Commercial Law Review

Negotiable Instruments Law

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Zarah Villanueva- Purple
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CHAP 1: Introduction
Governing Laws
1. Negotiable instruments Law
a. It can only apply to negotiable instruments. If it is not negotiable, pertinent provisiosn of Civil Code or other special laws should apply.
b. NIL can be applied but only by analogy if the instrument is not negotiable if there is no law that can be applied.
2. Code of Commerce
a. Code of Commerce has provisions on crossed checks. These provisions are still in force because there was no provision in NIL that deals with crossed checks.
3. New Civil Code
a. ART 1216

NEGOTIABLE INSTRUMENTS: written contract for the payment of the money, intended to be a substitute for money. It passes from one person to another as money, in such a manner as to given a holder in due course the
right to hold the instrument free from defenses available to prior parties.

Classes of negotiable instrument:

Promissory note Bill of exchange
SEC 184. A negotiable PN is an: SEC 126. A bill of exchange is an:
 Unconditional promise in writing made by one person to another  Unconditional order in writing addressed by one person to another
 Signed by the maker  Signed by the person giving it
 Engaging to pay on demand or at a fixed or determinable future time  Requiring the person to whom it is addressed
 A sum certain in money  To pay on demand or at a fixed or determinable future time
 To order or to bearer  A sum certain in money
 To order or to bearer
Where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

Personal engagement on the part of the maker. There is only an order directing other party to pay the instrument.

Kinds of PN: Kinds of Bills of Exchange:

1. Certificate of deposit—which a written acknowledgement of a bank of its receipt of a certain sum
within a promise to repay the same.
2. Bonds—certificate or evidence of a debt or which the issuing company or governmental body
promises to pay the bondholders a specified amount of interest for a specified length of time, and
to repay the loan on the expiration date.
3. Debenture—a PN or bond backed by the general credit of a corporation and usually not secured
by a mortgage or lien on any specified party
1. Draft—used synonymously with bill of exchange although it normally refers to a BE used in
documentary exchange like letters of credit transactions.
2. Inland and foreign bill—an inland bill is a bill which is, or on its face purports to be, both drawn
and payable within the Philippines. Any other bill is a foreign bill.
3. Time draft—draft that is payable at a fixed date.
4. Sight or demand draft—draft that is payable when the holder presents it for payment.
5. Trade acceptance—bill that is used in contracts of sale where the seller as drawer orders the
buyer (as drawee) to pay a sum certain to the same seller (payee).
6. Banker’s acceptance—a time draft across the face of which the drawee has written the word
accepted.
7. Check—a BE drawn on a bank payable on demand.

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Unconditional promise Unconditional order
Involves 2 parties Involves 3 parties
Maker primarily liable Drawer secondarily liable
Only one presentment: payment GR: 2 presentments: acceptance and payment

 When can a BE be treated as a PN?

A: Instances when a bill may be treated as a PN:
1. Drawer and drawee are the same person.
2. Drawee is a fictitious person.
3. Drawee has no capacity to contract.
4. Instrument is so ambiguous that there is doubt whether it is a bill or a note.

Bill of exchange Check

Not drawn on deposit. It is not necessary that a drawer should have funds in the hands of the drawee. Necessary that a check is drawn on deposit. Otherwise, there would be fraud.
Death of drawer with the knowledge of the bank, does not revoke the authority of the bank to pay. Death of drawer, with knowledge of bank revokes the authority of the banker to pay.
May be presented for payment within a reasonable time after its last negotiation. Must be presented within a reasonable time after its issue.

NOTE: A crossed check is usually negotiable as it normally complies with the requirements under SEC 1, but
issued for a special purpose and can be negotiated only once.

Functions of negotiable instrument:

1. It operates as a substitute of money
a. This is the main function of negotiable instruments
b. It is a substitute for money whether it is a negotiable or a non-negotiable instrument. Both are in place of money.
2. It is a means of creating and transferring credit.
3. It facilitates the sale of goods
4. It increases the purchasing medium in circulation

Q: What is the best substitute for money?

A: A negotiable instrument because of its:
1. Negotiability
2. Accumulation of secondary contracts

Characteristics of negotiable instrument

Negotiability
A bill or a note or check may pass from hand to hand similar to money, so as to give the holder in due course
(HDC) the right to hold the instrument and to collect the sum payable for himself free from defenses.
This attribute is very important.
Accumulation of secondary contracts
Secondary contracts are picked up and carried along with them as they are negotiated from one person to
another, or in the course of negotiation of a negotiable instrument, a series of juridical ties between parties
thereto arise either by law or by privity.
The parties are converted to obligors because of their indorsements.

Difference between negotiable instruments and non-negotiable instruments:

Negotiable instruments Non-negotiable instruments

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Only negotiable instruments are governed by NIL.
Can be transferred by negotiation or assignment.
Can be an HDC if all requirements of SEC 52 are complied with.
Distinguish negotiability from assignability
Negotiability
Pertains to negotiable contracts
Person who takes the instrument by negotiation takes it free from personal defenses available among
parties.
Negotiable instruments compared with other papers:
Negotiable instruments
It is a written contract for the payment of the money, intended to be a substitute for money. It passes from
one person to another as money, in such a manner as to given a holder in due course the right to hold the
instrument free from defenses available to prior parties.
It represents payment of money. It substitutes money.
Negotiable instruments
It is a written contract for the payment of the money, intended to be a substitute for money. It passes from
one person to another as money, in such a manner as to given a holder in due course the right to hold the
instrument free from defenses available to prior parties.
It is similar to a bill of exchange where it directs another part to pay the instrument. However, there are no
conditions restricting the negotiability of the instrument. Promise or order to pay must be unconditional.
Negotiable instruments
It is a written contract for the payment of the money, intended to be a substitute for money. It passes from
one person to another as money, in such a manner as to given a holder in due course the right to hold the
instrument free from defenses available to prior parties.
Promise or order to pay must be unconditional.
Negotiable instruments
It is a written contract for the payment of the money, intended to be a substitute for money. It passes from
one person to another as money, in such a manner as to given a holder in due course the right to hold the
instrument free from defenses available to prior parties.
It represents or is a substitute for money.
NIL does not apply. Application of NIL to non-negotiable instruments is only by analogy.
Only be assignment.
Transferee can never be an HDC but remains to be an assignee.
Since transferee can never be an HDC, the maker or drawer may raise all defenses available to prior parties
may be raised against the last transferee.
Assignability
Pertains to contracts in general
Once who takes an instrument by assignment takes it subject to defenses obtaining among original parties
Document of title
ART 1636, Civil Code: This includes any bill of lading, dock warrant, quedan or warehouse receipt or order for
delivery of goods or any other document used in the ordinary course of business in the sale or transfer of
goods, as proof of possession or control of goods, or authorizing or purporting to authorize the possessor of
the document to transfer or receive either by indorsement or by delivery, goods represented by such
document.
It only evidences possession or control of goods. It proves that the one in possession of document of title has
possession or control of the goods subject to it.
Letter of credit
It is an engagement by a bank or other person made at the request of the customer that the issuer will
honor drafts or other demands for payment upon compliance with conditions specified in the credit.
It orders the bank or person requested by the customer to honor the demands for payment in compliance
with conditions specified in the credit.
Certificate of stock
It is a written evidence of shares but it is not the share itself. It does not represent credit. It is evidences
ownership of stocks and it is signed by the president or VP, countersigned by secretary or assistant secretary.
A non-negotiable instrument because it does not contain an unconditional promise or order to pay a sum
certain in money.
No certificate of stock shall be issued to a subscriber until the full amount of his subscription together with
interest and expenses (in case of delinquent shares), if any is due, has been paid.
Pawn ticket
NOTE: non-negotiable because it does not represent money but pawned articles.
It represents possession or control of articles pawned. It does not represent money.
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Negotiable instruments Postal money order
It is a written contract for the payment of the money, intended to be a substitute for money. It passes from These are drafts drawn by the post-office by a person purchasing money orders. It is payable at the second
one person to another as money, in such a manner as to given a holder in due course the right to hold the office to a payee named in the order.
instrument free from defenses available to prior parties.

Postal money orders are not negotiable.

1. They have limited negotiability as they may be indorsed once.
2. It is governed by postal rules and regulations which may be inconsistent with NIL.
3. The government is not engaging in commercial transactions but merely governmental power for
public benefit in establishing and operating postal money order system.

Negotiable instruments Treasury Warrants

It is a written contract for the payment of the money, intended to be a substitute for money. It passes from NOTE: negotiable because it is an order for payment out of a particular fund.
one person to another as money, in such a manner as to given a holder in due course the right to hold the
instrument free from defenses available to prior parties. “Payable from appropriation for food administration” is actually an order for payment out of particular fund
and is not unconditional, and does not fulfill one of essential requirements of negotiable instrument.

It is non-negotiable because it is conditional, being that there must be a particular fund to which payment
can be taken from first.

The following are also non-negotiable:

1. Warehouse receipts and bill of lading because these represent goods and not money.
2. Trust receipt because it is an evidence of ownership of goods, not money.

NOTE: Trade acceptance is negotiable because it is a BE addressed by the seller of goods to the buyer. But SEC 1 must be complied with.

 What is the difference between an inland and a foreign bill of exchange?

Inland bill of exchange Foreign bill of exchange
Bill of which is or on its face purports to be, both drawn and payable within the Philippines It may be drawn outside the Philippines payable outside the Philippines, or both drawn and payable outside
of the Philippines.

Legal tender character

Q: Does negotiable instruments have legal tender power?
A: NO.
Negotiable instruments Legal Tender
It is a written contract for the payment of the money, intended to be a substitute for money. It passes from This is a kind of money that the law compels a creditor to accept in payment of his debt when tendered by
one person to another as money, in such a manner as to given a holder in due course the right to hold the the debtor in the right amount. These are coins and notes circulated by BSP.
instrument free from defenses available to prior parties.

There is an element of compulsion.

SEC 52 New Central Bank Act (RA 7653)—only notes and coins issued by the BSP are considered legal.

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SEC 60 New Central Bank Act (RA 7653)—checks are not legal tender. Checks representing demand deposits do not have legal tender power and their acceptance in payment of debts, both public and private, is at the
option of the creditor. Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to delivery to the creditor of cash in an amount equal to the amount credited
to his account.

Pursuant to SEC 52 RA 7653 and BSP Circular 537, maximum amount of coins to be considered as legal tender are adjusted as follows:
1. 1,000 for denomination of 1-peso, 5-peso and 10-peso coins
2. 100 for denomination of 1-centavo, 5-centavo, 10-centavo and 25-centavo

Form and interpretation of negotiable instruments

1. Requisites of negotiability
SEC 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements—
a. It must be in writing and signed by the maker or the drawer
b. Must contain an unconditional promise to pay or order to pay a certain sum of money
c. Must be payable on demand, on a fixed date or a determinable future time
d. Must be payable to order or payable to bearer
e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated with reasonable certainty.

Q: What principle do we follow in determining the instrument as negotiable or not?

A: Negotiability is shown in the face of the instrument. Negotiability or non-negotiability is determined fro writing. In the construction of a bill or a note, intention of the parties is to control, if it can be legally ascertained.
While the writing may be read in the light of surrounding circumstances, the writing is the only outward and visible expression of their meaning. Duty of the court in such case is to ascertain, not what parties secretly
intended but what is the meaning of the words they have used.

REQUISITES:
1) It must be in writing and signed by the maker or drawer
2) It must contain an unconditional promise or order to pay a sum certain in money
3) It must be payable in demand or at a fixed or determinable future time
4) It must be payable to order or bearer
5) Omissions that do not affect negotiability
6) Additional provisions not affecting negotiability
 Are electronic messages negotiable instruments?
A: NO, they are not signed by the investor-clients as supposed to drawers of a BE. They also do not contain an unconditional promise to pay a sum certain in money as the payment is supposed to come from a specific fund
or account of the investor-clients. Lastly, they are not payable to order or to bearer but to a specifically designated 3rd party.

 What is the extent of liability of co-makers of an instrument?

A: Where the instrument contain the words, “I promise to pay” and such is signed by 2 or more persons, they are deemed jointly and severally liable. The fact that a singular pronoun is used indicates that the promise is
individual as to each other, meaning that each of the co-signers is deemed to have made an independent singular promise to pay the notes in full.

Problem
 Juan Cruz borrowed 1000 from Pedro Santos as evidenced by a PN executed by X as maker. All other requisites of negotiability are present in the note except that Juan Cruz did not affix his usual signature
thereon. As Juan was ailing at that time, he was only able to put X in the blank space meant for the signature of the maker. Is the requisite that the instrument must be signed by the maker complied with?
A: YES, “X” is sufficient to comply with the requirement that the instrument must be signed by the maker. The letter was adopted by Juan Cruz with the intent to authenticate the instrument. It is not necessary that the
signature is the usual signature of the maker.

It must be in writing and Q: Why must be in writing?

signed by the maker or A: For it to be used for negotiation.

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drawer RATIONALE: For achievement of purpose of negotiable instrument law
Q: Why must it be signed by the maker or drawer?
A: To be bound by the contract

It must contain an Promise to pay Order to pay

unconditional promise or It is the undertaking make by the maker to pay a sum certain in money to the payee or It is a command made by the drawer addressed to the drawee ordering the latter to pay the
order to pay a sum holder. payee or holder a sum certain in money.
certain in money
The word “promise” or “order” need not appear in the instrument to satisfy the requirement:
1. An acknowledgement may become a promise by the addition of words by with a promise of payment is naturally implied, such as “payable”, “payable on a given day”, “payable in
demand”, “paid when called for”.
2. ‘Due AB or order $325, payable on demand” or “I acknowledge myself to be indebted to the order of A in $109, to be paid on demand, for value received” or “IOU $85 to be paid on
June 5th are held to be promissory notes, indicating a promise to pay.

Q: Why does the law require that the promise or order be unconditional?
A: Because no one will accept it if the transferee does not know the certainty of the event that will happen. Hence, uncertainty will defeat the very purpose of the negotiable instrument law
(i.e. substitute for money)

Mere recital does not negate negotiability of the instrument.

Q: What is a condition?
A: It is a contingent event, happening of which is uncertain, even which may or may not happen. In alternative obligations, for the instrument to be negotiable, option must be left in the hands
of the creditor. If the option is left in the hands of the debtor, it is non-negotiable.

Promise or order to pay must be unconditional Payable in sum certain in money

1. In reference to transaction 1. Provisions which do not affect certainty of sum payable

SEC 3. WHEN PROMISE IS UNCONDITIONAL—Unqualified order or promise SEC 2. WHAT CONSTITUTES CERTAINTY AS TO SUM. Sum payable is a sum certain within the meaning
to pay is unconditional through coupled with— of this act although it is to be paid:
a. Indication of a particular fund out of which reimbursement is to a. With interest
be made or a particular account to be debited with the amount b. By stated installments
b. Statement of transaction which gives rise to the instrument c. By stated installments, with provision that upon default in payment of any installment or
But an order or promise to pay out of a particular fund is not unconditional of interest, the whole sum shall become due.
d. With exchange, whether at a fixed rate or at the current rate
2. Source or payment or account to be debited e. With costs of collection or an attorney’s fee, in case payment shall not be made at
Fund for reimbursement Particular fund for payment maturity.
The drawee pays the payee from There is only one act—the drawee
his own funds afterwards the pays directly from the particular 2. Payment of interest
drawee pays himself from the fund indicated. Q: Why is there a need to pay interest?
particular fund. A: For consumption of money owned by a person but was not used by him
Particular fund indicated is not the  Particular fund indicated is
direct source of payment. the direct source of 3. Payment by installments
payment. Q: What are stated installments?
 Particular fund depends on A: These are payments to which dates of each installment must be fixed or at least determinable and
the sufficiency of the funds. the amount to be paid for each installment must be stated.
 Extrinsic and collateral mater
negates negotiability. Things to be written in a negotiable instrument regarding payment of installments:
 Amount of each installment, which must be determinable.

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  Maturity date
Q: Is a PN where the maker promises to pay “as soon as he means permit
him to do so” negotiable? 4. Acceleration clause
A: NO, the phrase renders the promise conditional, although under the Civil Q: What is an acceleration clause?
Code, it may be considered as an obligation with a period. A: It is a statement which renders the whole debt due and demandable upon failure of the obligor to
comply with certain conditions.

DOCTRINE OF INDIVISIBILTY OF CONTRACT: obligations in the contract are interdependent, and no party
can demand performance from the other unless it performs its own part.

5. Payment with exchange

It must be the prevailing rate of conversion or fixed rate that is well known. Exchange rate, however,
does not affect the negotiability of the instrument because the sum remains to be certain.

6. Payment of attorney’s fees

It becomes due upon default of the obligor and the obligee is forced to engage the services of a lawyer.

NOTES for “payable in sum certain in money”:

1. Money need not be “legal tender”. An instrument is still negotiable although the amount to be paid is expressed in currency that is not legal tender so long as it is expressed in
money. Under RA 8183, the agreement to pay in foreign currency is valid. Example is YEN.
2. If the obligor like the maker is given the option to deliver something in lieu of money, the instrument is not negotiable (SEC 5). Example: A note where the maker “promisest o
deliver 1000 or a sack of rice” at his option.
3. But if the instrument gives the holder an election to require something to be done in lieu of payment of money, the instrument is still negotiable.
4. A sum is certain if the amount that is to be unconditionally paid by the maker or drawee can be determined on the face of the instrument even if it requires mathematical
computation.

Problem:
1. A treasury warrant was issued by Mr. BA in his capacity as disbursing officer of the Food Administration, a government instrumentality. The warrant states that it is “payable for
additional cash advances for the Food Program Campaign in La Union”, and the amount stated therein is “payable from the appropriation for the Food Administration”. Is the
warrant negotiable?
A: NO and Mr. BA cannot be considered HDC as he is not even a holder of the warrant. The promise to pay is conditional because the sum is payable out of a particular fund, the appropriation
for food administration.

2. A bookstore received 5 postal money orders totaling 1000 as part of sales receipts, and deposited the same with a bank. A day after, the bank tried to clear them with Bureau of
Posts. It turned out however, that the postal money orders were irregularly issued, thereby prompting the Bureau of Posts to serve notice upon all banks not to pay those if
presented for payment. The Bureau of Posts informed the bank that the amount 1000 had been deducted from the bank’s clearing account for the same amount. A complaint
was filed by the bookstore against the Bureau of Posts and the bank for recovery of the sum, which was dismissed by court. The bookstore appealed contending that the postal
money orders are negotiable instruments and their nature could not have been affected by the notice sent by the Bureau of Posts. How would you resolve the controversy?
A: The bookstore’s contention is untenable. Postal money orders are not negotiable instruments. They are under the restrictions and limitations of postal laws. Hence, they do not contain an
unconditional promise or order required by SEC 1 and 3.

