, together with your passport, they will accept your T
C as payment. In order for the entire scheme to work, the establishment must be
assured that the banks will honor it, without any questions ask (just like your
credit cards). Anyway, the whole scheme is insured.
* Means through which you will be able to carry your funds safely
* When lost, bank will replace them up to a certain extent . Am Express guarant
ee $300 outright, the rest of the amount will be subject to investigations.
Crossed Checks
* With parallel lines on the upper left-hand corner
* In Bataan Cigar, the court said that the crossing of a check has 3 Effects / C
onsequences:
1. It cannot be encashed over the counter, but must be deposited in a bank
2. Can be endorsed only once
3. To be a Holder in due course, the holder must inquire:
a. What is the nature of the title of the payee
b. For what purpose did he acquire it
* Actually a precautionary measure to assure that the intended payee is the one
who will get the money. This is true especially if you will mail the check.
* May be
* General
* Special if you name a specific bank. This will mean that you have to deposit
the check to the named bank and no other bank, this is rare. The idea is to req
uire it to be deposited to avoid loss by theft. Note that the greatest enemy of
THIEVES is TIME ELEMENT. She has to get away before she is discovered.
Now, if she steals a crossed check for deposit. She still needs to open
a bank account in the name of the payee. She will have to fabricate two I.D. s;
deposit the check; wait for the check to be cleared before she can withdraw the
money. By this time, the owner of the check would have discovered it was lost,
informed the drawer about the loss and there could have been and order for stop
payment in the bank. Therefore, it is a precautionary measure
* A CROSSED CHECK IS STILL NEGOTIABLE. Chang Juan Case: A check was issued to C
hang Juan, it was crossed. He presented it for encashment over the counter, it
was dishonored. He was running after the drawer. SC says that: you cannot hol
d him (drawer) liable because you (Chang Juan) did not make the proper presentme
nt of payment. The check is a crossed check, it cannot be encashed over the cou
nter. It must be deposited.
Section 186. Within what time a check must be presented. A check must be presen
ted for payment within a reasonable time after its issue or the drawer will be d
ischarged from liability thereon to the extent of the loss caused by the delay.
According to Section 186 A check must be presented for payment within a r
easonable time after its issue or the drawer will be discharged from liability t
hereon to the extent of the loss caused by the delay.
The practice of the bank is that they will honor the check for six (6) mo
nths. After that, they will consider it stale. It will not be honored anymore.
It is the commercial cut-off.
PNB v. Sito
The SC said, if there is delay in presenting the check for payment, the
indorser is discharged. He need not prove that he is prejudiced. Prejudice is
presumed. By the fact that there was undue delay, the potential liability was u
nduly prolonged. So long as there is undue delay in the presentment of check fo
r payment, indorsers are discharged. But the drawer, according to this case wil
l only be discharged to the extent he suffered the loss because of the delay.
This will only happen if the bank goes bankrupt such that if the check we
re presented on time, the check would have been fully paid, but because of the d
elay, the bank became bankrupt hence could only probably get 10 centavo per peso
.
If the bank did not go bankrupt, there is no prejudice.
Jamal v. Estacio
Jamal sold ladies underwear to Estacio. Estacio issued a check. However
, jamal never presented the check so it became stale. So now he sued Estacio fo
r payment.
SC: It there was delay in the presentment of the check, under the law Es
tacio will be discharged only to the extent of the loss. He has not shown that
he has suffered loss because of the delay. Hindi naman nabawasan iyong bank acco
unt nya e sapagkat walang DINEBIT.
Therefore, there will be a loss only when the bank is bankrupt. I mentio
ned this case because there was an occasion where J. Kapunan said that if there
was delay the DRAWER is discharge from liability/onerous obligation because the
civil code provides when you pay an obligation with a negotiable instrument. Th
e obligation is deemed paid if the negotiable instrument is paid OR it is impair
ed through the fault of the payee JACK REITERATES: being impaired through the fa
ult of the payee DOES NOT contemplate a situation where it was not presented for
payment. For example, the payee altered the amount and the bank discovered it,
payee cannot go back to the drawer and ask for another check. This is the pena
lty that the law imposes upon him.
Now, in a decision this year (still referring to 2001) J. Kapunan this ti
me said No, although the check was not presented and became stale, since there wa
s not prejudice or loss cause to the drawer, the obligation subsists. This is t
he correct doctrine.
