WARNING: Do not use these notes as a substitute for your own
notes, annotations and lectures of our professors because these
contains typographical errors and were not made under the
supervision or authority of the professor. These can only serve as
a guide for the better understanding of the subject matter.
SHOWING THAT YOU ARE USING THESE DURING CLASSES
(especially during recitations) MIGHT OFFEND THE
PROFESSOR, so please be warned about the inherent dangers of
relying on these notes.
~PS
But if any of you lacks wisdom, he should pray to God, who will
give it to him; because God gives generously and graciously to all.
But when you pray, you must believe and not doubt at all. Whoever
doubts is like a wave in the sea that is driven and blown about by
the wind.
JAMES 1:5-6
ACT 2031
THE NEGOTIABLE INSTRUMENTS LAW
(Based on the Lectures of Dean Divina)
Introduction
The study of Negotiable Instruments Law is basically as study
of the law on assignment of credit except for that one big
difference.
Negotiable Instruments Law is equivalent to assignment of
credit, except the rights accorded to a holder and subject to 2
essential requisites, that is:
1. Sec. 1 (The instruments must be negotiable); and
2. Sec. 52 (The holder must be a holder in due course)
If these two are present then it is governed by Negotiable
Instruments Law. But if one is lacking then it should be governed
by the law on assignment of credit.
FORMULA:
1) Negotiable Instrument (NI) + Holder in due course (HDC)
= Negotiable Instruments Law (NIL)
2) Non Negotiable Instrument (NN) + Holder in due course
(HDC) = Assignment of credit (A/C)
3) Negotiable Instrument (NI) + Non-holder in due course
(NHDC) = Assignment of Credit (A/C). This is subject to
one exception.
NI + HDC = NIL
NN + HDC = A/C
NI + NHDC = A/C
What is the only exception here (the instrument is still negotiable
but the holder is not a holder in due course)?
If the non-holder in due course acquires the instrument from a
holder in due course and he has not taken part in any fraud or
illegality, in which case he has all the rights of a holder in due
course, not just a mere assignee or transferee.
Salas vs CA 181 SCRA
Salas (S) purchased a car on installment basis. He paid the
down payment and issued a promissory note for the balance of the
purchase price payable to the car company (C). The car company
negotiated the instrument to the State Investment House
When the car was delivered, there was a discrepancy in the
chassis number in the invoice and the chassis number of the car.
Therefore there was a breach of contract or failure of
consideration.
If there is no transfer of the promissory note from C to State
Investment House can the company collect the balance of the
promissory note?
Can S stop paying because there was a breach of contract or
failure of consideration?
Between S and C, S can stop paying because C breached the
contract. It delivered a car different from what was specified by its
client.
But, in this case the promissory note has been transferred in
favor of State Investment House.
So can State Investment House enforce payment of the
promissory note against S?
Can S raise the defense that the car is defective and therefore
he is not liable for the balance of the promissory note?
It will depend on 2 things.
1) Is the instrument negotiable in the sense that there is
conformance to the elements of negotiability under Sec 1
of the NIL? And
2) Is the State Investment House a holder in due course
because it has all the conditions of a holder in due
course under Sec 52?
If it is negotiable and holder in due course then State
Investment House can enforce payment of the promissory note
despite the failure of consideration; despite breach of contract;
despite the defect in the vehicle.
But if the instrument is not negotiable then State Investment
House simply steps into the shoes of C. it is governed simply by
the law on assignment of credit. In assignment of credit, the
assignee cannot acquire a right better than that of the assignor. So
State Investment House is mere assignee or transferee not a
holder, cannot acquire a right, title or interest to the PN better than
that of the assignor.
(Warning: This is not what Dean actually said) What if the
instrument is negotiable but S was able to overcome the
presumption that SIH is a holder in due course (because if the
instrument is negotiable there is a presumption that the holder is a
holder in due course), by showing that the title of C was defective?
If the holder, SIH, was not able to prove that it acquired the title as
a holder in due course, can SIH enforce payment of the PN, or can
S invoke the defense of breach of contract as a defense and stop
paying?
In this case S can stop paying because if the instrument is
negotiable but the holder is not a holder in due course governed
only by the law on assignment of credit. The assignee simply steps
in to the shoes of the assignor.
State Investment House vs CA
D issued checks payable to the order of P as a security for
items of jewelries that D obtained from P to be sold on commission
basis. P negotiates the checks to State Investment House. D did
not sell the jewelries, so he returned the jewelries to P and
demanded for the return of the checks. Unfortunately the checks
were negotiated already in favor of State Investment House. D
withdrew his funds from Equitable. So when State Investment
House presented the checks Equitable, the bank dishonored the
instrument.
Can State Investment House collect against D and P assuming
that there was notice of dishonor?
Can D say the check has no more consideration? At the outset
1
there was consideration, but I returned the jewelries so there was
already a failure of consideration I am not liable to pay anymore.?
In this case the check is negotiable and therefore the
presumption is the holder is a holder in due course. SO that
defense of failure of consideration is not available against State
Investment House.
What if the instrument is not negotiable because it does not
conform to the elements of negotiability under Sec 1 or the State
Investment House is not a holder in due course?
You apply the law on assignment of credit. The State
Investment House simply steps into the shoes of P as assignor
and therefore cannot acquire a right or title better than that of the
assignor.
The case which almost cost the loss of the bank for P500 M
Two foreigners were in possession of 2 checks worth $10 M
(exchange rate at that time was 56:1). These checks were drawn
against a bank in the Fiji Islands, Republic of Vanuatu. The
foreigners told the manager they would like to open an account in
the bank. The manager opened the account and the checks were
deposited.
The foreigners requested for a certificate of deposit made
payable after 1 year. By that time the manager would have known
if the checks are cleared or not because checks drawn abroad will
be subject for clearing after 30 days. In 30 days you will know if the
checks were funded or honored.
The manager tagged along his assistant manager because
under the rules of the bank 2 officials must sign the certificate of
the deposits. So the 2 issued the certificate to the foreigners.
The foreigners left the country. After 2 months the bank got a
call from American Express Company. The certificate of deposit
was negotiated to American Express Company.The American
Express Company wanted to collect the $10 M.
Is the bank liable to pay?
It depends.
Is the instrument negotiable?
Can a certificate of deposit be considered as a negotiable
instrument?
In the case of Caltex vs IAC 212 SCRA
The certificate of deposit indicates:
This certifies that bearer deposited the sum of P5 K and
payable to such depositor in December 31, 2011, with 12% interest
per annum. Signed by the manager.
Is this negotiable?
In the case of Caltex vs IAC it is negotiable.
Who is the depositor?
It is bearer. It is payable to bearer. The depositor being referred
to is the bearer therefore it is negotiable.
A certificate of deposit may be a negotiable instrument if it
conforms to the elements of negotiability under Sec 1 of NIL, and if
American Express Company is holder in due course the bank will
be liable to pay for $10 M.
In our case, fortunately, our certificate of deposit was payable to
of a specific person. It provides that this certifies that Juan de la
Cruz deposited of a sum of #. Payable to him in Dec. 31, 2011.
What if it says to the order of Juan de la Cruz?
It becomes a negotiable instrument.
Take out the two words, order of?
It becomes just payable to Juan de la Cruz. It is a different
story.
So dont take the words of negotiability for granted. Dont take
order or bearer for granted, because they spell a difference
between a mere assignee and a holder with more rights and
privileges than a mere assignee or transferee.
You will encounter many cases in our book where the SC said
the instrument is not negotiable therefore dont apply the
warranties of an indorser.
There is one case, Golden Savings Bank vs CA (Metrobank vs CA,
1991)
D deposited with ABC Rural Bank of Mindoro treasury warrants
and then ABC in turn deposited the same in its account with
Metrobank.
So ABC was a Rural Bank and ABC has no clearing facilities. It
is not a universal bank or a commercial bank.
D came to follow it up with ABC, Have the warrants cleared?
ABC as soon as D makes the follow up have makes a call with
Metrobank, Have the warrants been cleared? Not yet. There
were series of follow ups by D to ABC, ABC to Metrobank to the
point that Metrobank got exasperated and cleared the warrants
and allowed ABC to withdraw from the proceeds of the warrants.
After clearing the warrants of ABC, ABC credited the account of
D allowing D to make withdrawals from his own account.
After a month, the warrants were dishonored by the clearing
house (in the case Bureau of Treasury).
So Metrobank now wants to enforce the warranties of ABC.
According to Metrobank, ABC signed the warrants. That amounts
to indorsement. When you signed at the back of the check or
instrument that signature goes with it all the warrants of an
indorser under the negotiable instruments law.
But, the SC said that the warrants are not negotiable therefore
the warranties of an indorser do not apply in this case.
NIL_2
What is the TEST to determine NEGOTIABILITY (1989)?
There is only one test, that is, if on its FACE it conforms to the
REQUISITES of negotiability under SEC 1 of NIL.
May an INSTRUMENT be negotiable even if it is VOID?
May an instrument be negotiable even though the MAKER is
INSOLVENT?
May the instrument be negotiable even though it is VOIDABLE or
UNENFORCEABLE?
Yes because the test is conformity with Sec 1 of the NIL.
Can the parties STIPULATE that the instrument is NEGOTIABLE
even though it is not?
BETWEEN THE PARTIES they can stipulate that the
instrument is negotiable even though it is not, in the sense that it
does not conform to Sec 1. That is by ESTOPPEL. But that
arrangement does not bind 3rd persons.
What are the FUNCTIONS of a negotiable instrument?
1) substitute for money
2) medium of exchange
3) medium of credit transactions
2
What are the CHARACTERISTICS/FEATURES of negotiable installments the due dates of the installments must be indicated.
instruments?
1) negotiability Payable in stated installments coupled with acceleration clause
2) accumulation of secondary contracts Negotiable

What are the KINDS/TYPES of negotiable instruments?
1) promissory notes
2) bill of exchange
3) checks (Sec 185) although a special kind of bill of
exchange drawn on a bank payable on demand, it is
considered as special type of negotiable instrument
Payable in dollars computed in Philippine currency at the
prevailing rate at the time of payment.
Negotiable
With interest but silent as to rate
Negotiable

The NIL provides for these 3. But, there are other instruments I promise to pay to the order of Juan de la Cruz the amount of
which are considered negotiable if they conform to Sec 1 and they P100 K with interest
will fall under the specie of promissory note, bill of exchange, or Negotiable.
check.
Is it still sum certain within the meaning of the NIL Sec 2 if it says
Examples of a PROMISSORY NOTE: with interest only?
Certificates of deposit, due bills, bonds, commercial paper Yes because if it is silent as to rate, it means that the legal rate
applies.
Examples of a BILL OF EXCHAGE:
Trade acceptances (an instrument drawn by the buyer What is the legal rate 6% or 12%?
against the seller and accepted by the latter); bankers
acceptances The fact that it is susceptible to two rates, does it affect the
certainty of the sum payable?
Drafts - in LC, it is used to facilitate the payment of the No because the presumption of the law comes in, that is 12% if
beneficiary it arose from a loan, forbearance of money, goods or credit and 6%
if it did not arise from a loan, forbearance of money, goods, or
Kinds of drafts are: credit. So the legal rate is 6% or 12% depending upon the
- sight drafts (being payable at sight) and obligation.
- usance (payable after 60 days after sight)
Payable out of a particular fund
What are the TYPES of CHECK? Non-negotiable because the fund may or may not exist
1) PERSONAL and impersonal or corporate check
2) CASHIERS check or MANAGERS check What if it indicates the fund from which reimbursement is to be
made after payment?
3) TRAVELLERS check Negotiable
One that must be SIGNED TWICE (once upon PURCHASE
[at the time of issuance] and upon NEGOTIATION [in the presence What if it includes a statement which gave rise to the transaction
of the payee before it is paid]) and the statement is long?
I promise to pay to the order of Juan de la Cruz the amount of
4) MEMORANDUM check P500 K with interest of 12% per annum on or before Dec. 31 2011.
This promissory note is issued in payment of the purchase price of
5) CROSSED check a vehicle
There are 2 PARALLEL LINES on the left hand corner of the Negotiable
check, which MEANS that:
1) It is only for DEPOSIT, it cannot be encashed; Payable before the death of A
2) It can be NEGOTIATED only ONCE in favor of one who Non negotiable because it is not certain
has an account with the bank;
3) It serves as a WARNING that the check was issued for After the death of A
SPECIFIC PURPOSES and the holder must acquire that Negotiable
check consistent with those purposes, otherwise he will not
qualify as a holder in due course Pay a sum of money or to pay taxes:
I promise to pay to the order of Juan de la Cruz the amount of
The holder in due course acquires title to instrument free from P100 K or to pay his taxes
all personal defenses, like lack of consideration or failure of Non-negotiable
consideration. The SC said that would change if the check is
crossed. What will make it negotiable?
It should be at the option of the holder
If the check is crossed then the lack or failure of consideration
becomes a defense. Payable on demand at the option of the maker
Non-negotiable
WHICH of these provisions AFFECT the NEGOTIABILTY of the
instrument? Payable on demand at the option of the holder
Negotiable
Payable in two installments
Non-negotiable Payable on demand. Silent as to whose option
Negotiable
Payable in equal installments
Non-negotiable December 31 ___
I promise to pay to the order of Juan de la Cruz the amount of
These are non-negotiable because the law says stated P100K on December 31 ____.
3
 Non-negotiable
What is the FICTITIOUS-PAYEE rule?
The instrument is payable to bearer when it is payable to the
order of a fictitious person or non-existing person and such fact
was known to the person making it so payable (Sec 9c).
It says there that payable to a fictitious person or NON-EXISTING
person. That is considered payable to bearer. Can you have an
instrument payable to bearer if the person really exists?
If the payee really exists can it still be covered by the fictitious
payee rule and therefore payable to bearer?
This is very important specially if it is a check which is payable
to order of a person who really exists because if it is payable to
order it requires the indorsement of the payee or indorsee to
transfer title. But if it is covered by the fictitious-payee rule that
means it can be negotiated by mere delivery because it is
considered a bearer instrument.
Can you have a fictitious-payee if the person really exists?
Yes as held in the case of PNB vs Spouses Rodriguez, and that
is, if the maker DID NOT INTEND him to be the real payee of the
instrument.
NIL_1b
Test of Negotiability
Negotiability cannot be determined by agreement except
between the parties. But that arrangement does not bind 3rd
persons.
Negotiable instrument serves as:
1. Substitute for money
2. Medium for commercial transaction
3. An instrument of credit
First Function: Substitute for money
You could use a check in the payment of an obligation and the
creditor, if he accepts the check, we can therefore consider the
check as same as money. Any action to collect should be held in
abeyance until the check is dishonored.
But is check good as cash?
We simply said that an instrument may be a substitute for
money but a check is not necessarily money, with the exception of
cashiers check or managers check.
There are conflicting decisions on whether or not cashiers
check is of legal tender.
Cashiers check and managers check are the same in terms of
being a check issued by the bank against itself. The only difference
is that a cashiers check is issued by the cashier of the branch
against the bank itself, while managers check is issued by the
manager against the bank itself.
What do you mean by a check issued by the bank against itself?
It may be the drawer and the drawee are both the bank.
In an ordinary check there are three parties: the drawer, the
drawee, and the payee.
In an ordinary check the drawer is always the bank. The drawer
may either be a natural or juridical person.
If the drawer and the drawee are one, it means it is just like a
promissory note. So the bank is ordering itself to pay somebody.
That is why in many cases SC said it is good as cash, because the
bank has presumably the assets to back up that the check that it
issued.
Survey of cases on cashiers check ending with the 2009 decision:
New Pacific Timber vs Seneris 101 SCRA (1980)
A compromise agreement was entered into by the plaintiff and
the defendant. Under the terms of the agreement the defendant
agreed to pay the plaintiff. The compromise agreement was
submitted by the court for approval and that rendered judgment on
the basis of the compromise agreement.
Unfortunately, the defendant, judgment debtor, breached the
terms of the compromise agreement. He did not pay the plaintiff as
promised under the compromise agreement. So the plaintiff, the
judgment creditor, moved for the issuance of writ of execution (a
judgment based on a compromise agreement is immediately
executory. In case of breach you can immediately move for an
issuance of a writ of execution). It was granted by the court.
The judgment creditor levied on the properties of the judgment
debtor and set the date of sale. But before the sale of the levied
personal properties, the judgment debtor tendered payment in the
form of a cash and check drawn against Equitable Bank.
The sheriff consulted the lawyer of the judgment creditor. The
lawyer said that a cashiers check is not good as cash so dont
accept it. It has to be cash so continue with the auction sale.
So the sheriff conducted the auction sale.
The judgment debtor took the case all the way to the SC
arguing that the sheriff should not have proceeded with the sale
because the tender of a cashiers check is payment in cash.
HELD: A cashiers check issued by a bank of good standing is
good as cash. This means that for as long as the bank is operating
in good condition, not insolvent, not closed, not distressed.
PAL vs CA (1990)
A check was issued in favor of judgment creditor covering a
judgment debt. Unfortunately, it was supposedly for the creditor but
made payable to the sheriff for the account of the judgment
creditor. The sheriff instead of giving the payment to the judgment
creditor pocketed the money.
ISSUE: Whether or not the issuance of a check payable to the
sheriff for the account of the judgment creditor is good as cash.
Did it extinguish the obligation of the judgment debtor?
HELD: The majority (CJ Narvasa dissented) of the SC held a
check whether ordinary check or cashiers check is not legal
tender. It does not produce the effect of cash.
A cashiers check simply proves the affirmative capacity of the
obligor to pay, because you buy/purchase a cashiers check from a
bank. You dont issue a cashiers check. It only proves that the
obligor/buyer has the affirmative capacity to pay but the check is
not legal tender.
The SC reiterated its ruling PAL vs CA in the case of Roman
Catholic Church vs CA.
Tibajia vs CA, 223 SCRA
This has the same facts as in the case of New Pacific Timbers
vs Seneris, except for the parties. A cashiers check was tendered
in payment of a debt, but the SC ruled otherwise.
HELD: SC held that cashiers check is not legal tender without
saying that the ruling in new Pacific Timber vs Seneris is
abrogated.
Tan vs CA, 239 SCRA(1994)
A cashiers check was purchased from Puerto Prinsesa Branch
4
of PCI Bank. The cashiers check was brought to Manila deposited
in an account with RCBC Manila.
The depositor accomplished a deposit slip for local check not a
deposit slip for regional check.
A check bought from a provincial bank is a provincial check as a
distinguished from a check drawn from a Metro Manila branch
which is a local check. If it is provincial check you must accomplish
a deposit slip for regional check. If it is local check accomplish a
check for local check.
As a consequence the local check which was deposited for his
account was misrouted. It was not credited to his account. So
when he issued a check in payment of an obligation thinking that
the cashiers check purchased had been credited to his account,
the checks were dishonored.
He sued the bank for damages.
HELD: If there is any mistake, it is the obligation of the bank to
call the attention of the client.
In the commercial world/parlance, the cashiers check is good
as cash and therefore that cashiers check should have been given
outright credit regardless of the kind of deposit slip signed or
accomplished by the client.
Pabugais vs Sahijiwani (2004)
A cashiers check is not legal tender. However, if the creditor
accepts without objection it becomes legal tender by estoppel. In
other words, the creditor has the option to refuse to accept the
cashiers check because it is not legal tender but once he accepts
it becomes legal tender.
Security Bank and Trust Company vs Rizal Commercial Banking
Corporation (2009)
SC held it was legal tender
Managers check was made payable to cash and there was a
stop payment order made by the purchaser, because the one who
intended to encash the check was not the intended payee.
Despite the stop payment order the drawee bank allowed the
encashment.
Is the drawee bank liable for allowing the encashment despite the
stop payment order?
HELD: The rural bank is not liable because a managers check
payable to cash is good as cash.
Another thing we learned from this case is that a managers
check or cashier is not subject to stop payment. The buyer cannot
ask the bank for a stop payment order.
Who can issue a stop payment order?
It is the drawer only. In a cashiers check or managers check
the drawer is the bank, so only the bank can issue a stop payment
against itself, not the purchaser.
The only exception, the only time when a managers check or a
cashiers check may be subject to a stop payment order - In the
case of People vs Misina that is if the cashiers check was lost. In
that case the purchaser issued the stop payment order to the
bank.
Given all these rulings, what is the better view?
When you become lawyers it depends on what side you would
argue.
But technically:
Under Sec 60 of RA 7653, Central Bank Act of 1990
provides that the debtor cannot compel the creditor to
accept a check in payment of a debt. If the debtor cannot
compel the creditor to accept a check in payment of a
debt it means it is not legal tender, because legal tender
is a currency which the debtor may compel the creditor to
accept when tendered in the right amount. The law
makes no distinction between ordinary checks and
cashiers check. If the law makes no distinction, why
should we distinguish?
Under Art 1249 of the NCC a check and other mercantile
documents do not produce the effect of payment until
encashed or when through the fault of the creditor they
have been impaired.
Therefore the creditor should be given the discretion not to
accept or to accept it. But if he accepts then it becomes legal
tender by estoppel following the ruling in Pabugais vs Sajihiwani.
2nd Function: Medium or instrument of credit transaction
What does medium of obtaining or extending credit mean?
Lets say you need to raise funds, you can issue bonds to the
public. In our discussion in banking and quasi banking, an entity
may issue debt instruments with recourse. So these are not
deposits instruments but instruments as alternative to deposits like
bonds and commercial papers.
Lets say ABC Co. needs funding or money but it does not want
to go to the bank, because it is expensive and the banks requires
mortgage on properties or collaterals. So instead of going to the
bank the company just issues bonds to the public. So the bonds
now are used as an instrument of credit to obtain funds from the
public.
FEATURES of Negotiable Instruments
1) Negotiability
the capability to be transferred from one person to
another
2) Accumulation of secondary contracts
if the instrument is negotiated you get secondary contract
I.e. Promissory not from M to P, that is one contract. If P
negotiated to A, that is another contract.A to B, another
contract.
3 KINDS of Negotiable Instruments under Negotiable Instruments
Law
1) Promissory Notes
2) Bill of Exchange
3) Checks
There are various TYPES of PROMISSORY NOTES
Bonds
Commercial papers
Certificates of Deposit
Caltex vs IAC, where despite the phraseology of the
instruments the SC still considered it a negotiable instrument.
Certificates of Deposit when it conforms to the elements of
negotiability may be considered a negotiable instrument it falls
under the specie of promissory notes a promise to pay by the
company that issued it.
BILLS OF EXCHANGE
Drafts
The beneficiary of an LC may issue a draft against the issuing
bank or confirming bank as a mode of payment.
2 KINDS:
5
 1) Sight drafts payable on demand
2) Usance drafts payable after sight,
60 days after sight payable to the order of Juan
de la Cruz the amount of P100 K which means
that the maturity of the instrument is fixed only
upon acceptance of the drawee.
After sight payable to the order of so and so
That means you have to present the instrument for the
acceptance of the drawee. If the drawee accepts then that is
the only time that you can fix the maturity of the instrument
Traders Acceptance
It is a draft drawn by seller against the buyer.
Pay to the order of myself the amount of P100 K on or before
this day. Drawn against the buyer. If the buyer accepts that
means he is liable.
What is so special about this?
What the payee or the seller can do is to negotiate the trade
acceptance in favor of a bank.
Example:
Coca-Cola (buyer) buys sugar from Central Azucarrera (seller).
So the seller will issue a draft against the buyer, pay to the order of
myself. If the buyer accepts it is already liable.
So what payee-seller will do is to negotiate the draft/trade
acceptance in favor of a bank. Since it was already accepted by
Coca-Cola presumably with plenty of resources being the top
corporation in the Philippines, the bank will buy it from the seller.
Instrument considered NON-NEGOTIABLE
Warehouse Receipts
It does not represent an unconditional promise or order to
pay a sum certain in money.
It is a promise to deliver goods not to pay money.
Real Estate Mortgage
As held in GSIS vs CA
Postal Money Order
As held in Phil. Education Co. vs Soriano, because there
are many restrictions which make them incompatible with
concepts of a negotiable instruments. And besides, when the
government engages in postal service it is not engaged in a
proprietary function but a governmental function.
I.e. Post Office of Manila will instruct Post Office of Dapitan,
Zamboanga to pay to the order of the holder.
Treasury Warrants
As held in Metrobank vs CA, because treasury warrants
require appropriations from the national government which
means the funds may or may not exist.
It is payable out or a particular fund which means the promise
to pay is unconditional.
Stock Certificates
There is no payment of sum of money.
It is simply an acknowledgement by the corporation that the
person named therein owns X number of shares.
It is considered quasi-negotiable because it can only be
transferred by indorsement plus delivery.
Withdrawal slips
Firestone vs CA.
Usually you issue a check in payment of an obligation. Drawer
has an account with the drawee bank. The drawer will issue a
check to its creditor in payment of an obligation. That check will be
presented to the drawee bank. That is how it goes.
Typical ordinary check transaction:
Drawer issue a check payable to the order of payee drawn
against the bank. The payee has two options, either to encash to
the drawee bank or deposit the check to his bank, which is called
the collecting or presenting bank, who will collect from the drawee
bank.
Collecting bank will send the check for clearing through
Philippine Clearing House Corporation. If the check clears
(meaning that if the check is not returned) then the account of the
collecting bank will be credited and account of drawee bank will be
debited and the collecting bank can now credit it to the account of
P and the Drawee bank will debit the account of the drawer.
Supposing D instead of issuing check to P issued withdrawal
slips. Withdrawal slips will be deposited to his collecting bank. The
collecting bank will send it to the drawee bank. Drawee bank
clears.
Are they negotiable?
Supposing one of those withdrawal slips was dishonored by the
drawee bank. Is the drawee bank required to send notice of
dishonor to the parties?
No. SC said withdrawal slips are not negotiable instruments. So
the obligation of giving notice of dishonor to the drawer, indorser in
nego does not apply despite the fact that withdrawal slips are
treated like checks.
TITLE I
Negotiable Instrument in General
CHAPTER I
Form and Interpretation
ELEMENTS
1) must be in WRITING
You can use any kind of instrument as long as the promise or
order is in writing.
You can use ball pen, pencil.
Lets say you are in a restaurant, you got a napkin, you forgot
your money, you can issue a promissory note in that napkin to the
waiter or to the owner of the bar. I promise to pay to the order of
the owner the sum of so much, on or before this day and this was
signed voluntarily, not under the influence of liquor.
2) SIGNED by the maker or drawer
Where should the maker or drawer sign?
In the instrument. Usually at the right hand corner, below.
If the signature is placed elsewhere, not in the customary place?
As long as he intends to be bound as a drawer or maker
3) Must contain an UNCONDITIONAL PROMISE or ORDER TO
PAY
When you say unconditional we follow the same test of
condition under the Civil Code, which means that it does not
depend upon the happening of a future and uncertain event. It
must not depend upon a contingent event.
Examples:
I promise to pay to the order of Juan de la Cruz if I pass the Bar
Examination; flat 1 in special commercial law or mercantile law
review.
The happening of the event does cure the defect. It does not
make the instrument negotiable.
Of course, when we say unconditional promise or order is not
6
subject to any condition EXCEPT the implied conditions under the
Negotiable Instruments Law.
What are the IMPLIED CONDITIONS?
1) To make the drawer and the indorser liable you have to
present the instrument for payment; and
2) The maker or the drawee should dishonor.
3) If it is dishonored you should give notice to the drawer or
the indorser. Otherwise they are not liable.
Is it necessary to use the word I promise all the time?
Words of similar import are acceptable like I bind myself to pay,
I guarantee to pay.
In the case Traders Royal Bank vs CA
The SC said that a mere acknowledgment of a debt is not a
promise to pay therefore it is not a negotiable instrument.
4) SUM CERTAIN in money
Sum payable is determined from the face of the instrument
without making any reference from the any document or
instrument.
On the very face of the instrument one should know how much
exactly is the obligation to be paid.
Sec 2. The sum payable is sum certain within the meaning of this
Act, although it is to be paid is -
b) With stated installments.
Stated installments means that the due date of the installment
payments must be indicated.
Example:
Maker has to say payable in 2 installments. First one payable on
this date, second one due on this date
c) With acceleration clause
Meaning default of one installment renders the entire obligation
due and demandable.
d) With rate of exchange
Example:
Dollars computed in Philippine Currency at prevailing rate of
exchange, because you know the prevailing rate of exchange is
provided for by BSP. It is not something which is uncertain
because there is a way of determining.
e) With cost of collection or an attorneys fees
If the cost of collection or attorneys fees are to be determined
after the maturity of the instrument. The law says it will not affect
the negotiability. It is still a sum certain because by that time the
instrument ceases to be negotiable in its commercial sense.
If the attorneys fees are payable at the outset and does not
contain any amount like reasonable attorneys fees then it is not
sum certain.
If it is payable before the maturity, then the cost of collection or
attorneys fees must be clear as to amount. Otherwise, it is not a
sum certain within the meaning of the Negotiable Instruments Law
If it is after maturity, reasonable attorneys fees it is considered
something which will not affect the certainty of the sum payable.
Reasonable attorneys fee is something which will not affect the
certainty of the sum payable, because the court anyway will fix it.
If the cost of collection or attorneys fee is payable after maturity,
even though the instrument will just say plus cost of collection and
attorneys fees silent as to amount, it will not affect the certainty of
the sum payable because the court will be the one to fix it.
a) With interest
The sum is certain because the presumption of the law comes
in, and that is, the legal rate of interest.
It doesnt matter also if there are 2 options of legal rate (6 or 12)
because the law applies.
The legal rate is fixed by law 6% if the obligation does not to
pertain loan, forbearance of money, goods or credit. It is 12% if it
pertains to a loan, forbearance of money, goods or credit.
Sec 3
What if it indicates a fund to be reimbursed or a fund to be debited
after payment, like pay to the order of Juan de la Cruz the amount
of so much and thereafter debit the account or reimburse yourself
from the account of Pedro Reyes in Equitable PCI Bank or Banco
de Oro?
The order or promise to pay is unconditional within the meaning
the law though coupled with an indication of a particular fund out of
which reimbursement is to be made, or a particular account to be
debited with the amount. This is because the debiting comes after
the payment.
But, if its payable out of a particular fund, like a treasury
warrant, the instrument is non-negotiable because the order or
promise to pay is no longer unconditional. The fund may or may
not exist.
4) Payable on DEMAND
Sec 7
When is the instrument payable on demand?
1. where it is expressed to be payable on demand, or at sight,
or on presentation; or
2. where no time of payment is expressed; or
3. if issued, accepted, or indorsed when overdue, it is
considered payable on demand as regards the person so
issuing, accepting, or indorsing it
5) Payable at a FIXED or DETERMINABLE FUTURE time
Sec 4
If the instrument is expressed to be payable
a) at FIXED period AFTER date or sight
b) ON or BEFORE a fixed or determinable future time
specified therein
c) ON or AT a fixed period AFTER the occurrence of a
specified event, which is certain to happen although the
time of the happening is uncertain
It is not on or before the occurrence of a specified event which
is certain to happen
In our example earlier it is payable before the death of A. This is
not negotiable because we do not know when A will die.
If it is payable after the death of A, then it is negotiable because
it is certain to happen.
6) Payable to ORDER or BEARER
Sec 8
When is an instrument considered payable to ORDER?
Where the instrument is drawn payable to the order of a
specified person or to him or his order, like pay to the order of
Juan de la Cruz; or
Payable to him or to his order, like Juan or order
Can it be payable to the order of the maker or drawer, meaning the
drawer is also the payee?
Bank of America vs CA. The draft issued by Inter Resin, the
drawer is also the payee. This is possible because the Sec 8(b)
7
says so.
What about an instrument payable to two or more persons jointly
like, Pay to order of A and B?
This is allowed under Sec 8 (c).
What if the instrument is payable to order of A and B? Both of them
signed at the back; you have a check payable to order of A and B
both of them signed at the back of the check. A alone went to the
bank. Can the bank allow the encashment even though B was not
around?
Yes, because the last indorsement is in blank. It is a blank
indorsement which converts the order instrument into a bearer
instrument. So anyone in possession may actually encash it.
So A alone can go to the bank and encash it because by that
time by virtue of the indorsement at the back, by virtue of the
signature at the back it becomes now payable to bearer under Sec
9, when the only and last indorsement is in blank.
Sec 9
Payable to BEARER
a) expressed to be so payable, like pay to bearer
b) payable to a person named therein or bearer, like pay to
Juan or bearer
c) payable to the order of a fictitious person or non-existing
person and such fact was known to the person making it
so payable
i.e. pay to the order of King Neptune, pay to the
order of Superman.
d) when the name of the payee does not purport to be the
name of any person, like an instrument payable to Cash
In the US it is possible that you have a person with the name of
Mr. Cash. But, in the Philippines when you say payable to cash it is
payable to bearer. The reason is that it does not purport to be the
name of any person.
What if in the Philippines you have a person with the name of Mr.
Cash?
Is that still payable to Bearer? Is that still covered by the fictitious-
payee rule?
That is the ruling in the case of Spouses Rodriguez vs PNB 566
SCRA
So even if the person really exists as long as the maker or the
drawer did not intend him to be the payee of the instrument, that is
still considered to be payable to bearer.
Lets say you have an instrument payable to the order of Juan de
la Cruz. Juan de la Cruz really exists, but the drawer did not intend
him to be the payee. Then Juan de la Cruz went to the Bank. Can
the bank allow the encashment?
Can the drawer say you should not have allowed him because he
did not sign at the back?
Not necessarily, because if it is payable to the order of a person
although existing but not intended by the maker or the drawer to
be the payee it is considered payable to bearer. An instrument
payable to bearer can be negotiated without indorsement
e) when the only or last indorsement is an indorsement in
blank
NIL_2
Sec 9
It is very important to determine when an instrument is
considered payable to bearer, because if it is payable to bearer it
can be negotiated by mere delivery, unlike an order instrument
which cannot be negotiated by mere delivery, but requires the
indorsement plus delivery.
When is an instrument payable to BEARER?
When -
1. EXPRESSED to be so payable
2. payable to a person NAMED therein OR BEARER
- like Payable to Juan or bearer
3. payable to the ORDER of a FICTITIOUS or NON-EXISTING
PERSON, and such FACT was KNOWN to the person making
it so payable
- Like Payable to the order of King Neptune; or
Superman, Catwoman
4. name of the PAYEE does NOT purport to be the NAME of any
PERSON
- Like Pay to Cash
5. ONLY or LAST INDORSEMENT is an indorsement IN BLANK
- i.e. I promise to pay to the order of Juan de la Cruz.
Juan de la Cruz indorsed, lets say Pay to Pedro
Reyes and then signed, that is a special
indorsement.
But, if Juan de la Cruz simply affixed his signature
in the instrument, then that is considered as
payable to bearer the only indorsement is in blank.
Fictitious-Payee Rule
As held in PNB vs Rodriguez, the instrument is payable to
bearer even though the person really exists.
The fictitious-payee rule does not only cover a fictitious-payee
or a non-existing person. It also includes an existing person as
long as it is not intended to be a payee of the instrument. The
maker or drawer did not intend him to be the payee of the
instrument. That is considered payable to bearer.
However, the fictitious-payee rule is subject to an exception,
that is, the COMMERCIAL BAD FAITH exception. If there is bad
faith on the part of the drawee-bank, that will not be covered by the
so called fictitious-payee rule.
Example:
You have a check payable to the order of Juan de la Cruz and
there is a person with the name of Juan de la Cruz. So the maker,
however, did not intend him to be the payee of the check. That is
considered payable to bearer. It does not require therefore the
indorsement of the payee before he can transfer title.
However, if there is bad faith on the part of the drawee bank,
then this commercial bad faith exception would make the
instrument no longer payable to bearer but payable to order. So in
this case it will require the indorsement of the payee or indorsee.
30% of the questions in Nego are based on abnormal instruments.
What are the 5 ABNORMAL INSTRUMENTS under Negotiable
Instruments Law
1. Incomplete but delivered (Sec 14)
2. Incomplete and undelivered (Sec 15)
3. Complete but undelivered (Sec 16)
4. Forged signature or made without authority (Sec 23)
5. Material Alteration (Sec 124)
Sec 14
What is the rule on INCOMPLETE but DELIVERED
1. The SIGNATURE of the maker or drawer has to be GENUINE;
and
2. Given for the PURPOSE of GIVING EFFECT to a negotiable
instrument
8