It must be payable in
demand or at a fixed or When payable on demand When payable at a determinable future time
determinable future SEC 7. WHEN PAYABLE ON DEMAND— SEC 4. DETERMINABLE FUTURE TIME; WHAT CONSTITUTES—An instrument is payable at a determinable future time which is
time. a. When so it is expressed to be payable on expressed to be payable:
demand or at sight or on presentation a. At a fixed period after date or sight
b. In which no time for payment is expressed b. On or before a fixed or determinable future time specified

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Where an instrument is issued, accepted or indorsed
when overdue, it is, as regards the person so issuing,
accepting or indorsing it, payable on demand.
It is the holder of the instrument that has the call in
case the negotiable instrument is silent or it does not
state a maturity date.
c. On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of
happening be uncertain
An instrument payable upon a contingency (possible but not certain) not negotiable, and the happening of the event does
not cure the defect.
The phrase “On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of
happening be uncertain”—means that an instrument payable upon a contingency is not negotiable and the happening of an
event does not cure the defect. This paragraph is one with a period.

If the instrument is demandable based on period, the negotiability of the instrument is still not affected.
With a condition With a period
Uncertain to happen Certain to happen though the date of
happening is uncertain

AT A FIXED PERIOD AFTER DATE OR SIGHT

Ex. 60 days after sight, pay to order of Jose Soriano P1000.

AFTER SIGHT—drawee has seen the instrument upon presentment for acceptance

ON OR BEFORE A FIXED OR DETERMINABLE TIME

Ex. On or before December 31 1950 I promise to pay X or order P1000

AFTER OCCURRENCE OF A SPECIFIED EVENT THAT IS CERTAIN TO HAPPEN, THOUGH THE TIME OF HAPPENING BE UNCERTAIN—
Instrument is payable at a determinable future time at a fixed period after the occurrence of a specified event which is certain
to happen though time of happening be uncertain.
Ex. 10 days after the death of X, pay to the order of B, P1000.
-- Occurrence of death is a certain event, although we are uncertain when it will happen exactly. Hence, once death happens,
the counting of the period after it occurs is also certain.

WORD USED IS “AFTER” NOT “BEFORE”

Ex. 10 days before the death of X, I promise to pay to bearer P1000. = NOT NEGO; date of maturity of instrument can be
determined only after the note has become overdue.

 What is the effect of antedating or postdating the instrument?

A: The instrument is still valid, provided that it was 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.

Acceleration clauses Insecurity clauses Extension Clauses

Negotiability of the instrument is not affected even if it is to
be paid by stated installments, with a provision that, upon
default in the payment of any installment or of interest, the
whole shall become due.
Provisions in the contract which allow the holder to
accelerate payment “if he deems himself insecure”. The
instrument is rendered non-negotiable.
An instrument is payable at a definite time if by its terms it
is payable at a definite time subject to extension at the
option of the holder, or to extension to a further definite
time at the option of the maker or acceptor or automatically
upon or after a specified act or event.

EX: An instrument is still negotiable if it is payable 2 years

from the date subject to extension for another 1 year at th
option of the maker.

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It must be payable to These are word are words of negotiability.
order or bearer The instrument is not negotiable if it is payable to a specified person or entity because NIL requires that the instrument must be payable to order or to bearer.

Q: Is a certificate of time deposit wherein it is stated, “this is to certify the bearer has deposited, repayable to said depositor” negotiable?
A: It is negotiated being payable to bearer. However, where CTDs were delivered, but not endorsed as ecurity, there is no negotiation. At most, the holder would be a holder for value up to the
extent of his lien (SEC 27) or a pledgee under Civil Code.

Q: What is the implication of these words?

A: It shows proper authorization for further negotiation by the maker or drawer.

When payable to bearer When payable to order

SEC. 9 WHEN PAYABLE TO BEARER— SEC 8. WHEN PAYABLE TO ORDER
Instrument is payable to bearer Instrument is payable to order where it is drawn payable to the order where it is drawn
a. When it is expressed to be so payable payable to the order of an specified person or to him or his order. It may be drawn
b. When it is payable to a person named or bearer payable to the order of (payee)
c. When it is payable to the order of a fictitious or non-existing person and such a. Payer who is not a maker, drawer or drawee
fact was known to the person making it so payable b. Drawer or maker
d. When the name of the payee does not purport to be the name of any person c. Drawee
e. When the only or last indorsement is an indorsement in blank d. 2 or more payees jointly
f. When expressed to be so payable e. One of some of several payees
f. Holder of an office for time being
Where instrument is payable to order, payee must be named or otherwise indicated
therein with reasonable certainty.

PRINCIPLE: Once a bearer, always a bearer instrument. The payee of an instrument that is payable to order must be a person in being, natural or
This principle applies only to an instrument originally issued as a bearer instrument. juridical, and ascertained at the time of issue.

Rule when an instrument is payable to a fictitious person: If an instrument is an order

instrument upon its face but it is named to a fictitious or non-existing person, it is converted
into a bearer instrument.
Q: Why does an instrument payable to a fictitious person become a bearer instrument?
A: A fictitious person or non-existing person cannot endorse.
Q: What if the person payable in an order instrument is existing but the drawer or maker
does not intend to pay him?
A: It is still considered a bearer instrument. A person to whose order the instrument is made
payable may be in fact existing, but is considered fictitious or non-existing under SEC 9(c) if
the maker or drawer (person making it so payable) does not really intend to pay the
specified person.
PAYER WHO IS NOT A MAKER, DRAWER OR DRAWEE—he may be a juridical person.
Q: How can it be negotiated further?
A: By indorsement of the person authorized by the corporation.
HOLDER OF AN OFFICE FOR THE TIME BEING- it is not necessary to name the person holding
the position since it is payable to the office itself and not to the person holding it.
NOTE: There are only 2 ways by which an instrument can be made payable to order:
1. Payable to the order of a specified person. (“Pay to order of Juan”)
2. Payable to a specified person or his order. (“Pay to Juan or order”)

It does not need an indorsement to be validly negotiated. It is negotiated by mere delivery. It requires an indorsement from the payee or holder before it may be validly negotiated.

NOTE: A bill may be addressed to more than 1 drawee jointly, whether they are partners or not, but not to 2 or more drawees in alternative or succession (SEC 128).
EX: an instrument may be addressed to “Juan and Pedro” but not to “Juan order Pedro”

 What is the Fictitious Payee Rule?

A: When the payee is fictitious or not intended to be the true recipient of the proceeds, check is considered a bearer instrument. A check is a BE drawn on a bank payable on deand. It is either

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 an order instrument or a bearer instrument.

 When is an instrument payable to a specified payee but is considered a bearer instrument?

A: A check that is payable to the order of a specified payee is an order instrument. However, if it is payable to a specified payee but such payee is a fictitious or a non-existing person + such fact
is known to the person making it so payable, it is a bearer instrument.

 What does the term “fictitious” mean?

A: An actual, existing and living payee may also be fictitious if the maker of the check did not intent for the payee to in fact receive the proceeds of the check. This occurs when the maker
places a name of an existing payee for convenience or to cover up an illegal activity. Once the payee is considered a fictitious payee and the check is a bearer instrument, the drawee bank is
absolved from liability and the drawer bears the loss. The underlying theory is that one cannot expect a fictitious payee to negotiate the check by placing his indorsement thereon. Since the
maker knew of this limitation, he must have intended for the instrument to be negotiated by mere delivery. In such case, he shall bear the loss.

 State the general effects of a fictitious payee-situation.

A: The effects are:
1. The drawee-bank is absolved from liability and the drawer bears the loss.
2. The instrument can be negotiated by delivery.

 What are the exceptions to the Fictitious Payee Rule?

EXCEPTIONS:
1. A showing of commercial BF on the part of the drawee-bank or any transferee of the check will strip of the defense of Fictitious Payee Rule. It will bear the loss.
2. Commercial BF is present if the transferee acts dishonestly, and is a party to the fraudulent scheme.

 What must be shown in order for the fictitious payee rule to be available as a defense on the part of the drawee bank?
A: The drawee-bank must show that the makers did not intent for the named payees to be part of the transaction involving the checks. The requisite condition of a fictitious-payee situation is
that the maker of the check intended for the payee to have no interest in the transaction.

Problems
1. Determine if the following instruments are negotiable: “for value received, I/we jointly and severally promise to pay to IT Corp, the sum of 1,093,789.71, Philippine currency, the
said principal sum, to be payable in 24 monthly installments starting July 15, 1978 and every 15th of the month thereafter until fully paid”.
A: The note is not negotiable because it is not payable to order or to bearer. It is payable to a specified person.

2. ATL drew a check on NOV 16, 2000 upon C Bank for the sum of 4000 payable to the order of cash. He delivered the check to Mr. LHH on the same day in exchange for money.
Mr. LHH gave the money to ATL because the latter represented that he badly needed the amount but could not withdraw from this bank because the bank was already closed.
ATL’s check was later dishonored because of insufficient funds. When ATL was later prosecuted for estafa, he alleged that he is not liable arguing that the check should not have
been presented for payment because he did not indorse the same. Is his argument tenable?
A: NO, a check that is payable to the order of cash is a bearer instrument. Hence, the drawee bank may pay it to the person presenting it for payment without the drawer’s indorsement.
Where a check is in ordinary form and is payable to bearer, a bank to which it was presented for payment, need not have the holder identified and is not negligence in failing to do so.

Omissions do not affect SEC 6. Omission; seal; particular money—validity and NEGO character of an instrument are not affected by the fact that—
negotiability a. X dated (date of issuance)
b. X specify value given or that any value had been given (SEC 24)
c. X specify place where it is drawn or place where it is payable
d. Bears seal (prove ownership)
e. Designates a particular kind or current money
But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of consideration to be stated in the instrument

1. It is not dated
It becomes payable on demand under SEC 7.

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  When may date be inserted by holder?
A: When date is necessary in order to determine the maturity date of the instrument:
 Where an instrument expressed to be payable at a fixed period after the date is issued undated.
 Where acceptance of an instrument payable at a fixed period after sight is undated

SEC 11 states that where the instrument or an acceptance or any indorsement 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.

2. It does not specify the value given or that any value had been given
All instruments have a presumption of consideration even if it does not specify the value given or the fact that a value was given for it.
SEC 24. Presumption of consideration—Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears to
have become a party for value.

3. It does not specify the place where it is drawn or place where it is payable
Since it is a written contract for the payment of the money, the New Civil Code is applied suppletorily. It states that, “laws of place where contract was entered into shall govern”.

4. It bears a seal
This is for authentication purposes.

5. It designates a particular kind or current money

It is still negotiable because it would still be considered payable in money. Foreign currency is convertible to Philippine money which is legal tender in the Philippines.
Provided that it is current money or foreign money which has a fixed value in relation to the money of the country in which the instrument is payable, still the negotiability of the instrument is
not affected, as the instrument would still be considered payable in money.

Problem
 Can a BE or PN qualify as a negotiable instrument if: a) it is not dated, b) the date and month, but not the year of its maturity is given; c) it is payable to cash; d) or it names 2
alternative drawees; e) or it does not state the place where it is made or payable?
A: For A, YES. SEC 6(a) provides that negotiability of an instrument is not affected if it is not dated. The date of issuance is not a requisite under SEC 1.
For B, NO. Absence of year of maturity affects the negotiability. Evident intent is to make the instrument payable at a fixed date but the year was omitted. Hence, the time for payment is not
determinable int his case.
For C, YES. SEC 9(d) states that an instrument is payable to bearer if the name of the payee does not purport to be the name of any person. Name of a payee (cash) is an inanimate object,
hence it is a bearer instrument.
For D, NO. SEC 128 provides that a bill may not be addressed to 2 or more drawees in alternative or in succession. Otherwise, there is no certainty as to the person to whom the instrument
may be presented for payment.
For E, negotiability of an instrument is not affected if it does not state the place where it is made or where it is payable. All that is required is SEC 1.

Additional provisions not SEC 5. Additional provisions not affecting negotiability—

affecting negotiability An instrument which contains an order or promise to do any act in addition to the payment of money is NOT NEGO. But NEGO CHARACTER of an instrument otherwise negotiable is not
affected by a provision which—
a. Authorizes sale of collateral securities in case instrument be not paid at maturity.
b. Authorizes a confession of judgment if instrument be not paid at maturity
c. Waives the benefit of any law intended for the advantage or protection of obligor
d. Gives the holder an election to require something to be done in lieu of payment of money
But nothing in this section shall validate any provision or stipulation otherwise illegal.

NOTE: GR: an instrument which contains an order or promise to do any act in addition to payment of money is not negotiable.
EXCEPTION:
 Sale of collateral securities after maturity
 Confession of judgment

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 1. Sale of collateral securities after maturity
Ex. I promise to pay B or order P1000 on Dec 21 1950. Provided however that if this note is not paid at the date of maturity, ring which I deliver to B by way of pledge to secure the payment of
my indebtedness to him may be sold by B and the proceeds applied to value of this note. =NEGO
Additional act is to be executed AFTER DATE OF MATURITY

Q: Is the authority to sale includes authority to appropriate for himself?

A: NO, if it is that way, it will constitute as a pactum commissorium thus a form of unjust enrichment.

Q: What is the meaning of sale of collateral securities?

A: It contemplates that securities are to be added to the obligation to pay.

2. Confession of judgment
The confession is void by reason of public policy but the instrument is still negotiable. In effect, such provision is considered not existing. It waives his right to due process or his right of a day
in court.
SEE  PNB vs. MANILA OIL REFINERY

COGNOVIT ACTIONEM CONFESSION RELICTA VERIFICATIONE

Written confession authorizing to confess judgment and issue execution for a sum named. Confession of judgment made after plea is pleaded accompanied by a withdrawal of
Given in order to save expense and differs from warrant of attorney which is given before the plea.
commencement of any action

EFFECT OF CONFESSION: AGAINST PUBLIC POLICY

a. Field for fraud
b. Promissor bargains away his right to a day in court
c. Effect of instrument is to strike down right of appeal
d. SEC 5(b) does not validate kind of stipulation
e. Illegal

3. Waiver of benefit
This pertains to benefits granted by the NIL.

Q: What are the benefits that can be waived but the negotiability of the instrument is not affected?
1. Presentment for payment
2. Notice of dishonor
3. Protest
All these may be waived; intended merely to prevent discharge of secondary parties by extensions of time but not to alter specified date of maturity.

4. Holder is given the option to do something in lieu (in exchange) of payment of money
If it is the obligor or debtor who is given the option to choose what can be done, it is not negotiable because the instrument becomes conditional. Thus, the requisites for negotiability is not
complied with.

ELECTION OF HOLDER TO REQUIRE SOME OTHER ACT WHERE CHOICE LIES WITH DEBTOR
= NEGO = NOT NEGO
Even if there is an additional act, NEGO provided that right to choose between payment of money or Holder cannot demand delivery of money even if he wants to
performance of additional act is in the hands of the holder.

Problem
 The manager and treasurer of ORB Company executed and delivered to PNB a PN whereby the company promises to pay to the order of PNB the amount of 61,000. The note

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 contains the following stipulations: “without defalcation, value received, and do hereby authorizes any attorney in the Philippines, in case this note be not paid at maturity, to
appear in the name and confess judgment for the above sum with interest, cost of suit and attorney’s fees of 10% for collection, a release of all errors and waivers of all rights to
inquisition and appeal, and to the benefit of all laws exempting property, real or personal, from levy or sale”. Are the stipulations valid and is the instrument negotiable?
A: YES, the negotiability of the instrument is not affected by the stipulations. Although ORB Corp is correct in stating that the stipulations are void, it is still negotiable because SEC 1 is complied
with. They are in the nature of stipulations authorizing confession of judgment which is considered void for being against public policy. However, SEC 5 NIL provides that negotiable character
of an instrument is not affected by the confession of judgment if the instrument be not paid at maturity. In order words, only the stipulation is avoided.

2. Rules to be followed in interpreting negotiable instruments

SEC 17. Construction where instrument is ambiguous—Where language of instrument is ambiguous or there are omissions, following rules of construction apply:
a. Where SP is expressed in words and also in figures and there is a discrepancy between the 2, sum denoted by the words is the SP; but if the words are ambiguous or uncertain, reference may be had to the
figures to fix the amount.
b. Where instrument provides for the payment of interest without specifying the date from which interest is to run, interest run from the date of the instrument and if the instrument is undated, from the
issue thereof
c. Where instrument is not dated, it will be dated as of the time it was issued
d. Where there is a conflict between the written and printed provisions of the instrument, written provisions prevail
e. Where instrument is so ambiguous that there is doubt whether it is a bill or a note, 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
g. Where an instrument containing the word “I promise to pay” is signed by 2 or more persons, they are deemed to be jointly and severally liable.

Requisites under SEC 1 must appear upon its face. However, lack or doubt of it does not render the instrument automatically non-negotiable. SEC 17 may still apply. SEC 17 is only applicable when there is ambiguity or
doubt, thus needing interpretation, on the negotiable instrument.

INSTRUMENT NOT DATED

SEC 11 SEC 17
GR: Date of instrument, if dated, will be presumed to be its true date. Instrument is not dated.
However, presumption is prima facie between immediate parties (but not Date of its issue will be considered its date.
against HDC). An undated acceptance of an undated BE is payable on demand and will be considered to be dated as of the time it was executed.

CAPACITY OF PARTY SIGNING NOT CLEAR

Usually, signature of maker or drawer is at lower right hand corner and of acceptor across the face of the instrument.
Ex. A is the maker of PN payable to bearer. B signs his name across the face.
B cannot be acceptor because it is a PN, not a BE.
Under SEC 17, he is deemed to be the indorser

ILLUSTRATIVE CASES
1. One who signed in the place of the maker’s name is not an indorser. SEC 17 only applies to cases of doubt arising out of the location of the signature.
2. Note reading “we promise to pay” and stating “the maker and indorser each waive” various privileges, was signed by company through its officers (Framers Mutual Exchange through treasurer), followed by
names of 10 persons on the face of the instrument, it was held that persons were indorsers and indorsements may be written on the face of the instrument.

2 OR MORE PERSONS SIGNING

Ex. A and B sign the following note: “I promise to pay to C or order P1,000 (Sgd) A and B.
A and B are deemed JOINT AND SEVERAL, not merely joint. Holder of the instrument can collect the whole amount of the instrument from either one of them. Inclusion of other co-signer in the complaint as co-defendant
is not necessary.
But if note used the word “we promise” instead of “I promise”, A and B—JOINT (or mancomunadamente)

CHAP 2: Negotiation
 What is negotiation?

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A: The transfer of an instrument from one person to another in such a manner that the transferee becomes the holder. A holder is the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.

 How is negotiability determined?

A: Consider the instrument in its entirety and only what appears on its face. It must comply with the requirements of SEC 1.

 When does negotiability end?

47 Continuation of An instrument negotiable in its origin continues to be negotiable until:
negotiable 1. It has been restrictively indorsed
character 2. Discharged by payment or otherwise

NOTE: restrictive indorsement makes the instrument non-negotiable only if it is the first type—it prevents further negotiation of the instrument, and not the two other types (constitute the
indorsee the agent or trustee).
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.