Section 187. Certification of checks; effect of. Where a check is certified by
the bank on which it is drawn, the certification is equivalent to an acceptance.
Section 188. Effect where the holder of check procures it to be certified. Wher
e the holder of a check procures it to be accepted or certified, the drawer and
all indorsers are discharged from liability thereon.
As I have said, banks do not certify checks anymore.
Section 189. When Check operates as assignment. - A check of itself does not
operate as an assignment of any part of the funds to the credit of the drawer wi
th the bank, and the bank is not liable to the holder unless and until it accept
s or certifies the check.
In this section, as I have, said Checks are not certified anymore, they a
re merely presented for payment.
There was a decision of J. Mendoza which is not correct.
What happened was that there was a real estate transaction, the seller wa
s supposed to pay for the Capital Gains Tax. The seller did not pay it so the b
uyer was the one who paid. The Seller issued a check to him, to reimburse him.
But later, the sellers issued and order for the stop payment.
The clerk of Security Bank attached the stop payment order to the ledger
of the savings account because the depositor also had a savings account. So, wh
en the check was presented, he looked at the ledger (of the current account) and
there was not stop payment order as the said order was attached to the savings
account, the check was honored. When the bank discovered that it had made a mi
stake in honoring the check although there was a stop payment order, it reinstat
ed the amount in the account of the depositor and now sued the payee to get the
back the money.
The SC said that Security Bank could no longer recover because the seller
was really obliged to reimburse the payee for the capital gains tax . It was a
n amount due him. When the Security Bank paid the check, it stepped into the sh
oes of the drawer of the check and became subrogated to his rights. And therefo
re, the payee could invoke against him defenses it could have raised against th
e drawer of the check. And since the payee could have invoked against the drawe
r the defense that you really owe me that money for the reimbursement of the capi
tal gains tax that could be raised against the drawee bank and the bank could no
t recover. MALI! I Don t know why He (referring to the ponente) is applying civil
law when this is a negotiable instrument (says Jack).
The law is clear the CHECK DOES NOT OPERATE AS AN ASSIGNMENT and that th
ere was a stop payment order which the bank erroneously failed to honor. Now, t
he court has said that: if the bank erroneously dishonors a check, time and agai
n they would hold the bank liable for moral damages to the drawer.
In the Agbayani Book Note: Agbayani says that if the Depositor has a bal
ance of P50,000.00 available to pay for checks. And 3 checks in the amount of P
20,000.00, P30,000.00 and P50,000.00 were issued and was presented for payment a
ll at the same time, the bank cannot choose which one to honor. It should disho
nor all the checks JACKS COMMENT: In practice, banks will not do this. What it
will do is to accommodate as many checks as possible within the outstanding bal
ance, and only dishonor what cannot be accommodated. Ayan, so you see, another br
ight idea of agbayani.
Suppose you went to the bank to encash a check, they told you that it wa
s DAIF Draw against Insufficient Funds (i.e. Check drawn is for P50,000.00 by t
he outstanding balance of drawer is less that P50,000.00) the remedy is you depo
sit money in the account so that there will be enough balance. JACK s COMMENT: T
his is not feasible because the bank will not tell you how much money is still n
eeded or how much is the deficiency because of the bank secrecy law. The bank w
ill just tell you insufficient funds, but it will not tell you how much. You wi
ll not how much to deposit.(If you want you can try, piso piso:) )
SECTION 190:
Contains definitions like the holder the payee or indorsee of a bill or n
ote who is in possession of it, or the bearer thereof. This is why Branan says t
hat the payee can be a holder in due course.
The person primarily liable is the person absolutely required to pay, tha
t is the maker and the acceptor. All other are secondarily liable because their
liability is conditional on the party primarily liable failing to pay. These a
re the drawer, indorsers, persons negotiating by delivery.
Reasonable time depends on the nature of the instrument, commercial custo
ms (like the banks here, they honor checks within 6 months), and the facts of ea
ch case.
Computing the time like in civil law, admin code exclude the first, excl
ude the last. It the act falls on a holiday, you have until the next business d
ay to do it.
Any disputes involving negotiable instruments apply first the law (NIL),
if there s any deficiency, apply civil law in a suppletory manner. Note that if t
here s a provision in NIL, do not apply other laws. For instance, what is the eff
ect of payment an obligation covered by a negotiable instrument. This is not pr
ovided in NIL, therefore apply Civil Law which states that: the obligation is de
emed paid if the instrument is honored and paid OR impaired through the fault of
the payee.
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