1st requirement:
If the SIGNATURE is NOT GENUINE then you apply the rule on
forgery under Sec 23.
2nd requirement:
It is given for the purpose of giving effect on the negotiable
instrument.
If the signature is given for autograph purposes, that may be
genuine. But is that covered by the rule on incomplete but
delivered?
Example:
You are a fan of Lady Gaga and you watched her concert. After
the concert you got her signature. Lady Gaga obliged. Then you
made a promissory note under that signature, I, Lady Gaga,
promise to pay to the order of Bruno Mars. Signed Lady Gaga.
Is that covered by the rule on incomplete but delivered?
It is not. The signature may have been genuine but is not given
for the purpose of giving effect to the instrument. The section to
apply is Sec 23, the rule on forgery.
So FORGERY is not limited to the counterfeit-making of
signature, it also includes a situation where the signature is
genuine but given for the purpose other than to be bound by the
instrument, in this case, for autograph purposes.
A signature on a negotiable instrument without any other
particulars operates as a PRIMA FACIE authority on the part of the
HOLDER to fill it up.
In other words, if there is a signature on a negotiable instrument
given for the purpose of giving effect to that instrument and all the
rest are blank then the one in possession, the payee, has the
prima facie authority to fill it up. So it can be the amount, date, the
interest rate, place of payment. So he has the prima facie authority
to fill up the blanks.
It is incumbent upon the maker or drawer to prove that the
payee filled up the instrument not in accordance with the authority
given by the drawer and within a reasonable time.
If he failed to overcome the presumption then the prima facie
authority obviously stands. So the maker or drawer is liable as
filled up, as completed.
But, that is only prima facie between the maker or the drawer
and payee.
However, if the instrument is negotiated after completion to a
holder in due course (HDC), there is now CONCLUSIVE
presumption that the instrument was filled up in accordance with
the instruction of the maker or drawer and within a reasonable
time.
So that prima facie presumption in the hands of the payee,
when negotiated to a holder under the conditions making the
holder a HDC, the presumption becomes conclusive, that the
instrument was filled up in accordance with the instructions of the
maker or drawer and within reasonable time. That means that
insofar as the HDC is concerned, he can enforce the instrument as
filled, as completed. And that presumption of authority cannot be
overcome by any evidence to the contrary. So that is the beauty of
being a holder in due course.
So this kind of infirmity, INCOMPELETE but DELIVERED does
NOT AFFECT the rights of a HDC.
Example:
M signed on a negotiable instrument, intended for the P but the
amount left in blank.
P has the prima facie authority to fill it up. So P filled it up for
P100K. Lets say that P was only authorized only up to P10K.
In favor of P there is a prima facie presumption that the
instrument is payable for P100K.
It is incumbent upon M to prove that authority accorded by M is not
P100K. That is the price he should pay for simply affixing his
signature on the instrument without completing all the material
particulars.
Lets say P negotiates in favor of X, under conditions making X
a HDC.
For how much can X enforce the instrument against the maker?
As completed, as filled up for P100K.
So from a mere prima facie presumption from the payee, when
it goes to the HDC after completion it is now conclusive. No way
can M disprove that the amount is for P100K.
If the maker dishonors, how much is P liable to X?
Also for P100K, because under Sec 65 under NIL he warrants
that the instrument is genuine and in all respects what it purports
to be.
Sec 124
How do you distinguish Sec 14 from this one M issued a
promissory note payable to order of P for P10K. Everything
complete for P10K. Now P ALTERED it to P100K.
How much is M liable to P?
The law says in cases of material alteration, the one who
altered it cannot enforce it. It is AVOIDED insofar as he is
concerned.
However, if it is negotiated to A, a holder under the conditions
making the holder a HDC, how much can A enforce the instrument
against M?
Under Sec 124 of the NIL A may enforce the instrument for
P10K, only in accordance with the original tenor of the instrument.
So as distinguished from Sec 14 where the HDC can enforce
the instrument as completed, as filled up, for material alteration the
law says (Sec 124), the HDC can only enforce it in accordance
with the original tenor of the instrument which is P10K.
If M dishonors for how much is P liable to A?
For P100K because, again, as indorser he warrants that the
instrument is genuine and in all respects what it purports to be.
Sec 15
INCOMPLETE and UNDELIVERED
If the instrument is incomplete and undelivered the PAYEE
CANNOT ENFORCE it against the maker or drawer.
And if it is negotiated in favor of a HDC, the law says that kind
of instrument (incomplete and undelivered) is NOT a VALID
contract in the hands of ANY HOLDER only against a PARTY
PRIOR to its completion and delivery.
Example:
M signed a promissory note but left the amount in blank
intended for P, the payee.
M left the promissory note on top of his table, left his office. P was
able to obtain possession of that promissory note.
Can P enforce that promissory note against the Maker?
NO, because it is both incomplete and undelivered. So there is
no prima facie presumption or authority in favor of the payee
because the instrument is both incomplete and undelivered.
The prima facie authority applies only to incomplete but
9
delivered instruments, but not in incomplete and undelivered.
Supposing P completes the instrument, filled up the amount and
then negotiated the instrument to A under conditions making A a
HDC. Can A enforce the instrument against M, the maker?
Law says no, because an incomplete and undelivered
instrument is not a valid contract in the hands of any holder.
So whether or not he is a HD, it does not really matter if it is
incomplete and undelivered. It becomes a defense available even
against a holder in due course.
Can A, the HDC, enforce instrument against P, the one who
enforced or negotiated it?
Yes because the law say it is not a valid contract in the hands of
any holder only against a party prior to completion and delivery.
Since P is a party after such completion and delivery therefore he
is not covered by that rule. So he is liable as an indorser under
Sec 65, he warrants that the instrument is genuine and in all
respects what it purports to be.
So if it is Sec 14, Incomplete but delivered, it is only a personal
defense, not available against a holder in due course.
Material alteration (Sec 124) is partly real, partly personal, in
the sense that if the instrument is enforced beyond the original
tenor, it is a real defense. But, to the extent the instrument is being
enforced only according to its original tenor, it is only a personal
defense not available against the holder in due course.
If it is Sec 15, Incomplete and undelivered, it is a real defense
available even against a HDC.
Sec 16
COMPLETE but UNDELIVERED
The maker or drawer may sign an instrument, a promissory
note, or check for that matter, it may be complete in all material
particulars but unless he delivers it then that contract is revocable.
That means it can be withdrawn at anytime. So no right can be
given in favor of the intended payee.
However, the law says if the instrument which is complete is in
the hands of the payee there is a prima facie presumption of valid
and intentional delivery. But that is only prima facie in favor of the
payee or any immediate party. When we say immediate party it
means one who knows the limitations of the instrument.
If the payee, however, negotiates to a holder under the
conditions making a holder a HDC there is now a conclusive
presumption of a valid and intentional delivery for the purpose of
giving effect to the instrument.
Similarly, it can be established also by the maker and the
drawer, as the case maybe, that instrument was delivered for a
specific purpose, like for safe-keeping or custodianship. So there
can be limitations or conditions placed on the delivery.
Take note that the limitations or conditions are not on the
promise or order to pay; otherwise it is not a negotiable instrument.
The limitations or conditions are placed on the delivery, like deliver
to P only for sake-keeping, or deliver to P but not to be enforced
against M.
All the limitations or conditions do not exist on a prima facie
basis insofar as the payee is concerned. One who is in
possession, the presumption is, although prima facie, there is valid
and intentional delivery and there are no conditions in the delivery.
It is now incumbent upon the maker or drawer to prove that there
are conditions or limitations to the delivery.
If the instrument is delivered in the hands of the HDC those
limitations, those conditions on delivery do not apply, because in
the hands of a HDC it is not just a prima facie presumption but a
conclusive presumption of valid and intentional delivery to make all
prior parties liable to him.
Example:
M made a promissory note, complete in all material particulars.
He placed it on top of his table, not for delivery to the intended
payee, but the payee got hold of it.
In the favor of the payee is a presumption that there was valid
delivery. P, on a prima facie basis, can enforce the instrument
against M.
It is incumbent upon M to prove that there was no valid delivery.
OR lets say M made a promissory note complete in all material
particular but only for safe-keeping, therefore not to be enforced.
But again, because there is a prima facie presumption in favor of
P, it is incumbent upon the maker or drawer to prove that it is only
for safe-keeping.
But if the instrument is negotiated to A, a HDC, then the HDC
can enforce the instrument against M despite the fact that it is only
for safe-keeping, despite the fact that it should not be delivered to
the payee, because of the conclusive presumption in favor of the
HDC to make all prior parties liable on the instrument.
Regarding CHECKS there are conflicting decisions.
In a check transaction, there are 3 parties the drawer, payee,
and the drawee.
Supposing the D (drawer) filled up a check complete in all material
particulars in payment of the services that P (payee) rendered to
D, But D did not deliver it to P. It was drawn against the ABC
(drawee bank).
For whatever reason the check did not end up to P, but instead
deposited in the account of X, with XYZ bank. XYZ bank sent the
check for clearing, with the drawee. The check clears. So the
clearing account of XYZ was credited, and the clearing account of
the drawee bank was debited. So XYZ credits to X, and drawee
debits D.
Take note that the check is payable to Ps order and therefore it
could not transfer title without his indorsement plus delivery. It
could not have been transferred in favor of X, because it was
without Ps indorsement or delivery or both. But X was able to
deposit it to XYZ and XYZ credited it to the account of X.
Does P have a cause of action against all of the parties, especially
against the collecting bank?
There are 2 conflicting SC decisions; 2 conflicting schools of
thought:
1. DBP of Rizal vs Sim Wei 219 SCRA
2. Westmont Bank vs Ong, 375 SCRA
DBP of Rizal vs Sim Wei 219 SCRA
The SC said that the payee has ho cause of action against the
collecting bank because there is no delivery to him. Since there is
no delivery he does not acquire title to the instrument. If he has no
title to the instrument he has no cause of action arising from that
particular instrument.
Westmont Bank vs Ong, 375 SCRA
The SC said that the payee may proceed directly against the
collecting bank because in case of forged indorsement or no
indorsement, like in this case, then the payee may proceed directly
10
against the collecting bank under the so called, SHORT-CUT
ROUTE of determining the chain of liability for forgery of the
payees indorsement.
There are 2 ROUTES in determining the chain of liability in case of
forgery of the payees indorsement:
1. Circuitous and
2. Short-cut
What is the LONG ROUTE or CIRCUITOUS ROUTE?
Circuitous route was applied in cases of:
Banco de Oro vs Equitable Bank 157 SCRA
China Bank vs CA 182 SCRA
Associated Bank vs CA 25 SCRA
Lets say D is issued a check payable to the order of P in
payment for legal services. It was handed over to X the messenger
of P. (As you know lawyers dont go to the clients to get their
check. Instead, they sent their messengers. So the messenger is
sent there and the messenger should be familiar with the signature
of his boss).
Suppose X, the messenger of P, forged Ps signature and then
deposited it to his account with XYZ Bank.
XYZ is called the collecting bank or the presenting bank because
it collects the proceeds of the check from the drawee-bank through
the Philippine Clearing House Corp. (PCHC), and after collecting
the proceeds credits the account of the depositor. All banks have
clearing accounts with PCHC. The members, which are banks, of
PCHC have clearing accounts.
PCHC is not BSP. It is not controlled by BSP. It is a private
corporation. The members are banks. So the checks are cleared
through the PCHC. So every morning or afternoon, as the case
maybe, messengers go to the PCHC to pick up the checks drawn
against the respective branches. That check will be presented to
the drawee and the drawee now will examine if it is genuine, if it is
ok.
Take note in this case that the drawee has no way of
determining the forgery of the payees indorsement, because the
payee does not have an account with the drawee. The one who
has an account with the drawee is the drawer, but not the payee.
Thats why in case of forgery of the Payees indorsement the
drawee will not be able to return the check right away. It will take a
while before he can discover the forgery and return it.
In this case the check was sent for clearing, if the check clears,
that means the clearing account of the collecting bank will be
credited and the account of the drawee-bank is debited. If the
account the drawee-bank is debited, drawee bank will debit the
account of the drawer and the collecting bank will credit the
account of the depositor X.
Under the circuitous route P has to proceed against the drawer,
because the check does not produce the effect of payment until
encashed.
What about the DRAWER?
The drawer can proceed against the drawee, because the
instruction of the drawer to the drawee is to pay to the order of P,
not to any person who acquires title by virtue of Ps indorsement.
That instruction was contravened. That instruction was breached.
Therefore the drawer has the right to seek reimbursement from the
drawee.
What about the DRAWEE?
The drawee can proceed against the collecting bank, because
when the collecting bank sent the check for clearing it assumes all
the warranties of an indorser under the NIL. That means the
instrument is genuine, and in all respects what it purports to be.
That warranties, obviously, has been breached because of the
forgery of Ps indorsment. Since there is a breach of warranty then
collecting bank is liable to reimburse the drawee-bank the amount
of the check.
In fact when a check is sent for clearing there is a stamp mark
which says, All prior indorsement and/or lack of indorsement
guaranteed. It is the duty of the collecting bank to stamp mark the
check with all prior indorsement and/or lack of indorsement
guaranteed, at the back of the check. That means all the
warranties of an indorser under Sec 65.
In fact there is one case where the SC said that the mere act of
sending the check for clearing already amounts to indorsment. And
an indorsement carries with it all the warranties of an indorser
under the NIL.
What about the collecting bank?
If X still has an account with the collecting bank, then the
collecting bank may debit the account of the depositor, as held in
the case of Jai-Alai vs BPI 66 SCRA, even without the consent of
the depositor, because when the depositor makes a check deposit,
he signs at the back of the check twice. That signature is
tantamount to all the warranties of an indorser under the NIL.
Because there is a breach of warranty, there being forgery, the
collecting bank can debit the account of the depositor even without
his consent.
What about the forger, does he have a right?
Of course. He has the right to love, the right to vote, the right to
hear, to listen to lectures.
But under the NIL, he has no right.
What about SHORT-CUT ROUTE?
This was applied in the cases of:
Associated Bank vs CA (208 SCRA)
Westmont Bank vs Ong (375 SCRA)
So short-cut route, SC said that lets cut chase, lets make it
shorter. Who is the one liable ultimately in case of forged
indorsement? The collecting bank. So why go to the circuitous
route? Lets allow the payee to proceed directly against the
collecting bank, because after all he has the last touch. He was the
last one at fault. So the presumption is he was the one who
caused all the problem. He has the obligation to ascertain that the
genuiness of the indorsement. Failing which he is liable.
So the GENERAL RULE is that in case of forgery of the payees
indorsement, whether circuitous route or short-cut route, the one
liable is the collecting bank.
NIL_3 1241
FORGERY
What is FORGERY?
Forgery is not limited to the counterfeit making of a signature.
Forgery includes:
counterfeit making of signature; or
signature given without authority; or
signature given for the purpose other than to be bound
on the negotiable instrument
The one which we are most familiar with is the counterfeit of the
signature. When you say forged, that means that the signature is
a fake. That is what we commonly associate forgery with.
But as we said, it includes a signature given without authority.
So if an agent signs in behalf of the principal without authority of
the principal, then the effects are similar to forgery.
11
 And the 3rd one is that the signature may be genuine but given
for the purpose other than to be bound on the negotiable
instrument. The example given above is the signature given for
autograph purposes. The signature may be genuine but it is
covered by the rule on forgery because it was not given for the
purpose of being bound on the instrument.
What is the basic RULE on forgery?
Lets simplify Sec 23 by simply saying that NO RIGHT can be
acquired under a FORGED SIGNATURE or one made without
authority. So by this statement we are clear that it is merely the
signature which is inoperative. It is only the signature that has no
effect, but not the instrument itself.
So despite a forged signature certain rights may be acquired on
that instrument even though it bears a forged signature of one of
the parties to the transaction.
Example:
P forged the drawers signature on a check. The check was
supposedly drawn against ABC Bank, but the payee forged the
drawers signature. Because the signature of the payee is forged,
there is no order to pay given to the drawee.
What if P, after forging the signature, negotiates the check in favor
of A and under conditions making him a holder in due course? A
goes to the drawee bank. The bank dishonors.
The drawer is not liable because his signature is forged.
What about P?
He is liable, because his signature is genuine and he is liable
as an indorser under the NIL. So he warrants that the instrument is
genuine and in all respects what it purports to be.
When the signature of the maker or the drawer is forged, then it
is as if there is no promise to pay.
What are the EXCEPTIONS, where a right may be acquired under
a forged signature or one made without authority?
The person against whom the instrument shall be enforced is
barred or precluded from invoking the defense of forgery.
What are the CASES or instances where a party is BARRED from
invoking the defense of forgery?
1. Those who by their ACTION, OMISSION, or
NEGLIGENCE are estopped from denying genuiness of
the signature
2. Those who WARRANT the genuiness of the signature
3. If the forger is NOT NECESSARY to the TITLE of the
holder
Example:
1. M issues a promissory note to the order of P. P forged Ms
signature and then negotiated to A. Then A to B. B goes to M.
M dishonored because the signature is forged
B can go against P or A because of their warranties as indorser.
2. M issued a promissory note payable to the order of P. A
forged Ps signature and made it payable to him.
So pay to A signed P. Ps indorsement was forged by A. After
forging Ps indorsement, A negotiated to B. Then B to C.
Can C enforce the promissory note against M?
Is it an order instrument or bearer instrument?
If it is a bearer instrument can C enforce payment of the
promissory note to M?
Can M reason that there is forgery of the instrument in this case?
No, because the forgery is not necessary to the title of the
holder. With or without the indorsement this instrument can be
negotiated by mere delivery.
What if it is an order instrument?
Under Sec 30 an order instrument can be negotiated only by 2
steps indorsement plus delivery. So if the indorsement is forged
then no title transferred in favor of the subsequent holder.
But in this case, the forgery is not on the signature of the
maker. The forgery is on the indorsement and the rule is that
parties subsequent to the forgery cannot enforce the instrument
against parties prior to the forgery. So virtue of the forgery the
relationship between the parties prior to the forgery and after the
forgery is cut-off. So the juridical tie is cut-off by virtue of the
forged indorsement.
So therefore can C enforce the instrument against M?
No, because there was forged indorsement. Title cannot be
transferred to AA to BB to C.
Can C enforce the instrument against P, assuming M dishonors?
No
Can C enforce the instrument against A or B?
Yes, because they are parties subsequent to the forgery.
In drawing a check there are 3 parties the drawer, the
drawee, and the payee.
The difference between a check and a bill of exchange is that a
check is drawn against the bank and payable on demand.
Example:
The signature of the drawer (D) is forged. P forged Ds
signature. P has the option either to go to the drawee-bank and
encash the check or to deposit the check to his account.
Lets say P goes to the drawee-bank to encash the check over
the counter. The drawee-bank is supposed to know the signature
of the drawer. The drawer maintains an account with the drawee.
When you open an account you are asked to give a specimen
signature or a specimen signature card. And every time a check is
drawn against your account the signature verifier or the cashier as
the case may be compares the signature on the check and
specimen signature of the signature card. It they dont match then
the drawee must dishonor the check because of the forgery.
What if the drawee honors the check because the forgery was
perfectly done?
What are the rights of D?
The SC held in many cases that the drawee has the obligation
to restore the account of the drawer, because no right can be
acquired from this forged signature.
When will you know that the signature is forged?
When you receive a statement of account, it contains all the
checks that the drawer has supposedly issued.
So when you maintain a checking account every month you
receive a statement of account from the drawee-with the check
stubs you have issued. So you have to compare, check each and
every check that you have issued to recall if you indeed issued a
check in favor of a particular person.
So once you received the statement account, you noticed that it
has been debited for so much cannot recall having issued such
check in favor of somebody else. It was paid to the bank and the
drawee-bank. So the drawee-bank has the obligation to restore the
account.
That is simple. Lets complicate it a little bit
12
 P instead of the going to bank over the counter deposited the
check to his account with ABC. As we said last time, in this kind of
transaction the bank that presents the check for clearing is called
the presenting bank or colleting bank. Presenting bank because it
presents the check to the drawee and at the same time a collecting
bank because it is supposed to collect the check proceeds from
the drawee.
All banks, universal banks, commercial banks, thrift banks
maintain a clearing account with the Philippine Clearing House
Corporation. Now those banks without clearing accounts open
accounts with those banks with clearing accounts. Example, a
Rural Bank has no clearing facility. So a rural bank will have an
account with Metrobank. Metrobank will be the one to send the
check for clearing of all accounts drawn against Rural Bank. So it
has a tie-up with a bank which has clearing facilities.
Banks which are universal, commercial and thrift are required to
have a clearing account with PCHC. All of them are considered
members of PCHC. This is very important because in many cases
the SC said that if it issues or executes rules or matters which
concerns clearing items then the banks are bound by the rules
issued by the PCHC. The 24 hour clearing rule, for instance is
not a court mandated rule or legislation. It is a rule issued by
PCHC but banks are bound because they are considered
members-participants of the PCHC. When you become a member
you adhere to the rules and regulations that PCHC will issue.
Now the PCHC is not the BSP. It is not an agency of the BSP. It
is not a government corporation. It is a private corporation that
facilitates the clearing of checks.
Everyday all banks send their messengers to PCHC. These
messengers pick up the checks drawn against their respective
branches and then they deliver the checks to their respective
branches for the branch manager to see if the checks are genuine
or not.
So it is not a question of ABC Bank as the collecting bank
asking the drawee-bank, Hey! There is a check being deposited
with my account, can you please confirm if it is valid or not?
Obviously, that kind of thinking will never work because there are
many branches of banks in the country. So they just pick it up the
checks at the PCHCdelivered to their respective branches for
comparison, whether or not it is genuine or forged.
If the signature is forged. P deposited the check with the
collecting bank. The collecting bank sent the check to the drawee-
bank through the PCHC. The drawee picks up the check from
PCHC and the check goes back to the drawee. The drawee
compares the signature of on the check with the signature of the
drawer. The drawee must dishonor the check, because the drawee
is supposed to know the signature of the drawer. So if there is an
indication of forgery, it must right there and then dishonor. This is
where the 24 HOUR RULE applies.
Under the 24 HOUR RULE, in case of forgery of the signature
the drawee must return the check to the collecting bank within 24
hours not within the following day.
What happens if the drawee did not return the check to the
collecting bank?
Under the PCHC rules the account of the drawee will be
debited and the account of the collecting bank will be credited. So
once the account of the collecting bank has been credited then the
collecting bank can now credit the account of P. And the account of
the drawer with the drawee-bank will be debited.
What if the signature of the drawer is genuine, and instead what is
forged is the signature or indorsement of the payee?
Example:
D, drawer, issued a check in favor of P for payment of legal
services. The check and the signature of the drawer are genuine.
D handed over the check to X, messenger of D. X forged the
signature of P and deposited the check in his account with ABC
Bank. ABC Bank sent the check to the drawee-bank through the
PCHC.
Is the drawee-bank expected to return the check within 24 hours?
No, because the payee does not have an account with the
drawee bank, unlike in the first situation it is the signature of the
drawer which was forged and the drawer maintains an account
with the drawee.
In case of forgery of the payees indorsement, the payee may
not have an account with the drawee bank. So the drawee-bank
has no way of ascertaining whether the signature of the payee is
genuine or forged. So if the check is sent for clearing, in all
likelihood, the account of the drawee-bank will be debited and the
account of the collecting bank will be credited. So the collecting
bank will now credit the account of the depositor-forger and the
account of the drawer will be debited.
Once P starts complaining with the drawer, You havent paid
me my attorneys fees.
P starts to investigate and then realizes that his account has been
debited and yet no payment has been made.
What are the rights and obligations of the parties?
There are 2 ways to determine the chain of liability - the
circuitous route and the short-cut route. Whether circuitous route
or the short-cut route, generally it is the INDORSER or collecting
bank which bears the liability.
So in case of forgery (this was asked twice in the bar already)
of the payees indorsement it is the indorser that generally bears
the liability.
If it is under the CIRCUITOUS route, the explanation of the SC
in the 2009 case of Bank of America the reasons are these:
1. With respect to the payee he has the right to seek for
payment against the drawer, because insofar as he is
concerned, the check does not have the effect of payment
until encashed.
2. On the other hand the drawer may seek reimbursement
from the drawee, because the instruction of the drawer to the
drawee was contravened or violated. The drawer instructed
the drawee to pay the payee or any person who acquires title
by virtue of his indorsement. That was contravened or
breached by the drawee-bank. So the drawee-bank is duty-
bound to reimburse the drawer.
3. The drawee-bank has the right to proceed against the
collecting bank because when the collecting-bank sent the
check for clearing it assumes all the warranties of an
indorser. The stamp mark, all prior and/or lack of
indorsement guaranteed, that is tantamount to indorsement.
And an indorsement carries with it all the warranties of a
general indorser under Sec 65 of the NIL.
In fact there is one case where the SC held that the mere act
of sending the check for clearing even without the stamp mark,
all prior and/or lack of indorsment guaranteed, is tantamount to
an indorsment. So therefore the collecting bank assumes all the
warranties of an indorser. And since there is a forgery this case, it
is deemed to have breached that warranty and therefore liable to
reimburse the drawee-bank.
3. The collecting bank has the right to debit the account of
13
 the depositor-forger, in the case of Jai-Alai vs BPI 66
SCRA, because when the depositor deposits a check to
his account with the collecting bank he signs at the back
of the check. That signature is tantamount to
indorsement. So it goes with it the warranty that the
instrument is genuine and in all respects what it purports
to be. That was breached or violated; therefore the
collecting bank can debit the account with or without his
consent.
On the other hand, the SHORT-CUT route is based on this
premise: The one who is ultimately liable is the collecting bank. He
is the one who is supposed to ascertain the genuiness of the
indorsement. So why go to the circuitous route, if you know
anyway the party ultimately responsible.
In the case of Associated Bank vs CA 208 SCRA the payee was
allowed to proceed against the collecting bank because of the
principle of quasi-delict, for negligence.
But, in recent cases, Westmont Bank vs Ong in particular, it
was not based on quasi-delict. It was based on the NIL. The
collecting bank has the obligation to ascertain the genuiness of the
indorsement. Failing which, it is liable.
EXCEPTIONS
There are parties who warrant the genuiness of the signature.
So those who warrant the signature are precluded or are not
allowed to invoke forgery.
Who are these parties who are PRECLUDED from denying forgery
by admitting the genuiness of the signature?
1. the ACCEPTOR
2. the INDORSER
3. Negligence
INDORSER
The indorser warrants that the instrument is genuine and in all
respects what it purports to be. So when the indorser negotiates,
he admits the signatures of the previous parties.
ACCEPTOR
Does the drawee admit the genuiness of the drawers signature?
He does not. It is the acceptor that admits the genuiness of
drawers signature. So if the drawee accepts the order to pay, that
is tantamount to admitting that the signature of the drawer is
genuine, otherwise he should not have accepted.
So the drawee is not liable unless and until he accepts the
instrument. The liability of the drawee is premised on his
acceptance. Being a mere drawee per se does not make him liable
to the instrument. It is the act of acceptance that makes him liable
on the negotiable instrument.
If the drawee dishonors the check without valid reason, he is
not liable under the NIL, meaning the payee cannot proceed
against the drawee for the dishonor of the check.
But the SC held, in so many cases, that the drawee, however,
is liable to the drawer for breach of contract. So the drawer has
funds with the drawee bank, the signature is genuine, but the
drawee dishonors the check issued by the drawer, in so many
cases, the SC said that the drawer can proceed against the
drawee for breach of contract.
But take note that under the NIL the drawee is not liable on the
negotiable instruments unless and until the drawee accepts the
same.
Therefore can the payee file a case against the drawee bank for
dishonoring the check or the instrument?
No. The cause of action pertains to the drawer. The drawer can
proceed against the drawee, but the payee has no cause of action
against the drawee because the liability of the drawee is premised
on acceptance of the check. Once he accepts then he is barred
from denying the genuiness of the drawers signature.
Bar Question:
Romeo fearful for his life issued a check payable to the order of
his girlfriend Juliet. He instructed her that if something happens to
him, present the check to the drawee to get the money for her
sustenance. The threat on the life of Romeo was aborted so he
survived. Juliet, however, presented the check to the drawee-bank.
The drawee bank dishonors. Due to the dishonor Juliet broke up
with Romeo.
Does Juliet, payee, have a cause of action against the drawee?
Juliet has no cause of action because the drawee is not liable
unless and until he accepts the check. The payee has no cause of
action against the drawee because the liability of the liability of the
drawee is premised on acceptance.
There is one author who said that the drawee-bank is liable
because if the drawee-bank did not dishonor the check Juliet
would not have broken up with Romeo. The liability is based on
quasi-delict. But how can you answer a question in nego based on
quasi-delict? It doesnt make sense. The question is on
Commercial Law, not on Civil Law. You have to answer it based on
the principles of nego, not under the principle of quasi-delict.
NEGLIGENCE
Unless the party against whom the instrument is sought to be
enforced is precluded from invoking the defense of forgery.
These are those by their action, omission, negligence, estoppel
are barred from invoking the defense of forgery.
Example:
Even though the signature is forged, but if the person claims it to
be genuine then he is estopped from denying forgery.
In case of NEGLIGENCE, the negligent party is precluded or
barred from invoking forgery.
Who can be the NEGLIGENT PARTY?
You can have the negligence of the:
drawer
drawee
collecting bank
Negligence of the DRAWER
PNB vs Quimpo 158 SCRA
D and A are best friends. A accompanied D to the bank to
transact business, but then D left his checkbook inside his car. A
saw the checkbook of his best friend, got a piece and because he
was the best friend he knew As signature and he forged the
signature of his best friend. A went to the bank and the bank
allowed the encashment. After that D, upon receiving his statement
of account noticed that he issued a check to his friend, A. But he
never issued that check, so he went to the bank and cried forgery.
The bank said that you are negligent, because if you did not
leave the checkbook inside your car then your friend would not
have obtained a piece and could not have committed forgery. Your
negligence facilitated the commission of the forgery.
Is that the kind of negligence contemplated by law?
It has to be gross negligence not the kind of negligence referred
to by PNB. The SC said that PNB it is your negligence that
14
facilitated the forgery, because you are supposed to know the
signature of the drawer. And you are supposed to dishonor the
check containing the forged signature. Failing which you are duty
bound to restore the account of the drawer.
How do you distinguish this with the case of Security Bank vs
Triump Lumber Co?
It involves LOST CHECKBOOK, but this time the drawer was
considered negligent. The DRAWER KNEW already that the
checkbook was lost but did NOT NOTIFIED security BANK.
MWSS vs CA 140 SCRA
The signatures of authorized signatories of MWSS were forged.
But despite the fact that the account was debited, the SC did not
made the drawee-bank liable to restore the account of the drawer,
because of the following reasons:
MWSS customized its own checks. So it does not use
the checks of PNB. It prints its own checks. And anyone
can access to the printing press. So there are no
appropriate security measures.
MWSS would not bother to check ____
All these things taken together, the SC says, amounted to
negligence on the part of the drawer. That is why it was barred
from invoking the defense of forgery.
Gempesaw vs CA
This involves trust on ones accountant.
Gempesaw owned a Sari-sari store in Caloocan. Her
accountant for 8 years would just prepare the checks for the
signature of Gempesaw. The Checks were supposed to be issued
in favor to the supplier of Gempesaw. But all the entries in the
check (the amount, the payee), the transactions, the invoices were
all prepared by the accountant. Gempesaw blindedly just signed
the check prepared by the accountant. It turns out the some of
these cases resulted in the forgery of the signature.
The SC said that too much trust in ones accountant and failure
to set-up an accounting system, where you can monitor and track
the checks that you issued amounted to negligence. With all your
business, you are supposed to have an accounting procedural
system so that you can compare the checks you have supposedly
issued with the checks duly returned by the drawee-bank. And you
are supposed to act right away if there is a forgery on your
signature.
BPI vs Montessori
What about a statement or a provision in the statement of account
which says that if there is no complaint in 10 days from receipt of
the statement of account, then the transactions are conclusively
presumed to be valid?
The stipulation does not prevent the invocation of forgery if
thats what really happened.
Ilusorio vs CA
Trust in ones secretary.
Every time the bank will call-up, it will be picked-up by the
secretary. Secretary said that yes my boss issued a check, yes for
that amount, yes as dated, yes to that payee. So true enough the
forgery was committed. So in that case Ilusorio, the drawer, was
barred from invoking the defense of forgery.
Republic vs Equitable Bank
There is a limit on the authority of the drawers authorized
signatories. Lets say the authorized signatory can only sign up to
P5K, but the amount is beyond P5K but despite the fact that
amount is beyond the authorized limit, the drawer did not
complain. So therefore the drawer is barred, likewise from invoking
forgery.
Negligence of the DRAWEE
Almost all the cases in the negligence of the drawee pertain to
the inability or FAILURE TO DETECT the forgery of the drawers
signature.
Negligence of the COLLECTING BANK
Collecting banks liability is based on its warranty as an
indorser.
There are cases, however, where the liabilities of the drawee
and the collecting bank were fixed. In the case of:
Gempesaw vs CA it was 50:50
BPI vs CA it was 60:40. 60% drawee-bank; 40%
collecting bank. That is the only case in the history of the
NIL where the liability of that is fixed at 60:40.
Why? What is the basis of the 60:40?
There was more negligence on the part the drawee rather than
the collecting bank, but the SC did not explain why 60:40. It made
its own allocation. But it can be deduced that it has something to
do with the negligence on the part of the drawee-bank.
BPI vs CA
An impostor was able to claim the proceeds of a pre-terminated
money market placement with BPI.
Lets say that PhilAm has a money market placement with BPI
and the authorized investor of PhilAm is X. Y pretended to be X
and he gave instructions to BPI as drawee to pre-terminate the
money market placement. And through the series of instruction
given, the BPI personnel believed that he is dealing with the real X.
It turned out that Y was not really the investor but the impostor.
The impostor was able to claim the proceeds of the pre-
terminated the market placement. So BPI issued a check in favor
of the impostor. The impostor went to China Bank and opens an
account and deposited the check representing the proceeds of the
money-market placement.
China Bank, the collecting bank in that case, did not conduct a
thorough investigation of the background of the investor. It allowed
the opening of an account with a mere strength of the Taxpayer
Account Number (TAN). Later on the impostor withdrew proceeds
of the check.
After that the real investor instructed BPI to terminate the
investment. BPI said you already terminated it.
The drawer conducted an investigation and he discovered that
the impostor was the one who obtained the proceeds.
Who is liable to pay?
BPI, the drawee-bank, did not require the surrender or return of
the instrument evidencing the money market placement. It was
negligent.
What about China Bank, collecting bank?
Negligent because it allowed the opening of the account without
conducting a thorough background investigation and allowed the
withdrawal of the proceeds.
In this case there was more negligence on the part of BPI that
is why it has to share more of the burden than that of the collecting
bank.
NIL_4b
Fictitious-Payee Rule
If an instrument is payable to the order of a 3rd person, like pay
15
to the order of John, that is an order instrument. And therefore
that instrument cannot be negotiated without the indorsement of
John plus delivery.
Is it possible for an order instrument to be considered payable to
bearer?
Yes, if it is payable to the order of a fictitious person or a non-
existing person, and such fact is known to the person issuing or
making it.
Under the fictitious-payee rule, which is a principle borrowed by
the SC from the US SC, even though the person really exists, but
he is not intended payee of the maker or drawer then he is
considered, likewise a fictitious-payee. And therefore the
instrument is considered payable to bearer.
Example:
If you have an instrument payable to the order of John, and
John really exists but he is not the intended payee of the drawer or
the maker. In that case it is considered payable to bearer still.
How is this applied in the Philippine setting?
Spouses Rodriguez vs PNB
Spouses A and B (Spouses Rodriguez) have an account with
PNB. And then you have the Philippine National Bank Employees
Association (PNBEA) also with an account with PNB.
PNBEA and A and B have a discounting arrangement, that is
PNBEA issues checks payable to its members, X and Y, members-
employees of the association.
If the account of PNBEA is not funded, A and B will discount the
checks, meaning X and Y will negotiate the checks to A and B,
then A and B will issue replacements payable to X and Y. That will
be spouses A and B payable to X and Y, employees or members of
the association.
Certain officers of the association committed fraud. They made
it appear the certain employees wanted to borrow money, lets say
J and Y. So they issued checks payable to J and Y and then
discounted to A and B. So A and B now issued checks payable to J
and Y.
When PNB learned about the fraud, PNB closed the account of
PNBEA. But A and B have already an existing check payable to J
and Y. J and Y or the officers of the PNBEA in connivance with the
manager of PNB were allowed to obtain the proceeds of the
checks issued by A and B to J and Y, even though J and Y did not
indorse the checks.
Ordinarily, J has to indorse the checks. If he deposits to his
bank, he must indorse the check. But in this case even without the
indorsement of J, PNB, due to the fraud of its manager, allowed
the encashment.
The defense of PNB when it was sued by A and B is that this is
covered by the fictitious-payee rule, meaning, it does not need the
indorsement of J because A and B did not intended them to be the
payee of the checks anyway. If they are fictitious-payees, therefore
they are payable to bearer and therefore PNB may allow the
encashment even without the indorsements.
The SC said fictitious-payee rule applies even if the payee
really exists as long as the maker or the drawer did not intended to
be the payee. But that is subject to an exception THE
COMMERCIAL BAD FAITH exception, meaning PNB cannot
invoke the fictitious-payee rule because there was fraud on the
part of its manager.
So the commercial bad faith exception strips the application of
the fictitious-payee rule. And because it is not applicable that
means that the checks are absolutely payable to order and
therefore requires the indorsements of the payees.
Sec 11
Date, presumption as to. - Where the instrument or an acceptance
or any indorsement thereon is dated, such date is deemed prima
facie to be the true date of the making, drawing, acceptance, or
indorsement, as the case may be.
That is very important specially if you have and instrument
payable after date or counted from the date of the instrument.
Example:
The instrument is payable 30 days after date. You have to know
the date of the instrument to determine when it will mature. The
date appearing on the instrument is deemed prima facie the true
date thereof.
If there is no date indicated, then date of issuance is the date of
the instrument.
Sec 12
Ante-dated and post-dated. - The instrument is not invalid for the
reason only that it is ante-dated or post-dated, provided this is not
done for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as of the
date of delivery.
Post dated
The instrument contains a date later than the true date of
issuance.
Example:
If today (July 14, 2011) I issued a check dated Sept. 30, 2011,
that is post dated.
Antedated
The instrument contains a date earlier than the true date of
issuance.
Example:
If today I issued a check dated June 30 2011, that is antedated.
Antedating and postdating are allowed as long as it was not
done for fraudulent purpose
Sec. 13.
When date may be inserted. - Where an instrument expressed to
be payable at a fixed period after date is issued undated, or where
the acceptance of an instrument payable at a fixed period after
sight is undated, any holder may insert therein the true date of
issue or acceptance, and the instrument shall be payable
accordingly. The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in due course; but
as to him, the date so inserted is to be regarded as the true date.
Sec 13 covers 2 kinds of instruments
1. an instrument payable after date, but the date of the
instrument is not indicated; and
2. an instrument payable after sight, but the date of acceptance
is not indicated
Example:
A promissory note which says I promise to pay to Juan de la
Cruz the amount of P100K, 60 days after date, but the date is not
indicated. The presumption is like Sec 14, the payee may insert
the date. Any date as indicated will be the prima facie date of the
instrument.
16
 Lets say that the payee made it earlier than the true date of the
payment the parties in order to accelerate maturity of the
instrument.
Example:
An instrument payable after 60 days after date, but the intention
is June 30 2011 from the date of the instrument. So June 30 plus
60 is Aug 30. The payee wants to accelerate the payment thereof,
so instead of indicating June 30, he indicates May 30. So the
maturity date will be July rather than August.
So the date as indicated, as inserted is the prima facie date of
the instrument. But, if that instrument after insertion of the wrong
date is negotiated to a HDC then the HDC may enforce the
instrument as filled up. So the date appearing on the instrument is
conclusively presumed to be the true date of the instrument insofar
the HDC is concerned.
So Sec 13 and 14 are related to each other in the sense that
the HDC may enforce the instrument as filled up, as completed.
Whether it is the date of the instrument, whether it is the amount
payable, the name of the payee, or the interest insofar as the HDC
is concerned, he may enforce the instrument as filled up, as
completed and the authority given to him by law is presumed to be
conclusive.
Sec. 17.
Construction where instrument is ambiguous. - Where the
language of the instrument is ambiguous or there are omissions
therein, the following rules of construction apply:
(a) Where the sum payable is expressed in words and
also in figures and there is a discrepancy between the
two, the sum denoted by the words is the sum payable;
but if the words are ambiguous or uncertain, reference
may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of
interest, without specifying the date from which interest is
to run, the interest runs from the date of the instrument,
and if the instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued;
(d) Where there is a conflict between the written and
printed provisions of the instrument, the written
provisions prevail;
Example:
A check which says. Pay to order of Juan de la Cruz. The
word order was cancelled and then written only. So because the
written words prevail over the printed words then that instrument is
considered payable to Juan de la Cruz only and therefore non-
negotiable.
(e) Where the instrument is so ambiguous that there is
doubt whether it is a bill or note, the holder may treat it as
either at his election;
(f) Where a signature is so placed upon the instrument
that it is not clear in what capacity the person making the
same intended to sign, he is to be deemed an indorser;
This principle of construction only applies if there is a doubt in
the capacity of the person signing the instrument. But if there is no
doubt, like when he indicated as a guarantor or as a surety, then
he is liable based in the in capacity or concept in which he signed
the instrument.
Example:
When I was with the Bank I was often approached by
employees. One has a check payable to the said employee but it
was from abroad, which requires 30 day clearing. So he requested
for my indorsement so that he can encash the check.
What if I say that sure no problem. Pay to Juan de la Cruz for ID
only signed NTD. Am I liable as an indorser?
No, because there is no doubt in what capacity that I signed the
instrument. It is clear I signed the instrument for identification only.
In that case I am just a guarantor or not even a guarantor but only
for identification purposes, that means I am vouching that he is the
guy.
(g) Where an instrument containing the word "I promise to pay" is
signed by two or more persons, they are deemed to be jointly and
severally liable thereon.
PNB vs Concepcion Mining
If one of the co-makers died and the holder of the promissory
note filed a collection case only against the surviving co-maker, the
surviving co-maker cannot invoke the defense that the estate of
the deceased co-maker must be impleaded.
Because the liability is joint and several therefore, he is liable
for the entire amount of the loan and there is no need for the
holder to implead the estate of the deceased co-maker.
I, or Either of us promise to pay - joint and several
We promise to pay, signed by two or more persons -
Joint
I/We promise to pay - Joint and several
Sec. 18.
Liability of person signing in trade or assumed name. - No person
is liable on the instrument whose signature does not appear
thereon, except as herein otherwise expressly provided. But one
who signs in a trade or assumed name will be liable to the same
extent as if he had signed in his own name.
Only a person whose signature appears on the instrument is
liable.
If you dont see your signature on the instrument, then you are
not liable. In that case you are not the indorser, not the drawer, not
the maker, not the acceptor.
Who are the parties liable to the instrument?
1. The maker
2. The acceptor
3. The drawer
4. The indorser
Exceptions are:
1. One who signs in a trade or business name,
- Like Juan de la Cruz doing business under the business style of
Juan de la Cruz Trading
2. Agent who signed in behalf of the principal and discloses the
name of his principal.
- The principal is liable even though his signature does not appear
on the instrument because the agent acted on behalf of the
principal and the agent disclosed his principal
3. Forger
4. whenever the acceptor makes his acceptance of bill of
exchange on a separate paper (allonge)
17