1. Modes of transfer
Negotiation Assignment
An instrument is negotiated when it is transferred from one person to another in such a manner that the An instrument is assigned when it is a non-negotiable instrument that is transferred to another. The assignee
transferee becomes the holder. is merely placed on the position of the assignor and acquires the instrument subject to all defenses that
might have been set up against the original payee.

An instrument must comply with SEC 1 in order to be negotiable. If the instrument is non-negotiable, the only transfer that can be made is through assignment.

ISSUANCE: it is the first delivery of the instrument complete in form to a person who takes it as a holder.
 Issuance to the payee is negotiation because the transfer constitutes the payee the holder. Payee may even be a HFC if he has acquires the note from another holder or he has not directly dealt with the maker
thereof.
 DELIVERY: transfer of possession of instrument by maker or drawer with intention to transfer title to the payee and recognize him as holder.

2. Concept of negotiation; distinguished from assignment

30 What Instrument is negotiated when it is transferred from one person to another in such manner as to constitute transferee the holder.
constitutes If payable to bearer, it is negotiated by delivery
negotiation If payable to order, it is negotiated by indorsement of holder completed by delivery

Negotiation Assignment
It pertains to negotiable instruments All contracts in general.

HDC takes it free from personal defenses available among parties. Assignee takes the instrument subject to the defenses obtaining among original parties.
He may acquire a better right than the right of the transferor. He steps into the shoes of the assignor and merely acquires whatever rights the assignor may have before he
transferred the instrument to the assignment.

All persons to whom the instrument is assigned may be considered as the person who made the instrument

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 and who had done what the original assignment said or did. If a subsequent assignee prevents enforcement
of the instrument, he cannot enforce it against the original party.

NIL Civil Code

Negotiation may either be:
1. Indorsement, completed by delivery (payable to order)
2. Mere delivery (payable to bearer)
Q: Is delivery to payee negotiation?
A: YES. SEC 191 states, “instrument is negotiated when it is delivered to payee or to indorsee. A holder is a
payee (or an indorsee) who is in possession of an instrument payable to order”.
Negotiation is not only about the transfer after deliver to payee. When an instrument payable to order is
delivered to the payee, the payee becomes a holder or a payee in possession of the instrument. Thus,
delivery to the payee makes him a holder. Since negotiation is defined as the transfer of instrument to
constitute the transferee, the holder, delivery to payee is negotiation.
Q: When and how does a negotiable instrument become subject to assignment?
A: When a holder of a bill payable to order transfers it without indorsement, it becomes an equitable
assignment to the subsequent transferee-holder. Thus, the holder taking such instrument, takes it subject to
rules applying to Assignment and not NIL.
Q: Can an instrument be transferred without assignment, indorsement or delivery?
A: YES under Transfer by Operation of :aw:
1. Death of holder, title passes to personal representatives
2. Bankruptcy of holder where title vests in his assignee or trustee
3. Death of joint payee or indorsee (GR: title vests at once in surviving payee or indorsee)

3. Ways of negotiation (in cae of order or bearer instrument)

Payable to bearer Payable to order
Mere delivery Indorsement + delivery

Q: Why can’t the original payee avoid or dismiss indorsement?

A: Because through indorsement, the original payee orders the maker to pay the transferee.

Q: Why is indorsement not necessary in a bearer instrument?

A: Because in a bearer instrument, the transferor does not transfer the order to pay but rather the amount prescribed by the instrument. The engagement in this instance is to pay the amount of the instrument to the
holder or to subsequent holders.

Q: If the instrument is original issued as an order instrument and was subsequently negotiated, does it always require indorsement and delivery?
A: It depends:
Indorsement is special Indorsement is blank
Indorsement and delivery are necessary Delivery alone is sufficient.

 What are the legal consequences of transferring a negotiable instrument for value without indorsing it?
A: SEC 49 contemplates a situation whereby the payee or indorsee delivers for value without indorsing it. It states, “Transfer without indorsement—where the holder of an instrument payable to his order transfers it for
value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right ot have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a HDC, the negotiation takes effects as of the time when the indorsement is actually made.

When the transaction is an equitable assignment, the transferee acquires the instrument subject to defenses and equities available among prior aprties. Thus, if the transferor had legal title, the transferee acquires such
title + right to have indorsement of the transferor + the right as holder of the legal title to maintain legal action against the maker or acceptor or other party liable to the transferor.
REASON: there was a valid transfer of ownership

Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are neither payees nor indorsees of such instruments. Mere possession does not itself conclusively establish either the
right of the possessor to receive payment, or of the right of the one who has made payment, or of the right of one who has made payment to be discharged from liability. Thus, something more than mere possession by
persons who are not payees or indorsers of the instrument is necessary to authorize payment to them in the absence of any other facts from which the authority to receive payment may be inferred.

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  Richard Clinton makes a PN payable to bearer and delivers the same to Aurora Page. Aurora Page, however, indorses it to X in this manner: “payable to X. Signed: Aurora Page.” Later, without indorsing the
PN X transfers and delivers the same to Napoleon. Richard Clinton subsequently dishonors the note. May Napoleon proceed against Richard Clinton for the note?
A: YES. The instrument is negotiated by delivery to Napoleon. Despite the special indorsement of Ms. Page, it can still be negotiated by delivery because it is originally a bearer instrument. Hence, Napoleon became a
holder who has the right to enforce the instrument against the maker.

4. Concept of delivery
16 Deliver: when Every contract on a negotiable instrument is incomplete and revocable until delivery of instrument for the purpose of giving effect thereto. As between immediate parties and as
effectual; when regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting,
presumed or indorsing, as the case may be; and, in such case, delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in
the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively
presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is
proved.

DELIVERY: transfer of possession of the instrument by the maker or drawer with the intention to transfer title to the payee and recognize him as holder thereof. It is always a common requirement.

 What is the concept of delivery?

A: Delivery means that the party delivering did so for giving effect thereto. Otherwise, it cannot be said that there has been delivery, the person to whom the instrument is delivered gets the title to the instrument
completely and irrevocably.

5. Indorsement
a. Concept
INDORSEMENT: it is a legal transaction effected by the writing of one’s name at the back of the instrument or upon a paper (allonge) attached thereto with or without additional words specifying the person whom or to
whose order the instrument is to be payable. One not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid.
This is the mechanical act.

b. How made
31 Indorsement; Indorsement must be written on instrument itself or upon a paper attached thereto. Signature of indorser, without additional words, is a sufficient indorsement.
how made
32 Indorsement An indorsement which purports to transfer to the indorsee a part only of amount payable or which purports to transfer the instrument to two or more indorsees severally does not
must be of operate as negotiation of instrument. But where instrument has been paid in part, it may be indorsed as to the residue.
entire
instrument

Signature of indorser is necessary for an instrument to become negotiable.

GR: Indorsement must be of entire instrument. If there is partial indorsement and such is not authorized, it becomes an assignment.
EXCEPTION: Where instrument has been paid in part, it may be indorsed as to the residue or balance.
A maker has paid P600
B can indorse instrument as to P400 balance

TRANFER TO TWO OR MORE INDORSEES SEVERALLY—does not operate as negotiation of instrument

Note is for P1000 oayable to order of B
Indorsement: “ Pay to C P600 and to D P400 Sgd. B
This does not operate as an indorsement

Pay to X and Y Sgd B.

This operates as an indorsement.

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  What happens when there is an incomplete negotiation of an order instrument?
A: The transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor.
For purposes of determining whether the transferee is HDC, negotiation takes effect as of the time when the indorsement is actually made.
EX: Mr. M, through fraud was induced by A to issue a P payable to the order of A. The payee, Mr. A, delivered the note to Mr. B on May 3, 2003 without indorsing it. On May 20, 2003, Mr. A, upon Mr. B’s request, placed
his indorsement at the back of the note: “Pay to B, sgd. A”. If Mr. B learned about the fraud committed by Mr. A prior to May 20, 2003, Mr. B cannot be a HDC beacause he had knowledge of the defect of the title of Mr. A
at the time the negotiation was made complete. He can be a HDC if he had no such knowledge at the time of the indorsement on May 20, 2003.

c. Kinds
i. How further negotiation of an order instrument be made
ii. When is the indorsement effective
iii. What are the liabilities of an indorser
iv. What are the rights of indorsee

Specified, restrictive, conditional, qualified are associated words—they can be used interchangeably.

 How further negotiation of an order instrument be made

Special Blank
SEC 34. Special indorsement; indorsement in blank—A special indorsement specifies the person to whom SEC 34 (second sentence)—An indorsement in blank specifies no indorsee and an instrument so indorsed
or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to is payable to bearer and may be negotiated by delivery.
the further negotiation of the instrument.

NOTE: the holder may convert a blank indorsment into a special indorsement by writing over the signature
of the indorser in blank any contract consistent with the charcter of the indorsement.

Indorsement and delivery is necessary. In blank indorsement, only delivery is necessary.

Example: Example”

Front
FFr (Back) Pay to C Back
Front (Back)
Sgd B Sgd B

 When is the indorsement effective

Conditional Unconditional
SEC 39. Conditional indorsement—where an indorsement is conditional, party required to pay the instrument may disregard the condition
and make payment to the indorsee or his transferee whether the condition has been fulfilled or not. But any person to whom an
instrument so indorsed is negotiated will hold the same, or the proceeds thereof, subject to the rights of the person indorsing
conditionally.

Q: What is suspended?
A: The very indorsement is suspended thus the right of the indorsee is made to depend on the happening of the event.

Example:
A → B ----› C

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  What are the liabilities of an indorser
Qualified Unqualified
SEC 38. Qualified indorsement—A qualified indorsement constitutes the indorser a mere assignor of title
to the instrument. It may be made by adding to indoser’s signature the words “without recourse” or any
words of similar import. Such indorsement does not impair the negotiable character of the instrument.

This indorsement is confined to warranties. In this kind of indorsement, SEC 65 is applicable. Indorsement makes the indorsee liable for warranties. Indorsee is secondarily liable in case of dishonor. SEC
66 is applicable in this kind of consideration.
SEC 65. Warranty where negotiation by delivery and so forth—every person negotiating an instrument by SEC 66. Liability of general indorser—every indorser who indorses without qualification, warrants to all
delivery or by a qualified indorsement warrants: subsequent HDC:
a. Instrument is genuine and what it purports to be a. Matters and things mentioned in ABC of next preceding section
b. He has good title to it b. Instrument is, at the time of his indorsement, valid and subsisting
c. All prior parties had capacity to contract In addition, he engages that, on due presentment, it shall be accepted or paid or both, as the case may be,
d. He had no knowledge of any fact which would impair the validity of instrument or render it according to its tenor, and that if it be dishonored and necessary proceedings on dishonor be duly taken,
valueless he will pay the amount to the holder, or to any subsequent indorser who may be compelled to pay it.
But when negotiation is by delivery only, warranty extends in favor of no holder other than immediate
transferee
(C) do not apply to person negotiating public or corporation securities other than bills or notes.

 What are the rights of indorsee

Restrictive Unrestrictive
SEC 36. When indorsement restrictive—
a. Prohibits further negotiation (Pay to X only).
b. Constitutes indorsee the agent of indorser (Pay to X for collection).
c. Vests title in indorsee in trust for or to the use of some other persons (Pay to X in trust of Y)
But mere absence of words implying power to negotiate does not make an indorsement restrictive.

1. It prohibits further negotiation of the instrument.

Indorser has both beneficial and legal title.

2. The indorsee is constituted as the agent of the indorser.

The indorser has the legal title while the beneficial title remains with the principal. The relationship existing here is a principal-agent relationship.

3. The instrument vests the title in the indorsee in trust for or to the use of some other persons.
The beneficial title belongs to other persons whereas the legal title remains with the beneficiary. The relationship existing is a trustee-trustor relationship.

SEC 37. Effect of restrictive indorsement; rights of indorsee—

a. To receive payment
b. To bring any action that indorser could bring
c. To transfer his rights as such indorsee, where form of indorsement authorizes him to do so
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement

It does not follow that if the instrument is restrictively indorsed, the liability is qualified.

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Additional notes on restrictive indorsement:
1. It prohibits further negotiation
a. “Pay to C only” Sgd. B
b. “Pay to C and no other person”

2. Indorsement of indorser—Agency type of restrictive indorsement

a. Pay to C for collection
i. C does not acquire title over instrument. He is merely an agent and may present paper, demand payment and remit proceeds. Hence, any action the indorsee (agent) may file is subject to
defenses available only against the indorser (principal) such as lack of consideration.
b. INDORSEMENTS FOR DEPOSIT: Indorsement constitutes a retention of title . This will not divest the indorser of his title until the money is paid. Indorsements for deposit are usually informal. Most are
by means of a rubber stamp. A bank may be justified in accepting a check indorsed for deposit even with only a typed indorsement. Example: As proof of payment, employer presented a check for
P400 payable to Granado, employee. On reverse side is Granado’s signature and a notation “for deposit only Riverdale Inc.”
i. HELD: There is no way that Manager could have paid Granado the proceeds. “For deposit” is a restrictive indorsement and indicates that indorsee bank is an agent for collection and not
the payee. Indorsement for a check by payee “for deposit” does not render it negotiable but prohibits further negotiation for any purpose except collection for deposit in payee’s account
in bank selected by payee. Title to the check remained in the name of firm.

3. Vests title in indorsee in trust for another—Trust type of restrictive indorsement

a. “Pay to X in trust for C”
b. “Pay to X for use of C”

Q: Can a indorser raise his defenses against a restrictive indorsee?

A: NO, indorsee of a restrictive check (for example, a check held in trust) for a 3rd person (who is an HDC) can still recover from the drawer. The drawer cannot use failure of consideration as a defense against the indorsee.
Even if restrictive indorsement served a notice of trust to subsequent purchasers, this did not give a notice of defenses between prior parties.

PRESUMPTION OF CONSIDERATION IN RESTRICTIVE INDORSEMENT—

GR: Indorsement which purports to pass the title to indorsee, imports a consideration and burden of proving want of consideration rests upon party alleging it.
EXCEPTION: RESTRICTIVE INDORSEMENTS—opposite to presumption because they are not intended to pass the title but merely to enable the indorsee to collect for the benefit of the indorser, such as indorsements “for
collection” or others showing that indorser is entitled to proceeds.

But an indorsement to one person affords no indication. Indorser parts his whole title to the bill and presumption is he does so for consideration. Only effect of restrictive indorsement is to give notice of rights of
beneficiary named in the indorsement and protect him from misappropriation.

EFFECT OF OMISSION OF WORDS OF NEGOTIABILITY

Mere absence of words implying power to negotiate does not make indorsement restrictive. “Pay to X” is the same as Pay to X or order”
Omission of “order” does not render indorsement restrictive. But will render the instrument non-negotiable.

Q: Can indorsee, such as B, bring an action against indorser such as A?

A: YES, if indorser received value for said indorsement.

d. Other rules on indorsement

In a representative SEC 44. Indorsement in representative capacity—where any person is under obligation to indorse in a representative capacity, he may indorse in such term as to negative personal liability.
capacity
In relation to—
SEC 20. Liability of person signing as agent—Where instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative
capacity, he is not liable on the instrument if he was duly authorized; but mere addition of words describing him as an agent, or as filling a representative character, without disclosing his
principal does not exempt him from personal liability.

In short, he must:
a. Add words describing himself as agent
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 b. Disclose his principal; But it has been held that an agent may indorse by merely signing the name of the principal.
c. Must be duly authorized

Presumption as to SEC 45. Time of indorsement; presumption—Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected
time of before the instrument was overdue.
indorsement
APPLICATION: Presumption is he indorsed the note on or before date of maturity (before note became overdue). Holder has burden of proof or the person alleging indorsement after maturity.
If the indorsement bears a date, presumption in this section would not arise. SEC11 will apply—

SEC 11. Date, presumption as to—where the instrument or an acceptance or any indorsement is dated, such date is prima facie to be the true date of the MDAI as case may be.
IMPORTANCE—In order than one may be a HDC, instrument must be negotiated to him before it becomes overdue. Indorsement without date establishes a prima facie presumption that
instrument was negotiated before maturity.

Place of SEC 46. Place of indorsement; presumption—Except where contrary appears, every indorsement is presumed prima facie to have been made at the place where instrument is dated.
indorsement IMPORTANCE—place of indorsement is material because indorsement is governed by the laws of state where it is indorsed.

Striking out of SEC 48. Striking out indorsement—holder may at any time strike out indorsement which is not necessary to his title. The indorser hose indorsement is struck out, and all indorsers subsequent
indorsement to him are thereby relieved from liability.
The striking of indorsement is under the discretion of the holder and not of the indorser.

In relation to—
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 person
indorsing specially is liable as indorser to only such holders as make title through his indorsement.

WHEN HOLDER MAY OR MAY NOT STRIKE OUT INDORSEMENT

GR: holder may strike out indorsements not necessary to his title.
EXCEPTION: Where instrument is transferred by a special indorsement, holder has no right to strike out name of person mentioned and insert his own name; nor can he strike out such name and
convert special indorsement into a blank indorsement. Holder who acquires title after the succeeding special indorsement must trace his title not only through the blank indorsement but through
the special indorsement as well.

EFFECT OF STRIKING OUT

1. Indorser whose indorsement is struck out is relieved from liability
2. All subsequent indorsers are also relieved

Transfer 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 person
indorsement of an indorsing specially is liable as indorser to only such holders as make title through his indorsement.
instrument payable
to bearer Indorsement on a bearer instrument does not affect the nature of the instrument because a bearer instrument is always a bearer instrument. This section applies only to instruments which are
originally payable to bearer.

Example:
Note payable to bearer
A → B → C → D
B indorsed the instrument to C

Q: Does the indorsement affect the instrument?

A: NO. Even if there is an indorsement, it does not change the fact that the instrument is a bearer one thus it can be negotiated by mere delivery.

Q: Can an indorser of the bearer instrument be held liable? What is his liability?

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 A: YES. He is liable in case of breach of warranty. He is liable as indorser for the fact that he indorses a bearer instrument.

Q: A issued to B a bearer note, B wants to negotiate it to C. B asked you how he can validly negotiate the bearer instrument?
A: The answer is by mere delivery.

Q: Is there a change in the liabilities of a person who indorses a bearer instrument?

A: YES. He is liable as an indorser under SEC 67.

Q: Is there any liability attaches to the person who negotiates the instrument by mere delivery?
A: YES. SEC 65 PAR 2 but confined to warranties only.

In relation to—
SEC 48. Striking out indorsement
Holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out and all indorsers subsequent to him are thereby relieved
from liability on the instrument.

APPLICATION—applies only to instruments which are originally payable to bearer. Not applicable where paper is originally made payable to order and indorsed in blank; for by SEC 9, note or bill
which upon its face, is payable to order, becomes payable to bearer only when last indorsement is blank; hence, when a blank indorsement is followed by a special indorsement, instrument is not
within SEC 9. Thus, if check drawn to the order of A is indorsed in blank by payee and delivered to B, and B indorses it to the order of C, it is not payable to bearer for the reason that the last
indorsement, which by SEC 9 is made the test, is a special indorsement.

If maker of drawer has expressly provided that instrument shall be made payable to bearer, it cannot be payable to order without modifying these terms. But where upon its face, indorsement
does not (by indorsing it specially) change its tenor as originally drawn.

NEGOTIATION OF INSTRUMENT PAYABLE TO BEARER BUT SPECIALLY INDORSED: Where instrument to bearer is indorsed, it may still be negotiated by delivery. An instrument originally payable to
bearer is always payable to bearer.

EFFECT ON LIABILITY OF SPECIAL INDORSER: Person indorsing specially is liable as indorser only to such holders as make title through his indorsement.
Note P1000 payable to bearer.
A maker
C bearer
C delivered it to D
D specially indorsed it to E indorsee
E specially indorsed it to F indorsee
F delivered it to G bearer

Is D liable to G, D being the first who specially indorsed the instrument?

NO. G did not make title through D’s indorsement but through delivery of F.
Delivery was sufficient to transfer title to G because instrument is originally payable to bearer and it can always be negotiated by delivery.
To whom is D liable?
E and F because they acquired their title through D’s indorsement as E and F can trace their title through a series of unbroken indorsements from D, special indorser. Had F indorsed the note to G,
instead of merely delivering it, D would also be liable to G.

Where instrument SEC 41. Indorsement where payable to 2 or more persons—where an instrument is payable to order of 2 or more payees or indorsees who are not partners, all must indorse unless one
is payable to 2 or indorsing has authority to indorse for the others.
more persons
APPLIES ONLY TO INSTRUMENTS PAYABLE TO 2 OR MORE PAYEES JOINTLY: “Pay to the order of A and B”.
DOES NOT APPLY TO INSTRUMENTS PAYABLE TO 2 OR MORE PAYEES SEVERALLY: “Pay to order of A OR B”.

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 HOW INDORSEMENT OF JOINT PAYEES MADE—all payees must each indorse in order to negotiate the instrument. If only one indorses, he passes only his part of the instrument. Indorsement will
not operate because it would not be an indorsement of the entire instrument.
EXCEPTIONS—
a. Where payee or indorsee indorsing has authority to indorse for the others
b. Where payees or indorsees are partners

Instrument is drawn SEC 42. Effect of instrument drawn or indorsed to a person as cashier—where an instrument is drawn or indorsed to a person as “cashier” or other fiscal officer of a bank or corporation, it is
or indorsed to a deemed prima facie to be payable to the bank or corporation of which he is such officer and may be negotiated by either indorsement of the bank or corporation or indorsement of the officer.
person as a cashier
APPLICATION
Note P1000 payable to order of cashier, Lyceum of Philippines
Presumption is note is payable to Lyceum of Philippines, not to cashier personally. Note may be indorsed by any duly authorized officer other than the cashier. Presumption is disputable.

AS TO MUNICIPAL OR PUBLIC CORPORATIONS

Payable to Treasure of Town of F
It stands on same footing as if payable to town which is real payee. However, town treasurer has no authority to indorse said instrument since “corporation” in SEC 42 does not include cities and
towns.

Where name of SEC 43. Indorsement where name is misspelled and so forth—where name of payee or indorsee is wrongly designated or misspelled, he may indorse instrument as described adding, if he
payee or indorsee is thinks fit, his proper signature.
misspelled
Indorsement of an SEC 49. Transfer without indorsement—Where holder of instrument payable to his order transfers it for value without indorsing it, transfer vests in the transferee such title as the transferor
order of instrument had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purposes of determining whether the transferee is HDC, negotiation takes
without effect as of the time when indorsement is actually made.
indorsement
Q: A issued an instrument payable to the order of B. B wants to negotiate it to C. How can the negotiation be validly made?
A: Indorsement and delivery

Q: A issued an order instrument to B. B transferred it to C only by delivery, without indorsing it. Is there any legal implication on B’s gesture?
A: YES, under SEC 49, it is an equitable assignment.

Q: Does the holder of the instrument have any other right?

A: YES, he has the right to have the indorsement of the transferor. This right is applicable only if the instrument is negotiable. He can file a case of specific performance.

Q: Why is the date of indorsement material?

A: It determines the date of the holding in due course.

Q: A issued a negotiable instrument to B. B negotiated it to C. Delivery took effect on May 1, and indorsement took effect on June 1. When was there a valid negotiation?
A: At the time the indorsement was made, June 1. There is no retroactive effect. The requisites of a holder in due course must be present up to the actual and valid negotiation took place.

APPLIES ONLY TO PAYABLE TO ORDER: If there is delivery but without indorsement, there is one element lacking for negotiation of instrument.
RIGHTS OF TRANSFEREE FOR VALUE
1. Transferee acquires only the rights of transferor. If defense is available against the transferor, defense is also available against transferee.
2. Transferee has also the right to require the transferor to indorse the instrument.

ILLUSTRATION
Where A is maker
B payee
No valuable consideration, B delivers to C without indorsement

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 C does not know absence of consideration

Can C transferee recover from A maker?

NO. C acquires only B’s rights and B cannot collect from A who can set up against him (B) absence of consideration
Is transferee a holder before indorsement?
NO. While he is in possession of instrument, he is not the indorsee.

Suppose B delived note to C on December 1 and actually indorsed it to C on December 15.

On December 10, after delivery but before indorsement, C learned of absence of consideration.
Is C HDC? NO. Because on December 15, actual date of indorsement, he already had notice of absence of consideration.

6. Negotiation by a prior party

50 When prior Where an instrument is negotiated back to a prior party, such party may reissue and further negotiate the same. But he is not entitled to enforce payment against any intervening party to
party may whom he was personally liable.
negotiate
instrument

Negotiation by prior party—where an instrument is negotiated back to a prior party, such party may reissue and further negotiation the same. But he is not entitled to enforce payment against any intervening party to
whom he was personally liable. However, he may strike out the intervening indorsements because they are not necessary for his title and he is liable to them because of his initial indorsement. E
EX: “A” payee indorsed the instrument to B, then B indorsed it to C, C to D, then D to B. B can further negotiate the instrument. He may also strike out indorsements of C and D.

CHAP 3: HOLDERS
1. General concept of holder
191 Definitions and HOLDER—payee or indorsee of bill or note who is in possession of it, or the bearer thereof.
meaning

If payable to bearer holder means the person who is in possession thereof.

Q: Can a named payee be called a holder?

A: YES, if the instrument is in his possession due to the presumption that there was a valid delivery.

 Can a payee who is not involved in the crossed check be considered an HDC?
A: YES, the word “holder” in SEC 52 may be replaced by the definition under SEC 191.

Q: What is the advantage of being a holder in due course (HDC)?

A: There is a shelter/protection to subsequent holders.

RIGHTS OF HOLDER IN GENERAL

1. May sue in his own name
2. May receive payment and if payment is in due course, instrument is discharged

EFFECT OF PAYMENT TO HOLDER

Payment in due course:
a. At or after maturity of instrument

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 b. To the holder thereof
c. In GF and without notice that his title is defective

 Who is a holder?
A: He is the payee or indorsee of a bill or note, or the person who is in possession of it, or the bearer thereof.

2. Holder in due course

52 HDC HDC is a holder who has taken the instrument under the following conditions:
a. Complete and regular upon its face
b. He became a holder of it before it was overdue and without notice that it had been previously dishonored if such was the fact
c. He took it in GF and for value
d. At the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in title of person negotiating it.

Requisites on SEC 52 boil down to F and innocence of holder. This is equivalent to an innocent buyer in GF under the New Civil Code.
REQUISITES:
1. Instrument is complete and regular upon its face.
2. It was taken before overdue.
3. There was no notice of infirmity or defect

Instrument is complete COMPLETE: all necessary details that define the necessary rights thereto and all requisites of SEC must be present.
and regular upon its face REGULAR: there must be no visible alterations/changes upon the face of the instrument.

Alterations referred to are those obvious in the naked eye.

It was taken before If the instrument is overdue, it is also a notice that it has been dishonored.
overdue OVERDUE: after date of maturity
It is very unusual to negotiate an instrument which has matured because such instrument should have been discharged.

Rule in case of installment instruments Rule in case of demand instruments

SEC 53. When person is not deemed HDC— Where instrument is:
1. Payable on demand
2. Negotiated on an unreasonable length of time after its issue
Holder is deemed as NOT HDC

When the instrument contains an acceleration clause, knowledge of the holder at the time In a demand instrument, reasonableness test is applied. It is the usage of trade or business
of the instrument’s acquisition, that one installment or interest or both, as the case may be, practice (if any), with respect to such instruments and the facts of case.
is unpaid, is notice that the instrument is overdue.
NOTE: This applies to checks because checks are demand instruments.
One who purchases in GF an instrument upon which the instrument is overdue is an HDC.
But if by the terms of the instrument, the principal was to become due upon default of
payment of instrument, one who takes the instrument upon which interest is overdue is not
an HDC.

ADDITIONAL RULES under SEC 53:

Applicable only to instruments payable on demand
52—Holder after it was overdue NOT HDC; applies to an instrument payable at a fixed or determinable future time
53—where instrument is negotiated an unreasonable length of time after its issue, holder NOT HDC

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 Thus, one who took check 2 ½ years after it became payable is not HDC; check is stale

UNREASONABLE LENGTH OF TIME—practically no authorities hold that a reasonable time for negotiating a demand note could be extended beyond a year

There was no notice of SEC 54. Notice before full amount paid—Where transferee receives notice of any infirmity or defect before he has paid the full amount agreed to be paid, HDC only to extent of amount
infirmity or defect paid by him.

APPLICATION
A P1000 B payee; X drawee
B indorses to C who fails to give value
C indorses to D on July 1 1950, who on maturity date pays C only P400
On July 5, 1950 D learns that C did not give value for instrument
D = HDC only for P400, amount he paid before he had notice, even if he pays balance of P600 afterwards, say July 7.

There is defect in the title when there is error in the indorsement and/or in delivery.
Q: Even if the instrument suffers infirmities, is it possible that holder is still an HDC?
A: YES, if he has no knowledge of infirmity.

SEC 55. When title is defective—title of person who negotiates is defective when he obtained the instrument, or any signature by fraud, duress or force and fear or other unlawful means,
or for an illegal consideration or when he negotiates it in breach of faith or under circumstances amounting to fraud.
Q: What are circumstances that render title defective?
A: When he obtained the instrument or any signature thereto by:
1. Fraud
2. Duress
3. Force and fear
4. Other unlawful means
5. For an illegal consideration
6. Negotiate it in breach of faith
7. Under such circumstances as amount to fraud

Example:
A → B → C
On the part of A, the issuance of the instrument is involuntary because of the presence of any circumstances mentioned in SEC 55. Thus making B’s title defective.

Q: Can C still be a HDC?

A: YES, as long as he has no knowledge of defect in the title of the person negotiating it to him.

SEC 56. What constitutes notice of defect—To constitute notice of an infirmity or defect in title, person to whom it is negotiated must have had actual knowledge of infirmity or defect or
knowledge of facts that his action in taking the instrument amounted to BF
Infirmities must include things that are wrong with the instrument itself. These are not visible to the naked eye. As long as he has knowledge of infirmity, due course holding is not present.

Q: How can we reconcile the 1st requirement (complete and regular upon its face) and the 4th requirement (he had no notice of any infirmity)?
A: The 1st requirement pertains to infirmities visible to the naked eye while the 4th requirement pertains to infirmities not visible to the naked eye.

Example: The instrument contains all necessary details except for the amount, A instructed B to fill the instrument of the any amount but upto P50,000 only. B inserted P80,000. B negotiated
it to C.

Q: Can C detect the infirmity upon its face?

25
 A: NO

Good faith and holder for NOTES: A person takes a crossed check without making further inquiries is not HDC. The act of crossing a check serves as a warning to the holder that the check has been issued for a definite
value purpose so that he must inquire if he has received the check pursuant to that purpose.

VALUE: a consideration sufficient to support a simple contract. These include antecedent debts and a lien on the instrument.
1. The holder is a holder for value only to the extent that the consideration agreed upon has been paid, delivered or performed. Non-performance of obligation will give rise to partial
or full defense of failure of consideration as the case may be.
2. Where the transferee receives notice of any infirmity in the instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed to be paid
therefor, he will be deemed a HDC only to the extent of the amount paid therefore by him.
a. EX: If the holder took the instrument on the strength of his promise to deliver 200,000 but he had only delivered 100,000, he is HDC only up to 100,000 if he receives
notice of infirmity before he could fully pay the consideration.
3. As regards an accommodation party, the requirement of lack of notice of any infirmity in the instrument or defect in title of persons negotiating it, has no application. However, this
inapplicability is limited to notice of absence of consideration, that is, notice of fact that the party is a mere accommodation party who did not receive any consideration on the
instrument. If the holder has notice of other infirmity, then holder is subject to personal defenses.

Problems
1. A is indebted to B in the amount of 100,000. In order to raise funds to pay for his obligation, A sold his old car to C for 100,000 on JAN 20, 2001. A agreed to deliver the car to C on JAN 25, 2001. However, A
convinced C to immediately issue a check and to make the check payable to B. A informed C that the check will be issued to B because A’s outstanding obligation. Hence, C issued a check to B to pay for the
loan of A payable on JAN 25, 2001. The check was delivered to B through A. B and C were not aware at the time that the car was sold, it was already destroyed by fire. A fraudulently hid such fact to
convince C to issue the check and to convince B to accept the check. Can B, the payee of the check be considered HDC?
A: YES, nothing in the problem indicates that he is not HDC, hence the presumption stands. All requirements under SEC appear to be present.

2. Rolando, intending to buy a car, saw an old friend, Roger who is an agent to sell the car belonging to Delgado Clinic. After negotiation, Rolando decided to buy said car. He drew upon request of Roger, a
crossed check for 600, payable to Delgado Clinic as evidence of his GF, but which was merely meant to be shown to Delgado Clinic by Roger who received said check. The check would then be returned when
Roger brings the car and its registration certificate for Rolando’s inspection. For failure of Roger to bring the car and its certificate of registration, and to return the check, Rolando issued a “stop payment
order” to the drawee bank. In the meantime, Roger paid the check to the Delgado Clinic for the hospital bill of his wife and was given 158.25 as change. May Delgado Clinic be considered HDC, hence
entitled to recover?
A: NO, although Delgado Clinic was not in fact aware of the circumstances with respect to the delivery of check to Roger, there are circumstances that should have put him on inquiry. Thus, it should have noticed that
Rolando had no relation with it; that the amount of the check did not correspond exactly with the obligation of Roger to the clinic; and that the check could only be deposited but may not be converted into cash should
have put the clinic to inquiry as to the possession of the check by Roger, and why he used it to pay his accounts.

3. Po Press issued in favor of Jose a postdated crossed check, in payment of newsprint which Jose promised to deliver. Jose sold and negotiated the check toe Excel Inc. at a discount. Excel did not ask Jose the
purpose of crossing the check. Since Jose failed to deliver the newsprint, Po ordered the drawee bank to stop payment of the check. Efforts of Excel to collect from Po failed. Excel wants to know from you as
counsel: 1) Is Except HDC?; 2) Can Po Press raise absence or failure of consideration as a defense?
A: Excel is not HDC. Instrument involved is a crossed check and was supposed to be deposited only. Except is therefore obligated to inquire regarding the circumstances involving the issuance of the check. Failure on his
part will prevent him from becoming HDC. Such failure or refusal constituted to BF.
YES, Since Excel is not HDC, it is subject to personal defense which Po Press can set up against Jose. There was failure of consideration in the problem because Jose failed to deliver the newsprint to Po Press.

Additional information on SEC 55 and 56:

DEFECTS of title covering all situations known as equitable defenses and those equities of INFIRMITIES—include things that are wrong with the instrument itself
ownership where there was breach of faith in negotiation Different from those that are lacking in the contracts not the instrument
a. Defenses
b. Infirmities
c. Defects
DEFECTIVE TITLE IN GENERAL NOTICE OF DEFECT OF TITLE IN GENERAL—actual knowledge either
1. In acquisition—when he obtains instrument or any signature by: 1. Defect or infirmity

26
 a. Fraud 2. Facts that his action in taking the instrument amounts to BF
b. Duress or force and fear
c. Other unlawful means May arise under:
d. For illegal consideration 1. SEC 13—wrong date inserted where instrument is expressed to be payable at a fixed period after sight is
2. In negotiation—title of person becomes defective when he negotiates it undated
a. With breach of faith 2. SEC 14—filing up blank not strictly in accordance with authority given or not within reasonable time, where it
b. Under circumstances amounting to fraud was delivered wanting in a material particular
3. SEC 15—filling up and negotiating without authority an incomplete and undelivered instrument
Illustration of illegal consideration 4. SEC 16—lack of valid and intentional delivery of a complete instrument
A gives check to B in consideration of B’s undertaking to beat up C, A’s rival 5. SEC 21—agent signing per procuration beyond authority
Consideration is illegal 6. SEC 23—forgery
7. SEC 124/125—material alteration
Illustration of negotiation in breach of faith Accordingly, notice by holder, at the time of negotiation = NOT HDC
1. B payee negotiates note already paid
2. B negotiates note which he holds only as collateral or security SEC 56 abolishes doctrine of constructive notice; actual notice is necessary to constitute BF
3. B negotiates note after he fails to deliver valuable consideration he agreed to give Knowledge of agent is knowledge by principal
in return for note
Not necessary to prove that defendant knew exact fraud that was practice that was practiced upon plaintiff by
Illustrations of circumstances amounting to fraud defendant’s assignor, it being sufficient to show that defendant had notice that there was something wrong about his
A ordered from “Snow Ltd” 10 cases of mercerized batiste assignor’s acquisition of title, although he did not have notice of particular wrong that was committed
Snow Ltd drew a draft for purchase price of goods upon A
Draft was negotiated by Snow Ltd Illustrative cases
Turns out, that when cases which were supposed to contain batiste were opened, they Check was indorsed for deposit of credit of A trustee
contained burlap of little value A deposits check with B bank
B bank credits amount of check to individual account of A
A withdraws amount for his own use, causing loss to trust estate
Bank is liable for participation of breach of trust
“Trustee” following “for deposit to credit of A” means danger ahead so to speak

A drawer
Mariano Roxas Fe payee
Mariano Roxas claimed check; he indorsed it “Pay to Timoteo Roxas”
Timoteo Roxas cashed it with X bank, who required indorsement of payee be made to correspond to name written on
check
Mariano Roxas added “Fe” to indorsement
Turns out Mariano Roxas was not Mariano Roxas Fe who was intended payee
X bank is not HDC; it should have made an inquiry as to the identity of Mariano Roxas

132 checks were made out in name of Insular Drug Co, brought to PNB branch office by Foerster (salesman of company),
Foerster’s wife and Foerster’s clerk.
Bank could tell by check that money belonged to Insular Drug and not to Foerster or his wife or clerk
Bank credited checks to personal account of Foerster and permitted withdrawals
Bank made itself responsible for amounts represented by checks.