Liability of an Agent (Sec 19-21)
These are the requisites so that the agent or anyone acting in
representative capacity may be liable:
1. he must disclose who his principal is
2. he must sign in behalf of the principal
3. impliedly he must act within the scope of his authority
Failure to comply with these requisites make the agent liable
personally
Sec 22
This refers to an instrument payable to a minor, instrument
payable to the corporation, but the corporation is not authorized by
its articles of incorporation to make the said instrument.
If an instrument is payable to a minor and the minor negotiates
then the minority is not an obstacle to the transfer of title of the
instrument to the holder. The holder despite of the minority of the
one who negotiated it can still enforce the instrument against the
maker or drawee.
If the maker or drawee dishonors the instrument then the minor
is not liable because minority is real defense. But although it is real
defense, that is personal only to the minor, which defense cannot
be invoked by the maker of the promissory note.
Same thing with the corporation.
Example:
M issues a promissory note payable to ABC corporation. ABC
through its authorized signatory negotiated the instrument to X, but
ABC is not allowed by its articles to negotiate or indorse an
instrument payable to the corporation.
Under Corporation Law if the article of incorporation does not
allow the negotiation or indorsement then that would be ultra vires.
But under the NIL that ultra vires act, nevertheless transfers title in
favor of subsequent holder. So the holder may enforce the
instrument against the maker despite the incapacity or lack of
authority of ABC.
If the maker dishonors, however, then ABC is not liable and it
can invoke the ultra vires act. So same situation and treated as
that of a minor.
Example:
M issues a promissory note payable to a minor A negotiates to
X. Despite the minority of A the indorsement transfers title to X.
Therefore M cannot say that he is not liable. M is liable despite the
minority of A. But if M dishonors, A is not liable because minority is
a real defense.
II. CONSIDERATION
Sec. 24.
This provides for 2 presumptions in case of a negotiable
instrument:
1. Every negotiable instrument is presumed to have been
issued for a valuable consideration
- That is why there is no need to indicate the
words, for value received in the promissory note
because the presumption is that the instrument was
issued for a valuable consideration.
- The presumption is only prima facie and could be
overcome by evidence to the contrary.
- If you tie up Sec 24 with Sec 59, if the instrument
is negotiable there is also a presumption that the
holder is a holder in due course. Both presumption
is prima facie only and can be overcome by
evidence to the contrary.
2. Every person whose signature appears thereon to have
become a party thereto for value
Sec. 25.
Value, what constitutes. Value is any consideration sufficient to
support a simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed such whether the instrument is
payable on demand or at a future time.
What do you mean by valuable consideration?
Does it mean adequate consideration?
The law does not say adequate. It merely says valuable,
meaning it presupposes a consideration sufficient to support a
simple contract.
Sec. 26.
What constitutes holder for value. - Where value has at any time
been given for the instrument, the holder is deemed a holder for
value in respect to all parties who become such prior to that time.
Sec. 27.
When lien on instrument constitutes holder for value. Where the
holder has a lien on the instrument arising either from contract or
by implication of law, he is deemed a holder for value to the extent
of his lien.
May a mortgagee or pledgee be considered a HDC?
The law says that a pledgee or a holder of lien on the instrument
is only a holder for value up to the extent of his lien.
What do you mean by that?
M issues a promissory note payable to the order of P. P obtains
a loan from PNB secured by a pledge on the promissory note
issued by M to P. In the case of IRC vs CA 174 SCRA deed of
assignment of an instrument is considered a pledge.
Can PNB collect from the maker?
Is PNB a HDC or holder for value?
Under Sec 27 PNB as pledgee is considered a holder for value
up to the extent of his lien.
Lets say the promissory note is for 100K and then P obtained a
loan from PNB for 75K.
How much can PNB collect from M?
100K, but because he is the holder for value up to the extent of
his lien only, he has the obligation to remit the excess of 25K to the
payee.
What if between M and P there are defenses, P forged Ms
signature. P obtained a loan from PNB secured by a pledge or
assignment of that promissory note?
If it is real defense, that real defense can be invoked even
against the holder for value. If it is only personal defense, PNB can
collect only up to extent of the amount of its lien.
Sec. 28.
Effect of want of consideration. - Absence or failure of
consideration is a matter of defense as against any person not a
holder in due course; and partial failure of consideration is a
defense pro tanto, whether the failure is an ascertained and
liquidated amount or otherwise.
Absence or failure of consideration is a personal defense not
available against a HDC.
Absence of consideration
- Means that at the outset there is no consideration; at the very
start there is no consideration
18
Failure of consideration
- There was valid consideration but there was failure to perform
such consideration
Void consideration
- Similar to absence or lack of consideration
Absence of consideration is a personal defense not available
against a HDC. We have to correlate this, however, with the SC
decision pertaining to cross-checks.
In case the checks are crossed, it serves several purposes. The
checks as crossed have specific characteristics:
1. cannot be encashed, but only for deposit
2. can be negotiated only once in favor of someone
with an account with the bank
3. (most important) serves as a warning that the
checks were issued for specific purpose, and
therefore the holder must acquire such instrument
consistent with the such purpose, otherwise he does
not qualify as HDC
Bataan Cigar vs State Investment House
D issued a crossed check payable to the order of P drawn
against ABC Bank. The checks was issued for payment of bales of
tobacco that P is supposed to deliver to D. P did not deliver the
bales of tobacco, but P could not return the checks because P
negotiated the checks in favor of State Investment House (SIH).
If the SIH goes to the drawee and the drawee dishonors SIH,
the holder, can enforce the instrument against the drawer despite
the fact that there was failure of consideration because such a
personal defense not available to a HDC.
However, if the check is crossed it is a different story
altogether. In that case SIH must prove that it acquired the
instrument consistent with that purpose otherwise it does not
qualify as a HDC. In other words, failure of consideration is a
defense even against a HDC if the check is crossed, because this
instrument was issued for a specific purpose, in payment of
tobacco leaves which were not delivered.
Sec. 29.
Liability of accommodation party. - An accommodation party is one
who has signed the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and for the purpose of
lending his name to some other person. Such a person is liable on
the instrument to a holder for value, notwithstanding such holder,
at the time of taking the instrument, knew him to be only an
accommodation party.
There are 3 requisites of an accommodation party
1. he signed the instrument as a maker, drawer, acceptor,
or indorser
2. he signed the instrument without receiving value on the
instrument
3. he signed the instrument for the purpose of lending his
name to another person
1st element
Example:
Facundo is a rich business man. He is in look out for people
who want to borrow from him.
Once a borrower has been identified, he will ask his right hand
man, M, to issue a promissory note payable to the order of the
borrower to accommodate the borrower.
Is Facundo an accommodation party because he was the one who
provided money through M?
He is not because he did not sign the instrument as a maker,
drawer, acceptor, or indorser.
2nd element
He did not receive any consideration for that instrument to be
accommodated.
What if he receives any consideration for lending his name?
Example:
M to accommodate P issues a promissory note to
accommodate P. Because there was no consideration, just to
accommodate P, P cannot enforce the instrument against M.
Lets say P would like to capitalize with the credit standing of M, so
M as rich businessman and P has no credit standing. P would
capitalize on the credit standing of M, so P will now negotiate the
instrument with PNB. So now because the instrument was issued
by M, supposedly with money, then PNB may buy the instrument
or allow the negotiation and pay the payee.
Supposing the agreement between M and P is this: I will get x
amount from you once you get credit from 3rd party, like PNB, for
lending you my name to you. Does he cease to be an
accommodation party?
No, because the law says it is the fact that he did not receive a
consideration on the instrument that makes one an
accommodation party. So even though M received a consideration
for lending his name as long he did not receiver a consideration on
the instrument he accommodated, then he is still qualified as an
accommodation party.
The accommodation party is liable to a holder for value, even if
such holder knew that the former acted as an accommodation
party. In other words lack of consideration is not a defense
available to an accommodation party, because precisely he signed
the instrument without receiving consideration or value on the
instrument.
Example:
If M issues an instrument payable to the order of P, just to
accommodate P and without receiving value on the promissory
note. P negotiates to PNB. PNB now goes to M can M say I did not
receive any consideration on that promissory note?
No because by express provision of law the accommodation
party is liable to the holder for value, even though such holder
knew that the former acted only as an accommodation party. So
the knowledge of the holder for value of the fact that someone
acted only as accommodation party will not excuse the
accommodation party from liability.
What is the liability of an accommodation party?
Is it correct to say that an accommodation party is liable as a
surety?
It depends on what concept he signed the instrument.
He is not liable as a surety but he has the rights of a surety, in a
sense that has the right to seek reimbursement from the party
accommodated. But, his liability depends on what concept he
signed the instrument.
If he signs as a maker he is liable as a maker. If he signs as a
drawer he is liable as a drawer. If he signs as acceptor, he is liable
as acceptor. If he signs as indorser, he is liable as indorser, as the
case may be.
Is he solidarily liable with the party accommodated?
Here is the problem, there are 2 recent cases (2009 and 2011)
where the SC said that the accommodation party is liable solidarily
with the accommodated party, which means that the holder may
enforce the instrument either against the accommodation party or
the party accommodated. So the accommodation party cannot say
to the holder to sue first the party accommodated because he is
liable solidarily with the accommodated party. This is contrary to
previous decisions of the SC that it depends on what concept he
signed the instrument.
19