3. Presumption of holding in due course

59 Who is deemed Every holder is deemed prima facie to be HDC; but when it is shown that title of any person who has negotiated instrument was defective, burden is on holder to prove that he or some
HDC person under whom he claim acquired title as HDC. But last mentioned rule does not apply in favor of a party who became bound on instrument prior to acquisition of such defective title.

27
The presumption expressed in SEC 59 arises only in favor of a person who is a holder under SEC 191 or payee or indorsee who is in possession of draft or bearer. In order to be a holder, one must be in possession of note or
bearer. However, when instrument is not payable to holder or bearer, there is a defect in title of holder—presumption does not apply. It also does not apply in favor who is no longer in possession of instrument.

 What is the legal presumption regarding holders?

A: GR: Under SEC 52, every holder is presumed prima facie to be HDC. One who claims otherwise has onus probandi to prove that one or more of the conditions required to constitute a HDC are lacking. If the element of
“value” is not present, holder could not be HDC.

Q: How important is this statutory presumption?

A: The holder need not prove that he is HDC. The burden to prove is on the other party.

WHEN PRESUMPTION ACCRUES

A is maker of note payable to B or order
B negotiates note to C who acquires it by means of fraud
C has a defective title
C negotiates to D
D to E, E to F holder
F does not have to prove that he is HDC. It is presumed. But before presumption arises, he must prove he is holder of instrument. He is the indorsee in possession as it is payable to order.

WHEN BURDEN IS SHIFTED—B proves that C’s title defective because C acquired note by means of fraud, without proving that F has notice of C’s defective title, burden of proof shifts to F to prove that he is actually a HDC.
Since the title of C who negotiated note was defective, B is not a party who became bound prior to but simultaneous with acquisition of C’s defective title.

WHEN BURDEN NOT SHIFTED—last mentioned rule does not apply in favor of party who became bound on instrument prior to acquisition of such defective title.
LAST MENTIONED RULE: shifting of burden of proof to holder where it is shown that there is a defect in title of any person who has negotiated.

Q: Suppose A proves that C had defective title, is burden shifted to F?

A: NO, Under last sentence last mentioned rule does not apply in favor of party who became bound prior to acquisition of defective title. A is such a party prior to acquisition of defective title by C. Question is then WON
defendant who has no defense of his own and admits his liability can set up collateral equities (defenses) existing in favor of other persons.

Q: Can A set up defense of defective title which is available to B from whom C stole instrument?
A: NO, unless he has been notified by rightful owner not to pay same to holder. IN such case, 2 persons would be claiming ownership of same thing. Remedy is to file a complaint in interpleader or to bring him in as a party
to action if one has already been instituted. In other words, WON burden of proof is shifted or not is immaterial because any way, A cannot interpose defense of C’s defective title as against F.

4. Rights of holders in due course

57 Rights of HDC HDC holds instrument free from any defect of title prior parties and free from defenses available to prior parties among themselves and may enforce payment of instrument for full
amount against all parties liable thereon

51 Rights of holders Holder may sue in his own name; and payment to him in due course discharges instrument
in general

RIGHTS OF HDC
1. GENERAL RIGHTS:
a. Sue in his own name
b. May receive payment and if payment in due course, instrument is discharged
2. HDC holds instrument free from any defect of title prior parties and free from defenses available to prior parties among themselves and may enforce payment of instrument for full amount against all parties
liable thereon
a. HE is free from personal defenses
b. He is not free from real defenses

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 c. A holder not in due course is subject to personal and real defenses
i. EXCEPTION: Holder who is not a holder in due course but has derived his title from HDC
3. May enforce payment for full amount against all parties liable

 May one who fails to inquire as to an infirmity in a negotiable instrument and defect in the holder’s title, be HDC?
A: YES, the law does not impose on a holder the obligation to inquire into the infirmity or defect of title of the person negotiating it to him. However, failure to make inquiry, when circumstances indicate a defect, renders
him not HDC. Gross negligence may amount to legal absence of GF.

5. Shelter Rule
58 When subject to Other than HDC, instrument is subject to same defenses as if it were non-negotiable. But a holder who derives his title through HDC and who is not himself a party to any fraud or illegality
original defenses has all rights of former holder in respect of all parties prior to latter.

REQUISITES:
1. Holder derived his title from HDC
2. He himself is not a party to any fraud or illegality affecting the instrument

 What is the Shelter Rule?

A: A holder who is not HDC but derives his title through an HDC, and who is not himself a party to any fraud or illegality affecting the instrument, has all rights of such former holder in respect of all parties prior to the
latter.

Example:
A → B → C → D → E → F
E is a holder in due course
E negotiated the instrument to F who is not a HDC.
To subsequent holder, F is considered to be HDC because he was sheltered by E who is HDC.

The determination of whether there is due course holding or not is material only when there is a personal defense.

Q: Is it worth comparing HDC and those who derived title from HDC?
A: YES
HDC A person derived title from HDC
Always a holder in due course to all prior parties. HDC to all prior parties except to the person who negotiated the instrument to him.
Always with freedom against defenses and defective title.
Shelter rule is applicable. Shelter rule is not applicable

GR: Equitable defenses can be interposed against a person not a holder in due course.
EXCEPTION: Shelter rule (SEC 58)

Problem
 Larry issued a negotiable PN to Evelyn and authorized the latter to fill up the amount in blank with his loan account in the sum of 1000. However, Evelyn inserted 5000 in violation of the instruction. She
negotiated the note to July who had knowledge of the infirmity. Julie in turn negotiated the note to Devi for value and who had no knowledge of the infirmity. Supposing Devi endorses the note to Baby for
value but who has knowledge of the infirmity, can the latter enforce the note against Larry?
A: YES, the problem indicates that Baby is not HDC. When she took the instrument, she had knowledge of breach of trust committed by Evelyn against Larry. However, she has all the rights of a HDC because she took the
instrument from Devi, a HDC. Although Baby is not HDC, she did not participate in the breach of trust committed by Evelyn. Hence, Larry cannot set up the defense that the instrument was completed in breach of trust
against Baby because such defense is a personal defense.

RIGHTS OF NOT HDC

1. May sue in his own name
2. May receive payment and if payment is in due course, instrument is discharged

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 3. Holds instrument subject to same defenses as if it were non-negotiable
Generally, both real and equitable defenses can be interposed against person NOT HDC
4. But holder NOT HDC who derives his title through HDC and who is not party to any fraud or illegality has all rights of former holder

HOLDER ACQUIRING FROM HDC

GR: equitable defenses can be interposed against person NOT HDC
EXCEPTION: holder NOT HDC who derives his title through HDC and who is not party to any fraud or illegality has all rights of former holder
 purchaser from HDC is entitled to recover against prior parties even though he has notice of defenses or notice of maturity of negotiable certificate of deposit or with knowledge of equities but real defenses can be
interposed against him.

Illustration
A maker issued note to B payee
B induced A by means of fraud
Successive indorsements to C, C to D HDC
D indorsed to E who had notice of want of consideration (equitable defense) cannot be set up against E by parties prior to D (CB) even if E is not HDC but without taking part in fraud
E acquired all rights of D
E = HDC as to CB

BURDEN OF PROOF TO SHOW PREDECESSOR HDC—upon holder who derives title from HDC
E files action against maker A
Presumption under 59 not sufficient; Presumption under SEC 59 refers to HOLDER; Hence, one who is payee or indorsee who has possession and D is not holder because he is an indorsee in instrument, he is not in
possession, it being in possession of E.

AS TO ONE NOT HDC REACQUIRING FROM HDC

If original payee of note unenforceable for lack of consideration repurchases instrument after transferring it to HDC, paper against becomes subject of payee’s hands to same defenses to which it would have been subject
as if paper had never passed to hands of HDC. Same is true where instrument is retransferred to an agent of payee.

CHAP 4: Liability of parties

Parties involved:
1. Maker
2. Payee—the obligee or person who, by the terms of the note or bill, is to receive payment.
3. Drawer
4. Drawee—person to whom the order to pay is addressed in a BE
5. Acceptor—a drawee who accepts the order to pay made by the drawer. It is only when a drawee becomes an acceptor that he is primarily liable.
6. Holder—person in possession of a bearer instrument or an indorsee of a an order instrument who has possession thereof. A holder is the obligee, a person who can enforce payment of the instrument.
7. Referee in case of need—a person who may be designated in the instrument as the person who may be resorted to by parties in case of dispute.

 What are the liabilities of maker, drawer and acceptor?

Maker Drawer Acceptor (and drawee who pays without accepting the instrument)
Primary liabiltiy Secondary liability Primary liability
1. Engages to pay according to the tenor of the instrument 1. Admits the existence of payee and his capacity to indorse 1. Engages to pay according to the tenor of his acceptance
2. Admits the existence of the payee and his capacity to 2. Engages that instrument will be accepted or paid by the 2. Admits the existence of the drawer, genuineness of his
endorse party primarily liable signature and his capacity and authority to draw the
3. Engages that if the instrument is dishonored and proper instrument
proceedings are brought, he will pay to the party entitled to 3. Admits the existence of the payee and his capacity to
be paid. indorse.

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Q: What is your understanding of parties liable? When do you say a party is liable?
A: A person is liable when he is obligated to perform a particular prestation.

Q: What are the liabilities of parties according to its nature?

1. Warranties
2. Engagement to pay (primary and secondary)

1. Primary liability distinguished from secondary liability

Primary liability Secondary liability
Absolutely liable Conditionally liable
Engagement of a party to an instrument that on its due date, he will accept, pay or both the instrument to Engagement that on its due presentment, it shall be accepted, paid or both as the case may be according to
the payee or to whom it is negotiated according to its tenor. its tenor and that if it be dishonored and necessary proceedings on dishonor be taken, he will pay the
amount thereof to the payee or to whom it is negotiated or to any subsequent indorser who may be
compelled to pay it.

2. Liability distinguished from warranty

Liability Warranty
Obligation to perform a particular prestation. Party’s undertaking that at the time of his negotiation, he had title to the instrument and such is valid and
subsisting.
This is an affirmation, assertion or admission that certain things are true.

Q: Do all parties have warranties?

A: YES

Q: Is engagement to pay common to all parties?

A: NO

Liability Warranty
It is material to determine whether the person is primarily or secondarily liable. It is immaterial to know whether person is primarily or secondarily liable.

3. Liability and/or warranty of parties; liability in general

a. Warranty
b. Engagement to pay
PN BE
Primary Maker Acceptor If the holder’s cause of action is primary engagement, due
presentment and dishonor proceedings are irrelevant.
Secondary General indorser General indorser and drawer If holder’s cause of action is secondary engagement to pay, due
presentment and dishonor proceedings are relevant.

Q: Is liability on warranties common to all?

A: YES

Persons that had no engagement to pay:

PN BE
Maker Drawer

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 Acceptor
Indorser: Indorser
1. General 1. General
2. Qualified 2. Qualified
Persons negotiating by delivery Persons negotiating by delivery

Q: Can the drawee be forced to be held liable?

A: NO, as long as he does not accept the instrument. He cannot be compelled to accept the negotiable instrument.
If the refusal amounted to a tortious act, the drawee may be held liable but not based on the contract.
The payee has no cause of action against the drawee-bank. The bank is not liable to the holder unless and until he accepts or certifies the check. The remedy of the holder is against the drawer, provided, notice of dishonor
is given to him on the basis of the transaction that gave rise to the issuance of the check. Once the bank certifies the check, the bank becomes liable because certification is equivalent to acceptance and if procured by the
holder, the drawer and all indorsers are discharged from liability.

EXCEPTION: holder may sue the drawee based on ART 19 Civil Code if there was dishonor despite the instruction of the drawer to pay.

 What is the effect on liability of indorsers if the instrument is dishonored by non-payment?

A: After an instrument is dishonored by non-payment, indorsers cease to be merely secondarily liable; they become principal debtors whose liability becomes identical to that of original obligor. The holder of negotiable
instrument need not even proceed against the drawer before suing the indorser.

Parties:
Maker SEC 60. Liability of maker—Maker engages that he will pay it according to its tenor and admits existence of payee and his capacity to indorse.

The maker is primarily liable.

Maker is to pay the note according to its tenor; primarily and unconditional. He is presumed to have signed the document with full knowledge of its contents, unless fraud is proved. He cannot shift
the obligation to another without consent of the payee. He cannot allege that he spent the money on expenses which should be charged to a trust administered by creditor because it is not the
payee’s concern to know how the proceeds to be spent.

LIABILITY OF ONE WHO IS MERE AGENT AND NOT REAL BORROWER—action on PN is not properly dismissed against a defendant who is not the real borrower.
LIABILITY OF 2 OR MORE MAKERS—when 2 or more makers sign jointly and severally, each of them is individually liable for payment of full amount of their obligation, even if one of them did not
receive part of the value given as he would be considered an accommodation party.
We promise to pay (Sgd) AB

Q: Are they jointly and severally liable only because under CCODE, joint and several liability cannot be presumed?
A: It must be expressly stipulated. SEC 68. Order in which indorsers are liable—as to one another, indorsers are liable prima facie in order in which they indorse; but evidence is admissible to show
that between and among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.

PAYEE’S EXISTENCE—maker also admits existence of payee and his capacity to indorse.
Maker is precluded from following defenses:
1. Payee is fictitious
2. Payee was insane, a minor or a corporation acting ultra vires, because by making the note, he admits the then capacity of payee to indorse.

Drawer SEC 61. Liability of drawer—Drawer, by drawing the instrument:

1. Admits the existence of payee and his capacity to indorse
2. That on due presentment, instrument will be accepted or paid or both, according to tenor
3. That if it be dishonored and that necessary proceedings shall be duly taken, he will pay amount to holder or to any subsequent indorser who may be compelled to pay it
But drawer may insert an express stipulation negativing or limiting his own liability to holder

Drawer is secondarily or conditionally liable:

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 1. His relationship is directly with the drawee.
2. Drawee bank
3. Acceptor

Due presentment means not only any presentment but presentment in accordance with law.
Necessary proceedings o dishonor means proceedings must be one within accordance with law.

DRAWER SECONDARILY LIABILE—

CONDITIONS BEFORE PAYING/ACCEPTING/BOTH, according to tenor
1. It is dishonored
2. Necessary proceedings are duly taken
If bill is not paid, drawer becomes liable provided that notice of dishonor is given. In absence of due presentment, drawer is not liable.

TO WHOM LIABLE
1. Holder
2. If any of indorsers intervening between holder is compelled to pay by holder, drawer will be liable to that indorser so compelled to pay

Q: Is a drawer of an unaccepted bill primarily liable?

A: Before acceptance, drawer is the primary debtor. After acceptance, drawee or acceptor is principal debtor; drawer becomes secondarily liable as the first indorser
SEC 61, drawer not absolutely required to pay
SEC 192, person primarily liable is one who by terms of instrument is absolutely required to pay same.
Drawer not primarily liable even if bill is unaccepted.

NEGATIVES HIS LIABILITY—drawer can negative or limit his liability by express stipulation, as by addition to his order to pay words:
1. Without recourse
2. I shall not be liable in case of non-payment or non-acceptance

Acceptor SEC 62. Liability of acceptor—acceptor engages that he will pay it according to tenor of his acceptance and admits:
1. Existence of drawer, genuineness of his signature and his capacity and authority to draw instrument
2. Existence of payee and his capacity to indorse

Acceptor is primarily liable.

SEC 127. Bill not an assignment of funds in hands of drawee—does not operate as an assignment of funds in hands of drawee available for payment and drawee is not liable on bill unless and
until he accepts same.

ACCEPTOR PRIMARILY LIABLE—liability is not subject to any condition; by merely signing, he engages to pay unconditionally according tenor.
However, acceptor is a drawee who accepts the bill. Before acceptance, drawee is not liable. Upon acceptance, he becomes liable to the payee or his indorsee + drawer.
If he wants to escape liability, he must show that—
1. He is merely an agent of the drawer
2. Prove any other defense which he has to the liability
Same rule found inSEC 62 also applies in case of a drawee who pays a bill without having previously accepted it.

MORTGAGE EXECUTED BY ACCEPTOR—where being unable to pay BE which drawee has accepted, drawee makes a mortgage in favor of the holder. While sale is not effected, execution of said
mortgage does not constitute any novation of obligation represented by said accepted bills unless it is expressly stated in said mortgage.

ACCEPTOR TO PAY ACCORDING TO TENOR OF HIS ACCEPTANCE—while maker of note engages to pay according to tenor of note, an acceptor engages to pay according to the tenor of his acceptance,
not of the bill he accepts. Tenor of acceptance may be different from tenor of bill as acceptor may accept the bill with qualifications. If acceptance is general = tenor of bill is same tenor as tenor of
acceptance. Bill is for P1000 and acceptor accepts it for P600, acceptor would be liable only for P600 (tenor of his acceptance), not P1000 tenor of bill.

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 WHERE ORIGINAL TENOR IS ALTERED BEFORE ACCEPTANCE
Q: Bill is originally for P1,000. Before X drawee accepts it, it is altered by payee B to P4000. X accepts it. How much is X liable to HDC?

FIRST VIEW—Altered tenor is tenor of acceptance SECOND VIEW—Original tenor is tenor of acceptance
He must pay the amount called for by the time he accepted, even though larger than original amount SEC 62 should be paraphrased to state that liability of acceptor depends upon
ordered by the drawer. term of his acceptance, whether it is a general acceptance or a qualified
acceptance or an acceptance for honor.
“According to tenor of its acceptance”: instrument as it was at the time it came into the hands of acceptor
for acceptance, for he accepts no other instrument than one presented to him—the altered form—and by it Acceptor, by accepting the instrument, engages that he will pay it not according
alone, he engages to pay. to the tenor of the bill sine this would deny him right to qualify the acceptance
or to accept for honor but according to the tenor of his acceptance.
EFFECT OF SEC 124—what is the effect of SEC 124 which provides that HDC can recover only the original
tenor of instrument?
It seems that this refers to original tenor of instrument taken from standpoint of person principally liable.
Original tenor of instrument is P4000 (tenor of X’s acceptance)
If after acceptance, subsequent indorsee alters bill to read P9000, X could be liable only for P4000 even as
to an HDC.

Acceptor, by acceptance, admits:

1. Drawer’s existence
2. Genuineness of drawer’s signature
3. Capacity of drawer to draw instrument; but he does not admit genuineness of indorser’s signature.

Effect of acceptor’s admissions:

Acceptor is:
1. Precluded from setting up defense that drawer is non-existent or fictitious because of his admission of drawer’s existence
2. He cannot claim that drawer’s signature is a forgery because he admits the genuineness of drawer’s signature
3. He cannot escape liability by alleging want of consideration between him and drawer because he admits capacity and authority of drawer to draw the bill.

Acceptor (like maker/drawer) admits existence of payee and his capacity to indorse

Indorsers: SEC 66. Liability of general indorser—every indorser who indorses without qualification, warrants to all subsequent HDC:
General c. Matters and things mentioned in ABC of next preceding section
indorser d. Instrument is, at the time of his indorsement, valid and subsisting
In addition, he engages that, on due presentment, it shall be accepted or paid or both, as the case may be, according to its tenor, and that if it be dishonored and necessary proceedings on
dishonor be duly taken, he will pay the amount to the holder, or to any subsequent indorser who may be compelled to pay it.

They are liable for warranties and are secondarily liable.

APPLICATION—this includes an indorser for collection

LIABILITY OF GENERAL INDORSER—by merely placing his signature, without adding any words to his signature, warrants:
1. Instrument is genuine and what it purports to be
2. He has good title to it
3. All prior parties had capacity to contract
4. Instrument is, at the time of his indorsement, valid and subsisting

FOURTH WARRANTY OF GENERAL INDORSER AND QUALIFIED INDORSER DISTINGUISHED

GENERAL INDORSER QUALIFIED INDORSER

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 Warrants that instrument he is indorsing is valid and subsisting regardless whether he is ignorant of that fact or not. He is ignorant of fact that will render the instrument valueless or impair
its validity
This does not run in favor of holder who are parties to illegal transaction

Q: Can C set up defense that note is void because consideration as illegal?

A: NO. C, as general indorser, warrants that instrument is valid and subsisting, even if he did not know of illegality.
But if C is an qualified indorser, he would not be liable because he does not violate his warranties and he does not
warrant the instrument is valid and subsisting but merely that he does not known of any fact that renders the
instrument valueless or impairs its validity, and he did not know of the illegality.

TO WHOM WARRANTIES EXTEND—

a. Subsequent HDC
b. Persons who derive their title from HDC
c. Immediate transferees, even if they are not HDC. Otherwise, transferee of a qualified indorser would have greater rights than transferee of general indorser

WARRANTIES DO NOT EXTEND TO DRAWEE since drawee is not HDC (52) nor a holder (191) as drawee is not a holder nor is the presentation for payment to him a negotiation

OTHER LIABILITIES OF GENERAL INDORSER

GI, by merely signing his name and without expressly stating it on instrument, “engages that on due presentment, it shall be accepted or paid or both, as the case may be, according to its tenor and
that if it be dishonored and necessary procedures of dishonor be duly taken, he will pay the amount to the holder or to any subsequent indorser who may be complied to pay it. This is similar to
secondary liability of drawer.

INDORSER’S LIABILITY WHERE PERSON PRIMARILY LIABLE IS INSOLVENT—where person primarily liable is insolvent, general indorser is liable, even if he knew nor concealed that fact because he
engages to pay if the person primarily liable cannot pay.

WHEN PAROL EVIDENCE ADMISSIBLE AS TO EXTRINSIC AGREEMENT OF INDORSER

Any prior or contemporaneous conversation in connection with a note or its indorsement may be proved by parol evidence, and that an extrinsic agreement between indorsers and indorsee which
cannot be embodied in the instrument without impairing its credit is provable by parol provided that such extrinsic agreement should not vary, alter or destroy the obligations attached by law to the
indorsement.
Court held that oral assurances of the indorser that the drawer has funds and that he would refund the amount of the check if the drawer had no funds are precisely the ordinary obligation of an
indorser, and such obligations are considered discharged by an unreasonable delay in the presentation of the check for payment, as there is no express obligation assumed by the indorser that the
drawer would always have funds or that he would refund the amount of check even if there is delay in its presentation.

Indorsers: SEC 65. Warranty where negotiation by delivery and so forth—every person negotiating an instrument by delivery or by a qualified indorsement warrants:
Qualified a. Instrument is genuine and what it purports to be
indorsers b. He has good title to it
c. All prior parties had capacity to contract
d. He had no knowledge of any fact which would impair the validity of instrument or render it valueless
But when negotiation is by delivery only, warranty extends in favor of no holder other than immediate transferee
(C) do not apply to person negotiating public or corporation securities other than bills or notes.

They are liable for warranties.

APPLICATION OF SEC 65—treats warranties or liabilities of:

Person negotiating by mere delivery Person negotiating by qualified indorsement
Refers to payable to bearer, either originally or when the only or last indorsement is in One negotiating by qualified indorsement completes the process with delivery
blank
But one indorsing in blank is not referred to here, as he negotiates by indorsement Refers to payable to order
(although blank) completed by delivery, not delivery only. A makes note payable to B or order

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 B negotiates it by qualified indorsement to C
Liabilities incurred by B by so negotiating the note are also stated in this section

LIABILITIES:
A makes a note payable to bearer and delivers the same to B
B negotiates note to C by mere delivery
-- By merely delivering instrument to C, B warrants ABCD and liability is limited only to
these warranties.
Thus, he is liable to the holder only when holder cannot obtain payment from person
primarily liable by reason of fact that any of warranties of person negotiating by delivery
is or becomes false.
LIABILITIES—he has the same warranties as those of person negotiating by mere delivery
Only difference is while person negotiating by mere delivery is liable only to his immediate
transferee, person negotiating by qualified indorsement is liable to all parties who derive their title
through his indorsement
He is secondarily liable and their secondary liability is limited to their warranties. They are
secondarily liable only when the person primarily liable cannot pay for any other reason than the
violation of 4 warranties

 What is the difference between a contract of indorser and that of a guarantor/surety of a commercial paper?
Contract of indorsement Contract of guaranty
Primarily of transfer Personal security
Liability is broader than that of indorser.
Unless the bill is promptly presented for payment at maturity and due notice of dishonor given to the Except where required by provisions of contract of suretyship, a demand or notice of default is not required
indorser within a reasonable time, he will be discharged from liability thereon. to fix the surety’s liability. He cannot complain that the creditor has not notified him of the absence of
special agreement to that effect in the contract of suretyship.

Qualified indorsers General indorsers

NEGOTIATION BY DELIVERY NEGOTIATION BY QUALIFIED Warrants that instrument is valid and subsisting
INDORSEMENT
Warranty extends in favor of immediate transferee only. Engages to pay holder or any intervening party who may be compelled by the holder to pay if
instrument is dishonored either by non-acceptance or non-payment, whether such dishonor arises
Both parties are ignorant of fact which would impair validity of instrument or render it valueless. from warranties or from other causes such as insolvency.
Does not engage to pay instrument if it is dishonored by non-acceptance or non-payment except when such dishonor
arises from his 4 warranties. His secondary liability is NOT limited to the 4 warranties.
His secondary liability is limited to the 4 warranties.

INDORSER ASSIGNOR
Like the qualified indorser or person negotiating by delivery BUT NOT GENERAL Not responsible for insolvency of principal debtor and will not be liable to the assignee if for that reason the assignee cannot collect from
INDORSER the principal debtor

Warrants the existence and legality of credit assigned and will be liable to assignee in case the assignee cannot collect from principal
LIKE GENERAL INDORSER debtor where credit assigned is illegal or non-existent. This liability exists whether or not he knows of illegality or non-existence of credit
he assigned.

Order of liability of indorsers

68 Order in which As respects one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed
indorsers are otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.
liable
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APPLICATION OF SEC 68—Rule applies only with respect to an indorser against another indorser BUT NOT AGAINST HDC
Every indorser is liable to all indorsers subsequent to him but not those prior to him whom he in turn makes liable.
This section contemplates successive negotiations and successive indorsements. It does not determine order of liability of joint indorsers among themselves.

Illustration: SUCCESSIVE INDORSEMENT

From B to C to D to E to F holder
D is made to pay by F
D can file an action against C and B (indorsers prior him) but not against E because indorsers are presumed to be liable in the order they indorse
UNLESS D proves by parol evidence that agreement was that E should be held liable first.

LIABILITY AGAINST HOLDER—indorsers are liable in the order they indorse BUT NOT AGAINST HDC
F holder can file an action against any of them in any order and none of them can set up against him an agreement among themselves that one indorser should be held liable first.

JOINT AND SEVERAL LIABILITY OF JOINT PAYEES—deemed to indorse jointly and severally
Holder can make any one of them pay the whole amount

EFFECT OF LACK OF NOTICE OF DISHONOR

One of joint indorsers cannot escape liability because proper notice of dishonor was not given to his joint indorser
When holder expressly releases first indorser, second indorser will be discharged
However, if one of joint indorsers pays the instrument, second joint indorser is prima facie liable to contribute and burden of proof to show release from such liability is upon second indorser

ART 1217, CCODE—in joint and several obligations, he who made the payment may claim from his co-debtors only the share which corresponds to each, with interest for payment already made.

Parties negotiating by mere delivery

65 Warranty where Every person negotiating an instrument by delivery or by a qualified indorsement warrants:
negotiation by a. Instrument is genuine and what it purports to be
delivery and so b. He has good title to it
forth c. All prior parties had capacity to contract
d. He had no knowledge of any fact which would impair the validity of instrument or render it valueless
But when negotiation is by delivery only, warranty extends in favor of no holder other than immediate transferee
(C) do not apply to person negotiating public or corporation securities other than bills or notes.

Other cases
1. Irregular indorser
2. Indorser of bearer instrument
3. Accommodation party
4. Agents signing in behalf of principal
5. Collecting bank

Irregular SEC 64. Liability of irregular indorser—where a person, not otherwise a party to an instrument, places his signature in blank before delivery, he is liable as indorser, in accordance with following
indorser rules:
a. If payable to order of 3rd person, he is liable to payee and to all subsequent parties
b. If payable to order of maker or drawer or is payable to bearer, liable to all parties subsequent to maker/drawer
c. If for accommodation party of payee, he is liable to all parties subsequent to payee

IRREGULAR INDORSER—an irregular or anomalous indorser is a person who, not otherwise a party to an instrument, places his signature in blank before delivery.

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 REQUISITES:
1. He must not otherwise be a party to the instrument
2. He must signs instrument in blank
3. He must sign before delivery

REASON—he indorses in an unusual, singular or peculiar manner; his name appears where we would naturally expect another name.
Where instrument is payable to B or order, B’s name should appear on the back of the instrument as first indorser
But instead, we find the name of Y.
Y is an irregular indorser.

“BEFORE DELIVERY”—Does this mean the initial delivery or every delivery?

In dealing with irregular indorsers, INITIAL delivery

APPLICATION—
Where a person puts his signature on the instrument after delivery, SEC 64 does not apply but SEC 17 and 63
SEC 64 applies where signature in blank is placed on instrument before delivery
SEC 64 deals only with liability of irregular indorser to the payee but does not fix the rights of various irregular indorsers as between themselves which shall be govered by SEC 68, under which
evidence is admissible as to the order in which they are to be liable.

SEC 68. Order in which indorsers are liable—as respects one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among
themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.

PAYABLE TO ORDER OF A 3RD PERSON PAYABLE TO ORDER OF MAKER SIGNING FOR ACCOMMODATION PARTY
Irregular indorser is liable to the payee and to all subsequent Irregular indorser is liable to all subsequent parties Where irregular indorser signs for accommodation of payee, he is
parties. to maker/drawer liable to all parties subsequent to payee.

A makes a note payable to B or order
B is not willing to rely on the financial ability of A maker and is
not willing to take instrument payable to his order unless Y’s
credit was back of it.
A secures signature of Y in blank
A delivers to B, who not takes it because of Y’s signature
Y is an irregular indorser and would appear as first indorser
To whom is Y liable?
B payee is a 3rd person
Where B negotiates note to C, C to D, Y irregular indorser is
liable to B payee and CD subsequent parties
A draws bill payable to his own order but he cannot
circulate bill without name of Y being indorsed on it.
Y signs at back of bill in blank
A negotiates to B
Y is irregular indorser
A drawer and payee, negotiates to B, B to C, C to D.
To whom is Y liable? Y is not liable to A drawer but
to BCD.
This is also true to payable to bearer.
A makes note payable to B or order.
B wants to discount it with bank but bank is not willing to rely on
financial ability of A and B alone.
B obtains signature of Y in blank, Y not receiving any valuable
consideration but signs for the purpose of lending his name or
credit to B.
Y is also an irregular indorser and appears on the instrument as a
second indorser with B as first.
To whom is Y liable? Y is not liable to B but to bank and other
parties subsequent to B.

Indorser of SEC 67. Liability of indorser where paper negotiable by delivery—where a person places his indorsement on an instrument negotiable BY DELIVERY, he incurs all liability of an indorser.
bearer
instrument A makes note payable to bearer which is delivered to B bearer
B can negotiate note by mere delivery and his liability and warranties would be those stated in SEC 65
But if he indorses the note, his liabilities and warranties would be
1. Stated in 66 if he indorses generally
2. Stated in 65 if he indorses qualifiedly

Accommodation SEC 29. Liability of accommodation party—one who has signed the instrument as maker, drawer, acceptor or indorser, without receiving value and for the purpose of lending his name to some

38
party other person. Such person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking of instrument, knew him to be only an accommodation party.
The liability of an accommodation party depends on how they participate in the instrument.

NOTE: A corporation cannot act as an accommodation party. Issue or endorsement of negotiable instrument by a corporation without consideration and for accommodation of another is ultra vires.

 Who is an accommodation party? What is the nature of his liability?

A: An accommodation party is one who meets 3 REQUISITES:
1. He must be a party to the instrument, signing as maker, drawer, acceptor or indorser.
2. He must not receive value for his receiving and lending his name
3. He must sign for the purpose of lending his name or credit to some other person.

He is liable on the instrument to a holder for value even though the holder, at the time of taking the instrument, knew him or her to be merely an accommodation party, as if the contract was not for
accommodation. The relation between an accommodation party and the accommodated party is one of principle and surety.

In accommodation transactions, an accommodation party lends his credit to the accommodated party, by issuing or indorsing a check which is held by a payee or indorsee as HDC who gave full value
therefor to the accommodated party. The accommodated party receives or realized full value which it must then repay to the accommodating party, unless the accommodating party intended to
make a donation to the accommodated party. But the accommodating party is bound on check to the HDC who is necessarily a 3rd party and is not the accommodated party. Having issued or
indorsed the check, the accommodating party has warranted to the HDC that he will pay the same according to its tenor.

 The accommodated party was allowed extension of payment without consent of accommodation party. Is the accommodation party liable?
A: YES< since the liability of accommodation party remains not only primary but also unconditional to a holder for value, even if the accommodated party receives an extension of the period for the
payment without the consent of the accommodation party, the accommodation party is still liable for the whole obligation. The extension does not release him because as far as the holder for value
is concerned, the accommodation party is a solidary co-debtor.

 Spouses Yaki and Soba executed a PN in favor of the lender promising to pay the loan obtained by Yaki’s sister. When the loan fell due, the lender demanded that the spouses be made
liable on the said PN but they argued that they are not liable since they did not profit from the loan. Is the contention correct?
A: NO, when a married couple signed a PN in favor of a bank to enable the sister of the husband to obtain a loan, they are considered as accommodation parties who are liable for the payment of the
loan.

MEANING OF “WITHOUT RECEIVING VALUE THEREFOR” EFFECT OF “VALUE RECEIVED”

One who signs for purpose of lending his name is given P150 for and in consideration of lending his name Suppose note contains “value received”.
but not for the instrument he signs.
This will not negate the character of note as an accommodation paper.
Would he cease to be an accommodation party?
NO. “without receive value therefor” means without receiving value by virtue of instrument; NOT without All accommodation notes imply a valuable consideration prima facie.
receiving payment for lending his name.

RIGHTS AND LEGAL POSITION OF ACCOMMODATION PARTY

1. AP = surety of party accommodated.
2. They have right to sue accommodated party for reimbursement since relation between them is in effect of principal and sureties.

ACCOMMODATED PARTY CANNOT RECOVER FROM ACCOMODATION PARTY

Absence of consideration = VALID DEFENSE
Accommodated party is to:
1. Reimburse amount which accommodation party may be obliged to pay
2. Pay instrument directly to the holder
3. Real debtor
4. AP is only secondarily liable; accommodated party is primarily liable

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LIABILITY OF ACCOMMODATION PARTY—liable on the instrument to a holder for value, notwithstanding such holder knew him to only be an accommodation party
Holder for value had notice of fact that accommodation party did not receive valuable consideration, he is considered a HDC.

SEC 28 SEC 29
Want of consideration is a valid defense to holder not in due course Want of consideration cannot be a defense between an accommodation party
and the accommodated party against a holder for value/HDC

Instruments which are not accommodation papers, effect of this notice of absence of consideration is to Even if holder has notice that he is an accommodation party and therefore has
render the holder for value not a HDC because he has notice of defense of prior parties, namely want of notice that he did not receive any consideration for the instrument he signed
consideration

Illustration #1:
Q: A signs PN as accommodation maker to B, without receiving any consideration for the note. Amount is P1000. Date of maturity is December 1, 1951. B indorses note to PNB, which discounts
the note on basis of A’s signature (has a high credit standing). Indorsement made before maturity. PNB knows that A is only an accommodation party. On date of maturity, A refuses to pay PNB
on ground that he did not receive any consideration from B and PNB is not HDC because it had notice of absence of consideration. Can A interpose defense?
A: NO. Under SEC 29, holder for value can hold accommodation party liable even if he knows him to be an accommodation party.
Credit given to accommodation party is sufficient to bind the accommodation maker.

Illustration #2
Ting issued a check P4000 payable to CASH or BEARER. Bang indorsed it in blank. Ang Tiong presents it to drawee bank for payment but bank dishonored it. He makes a written demand against
Ting and Bang. Bang claimed that he signed as accommodation party and not as general indorser.
HELD: Even if Bang is just an accommodation party, he is liable under SEC 29.
Accommodation party is liable to holder for value as if the condtract was not for accommodation. Fact that an accommodation indorser may obtain security from maker to protect himself against
danger of insolvency of latter, cannot affect his liability to an HDC. Remedy (provided by SEC 28) is personal and exclusive only between the accommodation indorser and accommodated party.

RIGHTS OF ACCOMMODATION PARTIES AS AGAINST EACH OTHER: Since NEGO INST does not define right of accommodation maker to seek reimbursement from another accommodation maker, ART
2073 CCODE applies. Solidary accommodation maker may:
1. Demand from principal debtor reimbursement of amount he paid on PN
2. Demand contribution from his co-accommodation maker without first directing his action against principal debtor provided that:
a. He made payment by virtue of judicial demand
b. Principal debtor is insolvent

Problems
1. On JUNE 1, 1990, A obtained a loan of 100,000 from B, payable not later than DEC 21 1990. B required A to issue him a check for that amount to be dated DEC 20, 1990. Since he does
not have any checking account, A, with the knowledge of B, requested his friend C, president of X Banking Corp, to accommodate him. C agreed. He signed a check for the aforesaid
amount, dated DEC 20, 1990, drawn by X Banking Corporation with ABC Commercial Banking Corporation as drawee. The by-laws of X Banking Corporate requires that checks issued by
it must be signed by the President and Treasurer or VP. Since Treasurer was absent, C requested VP to co-sign the check, which the VP reluctanctly did. The check was delivered to B.
The check was dishonored upon presentation on due date for insufficiency of funds. Is X Banking Corporation liable on the check as an accommodation party? If not, who is liable?
A: X Banking Corporation is not liable because the act of accommodating the check is an ultra vires act. It is out side the powers of a corporation to accommodate another not in line with its own
business.
President and VP are liable to the instrument in their personal capacities.