Lets reconcile. When you read these 2 cases where the SC
said that the accommodation party is liable solidarily with the
principal debtor or the party accommodated, the accommodated
party signed as co-maker And of course if he signs as a co-
maker, the only conclusion is that he is liable solidarily with the
party accommodated.
If you sign as a drawer, how can you be liable solidarily with the
party accommodated? So it is still dependent on what concept he
signed the instrument.
The decisions of the SC to the effect that the accommodation
party is liable solidarily with the party accommodated have as
background a promissory note signed solidarily by both the
accommodation party and the party accommodated.
The right of an accommodation party is similar to that of a
surety. Insofar as the relationship of the accommodation party to
the accommodated party is concerned, it is one of suretyship. That
means he has the right to seek reimbursement from the party
accommodated.
Does the insolvency of the accommodated party extinguish the
liability of the accommodation party?
No. The insolvency of the accommodated party does not
extinguish the liability of the accommodation party. The SC
suggested that the accommodation party may file a contingent
claim against the party accommodated in the liquidation
proceedings (Associated Bank vs CA).
Does the extension of time given by the holder to the party
accommodated extinguish the liability of the accommodation
party?
No. The extension of time of payment given to the
accommodated party does not extinguish the obligation of the
accommodation party. This is in recognition that insofar as the
holder is concerned he is not a surety. His liability depends on
what concept he signed the instrument. Because if he is a surety it
would have been different, the obligation would be extinguished
since there is a change in terms of the contract without prior
consent.
His right as a surety pertains to the party accommodated, not to
the holder and his liability depends on the concept he signed the
instrument, in this case a co-maker, then the extension of time to
pay given to the party accommodated does not extinguish his
liability (Associated Bank vs CA).
NIL_5
Is an accommodation party entitled to a notice of dishonor?
It depends on what concept he signed the instrument. A maker
and an acceptor are not entitled to a notice of dishonor. Only the
indorser and the drawer, the parties secondarily liable are entitled
to a notice of dishonor.
Is it necessary for a holder of an instrument where there is an
accommodation party to be holder in due course so that he can
enforce the instrument against the accommodation party?
The holder enforcing the instrument against the
accommodation party must also be a HDC except for the notice of
want of consideration. In other words we dont include if he is a
holder in due course or not his knowledge that the instrument was
drawn or issued for accommodation purposes, because by
express provision of law under Sec 29, the holder for value may
proceed against the accommodation party even though such
holder knew that the accommodation party only acted as such.
But, other than the notice of want of consideration, everything else
the holder must be a HDC to be able to enforce the instrument
against the accommodation party (Prudencio vs CA).
Prudencio vs CA
Maker obtained a loan from PNB. A, acting as accommodation
party, signed as a maker. One of the conditions of the loan
agreement is collection by M from the DPWH (so it is a loan
secured by assignment of receivables), will be applied to his
obligation with the PNB. What PNB did was not to apply the
collection to the obligation, but instead allowed the remittance to
M.
Can PNB enforce the instrument in case of non-payment against
the accommodation party?
PNB is not a holder in due course, because one of the
requirements for the grant of the loan is that the receivables from
the government must be applied to the obligation, but for PNB to
remit the payment to the debtor, the maker of the PN, does not
make it a holder in due course. As such it cannot enforce the
instrument against the accommodation party.
In that case also, the SC said that the accommodation party is
in effect a surety and following the principle in credit transaction, in
case of change in the terms of the principal contract without the
consent of the surety, the surety is released from liability.
However, in Associated Bank vs CA (2009)
The SC said that extension of time of payment does not release
the accommodation party from liability even though he is supposed
to be surety.
How do we reconcile these two cases?
Prudencio vs CA - change in the terms and conditions of the
principal contract including extension of the time of payment will
release the accommodation party from liability.
Associated Bank vs CA the extension of time of payment or
even insolvency of the party accommodated does not release the
accommodation party from liability because the liability is solidary
with the principal debtor.
These are 2 completely conflicting decisions. In this case apply
the most recent case Associated Bank vs CA, that liability of the
accommodation party is not extinguished just because the term of
payment was extended.
But the principle of a holder being a holder in due course
except for the notice of want of consideration is still applicable
because there is no SC decision contrary to it.
III. NEGOTIATION
Sec. 30 - 35
Negotiation
It is the transfer of the instrument to make the holder the
transferee thereof.
The term holder has a precise meaning under the NIL, as
distinguished from a mere assignee or transferee. The holder
acquires the rights of a HDC if the instrument is negotiable
The transfer of the instrument to make the transferee a mere
assignee is governed by the law on assignment of credit.
The mode of negotiation depends on whether or not the
instrument is a bearer or order instrument.
If it is an order instrument, it cannot be negotiated without
the indorsement of the payee or indorsee plus delivery
If is a bearer instrument, it can be negotiated by mere
delivery
Example:
20
 An order instrument which was not indorsed but only delivered
is not negotiation. It is assignment. The other party is just a mere
assignee or transferee.
How does he acquire the right of a holder?
By compelling the payee or indorsee to indorse it to him. If
there is an indorsement plus delivery then he has the rights of a
holder. He is considered as a holder under NIL, not just a mere
transferee.
May a non-negotiable instrument be negotiated?
You cannot, because the term negation has a precise meaning
under the NIL. You can only negotiate if the instrument negotiable
and if it is transferred to a person to make him a holder then he is
such HDC presumably.
Sesbreno vs CA 222 SCRA
(Warning: There might be some inaccuracies here)
The issue in this case is whether or not a non-negotiable
instrument and may be negotiated. On the face of the PN is a
stamp mark Non-negotiable.
Sesbreno made a money market placement with Philfinance. In
a money market placement, the investor places his funds with the
company and the company issues a post dated check (PDC)
covering the principal plus interest. Let say he placed 100k
payable in 90 days, so Philfinance will issue a check covering the
principal plus interest up to 90 days. Being a money market
placement Philfinance will assign or sell the receivables for
Sesbreno or any client investor for that matter.
One instrument was assigned or transferred to Sesbreno as a
consideration for his money market placement - A promissory note
of Delta Motors issued for Philifinance.
Delta Motors issued a PN to Philfinance. Philfinance assigned it
to Sesbreno as consideration for the money market placement. So
Sebreno got postdated check covering the principal plus interest,
promissory note issued by Deltamotors to Philifinance.
The PN, however, is in the possession of Pilipinas Bank.
Pilipinas Bank, Philfinance and Delta Motors where at that time
owned by Silverio. So instead of delivering the PN to Sisbreno,
Philfinance delivered a custodianship receipt, meaning is in the
possession of Pilipinas Bank___ at anytime he could demand
delivery.
On maturity of the placement Philfinance could not return the
principal nor pay the interest because it went bankrupt. Sesbreno
now wanted to enforce the proceeds of the promissory note, but
the PN is in the possession of Pilipinas Bank. So he went to
Pilipinas Bank and demanded for the delivery of the PN, but
Pilipinas Bank refused.
Sesbreno filed an action against Delta and Pilipinas Bank.
The PN transferred or sold to Sesbreno and issued by Delta to
Philfinace has on its face non-negotiable.
May a non-negotiable instrument be negotiated?
No.
May a non-negotiable instrument be assigned or transferred?
Yes. But because it is only assignment or transfer, not
negotiation, then the assignee simply steps into the shoes of the
assignor. He does not acquire the rights of a holder under Sec 30
of NIL. This issue became relevant because between Philfinance
and Delta Motors, there is compensation. There was set-off. So
Philfinance and Delta Motors are both creditors and debtors of
each other.
Delta Motors said it is not liable to Sesbreno because
Philfinance is also liable to it. So its debts to Philfinance were
extinguished by its receivables from Philfinace.
May that defense of compensation or set-off be invoked against
Sesbreno?
Yes, because it is not a negotiable instrument. Sesbreno was a
mere assignee of the instrument and a mere assignee or
transferee, not a holder as defined under Sec 30, every defense
that can be raised by Delta Motors against Philfinance can also be
raised against Sesbreno. So if the debt of Delta Motors had been
set-off by the receivables it had with Philfinance, then it can also
be raised against Sesbreno.
Who is liable here?
Pilipinas Bank because it did not surrender the PN, so it can be
held liable for damages.
So under NIL only a negotiable instrument may be negotiated.
But a non-negotiable instrument may be assigned or transferred
except that the assignee or transferee acquires no right or title
better than that of the assignor.
How do you distinguish negotiation from assignment?
Negotiation is governed by NIL; assignment governed by
the law on assignment of credit under the NCC
In negotiation, the holder may acquire a better right than
the one negotiating the instrument; in assignment, the
assignee cannot not acquire better right than the
transferor
In negotiation, the holder acquires better title to
instrument free from personal defenses. In assignment,
the assignee acquires the instrument subject to both
personal and real defenses
In negotiation, notice of the negotiation is not necessary,
meaning the maker or drawer need not be informed of
the negotiation; in assignment of credit, notice is
necessary
In negotiation, the indorser warrants the solvency of the
maker or drawer as the case may be; in assignment the
assignor does not warrant the solvency of the obligor.
A promissory note for 1M and signed only for 50M, can the
debtor extinguish his obligation by paying only 50M?
Special Purpose Vehicle (SPV)
SPV is a law created by congress to help banks unload bad
assets, because bad assets affect the books of the bank (meaning
bad assets, non-collectible assets or loans or receivables have a
burden on the finance of the bank). They make the balance sheets
not healthy. Any bank burdened by debts would be losing. So the
bank to take off its bad assets from its books can sell to an SPV.
Those assets which have not been paid and have matured, the
bank will sell to an SPV.
Lately there have been surge of cases as to how much may the
debtor will have to pay.
Example:
The bank has receivable from Juan de la Cruz. The bank
assigned the receivable to the SPV Company. The bank thought
that the PN cannot be collected anymore so it decided to sell the
PN to an SPV at a discounted price from 100M to 20M. So atleast
the bank got 20 rather than nothing. SPV will collect the full
amount.
If the debtor wants to pay his obligation how much will the debtor
have to pay?
21
If you have a loan secured by a mortgage and the property was
sold only for so much, how much will you pay to be able to
redeem, is it for the amount sold or the full amount under the PN?
Philippine Asset Investment Co vs CA
In this case the counsel of the creditor made a mistake.
RTC ruled that the amount that the debtor will have to pay is
only for the amount for which the PN was sold, not for the face
value. So if the face value is 100 and it was sold for 20 then the
debtor may pay for 20.
The lawyer of the creditor went to the SC on question of law
because there was no settled jurisprudence.
SC, unfortunately, said that you violated the hierarchy of courts.
You should have gone to the CA. So the case was dismissed for
technicality.
So what we have is a decision of the RTC affirmed by
technicality by the SC only the amount for which the PN was sold
has to be paid by the borrower.
Obviously it is not a precedent setting. It is not a full discussion
of the merits of the case. It is only a minute resolution.
But, when you become lawyers and when you represent the
borrower-creditor you argue on the basis of this minute resolution.
If you are representing the creditor, how do you argue?
Based on the NIL. If it is a negotiable instrument, the HDC may
enforce the instrument for the whole amount against all parties
liable to the instrument.
If it is mere assignee or transferee then that defense would
probably work, liable only for the amount for which it was sold.
But if it is negotiable, the law is clear that the instrument may be
enforced for the whole amount, not for the amount for which it was
sold.
How do you negotiate a negotiable instrument?
It depends.
If it is an order instrument, by indorsement plus delivery
If it is a bearer instrument, by mere delivery
The most favorite topic in the bar, other than HDC and
elements of negotiability is this one How to negotiate a bearer
instrument that has special indorsement? This was asked no less
than 9 times in the bar, and still appropriate for MCQ.
Example:
M issued a promissory note to payable to P or bearer.
How may P negotiate the instrument?
A bearer instrument may be negotiated by mere delivery.
What if P negotiated the instrument by delivery to A and A Yes, because this time D acquired title by virtue of the special
indorsed it to B specially plus delivery, can this instrument be
negotiated still by delivery?
Yes, because Sec 40 says that an originally bearer instrument
will always be a bearer instrument may be negotiated by mere
delivery despite special indorsement in between.
Sec. 40. Indorsement of instrument payable to bearer. - Where an
instrument, payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery; but the person
indorsing specially is liable as indorser to only such holders as
make title through his indorsement.
So B therefore may negotiate the instrument by mere delivery
to C. and C may also negotiate the instrument by mere delivery.
What about this one: A indorsed to B specially, B indorsed to C
specially, and C to D by delivery? Is this allowed?
Yes, because the special indorsements do not affect the bearer
character of the instrument. If at the outset it is a bearer
instrument, all through out the way it can be negotiated by mere
delivery despite special indorsements.
C negotiated the instrument to D by delivery, so can D enforce the
instrument against M?
Yes because the instrument could be negotiated by delivery
therefore M is liable. D acquired title on the instrument by delivery.
If M dishonors can D run after P?
No.
What are the warranties of a person negotiating by mere delivery?
He does not warrant the solvency of the maker. He does not
warrant that the instrument will be paid as distinguished from a
general indorser.
A general indorser warrants that the instrument will be paid.
One negotiating by delivery does not warrants that. He only
warrants that he has no knowledge of any fact which would impair
the validity of the instrument or render it valueless. And besides,
the liability of someone negotiating by delivery extends only to the
immediate transferee. So if at all his liability only extends to A and
not anyone beyond A.
Is A liable to D if M and P dishonors?
No, because someone indorsing specially a bearer instrument at
the very outset is liable only to such party or holder who derives
title by such special indorsement.
D did not acquire title over the instrument by virtue of As special
indorsement. He acquired title only by virtue of Cs delivery.
If A dishonors is B liable to D?
No, because D did not acquire title by virtue of Bs indorsement.
Can D run after C?
Only if he breaches his warranties as someone negotiating by
delivery.
What about this one?
M issued a bearer instrument to P. P negotiates to A by
delivery, A to B indorsed specially, B to C indorsed specially, C to
D indorsed specially
D goes to M. Is M liable to pay?
Yes
If M does not pay is P liable to D?
No because P is liable only to A
If P does not pay can D run after A, B, C?
indorsements of A, B, and C.
Summary of the rules under Sec 40
If the instrument is originally payable to bearer then it
can be negotiated by delivery all through out the stages
of negotiation. The fact that one of the parties indorsed it
specially does not diminish the capability of the
instrument from being negotiated by mere delivery. In
other words a bearer instrument will always be a bearer
instrument.
One indorsing specially is liable only to such holder
who acquires title by virtue of such special indorsement.
22
 The liability of a party who negotiates by mere
delivery extends only to his immediate transferee and
only in case of breach of his warranty.
Example:
1st instance:
M issued an instrument payable to P or bearer. P negotiated to
A by delivery. A specially indorsed to B. B specially indorsed to C.
C negotiated to D by delivery.
D can enforce the instrument against M because the fact that
there was special indorsement in between does not affect the
capability of instrument from being negotiated by mere delivery
being an originally bearer instrument.
If M does not pay, P is not liable because his liability extends
only to his immediate transferee and only in case of breach of
warranty.
A is not liable to D because D did not acquire title by virtue of
As indorsement.
Neither is B liable to D, because D did not acquire title by virtue of
Bs special indorsement.
C is liable to D, the immediate transferee, but only in case of
breach of warranty.
2nd instance:
You have a bearer instrument. M issued it to P. P negotiated to
A by delivery. A indorsed to B specially. B indorsed to C specially.
C indorsed to D specially.
D has the right to enforce the instrument against M because D
acquired title by virtue of such special indorsements.
If M dishonors, P is not liable to D because Ps liability extends
only to A.
If P dishonors, D may enforce the instrument against A, B, and
C, because in this particular case there is now a successive
unbroken chain of special indorsement such that D acquires title
by virtue of such successive, unbroken chain of special
indorsements.
Lets distinguish this from an order instrument.
Example:
M issued a promissory note, payable to P or order.
How can P negotiate to A?
Only by indorsement plus delivery being an order instrument.
So Pay to A
sgd P.
Is this a special indorsement or indorsement in blank?
Special indorsement, because P specifies the indorsee to whom
the instrument is payable (Pay to A).
What if P simply signed and delivered to A, is there a valid
negotiation?
Yes, because there was indorsement plus delivery.
A got a blank indorsement, therefore can this be negotiated by A
by mere delivery?
Yes, because under Sec 9 if the only or last indorsement is in
blank, then it becomes a bearer instrument. So because of that
blank indorsement, P did not specify to whom the instrument is
payable he simply affixed his signature on the instrument, it
becomes a bearer instrument. And therefore A can negotiate by
mere delivery to B or to anyone.
Supposing B would like to negotiate to C, B can negotiate it by
mere delivery because it is a bearer instrument.
Supposing B want to be more secured so he indorsed specially,
Pay to C, signed B, how can C negotiate the instrument?
C can negotiate by indorsement plus delivery because the last
indorsement is special indorsement and in case of special
indorsement the indorsement of the special indorsee is necessary
to further negotiation of the instrument.
So how do you distinguish this from the first situation?
The first one is originally a bearer instrument. An
originally bearer instrument will always be a bearer
instrument and can be negotiated by mere delivery
despite special indorsements in between.
If it is an order instrument at the outset, then the last
indorsement determines the mode of subsequent
negotiations:
1. If it is a blank indorsement then it can be negotiated
by mere delivery/
2. If it is a special indorsement, it requires the
indorsement of the of the special indorsee plus
delivery.
So that is the distinction between Sec 35 and Sec 40 of the NIL.
Sec. 36.
When indorsement restrictive. - An indorsement is restrictive which
either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use
of some other persons.
But the mere absence of words implying power to negotiate does
not make an indorsement restrictive.
Kinds of Indorsements under NIL:
1. special (Sec 34)
2. blank (Sec 34)
3. restrictive (Sec 36)
4. qualified (Sec 38)
5. conditional (Sec 39)
6. joint (Sec 41)
Sec 36 on the first mode of restrictive indorsement must be
read in relation to Sec 47.
Sec. 47. Continuation of negotiable character. - An instrument
negotiable in its origin continues to be negotiable until it has been
restrictively indorsed or discharged by payment or otherwise.
Under the 1st mode of restrictive indorsement is the one that
prohibits the further negation of the instrument
Example:
M issues a negotiable instrument to P. P would like to indorse
restrictively. So he can indorse by stating Pay to A only, signed
P.
Is this instrument still negotiable?
Under Sec 47 it says that it cease to be negotiable if it is
discharged or restrictively indorsed. Therefore the subsequent
transferees will not acquire the right of the holder but only the
rights of A.
NIL_7
23
Negotiation
It is the transfer of a negotiable instrument to constitute the
transferee the holder thereof.
How an instrument may be negotiated depends on whether it is an
order instrument or bearer instrument.
If it is a bearer instrument it may be negotiated by mere
delivery.
Fictitious-Payee Rule
If an instrument is payable to the order of a person who really
exists but the maker or the drawer did not intend him to be the
payee, it is considered as payable to bearer.
The significance lies in the fact that if its a bearer instrument,
although payable to order, it can be negotiated by mere delivery.
The bank can encash it even if without the indorsement of the
indorsee or the payee.
If it is an order Instrument, it is negotiated by indorsement
plus delivery. That is why under Sec 49 of the NIL if the
instrument is payable to order but delivered only, without
indorsement the transferee acquires only the rights of an
assignee, not the rights of holder as defined by NIL.
If you have an order instrument it must be indorsed and
delivered. If it is only delivered without indorsement, under Sec 49,
it is not negotiation but mere assignment. And the transferee
acquires not the rights of a holder but the rights of a transferee. He
is entitled, however, to compel the indorsement of the instrument.
In which case, upon indorsement, he becomes a holder thereof.
What are the characteristics of indorsement?
1. Sec 31 tells us that the signature of the indorser, without
additional words, is a sufficient indorsement. This is the reason
why in our discussion on forgery the signature of the depositor is
very important.
The signature of the depositor in the instrument is tantamount
to all the warranties of an indorser under the NIL, because under
the law the mere signature of the indorser, without additional
words, is tantamount to indorsement.
BPI vs Jai-Alai
When the depositor-forger deposited the check after the forging
the payees indorsement to BPI, after the discovery of the
indorsement BPI debited the account of the depositor-forger
without his consent.
The SC upheld the action of BPI in debiting the account of the
forger-depositor because by depositing the check with the
collecting bank and by affixing his signature, that signature comes
with it all the warranties of an indorsee, specifically, the instrument
is genuine and in all respects to what it purports to be.
Likewise, even though there is no signature if there is stamp-
mark all prior or lack of indorsement guaranteed by the collecting
bank, that is also tantamount to warranties of an indorser.
There is even one case where despite the lack of the stamp
mark all prior and lack of indosement guaranteed, the mere act of
sending the instrument for clearing to the drawee bank through the
PCHC amount to the warranties on an indorser under the NIL.
2. Sec 32. The indorsement must be of the entire instrument. It
must be on the instrument itself or in a paper attached to the
instrument called allonge.
The indorsement cannot be in part unless it has been paid and
only the residual balance is negotiated.
If it is indorsed only in part, like an instrument payable to order
of A for P100K, but the payee transferred only P50K, and keeps
the P50K is not negotiation because if we split the instrument
between two persons, two persons will be enforcing the same
rights arising from one instrument. So to prevent splitting of cause
of action, the law requires the indorsement must be of the entire
instrument.
Kinds of Indorsement
1. Special
2. Blank
3. Restrictive
4. Qualified
5. Conditional
The one who can indorse is
1. the payee; or
2. the indorsee
The signature of the payee without additional words is
tantamount to indorsement
Special Indorsement
If the indorsement specifies the person to whom the instrument
is payable
Blank Indorsement
If the indorsement does not indicate the person to whom or to
whose order the instrument is payable.
The indorsement need not follow the words of negotiability.
What should follow the words of negotiability is the promissory
note or the bill of exchange, but not the indorsement.
The indorsement need not be Pay to the order of A. It can be
simply Pay to A, plus the signature of the payee.
In case of special indorsement, the indorsement of the indorsee
is necessary to the further negotiation of the instrument.
If P specifies A as the indorsee of the instrument (Pay to A, sgd
P), then this instrument cannot be transferred from A to B without
As indorsement.
A can indorse it specially (Pay to B, sgd A) or in blank. It is
called in blank because it only contains the signature of A (signed
A).
Order instrument
If it is an order instrument the last indorsement (its kind)
determines the mode of subsequent negotiation.
If it is special indorsement that means it cannot be
negotiated further without indorsement of the special indorser
plus delivery.
If it is a blank indorsement, if it is the signature of P (sgd P)
only, it can be negotiated by mere delivery only. Distinguish
this from a bearer instrument.
Bearer Instrument
If it is a bearer instrument despite special indorsements in
between the instrument can be negotiated by mere delivery
Liabilities of the parties
Negotiation by delivery
The warranties of a person negotiating by delivery extend only
to immediate transferee.
Qualified indorsement
All the warranties extend to subsequent holders.
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 The warranties of person negotiating by delivery and a qualified
indorser are the same, the difference is that to whom the
warranties extend.
Negotiation by delivery
Liability will attach only if there is a breach of warranties
Example:
Instrument payable to bearer that M issues to P. P indorsed
specially to A. A indorsed specially to B. B indorse specially to C.
C negotiates to D by mere delivery.
D acquired title by virtue of the delivery of C on the reason that
the special indorsements did not impair the negotiable character of
the instrument and its capacity of being delivered by mere delivery.
So despite those special indorsements C may transfer title by
mere delivery.
D presented the instrument to M for Payment. If M pays upon
maturity the instrument is discharged.
If M dishonors against whom can the instrument be enforced by D
assuming there is an appropriate notice of dishonor?
D cannot run after P, A, and B because being an originally
bearer instrument the liability of a person negotiating by special
indorsement is only to the person or party who acquires title by
virtue of such special indorsement.
If Specially Indorsed
How do we know that those indorsers are liable to the ultimate
holder?
If there is a successive unbroken chain of special indorsements
If the instrument is negotiated by C to D specially that there is
now a successive unbroken chain of special indorsements, so that
D now acquires title by virtue of all the special indorsments thats
why in that case D can enforce the instrument against P, A, B, and
C upon giving an appropriate notice of dishonor.
In this case P, A, B, and C are general indorsers, and as
general indorsers under Sec 66 they warrant that:
1. the instrument is valid and subsisting;
2. the instrument will be paid upon presentment for payment;
and
3. if dishonored and appropriate proceedings are paid against
them, then will pay the holder
If negotiated by delivery
If it is by delivery only then P, A, and B are not liable to D
because D did not acquire title by virtue of their special
indorsements. So D, therefore, can only run after C.
C is liable only to D only if C breaches his warranties as a person
negotiating by delivery under Sec 65. Just because the maker or
the party primarily liable did not pay does that automatically make
C liable.
Unlike a general indorser, one negotiating by delivery does not
warrant that the instrument is subsisting; or that the instrument
will paid or accepted or both upon presentment for acceptance;
and that if it is dishonored he will pay the holder.
On negotiating by delivery warrants that he does not know of
any information that would render the instrument valueless or
worthless. So if C is aware that M is insolvent, but negotiates the
instrument by delivery then C becomes liable now because C
warrants that he does not know of any information that would
render the instrument valueless or worthless.
If C pays D, can C run after P, A, B?
Yes, because he acquired title by virtue of their special
indorsements. The rule is that subsequent party may enforce the
instrument against prior party. Prior party is liable to subsequent
party.
Sec 36
Sec 37
Restrictive Indorsement
3 Kinds/Modes of Restrictive indorsement
1. One that prohibits further the negotiation of the instrument
Example:
Pay to A only. Sgd P
2. Constitutes the indorsee as an agent of the indorser
Example:
Pay to A for collection only. Sgd P
3. Vests title in the indorsee for some other person
Example:
Pay to A in trust for X
There is a difference between agency and trust, but for Nego
purposes they mean the same time thing, that is, the agent or
trustee can enforce the instrument, can receive payment in case of
non-payment, but only as agent or trustee, not in their own right.
Trustee has legal title over the instrument, unlike a mere agent
who does not have title. But in terms of the capacity to receive
payment from the maker and in terms of the ability to file a case
against the maker in case of dishonor, whether agent of trustee,
they can do it but as an agent of indorser P or in trust for X.
In terms of restrictive indorsement under the 2nd and 3rd mode, can
the instrument be further negotiated?
Example:
A promissory note payable to the order of P. P indorsed
restrictively to A for collection only.
Can A negotiate the instrument to B?
Yes, but B acquires only title of the first restrictive indorsee. So
he can receive payment but only as agent of the indorser. Or he
can file an action as agent of the indorser. So he cannot acquire
title better the 1st restrictive indorser.
Sec 38
Qualified Indorsement
Example:
Pay to A without recourse. Sgd P
Qualified indorsement consists of the signature of the indorser
plus the words without recourse, or san recourse or words of
such similar import.
If you have a qualified indorsement does that mean that the
subsequent indorsements should also be qualified?
No. So the qualified indorsement pertains only to an indorser
but not necessarily to dictate the mode of subsequent negotiations.
In our example, if you have an instrument payable to the order
of P. P indorsed qualifiedly to A without recourse and signed by P.
Can A negotiate the instrument to B without qualification?
Yes
If B is the holder and he goes to M, M should pay. If M pays the
instrument is discharged
If M dishonors what should B do to be able to enforce the
25
instrument?
He should present a notice of dishonor to the parties 2ndarily
liable.
Can B run after P?
Only if P breaches his warranties as qualified indorser.
What are the warranties of a qualified indorser?
Same warranties as a person negotiating by delivery. The 1st 3
warranties are the same for qualified indorser or the person
negotiating by delivery or a qualified indorser.
1. That the instrument is genuine and in all respects what it
purports to be.
Meaning, there is no forgery on whatever is
contained in the instrument.
2. That he has good title to it
3. That he does not know of any information that would render
the instrument valueless or worthless
A qualified indorser or one negotiating by delivery does not
make the same warranties as a general indorser that the
instrument shall be paid or accepted when presented for
payment; and if not paid he will be liable to the holder provided
appropriate proceedings have been taken against them.
So is P liable to B?
It depends if he violates or breaches his warranties as a
qualified indorser. If not then P is not liable to B.
What about A, is he liable to B?
Yes, because he is a general indorser.
But always keep in mind that a general indorser only becomes
liable only if the instrument is dishonored and the appropriate
proceedings have been taken against him. In other words, A must
receive the appropriate notice of dishonor from B within the period
and in accordance with the manner prescribed by the NIL,
otherwise the general indorser is not liable.
Sec 39
Conditional Indorsement
Example:
A promissory note that M issued to the order of P. P negotiated
to A but indorsing it conditionally, if A pass the Bar. Sgd P.
Can A enforce the instrument against the maker pending the
results of the bar examinations?
M is not liable to pay until the condition is fulfilled. But may M
opt to pay. He may disregard the condition because he issued the
instrument without a condition and therefore he cannot be
burdened by any condition on his obligation to pay. OR he may
wait for the outcome of the bar. If A did not pass, M is not liable.
But if he pays, what happens now to P and A?
The rights of A will depend on passing the bar. The law says,
subject to rights of the person indorsing conditionally. So if M
pays without waiting of the condition then A holds the proceeds of
the promissory note subject to the rights of the person indorsing
conditionally.
If he did not pass, he must remit to P. If passes he keeps the
proceeds.
Sec 41
If there 2 or more payees or indorsees, all must indorse, unless
one is authorized by the other or one is the partner of the other, in
which case any of them may indorse.
Sec 42
This refers to an instrument payable to the cashier or an officer
of a corporation. In this case it is deemed prima-facie payable to
the corporation.
Who may indorse the instrument if payable to the cashier of
UST or ABC Bank for instance?
The law says indorsed either by the cashier or authorized
signatory of the corporation.
Sec 43
Misspelling
In case of misspelling, on the assumption that there was
misspelling, then it must be indorsed as misspelled but adding if he
thinks fit his true signature.
In practice, you dont assume that there was a misspelling.
Instead you refer it back to the drawer so that they can
authenticate.
Sec 44
Representative Capacity
How an instrument may be negotiated or indorsed by an agent,
guardian, administrator executor
2 Requisites
He must disclose who his principal is; and
He must sign in behalf of the principal,
Failure which he incurs the liability of a general indorser.
Sec 45
Time of indorsement
The presumption is that the instrument was indorsed before it
was overdue
Sec 46
Place of Indorsement
Where it is dated
Sec 47
Should be discussed in relation to Sec 36.
An instrument negotiable in its origin continues to be negotiable
until it has been restrictively indorsed or discharged by payment or
otherwise.
When the law says restrictively indorsed or discharged it refers
to the first mode, the one which prohibits the further negotiation.
Sec 38
Cancellation or Striking out of indorsement
What can be cancelled or struck out is only the indorsement not
necessary to the title of the holder. In case the indorsement is
cancelled or struck out, then the party whose indorsement was
struck out or cancelled and the parties subsequent to him are
relieved from liability.
Example:
Originally Bearer Instrument
Bearer instrument which M issued to P. P indorsed specially to
A. A indorsed specially to B. B indorsed specially to C. C indorsed
specially to D.
If an instrument is originally bearer instrument it can be
negotiated by mere delivery. There was no need for special
indorsement therefore D can cancel the indorsement of A. So A
and all parties subsequent to him are relieved from liability.
(Warning: Dean previously said that D can cancel Ps special
indorsement, but later on he took it back. According to Atty. De
Leon D may strike out Ps indorsement, making the instrument
enforceable only against M.)
What if he cancelled the indorsement of B?
26
 Then only B is relieved from liability and all parties subsequent
to him, C.
Originally Order Instrument
In case of order instrument the indorsement of the payee
cannot be cancelled because the indorsement of the payee is
necessary for the further negotiation of the instrument.
So if it is an order instrument, how and in what instance can you
cancel an indorsement?
In case there is a blank indorsement.
If there is blank indorsement then it can be negotiated by mere
delivery. If after the blank indorsement there are special
indorsements then the special indorsements can be cancelled
because these are not necessary to his title. If so then the
subsequent parties are relieved from liability.
Example:
Order instrument that M issues to P. P indorsed in blank to A. A
indorsed specially to B. B indorsed specially to C.
The blank indorsement by P enabled the instrument to be
negotiated by mere delivery. So C does not need the special
indorsements of A and B, because the blank indorsement of P
would be enough to transfer title in favor of the holder.
So C may cancel As special indorsement. If he does, then A
and parties subsequent to him are relieved from liability.
If C cancels the only Bs special indorsement, then only B is
relieved from liability.
NIL_9
CHAPTER IV
RIGHTS OF THE HOLDER
What are the obligations or liabilities of a holder?
None. The holder has rights, not obligations or liabilities.
Chapter 5 refers to the liabilities of the parties (the maker, drawer,
acceptor, indorser), but with respect to the holder, he has no
obligations on the negotiable instrument. He has rights.
Kinds of Holder
1. ordinary holder (Sec 51)
2. holder for value (Sec 27)
3. holder in due course (Sec 52)
Pledgee
Does a pledgee qualify as a holder in due course?
Pledgee is only a holder for value to the extent of his lien. So
not the rights of a HDC under Sec 52. His rights as a pledgee will
not only be governed by NIL but more by the Civil Code (Caltex vs
CA, SCRA 212). The right of the pledgee is to foreclose the pledge
in case of non-payment, but not all the rights of a HDC under Sec
52.
Sec 51
What are the rights of mere holder under Sec 51?
1. he may collect on the instrument
2. he may sue in his own name in case of non-payment
3. payment to him in due course discharges the instrument
Under Sec 88 payment is payment in due course, when it is
made in favor of the holder at maturity without notice that his title is
defective.
Sec 52
What are the conditions to make a holder a HDC under NIL?
A holder in due course is a holder who has taken the instrument
under the following conditions:
1. That it is complete and regular on its face
2. That he became the holder of it before it was overdue
and without notice that it has been previously
dishonored, if such was the fact
3. That 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.
1st Condition
What do you mean by complete?
Not wanting or lacking in any material particulars.
When do you say it is material?
If it affects or changes the rights and obligations of the parties.
So if there is no payee, there is no amount, no interest, no due
date of payment
Check Number or Serial number
The absence of check number the does not make the
instrument incomplete. The absence of a serial number, likewise
does not make the check incomplete. So the check number and
serial number are not material particulars (PNB vs CA)
If what is altered is the check number or the serial number it will
not be governed by the rule on material alteration because it is not
a material particular.
Regular Upon its Face
What if the irregularity is not apparent on the face of the
instrument?
If the irregularity is not apparent on its face he can still qualify
as a HDC but his rights will be governed by Sec 124 that is he can
only enforce the instrument according to the original tenor thereof.
2nd Condition
Is it possible for the instrument be dishonored and yet not yet due
for payment and therefore could be negotiated to a holder
qualifying him as a HDC?
Sec 52 paragraph 2 contemplates an instrument which has
been dishonored and yet negotiated to a holder and if that holder
had no notice of that dishonor, then he is qualified.
Is it possible then for an instrument to be dishonored and yet
negotiated to a HDC before maturity, because if an instrument is
negotiated after maturity, the presumption is the holder is not a
HDC?
Sec 143 contemplates 2 Kinds of Presentment:
1. presentment for acceptance
2. presentment for payment
Ordinarily, in a bill of exchange presentment for acceptance is
presentment for payment.
Example:
When you present the check for acceptance it is considered as
presentment for payment.
But there are certain instruments which require presentment for
payment independently of the presentment for payment, like if an
instrument is payable after sight, where it is necessary to fix the
maturity of the instrument.
Example:
The drawer drew a bill of exchange against ABC payable to the
order of P directing the drawee to pay the payee to pay P100K 60
days after sight that means that the instrument must be presented
for acceptance of the drawee to fix the maturity of the instrument.
27
Unless the drawee accepts the instrument then you cannot
determine when the instrument will be paid.
Once accepted thats the time you start counting the 60 days.
On the 60th day after acceptance and after sight you have to
present again the instrument for payment.
What if on presentment for acceptance of the instrument it is
already dishonored? Then it is possible it is possible that the
instrument is not yet mature but presented for acceptance and
dishonored by non-acceptance and negotiated to a holder.
If the holder is not aware of the non-acceptance then he still
qualifies a HDC.
3rd Condition
That he took the instrument in good faith and for value
4th Condition
The critical period is, at the time of negotiation.
If at the time of negation, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it he
qualifies as a HDC even though subsequent to the negotiation he
has notice of the infirmity or defect in the title of the person
negotiating the instrument.
The Payee
In our jurisdiction a payee may be considered as a HDC so the
definition of holder under Sec 191 means the payee or indorsee of
a bill or note who is in possession of it, or the bearer thereof.
But in the 2 cases where the payee is considered a HDC, the
payee did not acquire directly from the instrument from the maker
or the drawer. Instead he acquired it from a 3rd party intervening
between the maker and the payee, or drawer and the payee.
Example:
If the payee acquired the instrument from the maker and
constituted the payee as a HDC and he holds the instrument free
from any defect of title and free from personal defenses.
Lets say the maker without consideration issued the instrument
to the payee constituting the payee as HDC and holds it free from
defect of title and free from personal defenses.
Is the maker liable on that instrument to the payee despite lack of
consideration?
If you say that the payee is a HDC and free from personal
defenses, theoretically the maker is entitled to pay the payee. But
that is not the impediment obviously.
The impediment is that the payee acquired the instrument from
an intervening party between the maker and payee, or drawer and
payee.
De Ocampo vs Gatchalian
An agent of a seller of a car obtained a check from the
interested buyer to show that he is interested in buying the car of
the seller. So the agent got the check.
The buyer-drawer in the transaction issued a check payable to
the order of the payee, the seller of the car. He did not give it
directly to the seller; instead he gave it to the agent for the agent to
show it to the seller that the buyer is interested in buying the car.
The agent negotiated it to the payee, not to show good faith in
buying the car by the buyer but in payment of his wifes
hospitalization expenses.
In this case the payee acquired the instrument from an agent
even though it was issued by the drawer. In that case the
conclusion is that payee is not a HDC.
He did not qualify for the following reasons:
1. The amount of the check did not correspond exactly with
the obligation of the wife to the payee; and it is different
from the purchase price of the car
2. The check is crossed. If the check is crossed then it
serves as a warning to the holder that it was issued for a
specific purpose and therefore the holder must inquire if
he acquired the check consistent to that purpose. If not,
he does not qualify as a HDC.
Yang vs CA
X tells to D, the drawer, to issue a check payable to the order P
and in exchange for the check and demand draft or dollar draft, I
will issue to you a new instrument (Example: Issue a check to P for
90K and I will issue a check to you for 100K).
D issued a check payable to P, in that case a demand draft or
dollar draft, but he did not give it directly to P instead he gave it to
X and X negotiated it to the payee. X did not give the exchange
instrument to the drawer. So the drawer was defrauded in issuing
the instrument payable to the order the payee.
Will the payee qualify as a HDC in this case?
The holder acquired the instrument under the 4 conditions
therefore he qualified as a HDC. So the drawer may be defrauded
but because there was negotiation by X to P and P acquired the
instrument under the 4 conditions under Sec 52 then the
encashment of the check is within his rights.
Sec 56
What constitutes defect of title?
There is defect either in:
1. the acquisition of the instrument or
2. the negotiation thereof
Defect in the Acquisition
There is a defect in the acquisition if the party acquired the
instrument by fraud, force, duress, and other unlawful means or for
illegal consideration.
Examples
Fraud
The payee obtained a check from the drawer because the
drawer issued to him a check in payment for a 14 karat jewelry. So
instead the payee gave to him jewelry made of tin can.
Employment of force, duress, and fear
Twisting the arm of the drawer for him to issue a check; poking
a gun at the head of the drawer
Illegal Consideration
The drawer issued a check in payment of a gambling debt; or to
stifle criminal prosecution; or to rig the results of an election
Defect in the title brought about by negotiation
What could be a defect in the title brought about by negotiation?
Example: Maker issued a promissory note to the payee, but the
maker already paid the promissory note but despite that the payee
negotiates the instrument to another party. So there is a defect in
the negotiation because the instrument has already been paid but
that breach of negotiation will not affects the rights of a HDC.
Sec 56
What constitutes notice of infirmity?
1. Actual notice or
2. Constructive notice
Actual Notice
If he is completely aware of it
Constructive Notice
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 Constructive in the sense that if a party ought to know that the It is personal defense only if the instrument is being
circumstances under which he acquired the instrument amounts to enforced in accordance with the original tenor.
bad faith. It is a real defense available against a HDC, if it is being
enforced in excess of the original tenor.
Sec 57
The rights of a HDC Cases regarding the Rights of a HDC
In addition to the rights of a holder under Sec 51 (the right to
receive payment, the right to sue in his own name) Sec 57 tells Salas vs CA, 181 SCRA (asked twice in the bar)
us the other rights of a HDC M purchased a car from P. M paid the down payment and
1. He holds the instrument free from any defect of title of prior issued a promissory note for the balance of the purchase price of
parties the car.
2. He holds the instrument free from personal defenses among
prior parties There was a discrepancy in the chassis and engine number in
3. He may enforce payment of the instrument for the full the invoice and the chassis and engine number of the car. But the
amount thereof against all parties liable thereon instrument was negotiated already in favor of another party, State
Investment House (SIH)
2 Kinds of Defenses
1. Real Defenses Can SIH enforce the promissory note despite the failure of
- Called as such because they attach to the instrument regardless consideration (because there was a consideration but it did not
of the merits and demerits of the holder. That is why these are conform with the agreement)?
available even against a HDC. If an instrument is negotiable, then the presumption is that the
holder is a holder in due course, and as such holder he acquires
Examples: title to the instrument free from personal consideration. Since the
Sec 15, Incomplete and undelivered failure of consideration is merely a personal defense, not available
Sec 23, Forgery against a HDC the maker or drawer of the check, as the case may
Fraud in fact, which also fall under forgery. The signature be is liable on the instrument.
was given for the purpose different from that intended by
maker or drawer. He cannot invoke the breach of contract or failure of
Sec 124, Fraudulent alteration by the holder consideration by the payee-car company. That defense can be
Sec 22, Minority invoked against the car company but not against the holder who
Sec 119, Discharge of the instrument. But the discharge acquired the instrument against the said company.
must be after maturity
State Investment House vs CA 217 SCRA
Other causes of discharge (NoCoMeRePrePaLo). The drawer issued checks payable to the order of payee drawn
Novation against Equitable Bank as security of items of jewelry that D
Compensation obtained from P to be sold on commission basis. P negotiated the
Merger check to SIH.
Rescission
Prescription In the meantime the D failed to sell the jewelries, so D returned
Payment the jewelries and demanded the checks issued as a security be
Loss returned to him. Unfortunately the checks cannot be returned
anymore because it was already negotiated to SIH. So upon
These are the modes of extinguishment under the Civil Code knowing this, the withdrew or closed his account with Equitable
Bank.
2. Personal Defenses
- They are only personal to the party concerned who by reason of When the check was presented for payment, it was dishonored
his conduct or agreement make it inequitable for him to enforce the for being drawn against a closed account or insufficiency of funds,
instrument. as the case may be.
- Not available against a HDC
Can the Holder, SIH, enforce the instrument against the Drawee
Examples: and/or the Drawer; or can the drawer invoke the defense that
Sec 13, Filling up of a wrong date. If the date inserted is those checks had no consideration?
erroneous or wrong insofar as the HDC is concerned he SIH is presumed to be a HDC because the checks are
can enforce the instrument based on the instrument as negotiable in nature and therefore as such holder he can enforce
inserted because he can enforce the instrument as the checks without being subjected to personal defenses like
completed as filled up. absence of consideration.
Sec 14, Incomplete but delivered
Sec 16, Complete but undelivered What about the act of withdrawing the funds by the drawer?
Sec 28, Absence of consideration One of the defenses that were given by the drawer is that he
Sec 57, defect in the negotiation or the acquisition by of was not given a notice of dishonor.
the title by fraud, force, fear, duress, illegal consideration, The liability of the drawer and the indorsers is premised on the
or negotiation by breach of faith, and other circumstance dishonor of the instrument and of the giving of the appropriate
amounting to fraud notice of dishonor.
Simple fraud
Discharge by payment or renunciation or release before The SC said that it is not a good defense because one of the
maturity cases where notice of dishonor is not necessary is when the
Discharge of party secondarily liable by discharge of prior drawer had no right to expect or require that the instrument would
party be honored anyway. Since he withdrew the funds from the drawee
bank he had no right to expect that the instrument would be
What about material alteration not done by the holder? honored, so it is pointless giving him a notice of dishonor.
The material alteration is both personal and real defense.
Crossed Checks
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 While the HDC acquire title to the instrument free from personal
defenses that principle has to be modified if the checks are
crossed. As we saw in:
Bataan Cigar vs CA and
State Investment House vs CA.
If the checks are crossed the effects are as follows:
1. it cannot be encashed, it can only be deposited
2. it can be negotiated only once in favor of someone
with an account with the bank
3. serves as a warning that the checks have been
issued for a specific purpose, with certain limitation
and therefore the holder must acquire the instrument
consistent with the purpose or limitations, otherwise
he does not qualify as HDC
Bataan Cigar vs CA
The drawer issued crossed checks payable to order of P drawn
against ABC Bank in payment for bales of tobacco that P
supposedly has to deliver to the drawer. P did not deliver did not
deliver the bales of tobacco as agreed upon and also negotiated
the check to State Investment House (SIH).
Can SIH enforce the check despite lack of consideration?
Ordinarily if the checks are not crossed that defense is not
available against the HDC (Salas vs CA).
But because checks are crossed, then it changes the complexion
of the law. This time SIH has limited rights. That defense of lack of
consideration which erstwhile was not available against a HDC,
became available if the check is crossed.
State Investment House vs CA
A crossed check was issued only as a financial assistance not
to be negotiated, but the payee in breach of faith negotiated the
instrument.
Can the crossed check be enforced or can the drawer raise the
defense that the check is not supposed to be negotiated because it
is only for financial assistance?
If a check is crossed, that defense, that limitation place on the
check can be raised even against the HDC.
Sec 58
There are 2 conditions to concur so that the transaction will be
governed by NIL, not just by the law on assignment of credit
1. The instrument must be negotiable; and
2. holder must be a HDC
If the instrument is non-negotiable, that serves as a warning
that the purchaser that there a certain limitations attached to the
instrument. So both must concur negotiable under Sec 1 and
HDC under Sec 52.
Is there an exception where a non-holder in due course may
acquire the rights of a HDC?
Sec 58 tells us that if a holder is not a HDC it is as if the
instrument is not negotiable, which means transaction is governed
by the law on assignment of credit, not the NIL with respect to the
rights of the transferee. The exception is if the non-HDC acquires
title from a HDC and is not himself a party to any fraud or illegality.
Example:
M issues promissory note to P without consideration. P
negotiates to A. Lets say B is aware that the instrument from the
beginning has no consideration. But A negotiated the instrument to
him.
Is B a HDC?
No because he did not satisfy the 4th condition, he had notice of
the infirmity of the instrument because there was no consideration.
Does B have the rights of a HDC?
Yes, under Sec 58 because he acquired the instrument from A,
who is a holder in due course and is not a party in any fraud or
illegality.
B acquired the rights of a HDC with respect to the parties prior
to such HDC, meaning B can enforce the instrument against P if M
dishonors because he has the rights of A against parties prior him.
CHAPTER V
LIABILITIES OF PARTIES
Maker vs Drawer
1. A maker is primarily liable as distinguished from a
drawer, who is a party secondarily liable
2. Maker is a term appropriate for a promissory note; while
a Drawer is a term appropriate for a bill of exchange
3. A maker cannot limit his liability. He is liable based on the
tenor of the instrument.
A drawer can issue an instrument without recourse to him,
meaning he can negative his personal liability by issuing an
instrument without recourse to him. Sec 61 tells us that it is
possible for the drawer to issue an instrument without
recourse.
Liable for the Tenor of the Instrument
Can the maker introduce parol evidence to show that the amount
indicated in the promissory note is not the amount agreed upon by
the parties? I.e. Maker issue a PN for 10K, can he say that it
actually is only for 5K because they have an agreement that it is
only for 5K?
No, because the law says he is liable to pay according to the
tenor of the instrument
4. Both the maker and the drawer admits that the payee exists
and his then capacity to indorse
Accumulation of Secondary Contracts
If M issues a promissory payable note to the order of P. P
negotiates to A. A to B, You have so many contracts. You have
promissory note and you have accumulation of 2ndary contracts -
P to A, A to B.
Can B enforce the instrument against A the indorser?
No. An indorser, a party secondarily liable is liable only if 2
conditions concur:
1. the instrument is dishonored by parties primarily
liable; and
2. Appropriate proceedings were taken against him,
which means giving him the appropriate notice of
dishonor.
That is why the holder cannot proceed directly against the
indorser, because the liability of the indorser is yet to be
determined, is yet to attach, is yet to arise. Only if the instrument is
dishonored by the party primarily liable, which presupposes the
presentment of payment of the instrument to the party primarily
liable, in this case the maker.
If the maker pays to the holder at maturity without notice that
the title of B, the holder, is defective, then it effectively discharges
the instrument. That cannot be further negotiated because of the
discharge. All the liabilities are likewise extinguished, even those of
the indorsers, P and A.
If M dishonors, under Sec 68 the indorsers are liable in the
order in which they indorse, which means that the prior party is
liable to subsequent party or subsequent parties may enforce the
instrument against prior parties. But that order is only between the
indorsers. It does not bind the holder.
30

In other words, the holder may choose which one to sue either
P or A. So between A and P, they are liable in the order in which
they indorsed but it does not bind the holder who can sue whoever
he wants to sue.
In our example if B gives notice of dishonor to A only then he
can sue A only.
What about P?
P is discharged if he was not given any notice of dishonor,
unless A gives P a notice of dishonor within the period allowed by
law, because notice that is given by A to P inures to the benefit of
the holder.
The point is that the holder may choose which one to sue,
either A or P. If B sues A only then P is not an indispensable party.
There is no need for B to implead P, because P insofar as B is
concerned is not an indispensable party.
How can A obtain reimbursement from P?
The remedy available to A is to file a 3rd party complaint against
P for reimbursement or indemnification because after all P, a prior
party, is liable to A, a subsequent party.
Checks
D issued a check payable to the order of P drawn against ABC
Bank. P negotiates to A. A is the holder. It stops there. In the real
world that is the best it can go. So only 2nd indorsement. It is very
rare that there is a 2nd indorsement because of the policy of banks
not to accept 2nd indorsed check, because it has no way of
determining if the indorsement of P to A is genuine, and if it
accepts 2nd indorsed check and then it was proven that the Ps
indorsement is forged the fault is on ABC.
But in those cases where there is acceptance of 2nd indorsed
check, usually P has a facility arrangement with the bank. He signs
an agreement with the bank the in case the instrument is
dishonored he will be liable.
D issued a payable to the order of P drawn against ABC Bank.
P negotiates to A.
(Asked twice in the Bar) Can A enforce the instrument against P,
the indorser?
No, because the drawer and the indorser are parties
secondarily liable. They are liable to the instrument only if the
instrument is dishonored by non-acceptance by the drawee and
appropriate proceedings are taken against them, which means A
gave notice of dishonor from the drawer and indorser.
An instrument cannot be dishonored by non-acceptance unless
it is present for acceptance. That is why A must presented the
instrument to ABC. If the bank dishonors then D and P becomes
primarily liable. So from 2ndary liability they become primarily
liable (Tuazon vs Bartolome).
Tuazon vs Bartolome
If A files an action only against the indorser, P, is D an
indispensable party?
Is there a need to implead the drawer of the check as an
indispensable party to give relief to all parties liable to the
instrument?
It is the option of the holder whom to sue. If he files an action
only against the indorser, he need not implead the drawer. It is his
call. The non-inclusion of D will not result in the dismissal of the
complaint. He is not an indispensable party insofar as the holder is
concerned.
Here P, as indorser, has the right of reimbursement from D, the
drawer, because D warrants to pay the amount of the instrument to
the party who was made liable thereon in case of dishonor and
was given the notice of dishonor. In such case D is liable to P.
So P despite the non-inclusion of D as dispensable party can
file a 3rd party complaint against D, so that in case P is made to
pay A, in the same case, P can claim for reimbursement from the
drawer without having to file it later on.
Villanueva vs Nite
If the drawee-bank dishonors the check, despite the fact that it
is funded, does the payee have a cause of action against the
drawee?
The payee has no cause of action against the drawee, because
the drawee is not liable on the instrument, unless and until it
accepts the same. That is why in NIL there is no liability for a
drawee. There is no chapter or section on the liability of the
drawee, but yet there is a section on the liability of an acceptor.
Probably P may have a cause of action against the drawee
under quasi-delict as you have seen in the case of Romeo and
Juliet, which was asked in the bar. But for NIL it is clear that the
drawee is not liable on the instrument, unless and until it accepts
the same.
What are the remedies of the parties?
If the payee goes to the bank and the drawee-bank dishonors,
the payee can sue the drawer. And the drawer can sue the
drawee-bank for breach of contract. If the account is funded and
there is no reason to dishonor the check, the drawee is liable to
the drawer or principal.
If the drawer has a current account with the bank, he has a right to
order the bank to pay any payee. And if the amount is enough, the
amount is the same or more, or if the account is funded then the
drawee has no right to dishonor the check. If it does, it is liable for
breach of contract.
A check was issued by D to P drawn against ABC. P negotiates to
A.
P is the indorser in this case. As an indorser he is liable only in
case of dishonor and then was given appropriate notice of
dishonor.
Is there an instance where despite lack of notice of dishonor P may
be held liable?
If the indorser negotiates the instrument with recourse to him,
the lack of notice of dishonor to the indorser will not extinguish his
liability. His liability is not based on NIL, but because of the
agreement he signed that the negotiation is with recourse to him.
With recourse, means that if the instrument is not paid I will pay
(Great Asian Sales vs CA)
31
NIL_10
I can do all things through Christ who strengthens me.
PHILIPPIANS 4:13
We know that all things work together for good to those who love
God, to those who are called according to His purpose.
ROMANS 8:28
Sec 70
Presentment for payment
- is the production of the instrument to the party primarily liable
for the purpose of demanding and receiving payment
Presentment for payment is not necessary to charge persons
primarily liable, because with or without presentment he is required
absolutely to pay the instrument:
The maker based on the tenor of the instrument
The acceptor based on the tenor of his acceptance
Presentment for payment is necessary to charge the drawer
and indorser liable to the instrument.
The drawer and the indorser are secondarily liable. Their
liability is premised or dependent on the dishonor of the instrument
for non-payment. That presupposes therefore that the instrument
must be presented for payment to the party primarily liable.
Asked in the Bar: What if the instrument indicates that payment
should be made at a special place (place specified by the parties;
i.e. BDO Head Office), and the holder did not show up?
Does that discharge the instrument?
Does that discharge the parties primarily liable to the instrument?
Does that negate or extinguish liability?
No, because presentment for payment is not necessary to
charge the parties primarily liable. He is required to pay even
without the need for presentment for payment.
However the law says if it is payable at a special place and the
party primarily liable shows up, then that is equivalent to tender of
payment. So from that time on the party liable thereon is not liable
to pay the accruing interest. He is liable to pay the principal
amount, but the interest that has accrued on that date or interest
accruing thereafter is no longer the liability of the obligor.
Sec 74
Presentment for payment is the production of the instrument to
the party primarily liable. In other words the instrument must be
exhibited to the party primarily liable. Without the exhibit of the
instrument the party primarily liable may opt not to pay. However
after paying it, the law says he may take up the instrument.
If the instrument evidencing the credit is in the possession of
the creditor or the holder the presumption is that the instrument is
still unpaid (Far East Bank vs Querimit).
Sec 74 confirms the prerogative of the obligor or the party
primarily liable to require the submission or the surrender of the
instrument after paying it. Otherwise the presumption is that it is
not yet paid.
Far East Bank vs Querimit
In the books of Far East Bank (FEB) the obligation is already
paid. The instrument in that case was a certificate of time deposit
(CTD). CTD can be a negotiable instrument if all the elements are
present (Caltex vs CA).
In the books of the bank the CTD is no longer outstanding.
Unfortunately, the CTD was still in possession of the holder.
Between the books of the bank and the possession of the holder,
which has the greater weight?
SC said making reference to Sec 74, the obligation is still
outstanding if the instrument is still in the possession of the
creditor or the holder.
The procedural aspect as to where, how, when are all important
because if there is no valid presentment for payment the drawer
and the indorser are discharged.
Sec 71
If the instrument has a due date, you make presentment for
payment on the due date.
If it is payable on demand when do you make presentment for
payment?
Promissory note within a reasonable time from
issuance
Bill of exchange within a reasonable time from the last
negotiation
Check within a reasonable time from issuance
Sec 72
Requisites for Presentment for Payment
1. It should be made by the holder to the party primarily liable
2. At reasonable hour on a business day
3. At the proper place Sec 73 in the following order:
(Code: SAURO)
1. place Specified in the instrument
2. Address of the person to make the payment
3. Usual place of business or Residence
4. any Other place where he may be found
Sec 75
Supposing a holder of a check goes to the bank. At 9 am the
account is not funded. The manager of the branch called up the
drawer. The drawer told the manager to give him up to 3 hours to
fund the check. But the holder insisted that the bank should either
honor it or dishonor it right here right now indicate DAIF, so that he
can sue the drawer the following day.
Does the law allow the drawer to make good his check?
Does the law give the drawer the time to fund the check?
Yes. The payee or holder cannot insist that the decision be
made by the branch manager right there right now, because the
law affords the drawer up to the close of the business hours to
fund the check.
Moran vs CA
The check was deposited and sent for clearing. The funds were
insufficient. So the drawee bank dishonored the instrument. The
contention of the drawer is: You should have honored it up to the
extent of my deposit.
The SC said that it is all or nothing. If your account with the
bank is not sufficiently funded, the check should be dishonored.
The bank has no obligation to fund it for you. The bank has no
obligation to make good the check up to the amount of your
deposit.
Sec 75 of NIL is an over the counter transaction. When a check
is deposited and sent for clearing. Then it is the amount of your
deposit at that time of day. If the funds is not sufficient, the bank is
well on its right to dishonor the check.
Sec 84
This tells us the consequence of a dishonor for non-payment:
Subject to the provisions of this Act, an immediate right of recourse
accrues in favor of the holder against the parties secondarily liable.
32