2. Santos purchased Vera’s car for 50,000. Not having enough cash at hand, Santos offered to pay in check. Vera refused to accept the check unless it is indorsed by Reyes, their mutual
friend. Reyes indorsed Santos’ check and Vero, knowing that Reyes had not received any value for indorsing the check, accepted it. Vera presented the check to the drawee bank for
payment. Payment was refused for lack of funds. Vera gave notice of dishonor to Reyes, but Reyes refused to pay saying that he indorsed it merely as a friend. In the event, Reyes
voluntarily pays Vera. Does Reyes have a right to recover from Santos?
A: YES, Reyes may recover. Relation between Santos and Reyes is in effect that of principal and surety, accommodation party. Reyes, being the surety of Santos, can recover from Santos whatever
amount that he paid to Vera.

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Agents signing SEC 19. Signature by agent; authority; how shown—Signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose and the
in behalf of the authority of the agent may be established as in other cases of agency.
principal
AUTHORITY TO COLLECT DOES NOT INCLUDE INDORSEMENT
BUT right of an agent to indorse commercial paper will not be lightly inferred.
A salesman with authority to collect money belong to his principal does not have implied authority to indorse checks received in payment.
Person taking checks made payable to corporation which can act only by agents, does at his peril and must abide by consequences if agent indorsing does not have authority.

 What factors would negate personal liability on the part of corporate officers who signed a PN for a loan obtained by the corporation?
A: Inference that corporate officers signed in their individual capacities would be negated by the following facts:
1. Name and address of corporation appeared on the space provided for maker/borrower.
2. Officers had only 1 set of signatures on the instrument, when there should have been two, if indeed they had intended to be bound solidarily—the first as representatives of the
corporation and the second in their individual capacities
3. They did not sign under the spaces provided for co-maker and neither where their addresses reflected there
4. At the back of the PN, they signed above the words “authorized representative”. (Solidbank Corp. v. Mindanao Ferroalloy Corp.)

SEC 69. Liability of agent or broker—where a broker or other agent negotiates an instrument without indorsement, he incurs all liabilities prescribed in SEC 65, unless he discloses the name of his
principal and fact that he is acting only as agent

SEC 69 applies only to payable to bearer

Liability and warranties of agent:
Every person negotiating an instrument by delivery or by a qualified indorsement warrants:
a. Instrument is genuine and what it purports to be
b. He has good title to it
c. All prior parties had capacity to contract
d. He had no knowledge of any fact which would impair the validity of instrument or render it valueless
But when negotiation is by delivery only, warranty extends in favor of no holder other than immediate transferee
(C) do not apply to person negotiating public or corporation securities other than bills or notes.

To escape personal liability as a party negotiating by delivery, agent must:

1. Disclose principal
2. State he is acting only as agent

BUT PAROL EVIDENCE IS NOT ADMISSIBLE TO RELIEVE AGENT

Collecting Bank  A check, payable to the order of Yang and Chow was deposited to a bank (collecting bank) with the lone indorsement of Yang. Yang, subsequently withdrew the entire proceeds
thereof. What are the implications.
A: Where the instrument is payable to the order of 2 or more payees or indorsees, who are not partners, all must indorse unless the one indorsing has the authority to indorse for others.
Payment of an instrument over a missing indorsement is the equivalent of payment on a forged indorsement or an unauthorized indorsement in itself in the case of joint payees.

A collecting bank, where a check is deposited and which indorses the check upon presentment with the drawee bank, is an indorser. In indorsing a check to the drawee bank, a collecting bank stamps
the back of the check with the phrase “all prior endorsements and/or lack of endorsement guaranteed” and, for all intents and purposes, treats the check as a negotiable instrument, hence, assumes
the warranty of an indorser. Without the collecting bank’s warranty, the drawee bank would not have paid the value of the subject check.

The collecting bank or last indorser, generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuiness of prior indorsements.

 Chow and King received a check from Machang as payment for motor vehicles. Chow and King deposited the check to Pigue Bank. Pigue Bank, in turn, presented the check to the

41
 drawee bank, Porki Bank, where the check was honored. As a result, the amount of check was credited by Pigue Bank to the savings account of Chow and King. It then turned out the
check was materially altered from 4000 to 200,000. What is the liability of Pigue Bank as depositary/collecting bank in this case?
COLLECTING BANK: any bank handling an item for collection except the bank on which the check is drawn.

A depositary/collecting bank, where a check is deposited and which endorses the same upon presentment with the drawee bank, is an endorser. SEC 66 states that an endorser warrants “that the
instrument is genuine and all respects what it purports to be, that he has good title to it, that all prior parties had capacity to contract, and that the instrument is at the time of his endorsement valid
and subsisting”. In check transactions, depositary/collecting bank or last endorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior endorsements considering
the act of presenting the check for payment to the drawee is an assertion that the party making the presentment has done its duty to ascertain the genuineness of the endorsements. If any of the
warranties made by the depositary/collecting bank turns out to be false, then the drawee bank may rec over fro it up to the amount of the check (AREZA vs. Express Savings Bank).

CHAP 5: DEFENSES
1. Real and personal defenses, distinguished

Real defenses Personal defenses

Stronger defense Weakest defense
Cannot be enforced by holder because there is no contract to enforce Can be enforced by a holder because there is an existing contract but subject to defenses.
ABSOLUTE DEFENSE: Those that attach to the instrument itself and are available against all holders, whether EQUITABLE DEFENSE: Those which are available only against a person not HDC or a subsequent holder who
in due course or not. However, it can only be raised by parties entitled to raise them. stands in privity with him.

Those that attach to instrument itself and can be set up against whole world, including HDC.
Right sought to be enforced never existed or ceased to exist; defense against everybody.
GR: Real defense is a defense which person against whom one is endeavoring to recover may set up and that
person is usually the person primarily liable upon instrument
Those which grow out of agreement or conduct of a particular person in regard to instrument which renders
it inequitable for him, though holding legal title, to enforce it against defendant, but which are not available
against bona fide purchasers for value without notice

Examples Examples
1. Where contract was void, not voidable only 1. SEC 28—Absence or failure of consideration
a. Signature was forged or unauthorized 2. Illegal consideration
b. He was legally incapable of making the contract 3. SEC 16—Non-delivery of complete instrument
c. Signature secured by misrepresentation of kind of paper he was signing 4. Conditional delivery of a complete instrument
d. Contract was void under an invalidating statute 5. SEC 13—Insertion of wrong date in an instrument where it is payable at a fixed period after date
e. Contract has lost its vitality by occurrence of subsequent event of by material and it is issued undated or where it is payable at a fixed period after sight and acceptance is
alteration without defendant’s consent, lapse of time or by discharge by payment in undated
due course, by bankruptcy proceedings or otherwise 6. Antedating or postdating for illegal or fraudulent purpose
2. Material Alteration 7. SEC 14—Filling up not within authority or not within reasonable time, where instrument is
3. SEC 15—Non-delivery of incomplete instrument delivered
4. Vicious force, violence or duress amounting to forgery 8. SEC 55—Fraud in inducement
5. Fraud in factum or fraud in esse contractus 9. SEC 55—Acquisition by force, duress or fear or intimidation
6. Minority (only available to the minor) 10. SEC 55—Acquisition by unlawful means
7. Insanity 11. SEC 55—Transfer/negotiation in breach of faith
8. Ultra vires act of corporation, where corporation is absolutely prohibited by its charter or statue 12. SEC 55—Negotiation amount to fraud
from issuing any commercial paper 13. SEC 55—Mistake
9. SEC 23—Forgery 14. Intoxication according to better authority
10. Prescription 15. Ultra vires acts of corporations, where corporation has the power to issue negotiable paper but
11. Marriage in case of a wife issuance was not authorized for particular purpose
12. Insanity where insane person has a guardian appointed by court 16. Want of authority of agent where he has apparent authority
13. Lack of authority of agent 17. Insanity where there is no notice of insanity on one contracting with insane person

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 14. Execution of instrument between public enemies 18. Illegality of contract where form or consideration is illegal
15. Illegality where it is the contract which is expressly made illegal by statute; if declared void for any
purpose
16. Prescription
17. Discharge in insolvency

Q: In a creditor-debtor relationship, who is interested in the existence of a defense?

A: DEBTOR, a presence of a defense exonerate the liability of the debtor.

Q: Why are real defenses stronger than personal ones?

A: Because there is no contract existing on the holder’s part.

2. Real defenses
Minority and ultra vires SEC 22. Effect of indorsement by infant or corporation—Indorsement or assignment of instrument by coporation or infact passes the authority therein, notwithstanding that from want of
acts capacity, corporation or infant may incur no liability.

Examples:
Q: A, a minor issued a PN to B. B negotiated it to C. C to D then D to E. What defense is available to A?
A: Minority. It is a real defense because of his lack of capacity.

Q: What recourse is available to the holder?

A: Go after the indorsers.

Q: A issued a negotiable instrument to B, a minor. Can A use minority as a defense?

A: NO, as a maker, he admits the existence of the payee and his then capacity to indorse. An indorser, maker, drawer and acceptor cannot raise the defense of minority because they warranted
not only the existence of the payee but also his capacity to indorse.

NOTES:
1. Minority or incapacity (insanity) may be invoked by the minor or incapacitated as a real defense. However, other aprties who are capacitated cannot invoke such. The defense is
personal to the minor or incapacitated only. Transfer of title by minor is however effective negotiation.
2. Fact that indorsement or issuance of an instrument as an ultra vires act of a corporation is a real defense.

Minor’s contract is voidable but he may ratify it. Defense is available only to minor and his indorsement passes title to indorsee but it does not bind him so as to make him liable. Defense is not
total. Where minor has kept whole of valuable consideration, he cannot interpose his minority as defense. Where he has kept only a party, defense is only to extent of benefit received by
minor.

Problem: minority and ultra vires acts

 Where the President of a corporation issues a company check and signs it in his capacity as president (being an authorized signatory) in payment of a car which he purchased for his
office use, but without approval of BOD, and the check is dishonored by drawee bank, may the seller recover from the drawee bank, corporation and president?
A: DRAWEE BANK—NO, a check itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank and the bank is not liable to the holder, unless and
until it accepts or certifies the check.
CORPO—NO, there being no BOD approval of the purchase of the car (assuming such board approval is required), the corporation is not liable unless estopped.
PRES—YES, it is one of the cases where a corporate officer can be held personally liable for his official act.

Non-delivery of an SEC 15. INCOMPLETE INSTRUMENT NOT DELIVERED—Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract
incomplete instrument in the hands of any holder, as against any person whose signature was placed thereon before delivery.

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 INSTRUMENT NOT VALID AGAINST PARTY BEFORE DELIVERY
Q: A signed a blank check which was stolen by B who filled the amount and a fictitious name as payee. B then indorsed the payee’s name and passed the check to C, C to D, D to E and E to F.
Can F enforce the instrument against A? Why?
A: NO, against A, whose signature was placed on check prior to delivery, instrument is not valid.

Q: Suppose F is a HDC. Would answer still be the same?

A: YES, law puts the phrase “any holder”.

BUT INDORSERS ETC ARE LIABLE

Invalidity of instrument only refers to parties whose signatures appear on instrument prior delivery. As to parties whose signatures appear after delivery, instrument may be valid. Thus where B
who steals blank check and fills it up, indorses. F can enforce it against BCDE. Instrument is valid as to B because he was the one responsible for the negotiation, theft and filling up and because
he is an indorser and as such he warrants that instrument is what it purports to be and as to CDE because they are indorsers.

Fraud in factum The person who signs the instrument lacks knowledge of the character or essential terms of the instrument. But the defense is not available if the party involved ha reasonable opportunity to
obtain such knowledge.

NIL has no provision as to fraud in factum. Maker may however be estopped by negligence to deny knowledge of character which he has signed and if he was not negligent, he is not liable. In
some cases, use of signature was applied was forgery and analogous to forger under SEC 23.

FRAUD IN FACTUM: cases in which person, without negligence, has signed but was deceived as to character of instrument and without knowledge of it.
Essential element is that maker or indorser must have exercised ordinary diligence and no matter contributed negligently to imposition.
TEST: WON artifice or trick constitutes forgery is WON signature is procured in such manner as to be voluntary act of signer. If procured in such manner, without assent of signer and not a
voluntary act, he is not liable.
REASON: instrument never existence; treated as though defendant never signed the instrument and since there is no instrument, defendant cannot be liable

Illustrative cases
1. Where note was signed under belief that he was signing a guardians’ petition
2. Where note was signed under belief that it was a petition for a road
3. Where signature was procured by fraudulent use of carbon paper

Forgery and want of SEC 23. Forged signature; effect of—When a signature is forged or made without authority of person whose signature it purports to be, it is wholly inoperative and no right to retain the
authority instrument or to give a discharge there or to enforce payment against any party, can be acquired through or under such signature, unless the party against whom it is sought to enforce such
right is precluded from setting up forgery or want of authority.

Take note of the following rules:

1. Only the forged signature is wholly inoperative and not the instrument itself, and not the genuine signatures.
2. In case of forgery of an indorsement of an instrument payable to order, it is not only the person whose signature was forged who would be liable but also the parties prior to such
person. Payment under a forged indorsement is not to the drawer’s order.

3. Despite the forgery of the signature, there may be parties who shall be precluded from setting up the forgery or want of authority such as:
a. Those who ratified the forgery expressly or impliedly
b. Those who were negligence.
i. In one case, the drawer was not allowed to recover although his signature was forged because the person who encashed the checks was his trusted secretary.
The drawer’s negligence was considered the proximate cause of his loss because the entrusted his blank checks and credit cards to his secretary.

4. GR: in case of forgery of indorsement of payee of the check, the drawee bank cannot debit the darwer’s account and that loss shall be borne by the drawee bank. The depositary or
collecting bank is liable to the drawee because it guarantees all prior indorsement.
a. NOTE: This is subject to qualification that the drawee himself was not negligence or guilty of such conduct as would estop him from asserting the forged character of the

44
 indorsement as against the drawer.
i. In another case, SC explained that only the drawee may be held liable if it was not established that the checks containing forged indorsements passed throught
he alleged collecting bank. The drawee in this case encashed the checks (one of which was crossed) presented by unknown persons although said checks were
payable to BIR. Hence, the drawee was negligent in encashing the checks.

5. If the signature of the drawer in a check is forged, drawee cannot charge the account of the drawer and the drawee cannot recover from collecting bank.

What is inoperative is only the signature and not the instrument.

Parties precluded from raising forgery as defense:
1. Person negotiating by delivery
2. Prior parties/indorsers

Forgery of maker’s signature
Maker cannot be held liable by
any holder, because the
purported maker is not a party to
the instrument as his forged
instrument is inoperative and has
no right to retain, enforce or
discharge the note.
Forgery of indorser’s signature
Indorsement is inoperative, thus it cannot effect any
transfer of any rights to the holder.
Q: A (maker) -> B -> C -> D ->E
B’s signature was forced. Can A raise the defense of
forgery?
A: YES
Q: Can E go after B?
A: NO, his recourse is to go after C or D.
The CUT-OFF RULE is applicable. Indorsement is
necessary for transfer of title.
Q: X-> A -> B -> C -> D ->E
Can acceptor admit the genuineness of the signature
of the payee?
A: NO
Q: Can the drawee refuse payment of BE bearing a
forced indorsement?
A: YES, Cut-off Rule applies.
 ASSOCIATED BANK vs. CA; PNB vs. CA; RP vs.
EBRADA
Forgery of drawer’s signature Forgery of bearer instruments
In cases involving a forced check, where the Signature of the payee or holder is
drawer’s signature is forged, the drawer can unnecessary to pass title to the
recover from the drawee bank. No drawee has a instrument. Hence, where
right to pay a forged check. If it does, it shall have indorsement is a forgery, only the
to re-credit the amount of the check to the account person whose signature is forged
of the drawer. can raise the defense of forgery
against a HDC.
REASON: Drawee bank is bound to know the
signature of the drawer since the drawer is its
customer.
Q: What is the implication of accepting BE baring a
forged signature of the drawer?
A: SEC 62, once accepted, the drawee cannot raise
forgery as a defense.
RECOURSE: Go after the last holder/collecting bank
 GEMPESAW vs. CA
Cut- off rule is not applciabe
GR: Drawee bank is liable for the loss
EXCEPTION: There is fault or negligence on part of
the drawer.

 What are the effects of forgery? What is the exception if any?

A: When a signature is forged or made without authority of the person whose signature it purports to be, the check is wholly inoperative. No right to retain the instrument or to give a discharge
therefor or to enforce payment thereof against any party can be acquired through or under such signature.
EXCEPTION: Unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.

In a case, the party was precluded from setting up the forgery, assuming there is a forgery, due to his own negligence in entrusting to his secretary his credit cards and checkbook including the
verification of his statements of account.

 If the drawee pays a check with the forged signature of the drawer, who will suffer the loss?
A: GR: Drawee who has paid upon the forged signature bears the loss.
EXCEPTION: When negligence can be traced on the drawer whose signature was forged, and the need arises to weigh the comparative negligence between the drawer and the drawee to

45
determine who should bear the burden of loss.
EXCEPTION TO EXCEPTION: But the mere fact that depositor leaves his checkbook lying around does not constitute such negligence as will free the bank from liability to him, where a clerk of the
depositor or other persons, taking advantage of the opportunity, abstracts some of the check blanks, forges the depositor’s signature and collect on the checks from the bank. Drawer cannot be
considered negligent if he reported the forgery immediately upon discovery.

 Where both the bank and depositor are negligent, who as between them shall bear the greater proportion of loss?
A: Between the bank and depositor, if the bank’s negligence is the proximate cause of loss and depositor is guilty of contributory negligence, the greater proportion of loss shall be born by the
bank. In one of the cases, the bank was negligence because it did not verify the genuineness of signatures in the applications for manager’s checks while depositor was negligent because it
clothes its accountant with apparent authority to transact business with the Bank and it did not examine its monthly statement of account and report the discrepancy to the Bank. The court
allocated damages on a 60-40 ratio.

 May the bank invoke GF if it pays a forged check?

A: NO, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount to the depositor.

 Kel Bank’s manager encashed manager’s checks which were plainly crossed checks. It was later discovered that the manager forged the signature of the authorized signatories of
clients in the application of said checks and that of the payees. Is Kel Bank liable?
A: YES, while its manager forged the signature of the authorized signatories of clients in the application for managers checks and forged the signatures of payees thereof, the drawee bank also
failed to exercise the highest degree of diligence required of banks in the case at bar. It allowed its manager to encash the managers checks that were plainly crossed checks.