Subject to the provisions of this act
This refers to the giving of the appropriate notice of dishonor.
The liability of the drawer and the indorser or the parties
secondarily liable is premised on the presentment for payment,
dishonor of the instrument by non-payment, and the giving of the
appropriate notice of dishonor.
An immediate right of recourse accrues in favor of the holder
against the parties 2ndarily liable:
Does it mean that he can sue drawer and indorser and never mind
the drawee?
Can he sue the indorser and never mind the maker in case of a
promissory note?
Does he have to sue the maker and together the indorser in case
of a promissory note?
What the law means it is that he has the option to choose to
sue either the maker or the indorser in a promissory note; or the
indorser only and dropping the drawer; or the drawer and dropping
the indorser, because his right of action has accrued against
drawer or the indorser in a bill of exchange, or the indorser in a
promissory note, without having to sue the maker or the party
primarily liable. If he wants to, he can sue as many defendants as
possible, but that is his option. In other words, he need not wait for
a case to be filed against the parties primarily liable. He can sue
directly the parties secondarily liable, who by reason of the
dishonor of the instrument become parties primarily liable on the
instrument.
Sec 83
When is an instrument considered dishonored by non-payment?
1. When the presentment for payment is made and
payment cannot be obtained; or
2. When presentment for payment is excused or waived
and the instrument is overdue and unpaid
In the coverage of the bar the discussion on bill in set, protest
are not part of the bar. No body uses bill in set anymore. The
syllabus only includes dishonor, discharge. It does not include
anymore the procedural aspect.
Why?
Because in practice one sentence makes all the difference:
Presentment for payment, notice of dishonor, and protest are
hereby waived. So one half of your NIL is covered by one
sentence.
Sec 88
Payment in due course
What are the requisites of payment in due course?
Payment is made in due course when
1. it is made by the party primarily liable
2. at or after the maturity of the payment
3. to the holder thereof
4. in good faith and without notice that his title is defective
Does the phrase without notice that his title is defective refer to
the maker or to the holder?
The title of the holder.
The drawer and the indorser become liable to the instrument if
the instrument is dishonored for non-payment and the appropriate
notice of dishonor is given to them.
D issued an instrument payable to the order of P. P indorsed to
A. A to B. B to C.
C goes to the drawee presented the instrument for payment
and the drawee dishonors.
Sec 89
The holder must give notice of dishonor to B, A, P and D, the
drawer and each of the indorsers. Otherwise they are discharged.
If C notifies B only, what happens to A, P, and D?
They are discharged, unless within the period prescribed by law
B gives notice to prior parties. Notice given by a subsequent party
to a prior party inures to the benefit of the holder.
C notified B only. If B notified A, A notified P, P notified D those
notices inures to the benefit of the holder. One important thing is
that the drawer and the indorser is given the notice within the
period prescribed by law.
What if C notifies A, what happens to B?
B is discharged because A cannot notify B. He can only notify a
prior party who upon being given a notice of dishonor will be liable
to the party subsequent to him.
Sec 90
Who are the parties who can give notice of dishonor?
1. The holder or his agent
2. The party who may be compelled to pay it to the holder
and who would have the right of reimbursement from the
party to whom notice is given
C, the holder, or his agent may give notice of dishonor to each
of the indorsers and the drawer; otherwise as general rule they are
discharged from liability.
If C notifies B, then B in that case becomes a party entitled to
give notice because having received the notice of dishonor from C
he is compelled and may be compelled to pay the instrument.
B may give notice of dishonor to A and A may give notice of
dishonor to P and then P to D. So subsequent party may give
notice of dishonor to prior party. But, a prior party cannot give
notice of dishonor to subsequent party because prior party is liable
to subsequent party.
Supposing in the hands of C, the instrument is dishonored and
then he notifies B, A, P, and D. Then after giving notice of dishonor
to the parties prior to him, he negotiates the instrument to Y, a
subsequent holder.
Is Y bound give another notice of dishonor to the drawer and
indorsers?
As long as the drawer and the indorsers have been given the
notice of dishonor there is no need to notify them all over again.
One notice is sufficient.
The subsequent holder need not give another notice of dishonor
to the parties prior to him.
To repeat the discussion, the holder or subsequent party may
give notice of dishonor to prior party. Prior party is liable to
subsequent party. A party cannot give notice of dishonor to a
subsequent party because he is liable to him. He can only give
notice of dishonor to a party prior to him upon invoking the right of
reimbursement.
In our discussion, B cannot notify C because B is a party
subsequent to C, instead he can notify A. The notice given by B to
A inures to the holder and subsequent holders likewise if the
instrument is subsequently negotiated.
Checks
Is a dishonored check the same as stale check?
They have the same effects or consequences, but a stale check
is different from a dishonored check.
A stale check is a check which has become worthless because
it was not presented for payment within reasonable time from
33
issuance.
Under Sec 185 a check is a bill of exchange drawn in a bank
and payable on demand as distinguished from an ordinary bill of
exchange which need not be payable on demand. That is why it
must be presented within a reasonable time from the issuance, not
from negotiation.
A dishonored check is one presented for payment to the drawee
but the drawee dishonors it.
What do we mean by reasonable time?
6 months (this is based on customs, usage, and practice; what
the law only says is reasonable time) unless, the check has a date
on the face thereof within which presentment for payment must be
made. In this case the check must be presented within the period,
otherwise it becomes stale.
What happens if the check was not presented within reasonable
time from issuance?
Does that discharge or extinguish the obligation of the drawer?
Only to the extent that the drawer has been prejudiced. If there
is no prejudice to the drawer, the drawer is still liable to pay the
payee, because under Art 1249 NCC a check does not produce
the effect of payment until it is encashed or due to the fault of the
creditor its value was impaired.
So if by reason of the delay in the presentment for payment, the
drawee bank becomes insolvent. In that case the inaction of the
holder caused prejudice to the drawer. In this case the drawers
liability is extinguished. But if there is no impairment, injury, or
damage to the drawer anyway then his obligation to the payee or
to the holder still subsists. It only means that that particular check
cannot be enforced anymore, but the drawer is still liable to pay
the payee for his obligation.
Combo (meaning combination) Account
Moran vs CA/ Alunan vs Traders Royal Bank
A drawer has a savings account and a current account. He
issued a check. The balance of the current account was insufficient
for the check he issued, but if you combine the deposit in the
savings and the current account the aggregate deposit should be
more than enough to cover the obligation.
Does the drawee bank have the obligation to combine or
aggregate the deposit from the savings and current so the check
issued by the drawer will be honored?
There is no such thing as automatic transfer of funds from
savings to current or current to savings. It is a facility that must be
applied for with the bank. If you want a transfer of funds
arrangement, it is something which you must apply for with the
bank because it is not automatic.
From the previous discussions we said that there are conflicting
decisions on whether or not cashiers check is legal tender. It is
submitted that the correct answer should be under Sec 60 RA
7653 checks, whether managers check or cashiers check, are not
legal tender because under the law the debtor cannot compel the
creditor to accept the check in payment of a debt. If the debtor
cannot compel the creditor to accept a check in payment of a debt,
it means that it is not legal tender. Legal tender is a currency which
the debtor may compel the creditor to accept when tendered in the
right amount.
However while there are conflicting decisions on whether or not
cashiers check is legal tender, with respect to redemption there is
no conflict.
In case of Fortunado vs CA and reiterated in subsequent
decisions, a redemptioner may tender redemption price in the form
of a managers check or cashiers check. So the mortgagee or the
judgment creditor cannot refuse to accept a managers check or
cashiers check when it is tendered as a redemption price,
because redemption is not an obligation. It is a right.
So the limitation on cashiers check as not being legal tender
only applies to an obligation, but not in the exercise of a right.
Rule 32, Rules of Court: A judgment may be satisfied through a
certified check.
The drawee is not liable on the instrument unless and until it
accepts the same OR if IT CERTIFIES the same, because
certification is tantamount to acceptance. Certified check is good
as cash because it is accepted by the therefore it makes the
drawee bank liable already.
A certified check is different from a cashiers check. A certified
check is a check already accepted by the drawee-bank, therefore it
is liable.
As a general rule with respect to bill of exchange or a
promissory note, the notice of dishonor must be given within 24
hours, not the following day.
What about a check, is that the same requirement?
For the purpose of BP 22 is it 24 hours?
5 days for the drawer to make good his check with respect to
the prosecution for violation of BP 22. It is not 24 hours under the
NIL.
Usually you sue the drawer, because the drawer knew or opt to
have known that the check is not funded and he has 5 days to
make good the check, otherwise there is a presumption the he
issued a bouncing check or worthless check.
Can you sue an indorser for violation of BP 22?
The gravamen of the offense under BP 22 the knowingly issuing a
worthless check.
Does that extend to an indorser?
Yes, the indorser may be held liable for violation of BP 22 if it
can be establish that when he indorsed the instrument he knew
that the account is not funded.
We know that closed account, unfunded account, or drawn
against insufficient fund (DAIF) liable for BP 22
What about if the drawer issued a stop payment order to the
drawee, can he be held liable for BP 22?
Under banking rules if there is a stop payment order by the
drawer, drawee is required to indicate on the check whether or not
the account is funded. So the stop payment order does not negate
criminal liability if the account is not funded. And the drawee-bank
has the obligation to indicate on the instrument whether or not the
account is funded despite the stop payment order.
If you issue a check but you dont want to pay your creditor,
make sure that the account is funded and issue stop payment
order. So in that case you will not be charged for violation of BP
22. After you have funded the account and issued a stop payment
order, the drawee-bank will not honor the check issued to the
payee. After that you can withdraw your money. But what is
important is at the time it was presented you have funds.
What do you mean by drawn against uncollected deposits
(DAUD)?
You funded your account with a check that is yet to be cleared.
If that is the reason for dishonor, can there be a prosecution for
violation of BP 22?
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 Yes. There is one case in our book.
There are 2 drawers, A or B account. A wanted to withdraw,
but B issued a stop payment order.
What do you do in that case?
File an action for interpleader, because there are conflicting
claims on the same deposit. You dont take sides. Let the court
decide on what to do.
NIL_11
Ask, and it will be given to you; seek and you will find; knock, and
it will be opened. Or what man is there among you who, if his son
asks for bread, will give him stone? Or if he asks for a fish, will he
give him a serpent? If you then, being evil, know how to give good
gifts to your children, how much more will your Father who is in
heaven give good things to those who ask Him!
MATTHEW 7:11
God keeps every promise he makes. He is like a shield for all who
seek his protection.
PROVERBS 30:15
Bill of exchange payable after sight:
D issues a bill of exchange payable to the order of P drawn against
X and says Pay to order of P $ 100 K, 30 days after sight. Signed
D. P negotiates to A. A to B.
What are the rights or remedies available to B?
B may present the instrument for the acceptance of the
drawee, X; or
Negotiate
This instrument requires presentment for acceptance separately
from presentment of payment.
Why?
When is presentment for acceptance necessary?
Sec 143 Where the bill-
1. is payable after sight, or where presentment for
acceptance is necessary in order to fix the maturity of the
instrument; or
2. stipulates that it shall be presented for acceptance; or
3. is drawn payable elsewhere than at the residence or
place of business of the drawee.
In this case the instrument is payable at a fixed date after sight.
So presentment for payment is necessary in case of a usance
draft, in order to fix the maturity of the instrument.
What about sight bills (payable at sight) does it require payment for
acceptance?
Sec 143 says if the bill is payable AFTER sight, not at sight.
If the draft is at sight, it does not require presentment for
acceptance (Prudential Bank vs IAC).
What happens if there is delay in the presentment for acceptance
or no negotiation within reasonable time?
The drawer and the indorser are discharged. The holder still
has rights. He can negotiate later on even though there was delay.
B decides to present the instrument for the acceptance of X. 2
things might happen. It may be honored, meaning accepted, or it
may be dishonored by non-acceptance.
What does acceptance mean?
Sec 132. The acceptance of a bill is the signification by the
drawee of his assent to the order of the drawer.
What are the kinds of acceptance?
1. Actual and Constructive
2. General and Qualified
Actual Acceptance
Sec 132
Requisites for actual acceptance:
1. in writing
2. signed by the drawee
3. acceptance to pay money, not any other act
4. made in the instrument itself or on a separate instrument.
But insofar as the holder is concerned he can insist that
the acceptance be made in the instrument itself
Constructive Acceptance
Sec 137
1. drawee destroys the instrument
2. drawee retains or refuses within 24 hours after delivery to
return the bill
Is there an implied acceptance under NIL or bill exchange?
None, because you have constructive, not implied. Sec 132 and
137 does not use the term implied acceptance. The term used by
law is constructive, not implied.
General Acceptance (Sec 140)
One where the drawee accepts the instrument without
qualification.
Qualified Acceptance (Sec 141)
Kinds: (Code: Carlo and Petra Lovers Tampuhan Sometimes)
1. Conditional accepts subject to a condition
2. Partial to pay part only of the amount for which the bill
is drawn
(i.e. bill is for 100K, only for 50K)
3. Local to be accepted only at a particular place, to the
exclusion of other place
(i.e. Head office of BDO)
4. qualified as to Time
i.e. Pay to the order X 30 days or 60 days after sight
5. acceptance of Some or more of the drawees, but not all
What is the effect of qualified acceptance?
Sec 142
The holder may refuse to take a qualified acceptance
If he does not obtain an unqualified acceptance, he may treat
the bill as dishonored by non-acceptance.
In case of qualified acceptance, the drawer and indorsers are
discharged from liability on the bill UNLESS they have expressly or
impliedly authorized the holder to take a qualified acceptance, or
subsequently assent thereto.
When the drawer or an indorser receives notice of a qualified
acceptance, he must, within a reasonable time, express his dissent
to the holder or he will be deemed to have assented thereto.
The other option is to dishonor the instrument by non-
acceptance
In case of dishonor of the instrument by non-acceptance, what
should B do to preserve his rights against parties liable to the
instrument?
35
 In case of dishonor by nonacceptance, an immediate right of 1.
recourse against the drawer and indorsers accrues in favor of the 2.
holder against parties secondarily liable subject to the provision of 3.
this law, which means giving the appropriate notice of dishonor.
4.
If the instrument is dishonored by non-acceptance, the holder,
B, must give notice of dishonor to the drawer and each of the 5.
indorsers, otherwise they are discharged.
The drawer and the drawee are the Same person
The drawee is a Fictitious person
When the drawer is the same person to whom the
instrument is Presented for payment
When he has no Right to expect that the instrument will
be accepted or paid
Where the drawer has Countermanded payment or stop
payment order

Lets assume that C is the holder. B negotiates to C and B was
the one who presented the instrument for acceptance, or it was in
his hands the instrument was dishonored. C must give notice to
the drawer and each of the indorsers otherwise the instrument is
discharged.
Within what period should C notify the drawer and the indorser?
Within 24 hours.
Supposing C notified B, are A, P, and D discharged?
Yes
These are the cases that even without notice the drawer is liable.
What are the instances where notice of dishonor is not necessary
to be given to the indorser?
Sec 115
1. If the drawee is a fictitious person and not having the
capacity to contract
2. Where the indorser is the same person to whom
instrument is presented for payment
3. Where the instrument was made or accepted for his
accomodation

Absolutely?
B can notify A within the same period allowed by law. B is
entitled to give notice to A, P, and D because there are two
persons who can give notice of dishonor the holder or any party
who may be compelled to pay, and who after paying it up has the
right to secure reimbursement against the party to whom notice of
dishonor was given.
The notice given by B to A inures to the benefit of C. If A notifies
P also within the same period, the notice given by A to P inures to
the benefit of the holder.
So therefore C, the holder, can proceed against B, A, and P
despite the fact that initially C did not give notice to B, A, and P.
Supposing C notifies B, B notifies P, what happens to A?
A is discharged.
The notice given by B to P inures also to the benefit of the
holder.
What if C negotiates to D, and D to Y, should Y give notice again to
parties prior to him?
Not anymore because the notice given by the holder inures to
the benefit of subsequent holders.
What are other cases where notice of dishonor is not necessary?
Sec 109. When there is a waiver.
Sec 111. Waiver of protest
Sec 112. When despite the exercise of due diligence notice of
dishonor cannot be given.
When does the waiver affect only the indorser?
When does the waiver affect all the parties to the instrument?
Sec 110. When it is embodied in the instrument itself, it is
binding upon all parties;
but where it is written above the signature of an indorser, it binds
him only.
If the drawer closed his account and the holder presented the
instrument for acceptance and the drawee dishonors, is the drawer
entitled to be given notice of dishonor?
State Investment House vs CA (217 SCRA)
The drawer in that case after being informed that the check was
negotiated to SIH, withdrew his funds closed her accounts. One of
the defenses given by the drawer is that he is not liable because
he was not given the appropriate notice of dishonor.
Notice is not necessary because the drawer has no right to
expect that the instrument will be honored.

Is there any formality in giving notice of dishonor?
It may be made verbally or in writing. No specific form is
required as long as the drawer and the indorsers are informed.
Supposing C notifies everybody, B, A, P, and D, can C afterwards
decide just to file an action against the drawer, and drop his claim
against the indorsers?
Yes
Can the drawer implead as 3rd party defendants B, A, and P?
No. D cannot file a 3rd party complaint against B, and P
because D is liable to P.
Supposing C decides to file an action only against B, can B file a
motion to implead D, P, and A as additional party defendants?
No. The holder can decide who to sue and the drawer and
indorsers not sued are discharged (Tuazon vs Bartolome).
The remedy available to B is to file a 3rd party complaint against
A, P, and D, against whom A has a right of recourse, but not just a
motion to implead them as party defendants.
What are the cases where notice of dishonor is necessary to be
given to the drawer?
Sec 114. (Code: San Fernando Pampanga Rotary Club)
Lets say the drawee dishonored the check because it is under
garnishment.
Is the drawer entitled to be given notice of dishonor?
No. He has no right to expect that it will be paid or honored
anyway.
The check was drawn against insufficient funds (DAIF).
Is he entitled to be given notice of dishonor?
No, because he has no right to expect that the instrument will
be accepted or paid.
D issued a stop payment order, but it is funded.
Is he entitled to be given notice of dishonor?
No, this falls under Sec 114 (e) the drawer is not entitled to be
given notice of dishonor where the drawer has countermanded
payment. Countermand means stop payment.
Pay to the order of P the amount of $100K 30 days after sight. C
presented the instrument to the drawee. The drawee accepted.
Signed drawee.
Can the holder now collect payment from the drawee or acceptor?
He must wait for the maturity, meaning wait for 30 days after
acceptance.
36
On maturity, what should C do to preserve his right as the holder?
Present the instrument for payment.
2 things may happen again:
1. acceptance for payment or
2. dishonored for non-payment
If the acceptor pays, does that discharge the instrument?
Yes. Sec 88 in relation to Sec 119. Requisites for payment in
due course.
Payment is made in due course when:
1. it is made by the party primarily liable
2. at or after the maturity of the payment
3. to the holder thereof
4. in good faith and without notice that his title is defective
OR it may be dishonored for non payment
Is it possible for the instrument to be accepted, and then eventually
dishonored for non-payment?
Yes
What should the holder do in case of dishonor by non-payment?
The holder must notify the drawer and the indorsers otherwise
they are discharged.
In case of dishonor by non-acceptance of the drawee, can the
holder sue the drawer and the indorser after giving them the
appropriate notice of dishonor without suing or filing an action
against the drawee?
Should he wait for the maturity of the instrument?
Sec 151. When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and the indorsers
accrues to the holder and no presentment for payment is
necessary.
There is no need to wait for maturity and present the instrument
all over again for payment. There is no need for the holder to file
any case against the drawee, he may proceed directly and right
away to the indorser, subject to the giving of the appropriate notice
of dishonor.
In case of dishonor by non-payment, the principle is the same.
Give notice of dishonor, otherwise the drawer and the indorser are
discharged from liability.
Lets say that the instrument is drawn abroad payable in the
Philippines or drawn here payable abroad, is there any particular
requirement to be complied with, otherwise the drawer and the
indorser are discharged?
Sec 152. Protest.
Why is protest necessary in that case?
Is protest necessary if a bill is drawn and payable in the
Philippines?
No
When is protest necessary?
In case of a foreign bill of exchange. If it not both drawn and
payable in the Philippines, the foreign bill of exchange must be
protested, not just giving of notice of dishonor.
It must be made by a notary public or a respectable resident of
the place where the bill is dishonored , in the presence of 2
credible witness (Sec 154). Otherwise the drawer and the indorser
are discharged.
Sec 119
What does discharge mean?
The parties on the instrument whether primarily or secondarily
liable are released from liability.
When is a negotiable instrument discharged?
1. Payment by the principal debtor at or after maturity to the
holder without notice that title of the holder is defective
(Sec 119 in relation to Sec 88)
Sec 47. An instrument negotiable in its origin continues to be
negotiable until it has been restrictively indorsed or discharged by
payment or otherwise.
Payment made before maturity do not discharge the instrument.
In fact it can be negotiated
2. Payment by the party accommodated, where the
instrument is made or accepted for his accommodation
Payment made by the party accommodated discharges the
instrument because in case of an accommodation party the party
accommodated is the principal debtor.
Does payment made by the accommodation party discharge the
instrument?
No, because the party primarily liable or the principal debtor is
the party accommodated. If the accommodation party pays the
instrument he is entitled to reimbursement from the party
accommodated (Sec 29).
3. Intentional cancellation thereof by the holder
Intentional cancellation means the instrument itself is cancelled,
not just the signature of the drawer or the indorser as the case
may be.
It can be tearing up the paper, destroying it, burning it, or just
placing the word cancelled.
It the word cancelled is written across the face of the
instrument, the presumption is that the cancellation was made
intentionally. He who alleges otherwise has the burden of proving
that the cancellation is not intentional (Sec 123).
4. Any other act which will discharge a simple contract for
the payment of money.
This is because a negotiable instrument is a contract for the
payment of money. That obligation may be extinguished using the
same mode of extinguishment.
Modes of extinguishing an obligation under the Civil Code
(Code: NoCoMeRePaLo)
1. Novation
2. Compensation
3. Merger
4. Remission
5. Payment
6. Loss
Other than these are:
1. Prescription
2. Fulfillment of a resolutory condition
4. When the principal debtor becomes the holder of the instrument
at or after maturity in his own right.
Is this not a surplusage?
Will it not fall under the preceding paragraph?
Doesnt this amount to merger or confusion?
Yes. This is basically merger or confusion. The merger of the
personality of the creditor and debtor in one person. The last
paragraph is a redundancy it should be covered by the preceding
37
paragraph because confusion is also a mode of extinguishing an
obligation.
Sec 120
What are the cases which discharges persons secondarily liable?
(Code: AC D TRE)
1. Any Act which discharges the instrument
2. Intentional Cancellation of his signature by the holder
This must be read in relation to Sec 48. The holder cannot
cancel the indorsement necessary to his title. The effect of that
cancellation of that particular signature and all parties subsequent
to him are discharged from liability.
3. Discharge of a prior party
This is because the subsequent party will lose his right of
recourse against a prior party.
4. Tender or payment by a prior party
If the tender or payment is accepted it will discharge the parties
subsequent to him. It has the same effect as discharge of a prior
party.
5. Release of the principal debtor
unless the right of recourse expressly reserved against the
party secondarily liable
6. Any agreement binding upon the holder to Extend the
time of payment
UNLESS made with the assent of the party secondarily
liable or
UNLESS the right of recourse against such party is
expressly reserved
This is likened to a situation where the terms and
conditions of the principal contract are amended or changed
without the consent of the surety, the surety is released from
liability.
Does payment by a secondary party discharge the instrument?
No. The effect of such payment is that the secondary party is
remitted to his former rights. Therefore he has a right of recourse
against parties prior to him.
Sec 124
Material Alteration
(This was taken up in relation to the abnormal instruments.)
To be covered by Sec 124, what is altered should be a material
particular, which is something which will change the rights and
relations of parties.
Sec 125
Instances which constitutes a material alteration
1. date of payment (i.e. instead of 30 days it was made 60
days after sight)
2. sum payable (i.e. amount has been altered from 10K to
100K; or even the interest)
3. time or place of payment
4. number or the relations of the parties (i.e. instead of
order, it became bearer)
5. medium or currency of payment (i.e. P to $)
Alteration of a serial number or check number is not a material
alteration.
What are the consequences of a material alteration?
The law does not talk about beneficial alteration. It only talks
about material alteration. It could be adverse or favorable to the
holder.
The bottom line is if it is a material alteration if it is made
without the consent of the parties liable thereon, then the entire
instrument is avoided except as to those who assented or
consented to the material alteration and subsequent indorsers.
Example:
M issued a promissory note payable to the order of P for 10K. P
Altered the instrument to 100K and negotiated to A, who has
knowledge of the alteration. A negotiated to B also with notice of
the alteration.
Can B enforce the instrument against M?
The law says in case of material alteration the instrument is
avoided, except as against those who assented, consented to the
alteration, and subsequent indorsers.
What about the discussion that the holder in due course may
enforce the instrument according to the original tenor?
That is if the holder is a HDC. In this example B is aware that
the instrument was altered from 10K to 100K, therefore the entire
instrument is avoided. M is not liable even for a single centavo.
This instrument in so far as the M is concerned is avoided, not just
for 10K but for the entire amount.
M is liable for 10K not for 100K only if the holder is a HDC,
because Sec 124 says the HDC may enforce the instrument in
accordance with the original tenor provided he is not a party to the
alteration.
The instrument is avoided except as against the parties who
assented, consented, or did the alteration, and subsequent
indorsers. Therefore if M dishonors the instrument is P liable to B
for 100K?
Yes, because he was the one responsible for the alteration.
Is A liable to B for 100K, despite the fact that B is not a HDC?
Yes, because the law says as a against the party who cause
the alteration and subsequent indorsers. It does not matter that B
is not a HDC because by express provision of law the indorser
warrants that the instrument is genuine and in all respects what it
purports to be.
Kinds of Negotiable Instruments
1. Bill of exchange (Sec 126)
2. Promissory note (Sec 184)
3. Check (Sec 184)
Bill of Exchange (Sec 126)
An unconditional order in writing addressed by one person to
another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand at a fixed or determinable
future time a sum certain in money to order or to bearer.
Promissory note (Sec 184)
An unconditional in writing made by one person to another,
Signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to
bearer
3 parties in a Bill of Exchange
1. Drawer
2. Drawee
3. Payee
2 parties in a Promissory Note
1. Maker
2. Payee
If the payee negotiates he becomes an indorser.
The drawer is liable based on the tenor of the instrument, the
same with the maker.
38
 The drawee-acceptor is liable based on the tenor of his
acceptance.
How do you reconcile this with Sec 124, that the holder may
enforce the instrument in accordance with the original tenor?
Metrobank vs Cabilzo
The amount was altered from P1,000 to P91,000.
The drawer issued a check for P1,000 payable to the payee, but
the payee altered it to P91,000. The payee deposited the check in
his account with the collecting bank. The collecting bank sent the
check for clearing. The signature of the drawer is genuine, so
therefore it could not be returned on account of forgery.
What is the liability of the drawee-acceptor?
Anything in excess of the tenor of the instrument has to be
returned to the drawer. So P90,000 must be returned to the
drawer, but the P1,000 need not be, because the drawer is still
liable based on the tenor of its acceptance.
Can the drawee rely on the warranty of the collecting bank,
because when the collecting bank sent the check for clearing it
assumes the warranties of an indorser?
No, the drawee must return the amount excess of the original
tenor of the instrument and cannot rely on the warranties of the
collecting bank as an indorser.
Check (Sec 185)
A bill of exchange drawn on a bank payable on demand.
How do we distinguish a check from a bill of exchange?
In both cases, the issuance of a bill of exchange or a check
does not operate as an assignment of funds in favor of the payee
or the holder. The drawee is not liable in both bill or exchange or
check unless and until the drawee accepts the same. And in case
of a check unless the drawee certifies the same.
1. A bill of exchange need not be drawn against a bank; a
check is always drawn against a bank
2. A bill of exchange may be on demand or at a
determinable future time; a check is always payable on
demand
3. A bill of exchange does not presuppose the existence of
funds with the drawee; a check presupposes that the
drawer has existing funds with the drawee-bank
4. A bill of exchange must be presented within reasonable
time from the last negotiation; a check must be
presented for payment within reasonable time from
issuance
5. In a bill of exchange the death of the drawer does not
extinguish the authority of the drawee to pay the payee;
in a check the death of the drawer known to the drawee
bank, extinguishes or revoke the authority of the
drawee-bank to pay the payee
6. A bill of exchange in certain cases requires presentment
for acceptance under Sec 143; a check does not require
presentment for acceptance
7. In case of a check which is certified upon the instance of
the holder, the drawer and the indorser are discharged;
there is no such thing in a bill of exchange
If the check is not presented within reasonable time from
issuance, the drawer is not necessarily discharged from liability.
The check merely becomes stale but it does not extinguish the
liability of the drawer, unless the drawer is impaired or prejudiced
by reason of the delay in the presentment of the instrument. This
happens if the drawer becomes insolvent.
Kinds of Bill of Exchange
Draft
a) Sight draft
draft payable at sight; once accepted by the drawee, the
drawee becomes liable
b) Usance draft or time draft or term draft
payable at a fixed period after sight
Traders acceptance or bankers acceptance
a) Traders acceptance is a bill of exchange drawn by the seller
against the buyer and accepted by the latter.
Example:
Seller sells sugar to the Coca-cola, the buyer. Seller drew a bill
of exchange against Coca-Cola, buyer. If the buyer accepts the bill
of exchange, it is a traders acceptance. Because it is accepted by
Coca-Cola, then the seller may negotiate that instrument to any
interested party.
b) Bankers acceptance is drawn on a bank and accepted by the
latter. This is different from a cashiers check.
Cashiers check is a check drawn by the bank against itself.
In bankers acceptance the bill of exchange need not be issued
by a bank, but simply addressed against the bank and simply
accepted by the bank. Cashiers check is both issued and the
drawer and the drawee are both the bank.
Kinds of Promissory Note
Certificate of Deposit (CTD)
Bond is a long term promissory note involving large amounts,
various borrowers and usually for more than 1 year.
Commercial Paper (CP) may be long term or short term;
evidence of indebtedness issued to the public upon approval
by the SEC
What about a Treasury Bill?
It is an evidence of indebtedness of the government issued by
the National Treasury. So it is specie of a promissory note. It is
the only bill that is not a bill of exchange.
Kinds of Checks
Cashiers Check
Managers Check
Crossed Check
Memorandum Check
On Clearing Rules:
What is the remedy available to an aggrieved party, if there is a
dispute between banks involving a check or clearing items?
What is the forum for the drawee bank to enforce the warranties of
the indorser (collecting bank)?
If the dispute concerns clearing items or checks between bank
members of PCHC, then recourse is outside of court. They must
exhaust procedures within the PCHC. Any recourse to the court is
premature. It will be dismissed for prematurity of cause of action.
A bank cannot file a 3rd party complaint against another bank in
the RTC.
Example:
ABC files an action against XYZ. XYZ wants to drag another bank,
that 3rd party complaint have to be ventilated likewise to the PCHC,
outside of courts, for as long as the dispute pertains to a clearing
items, a check and between or among members banks of the
PCHC.
What is the remedy available if a bank is aggrieved by the decision
of the PCHC?
Metrobank vs CA, 2009
Under PCHC rules the remedy available to an aggrieved bank
is to file a petition for review with the RTC.
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Is that the right remedy?
Jurisdiction is conferred by law not by agreement. Therefore,
while petition for review is the remedy allowed under PCHC Rules,
that is not the in accordance with the Rules of Court.
What are the remedies available to an aggrieved party being
aggrieved by an arbitral award?
Any of these 3 remedies:
1. Petition to vacate the award with the RTC
2. Petition for review Rule 43 with the CA on both
question of fact or question of law
3. Petition for certiorari Rule 65 if there is grave abuse of
discretion amounting to lack or excess jurisdiction
(Metropolitan Bank & Trust Company vs Court of Appeals
579 SCRA, 2009)
NIL_12
The Lord is near to all who call upon Him, to all who call Him in
truth. He will fulfill the desires of those who fear Him; He also will
hear their cries and save them.
PSALMS 145:18-19
Come to Me, all you who labor and are heavy laden, and I will
give you rest. Take My yoke, upon you and learn from Me, for I am
gentle and lowly in heart, and you will find rest for your souls. For
my yoke is easy and My burden is light.
MATTHEW 11:28-
29
Liabilities of Parties:
1. Liabilities of a Drawer
PNB vs CA
Drawer drew a check against drawee ABC payable to the order
of P. The drawee paid the payee, but the checks were lost thats
why the drawee was not able to debit the account of the drawer.
If the checks are lost, in the event that the drawee-bank
discovered that the account of the drawer was not debited, can the
drawee debit the account of the drawer?
Will the drawee be held liable for damages for debiting the account
of drawer belatedly?
If the drawee pays the payee upon the instructions of the
drawer then the drawee to prevent unjust enrichment can debit the
account of the drawer.
Solidbank vs Arrieta
If the drawer issued a check that was dishonored for being
drawn against insufficient funds, does that mean that any and all
subsequent checks issued will be dishonored for insufficiency of
funds?
Just because the check was dishonored once does not mean
the checks will be dishonored again for the same reason. It
depends on whether or not subsequent check issuance was
backed up by sufficient funds.
2. Liabilities of Indorser
Gullas vs PNB
There is a treasury warrant for P365. P is the payee of the
treasury warrants. P goes to PNB to transact the treasury warrant
with the bank, but the bank wouldnt want to transact with the
payee unless it is indorsed by somebody known to the bank.
Gullas signed at the back of the treasury warrant. He became
an indorser of the treasury warrant. By reason of his indorsement,
PNB made good the treasury warrant. PNB paid the payee.
Subsequently when the treasury warrant was sent for clearing, it
was discovered that the treasury warrant was spurious. The PNB
wanted to debit the account of Gullas.
In an effort to comply with the old NIL, the drawee sent notice of
dishonor to Gullas. Unfortunately when the notice of dishonor was
sent to Gullas he was in Manila, not in Cebu. PNB thought that
there was a valid notice of dishonor. Thereafter, it debited the
account of Gullas.
Gullas issued a check in payment of an obligation. It was
dishonored for being drawn against insufficient funds. Gullas sued
PNB.
PNB argued on compensation. They are both debtors and
creditors of each other. So in a contract of deposit Gullas may be
the creditor and PNB may be the creditor, but with respect to the
treasury warrants indorsed by Gullas, Gullas is the debtor and
PNB is the creditor. PNB argued that there was set-off by
operation of law.
SC said, first, treasury warrants is not a negotiable instrument.
But even if assuming that it was negotiable and subject to the
giving of notice of dishonor, the notice of dishonor must comply
with the formalities prescribed by law.
In this case if Gullas was in Manila and the notice of dishonor was
given in Cebu. That means that there was no valid notice of
dishonor. If there was no valid notice of dishonor, then the liability
of the indorser does not fall due. If the obligation of the indorser
does not become due then there is not basis to apply
compensation or set-off by operation of law.
The liability of an indorser is premised on presentment for
payment, dishonor, and giving the appropriate notice of dishonor.
When the law says appropriate, it is means based on the
formalities as to time, place, and manner. If there was no valid
notice then the liability of the indorser does not attach.
Great Asian Sales Corp. vs CA
D issued various checks payable to the order of P drawn
against ABC Bank. P obtained a loan from ABC Finance Co.
secured by assignment of receivables with recourse. P signed a
deed of assignment whereby P assigned or indorsed the various
checks in favor of the finance company with recourse.
The checks when presented to the drawee bank were
dishonored. P the indorser of the checks were not given notice of
dishonor.
Is P liable despite the lack of notice of dishonor?
Yes, not because of NIL but because of the deed of assignment
executed by P in favor of the finance company whereby the checks
were indorsed with recourse.
If it is based only on NIL, then notice of dishonor would be
necessary to make the indorser liable. But because the indorser
assumed a separate obligation under a separate agreement, deed
of assignment, then the liability of the indorser shall be governed
either by the NIL or the contract. Under the contract the indorser is
still liable despite the lack of the notice of dishonor.
Traders Royal Bank vs Radio Phil. Network (RPN)
In case of forged indorsement and the check is deposited with
the collecting bank, the collecting bank generally assumes liability.
So in case of forgery of the payees indorsement, the general rule
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is that the collecting bank assumes liability, because when it sents
the check for clearing it assumes the warranties of an indorser.
What if the payees indorsement was forged, but the forger had the
check encashed over the counter?
Can the drawee rely on the warranties of the collecting bank in this
case?
No, because if the checks were not deposited to a presenting
bank or collecting bank how can you apply the warranties of the
collecting bank?
In that case the only one liable is the drawee-bank for allowing the
encashment of the check bearing a forged indorsement.
So not all cases of forged indorsement will make the collecting
bank liable if there is no collecting bank liable anyway in the
equation.
BPI vs CA
Sec 49
If an instrument is payable to order, it must be indorsed and
delivered so that there will be negotiation.
If an instrument is payable to the order of A, A must indorse and
deliver.
What if A does not indorse, but only delivers to B and B deposited
the check to his account with BPI?
Despite the lack of indorsement BPI paid B. Subsequently BPI
discovered that there was no indorsement by A to B, just a transfer
of the instrument from A to B. BPI debited the account B.
B sued BPI for damages, arguing that BPI should not have
deducted the same.
The transfer of A to B is presumed to have consideration.

Allied Banking Corp vs CA Is there a presumption of consideration if an instrument is payable

Negotiation of a draft:The beneficiary of a LC may either be paid in
cash or his account with the bank may credited be or a draft may
be drawn against the issuing bank or confirming bank. The payee,
the beneficiary of the LC, may negotiate the draft. If the entity that
pays the draft at a discounts that bank is called a negotiating bank.
In this case the negotiating bank required as a condition to the
negotiation of the draft payable to the order the beneficiary, that
the officers of the corporation paying the draft must execute a
surety agreement binding themselves liable with the corporation in
case of dishonor of the draft.
The draft after negotiation to the negotiating bank was
dishonored by the drawee- bank, issuing bank of the LC. No notice
of dishonor was given to the officers of the corporation acting as a
surety.
Despite the lack of notice of dishonor, is the surety liable?
Is surety entitled to a notice of dishonor?
A surety is not entitled of a notice of dishonor unlike an indorser.
An indorser is liable if there is a notice of dishonor. Tthe liability of
a surety is broader than an indorser.
to order and the payee transfers the instrument without
indorsement?
None. The presumption of consideration only applies if the
instrument is negotiable and the transferee, the one in possession
qualifies as a holder. The term holder has a precise meaning under
the NIL. He must be the indorsee of the bill. The bill or the note
must have been indorsed to him and delivered.
If both process are not observed, meaning an order instrument
is just delivered not indorsed, the transferee does not acquire the
rights of the holder and the presumption of consideration does not
apply.
Can BPI after discovery that there was not indorsement, just
deliver to B debit the account of B?
Yes, because B has not right to the check in the first place,
there being no indorsement.
What is the remedy available to B?
B should have required the indorsement of A, so that he would
have the full rights of a holder. Failing which he is left a transferee
subject to all the defenses against the transferor.

Gonzales vs RCBC
RCBC paid the monetary value of the foreign check on the
strength of the indorsement of one of its officers. Unfortunately this
officer indorsed at the back of the check indicating that it is
indorsed only for certain amount. Lets say the amount is for $10K,
but it was indorsed only for $5K. As a consequence the drawee-
bank dishonored the check because of irregularity.

Can irregular indorser, RCBC recover from the payee of the

check?

The holder has the right of recourse against the indorser. The
indorser is liable to the holder or subsequent holders or any party
who may be compelled to pay the instrument.

However, this is not so if the one who cause the irregularity is

RCBC. So RCBC, while a party subsequent to the payee and
therefore generally has a right of recourse against the payee-
indorser that will not apply if the irregular indorser is the cause of
the irregularity.

The drawee-bank would not have dishonored the check had it

not for the amount written by its officer accept it only for a certain
amount. It was the cause of dishonor, so because of that it has no
right of recourse against the payee of the instrument.

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