Problems:
1. M, Maker, prepared a PN payable to the order of A, but he did not sign the same and left it inside his drawer. X, a thief, stole the instrument, forged M’s signature and delivered it
to A. A indorsed the instrument to B, B indorsed it to C, C to D, the present holder. Against whom can D enforce payment? Will your answer be the same if it were a bearer
instrument?
A: D can enforce payment from X, A, B and C but not against M. Under SEC 23, forged signature of M is wholly inoperative and no right to enforce payment was acquired against M by virtue of
his signature.
However, indorsers ABC are liable because they are parties after the forgery and are precluded from setting up such against the present holder D. When ABC indorsed the instrument, they
warranted that the instrument is genuine and in all respects what it purports to be.
On the other hand, the forger will be deemed as the principal debtor because his wrongdoing prevented recovery from M. He is effect, the maker of the instrument.

If the instrument is a bearer instrument, the answer would still be the same. The forged signature of M is still inoperative as to him. The indorsers are still secondarily liable because NIL provides
that persons who indorse bearer instruments are liable to subsequent parties who acquired title through indorsement. In this case, D acquired title through indorsement of ABC.

2. Juan dela Cruz signs a PN payable to Pedro Lim or bearer, and delivers it personally to Pedro Lim. The latter misplaced the note and Carlos finds it. Carlos endorses it to Juana for
value by forging the signature of Pedro. May Juana hold Juan liable on the note?
A: YES, the PN is payable to bearer hence title is transferred by negotiation through mere delivery. However, Juan may validly invoke defense of non-delivery of complete instrument by Pedro if
Juana is not HDC. It does not appear however that Juana is not HDC, so she is presumed as HDC.

3. Fernando forged the name of Daniel, manager of Trading Company, as the drawer of the check. BPI, the drawee, did not detect the forgery and paid the amount. May the bank
charge it against the account of the drawer?
A: NO, a bank is charged with the knowledge of the signature of its customer and it should not honor any check bearing a forged signature of the drawer.

4. Hernan issued a check payable to the order of Fernando in the sum of 12,000 and drawn on X Bank. The check was delivered to Lovely by Adriano for encashment. At that time,
the check had indorsements of Fernando and Rosa. When Lovely encashed it with X Bank, she affixed her signature on the check. Upon Lovely’s receipt of cash proceeds of the
check, she turned over the amount to Adriano. X Bank was informed that the alleged indorsemet of the payee Fernando was a forgery since the latter had died 2 years ago. X
Bank having refunded the amount to Hernan, sued Lovely, who refused to return the money. Was X Bank correct in paying Hernan? Does X Bank have a cause of action against
Lovely?
A: YES, X Bank was correct in paying Hernan. The forged signature of the payee is wholly inoperative and was acquired by X Bank through forged signature. When X Bank paid Lovely, it did not
comply with the order of the client. Hence, it is the duty of the bank to reimburse him.

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 YES, X Bank has a cause of action against Lovely. Lovely is a general indorser and as she warrants that she has good title to the instrument. Having beached the warranty, she is now responsible
to the collecting bank. Even if she encashed the check for Adriano, as an accommodation party, her liability as an indorser remains. In fact, she is liable even if she was merely an agent of
Adriano as it does not appear that she disclose the fact that the check was delivered to her for encashment.

5. A delivers a bearer instrument to B. B then specially indorses it to C. C indorses it in blank to D. E steals the instrument from D and forging the signature of D, succeeds in
negotiating it to F who acquires the instrument in GF and for value. If, for any reason, the drawee bank refuses to honor the check, can F enforce the instrument against the
drawer? In case of dishonor of the check by both drawee and drawer, can F hold any of BCD liable secondarily on the instrument?
A: F can enforce it against the drawer but he cannot hold BCD liable. The instrument involved is a negotiable instrument that is payable to bearer. The holder is whoever is in possession of the
instrument and indorsement is not necessary for the title of the holder-indorsee. Hence, the drawer is liable to the holder. Nevertheless, persons who indorse the instrument are liable to those
who acquired the title through their indorsements. In this case, F did not acquire his title through the indorsements of CD. D did not even indorse the instrument and the title of F cannot be
traced from B and C’s indorsement because of the break created by the forged indorsement of D. The fact that F is HDC is not material because forgery is a real defense.

When a signature is forged or made without authority of person whose signature it purports to be:
1. Inoperative
2. No right to retain the instrument
3. No right to give a discharge there
4. No right to enforce payment against any party

SEC 23 applies only to forged signatures or signatures made without authority of person whose signature it purports to be. If forgery consists of amount, SEC 23 not applicable. This is covered by
SEC 124 (material alteration).

Indorser cannot set up defense of forgery of signature of maker, drawer or indorsers prior or subsequent to him because of his warranties. Forgery of indorser’s signature, in payable to order, is
also available to acceptor or drawer.
REASON: if payee B’s signature is forged, every indorsee such as CDEF would not acquire title to instrument because they are not persons to whom payee B, whose signature is forged,
commanded or ordered maker or acceptor to pay. Instrument is supposed to be paid according to order of B, but payment to CDEF is not the order of B, as his signature is forged.

Material alteration SEC 125. What constitutes material alteration—

Any alteration that changes:
a. Date
b. Sum payable, either principal or interest
c. Time or place of payment
d. Number or relations of parties
e. Medium or currency
f. Adds place of payment where no place of payment is specified
OR ANY OTHER CHANGE OR ADDITION WHICH ALTERS EFFECT OF INSTRUMENT IN ANY RESPECT, IS MATERIAL ALTERATION

Q: Why is this a partial real defense only?

A: Because HDC may still demand payment but according to its original tenor.

“OR ANY OTHER CHANGE OR ADDITION WHICH ALTERS EFFECT OF INSTRUMENT IN ANY RESPECT” is a catch all phrase.

Q: What is the condition/term of the instrument at the time it was altered?

A: The instrument is materially complete

 What constitutes material alteration?

A: It is defined under SEC 125 to be one which changes the date, sum payable, time or place of payment, number or relations of the parties, the currency in which payment is to be made of one
which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect.

 What is the effect of material alteration?

47
 A: It avoids the instrument, except as against the party who made, authorizes or assented to the alteration and subsequent indorsers. HDC can enforce it according to its original tenor.

 Does alteration on the serial number of the check constitute material alteration?
A; NO, alterations on the serial numbers do not constitute material alteration within NIL. Alteration is material if it alters the effect of the instrument. It is an unauthorized change in an
instrument that purports to modify in any respect the obligation of the parties or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the
obligation of a party. It is one which changes the items required to be stated in SEC 1.

 When the drawee bank pays a materially altered check, can it claim reimbursement fro the drawer? Are there exceptions?
A: NO, when the drawee-bank alters the check, it violates the terms of the check and its duty to charge its client’s account only for bona fide disbursements he had made. Since drawee-bank did
not pay according to the original tenor of the instrument, as directed by the drawer, it has no right to claim reimbursement fro the drawer’s account or does it have a the right to deduct the
erroneous payment.

EXCEPTION: when drawer was the one who made or authorized the alteration or when he failed to exercise reasonable diligence to avoid it.

 Kingdao issued postdated checks and delivered the same to Taipao. The checks were payable to cash. One of the checks issued was the check in question, Check 467322 for
200,000 dated MAY 8, 1988. It is alleged that it was a stale guarantee check, originally dated AUG 28, 1987 but was altered to make it appear that it was dated MAY 8, 1988. Was
the check materially altered?
A: YES, take note also of the fact that such alteration was not countersigned by the drawer to make it a valid correction of its date as consented by its drawer to make a valid correction of its
date as the standard operation procedure of the bank.

 The payee admitted that while it did not dispute the fact of alteration, it denied that the alteration was done without the maker’s consent and that part of its company practice is
to rubber stamp the old PN which has been renewed to make it appear that there is a new obligation. The maker did not rebut the same. Will the alteration of PN effectively
relieve the maker of liability?
A: NO, while the PN is evidence of an indebtedness, it is not the only evidence, for the existence of the obligation can be proven by other documentary evidence such as a written memorandum
signed by the parties. A check that was issued to secure in lieu of and for the same purpose as a PN and can be presented to establish the existence of indebtedness.

WHEN ALTERATION IS MATERIAL—if it alters effect of instrument WHEN ALTERATION IS IMMATERIAL

1. Subsituting words “or bearer” for “order”
2. Writing “protest waived” above blank indorsements
3. Change in date from which interest is to run
4. Insertion of number before original figure, otherwise instrument
unchanged
5. Adding “with interest” with or without a fixed rate
6. Alteration in maturity of note, whether time is curtailed or extended
7. Instrument was payable to “First National Bank”, added word
“Marion”
8. Plaintiff struck out name of payee and inserted name of maker of
original note
9. Striking out name of payee and substituting person who actually
discounted note
10. Substituting address of maker for name of co-maker
1. “I promise to pay” to “We promise to pay”, where there are 2 makers
2. Adding “annual” after interest clause
3. Adding date of maturity as marginal notation
4. Filling in date of actual delivery where makers of note gave it date in blank, “July…”
5. Alteration of marginal figures where sum stated in words remained unchanged
6. Insertion of legal rate of interest where note had provision for “interest at… per cent”
7. Printed form of PN had on margin printed words, “Extended to…” Holder on or after maturity
wrote in blank space “May 1, 1913” as reference memorandum of promise made by him to
principal maker at time words were written to extend time of payment
8. There was a blank for place of payment, filling in blank with place desired
9. Adding to indorsee’s name, abbreviation “Cash” when it had been agreed that draft should
be discounted by trust company of which indorsee was cashier
10. Indorsement by stranger after delivery to payee at time note was negotiated to plaintiff
11. Extension of time given by holder to principal maker, without consent of surety co-maker

Extinctive prescription It is a real defense. Prescriptive period for filing of a claim based on negotiable instruments is 10 years from the time of cause of action accrued. In case of checks, the action of depositor against
his drawee bank commences from time he is given notice of payment.

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  Myron Papa vs. AU Valencia—payee did not encash the check for more than 10 years from issuance. This failure resulted in the impairment of the check through his unreasonable and
unexplainable delay. Court invoked ART 1249 stating that acceptance of payee of check implies an undertaking of due diligence in presenting it for payment, and if he from whom it received
sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation for which it was given.

 International Corporate Bank vs. Spouses Gueco—contractual obligation remains even if the check is not presented for payment (CONTRADITORY RULING).

Spoilation Change of an instrument has no effect if original meaning can be ascertained. That is, if alteration be made by a stranger, rights of parties are not affected. However, SEC 124 abrogates doctrine
of spoliation. Effect is, where alteration is made by party, HDC can recover on original tenor.
Material alteration innocently made or made by stranger—instrument is discharged but debt survives
Material alteration made by party and as forgery—original debt and instrument are discharged

Duress amount to If physical pressure where duress amounts to forgery, such duress is legal or real defense. But even so, it seems negotiation an instrument would be under such circumstances as amount to
forgery fraud, still a HDC should be protected.

Duress (taken by force) is merely a personal defense. But where it amounts to forgery, it is a real defense.
Ex. A takes B’s hand and forces him to sign his name.

Insanity Contracts with person judicially to be insane and for whom a committee or guardian has been appointed are not valid and cannot be enforced if disaffirmed or avoided. Defense is not available
not only as between immediate parties but also to HDC. If insanity is known, contract is VOID. But where there is a conflict of authority as to whether ignorant of incompetency of a person with
whom contracts will be protected. He will be protected if he has acted in GF and taken no undue advantage of afflicted person.

Ultra vires act of Where corporation is absolutely prohibited from issuing any commercial paper, paper cannot be enforced even by HDC. However, indorser cannot set up defense that execution of bill or note
corporation is certain by a corporation was ultra vires.
cases
Want of authority of Where agent is without authority, want of authority is a legal or real defense. Principal will not be bound beyond authority given to agent.
agent in certain cases
Illegality of contract in Contract or instrument which is expressly made illegal by statue, not merely manner of execution or consideration, illegality of contract or instruction is real defense.
certain cases But illegality of contract is a personal or equitable defense where law declares to be illegal is not instrument itself but merely manner or consideration given. True even when consideration is in
direct violation of law.
In other words, distinction is to be made between a consideration simply illegal and one which, by statute, expressly makes bill VOID. In former case, HDC can recover.

Confession of judgment Stipulations have been declared void by judicial decision. But they are usually separable from principal contract which can be enforced.

3. Personal defenses
Q: Determination of whether the person is HDC or not is material. Why?
A: Because only holders not in due course can raise these defenses.

Ante-dating or post 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.
dating The person to whom an instrument so dated is delivered acquires the title thereto as of the date of delivery

WHEN ANTE-DATING or POST-DATING INVALIDATES INSTRUMENT—when done for illegal and fraudulent purposes
Ex. A wants to charge 24% on loan of P1000. He may require borrower to make PN and ante-date it 1 year to make it appear that period for payment is 2 years and interest is 12%/year.

WHEN TITLE ACQUIRED—person to whom instrument is delivered acquires title or ownership over it, not as of the date written on instrument but as of the date of actual delivery.

Insertion of wrong date 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

49
 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.

PRINCIPLE: One who made possible the infirmity shall bear the loss.
If E is the HDC and A is the maker, though both E and A are innocent, A shall suffer the consequences for he made it possible the loss. If E is not an HDC and A is the maker, E is not innocent but
A is, E cannot hold A liable.

EFFECT OF INSERTION OF WRONG DATE—knowingly inserting wrong date in an undated instrument will avoid it as to the party so inserting the wrong date. Implied in this section that insertion
makes the instrument void as to B, who has knowledge of the true date made the wrong inserting. Under SEC 12, also void because it was ante-dated for a fraudulent purpose.

AS TO HDC: Ex. B, after inserting wrong date, indorses to C, C is HDC.

Is instrument also avoided as to C as HDC? No. Insertion of wrong date does not avoid the instrument in hands of HDC. Date inserted will be regarded as true date.

 A negotiable PN payable at a fixed period after date was issued, undated and without any amount and was delivered to the payee named therein. Will the filling up of the balnks
with any date and for any value avoid the note in the hands of a holder?
A: NO, SEC 13 states that insertion of a wrong date will not avoid the instrument in the hands of HDC, but as to him, the date so inserted is to be regarded as the true date. SEC 14 states that if
an incomplete instrument, after completion is negotiated to HDC, it is valid and effectual for all purposes in his hands and he may enforce it as if it had been filled up strictly in accordance with
authority given and within reasonable time.

(ABUSE OF AUTHORITY) SEC 14. BLANKS; WHEN MAY BE FILLED—Where the instrument is wanting any material particular, the person in possession has a prima facie authority to complete it by filling up the blanks
Filing up the blanks therein. And a signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates a prima facie
beyond authority authority to fill it up as such for any amount. In order, however, that any such instrument when completed may be enforced against any person who became a party thereto prior to its
completion, it must be filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due
course, it is valid and effectual for all purposes in his hands and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time.

It is inequitable for a person to set up this defense against a more innocent party.

Q: Is there any recourse to the holder?

A: YES, to run against the indorsers
Subsequent indorsers cannot put up the defense of good faith.

EX:
Q: The amount should be filled upto 50,000 only.
A -> B -> C -> D
B inserted an amout of 80,000. Is there a defense?
A: YES

Q: Can it be used?
A: It depends whether the holder is HDC or not. If he is HDC, A cannot raise the defense. If not in due course, he can use it as a defense. The holder not in due course is not an innocent party as
far as the maker is concerned, thus the contract is avoided.
RECOURSE: Go after the immediate transferor in case of bearer instrument or the indorsers in case of order instrument.

One who takes negotiable instrument, knowing that it contained blanks when it was delivered, will not put on inquiry as to extent of agent’s authority and may recover notwithstanding
authority given has been exceeded. This is true even when blanks are filled up in transferee’s presence or by transferee himself, by agent’s authority.

 Jo Cla pre-signed several checks, which had no payee’s name, date or amount, to answer for the expenses for his business. The blank checks were entrusted to his business
partner, Paulo Co, with the specific instruction to the latter not to fill them out without previous notification to and approval by Jo Cla. Paulo Co however went to Marti Lio to
secured a loan stating that Jo CLa needed the money for construction of his house. Marti Lio granted the request and gave Paulo Co 2M. In exchange, Paulo Co simultaneously
delivered to Marti one of the blank checks Jo Cla earlier signed with the blank portions filed out with the words “Cash”, “2M” and dated “23 May 2014”. When Marti deposited
the check, it was dishonored for “account closed”. When Marti demanded payment fro Jo, Jo denied authorizing the loan or the check’s negotiation and asserted that he was not

50
 a privy to the loan agreement. It turned out that Marti knew that Jo was not privy to the loan. Is Jo liable to Marti?
A: NO, SEC 14 states that if the maker or drawer delivers a pre-signed blank paper to another person for the purpose of converting it into a negotiable instrument, that person is deemed to have
prima facie authority to fill it up. In order however that any such instrument, when completed, may be enforced against any person who became a party thereto prior to its completion, there
are 2 REQUISITES:
1. Blank must be filled strictly in accordance with authority given
2. It must be filled up within reasonable tie.

If it was proved that it was not filled up strictly in accordance with authority given and within reasonable tie, maker can set up a personal defense and avoid liability.
In this case, Paulo exceed his authority when he filled up the blanks and used the check, which was limited to the use of operation expenses and on the condition that Jo’s prior approval be first
secured. While Paulo had prima facie authority to complete the check, such authority does not extend to its use (subsequent transfer or negotiation) once the check is completed. Thus, only the
authority to complete the check is presumed. There is no evidence that Paulo ever secured prior approval from Jo to fill up the blank or use the check.

In addition, Marti’s knowledge that Jo is not privy to the contract of loan and correspondingly had no obligation or liability to hi renders him dishonest. Hence, he cannot be HDC. Accordingly,
the defense of incomplete but delivered instrument under SEC 14 will lie against him.

Want of delivery of a SEC 16. DELIVERY: WHEN EFFECTUAL; WHEN PRESUMED—Every contract on a negotiable instrument is incomplete and revocable until delivery of instrument for the purpose of giving effect
complete instrument thereto. As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the
authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, delivery may be shown to have been conditional, or for a special purpose only, and not
for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to
make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by
him is presumed until the contrary is proved.

Q: A issued a complete instrument but he has no intention of negotiating it yet. B got the instrument accidentally. B negotiated it to C, C to D and D to E. E is an HDC. Can C be HDC?
A: YES, as long as he has no knowledge of the infirmity.

Q: Between E and A, can A raise the defense?

A: NO, because the defense is a personal defense.
PRINCIPLE: One who makes the infirmity possible shall bear the loss.
RECOURSE: Go after the indorsers
REASON: Breach of warranty (i.e. they had good title to the instruent).

As against persons not HDC, it can be shown that no delivery was made or delivery is conditional or for a special purpose.
Where instrument is stolen, defense of want of delivery is equitable.
But where stolen instrument is payable to order, thief will have to forge payee’s or indorsee’s signature to negotiate it, defense would be FORGERY (real defense).

Absence of failure or  Explain the presumption of consideration in negotiable instruments.

consideration A: It is presumed that every party to an instrument acquires the same for a consideration or for value. It devolves upon the party who claims that there is no consideration to present convincing
evidence to overthrow the presumption and prove that the checks were in fact issued without valuable consideration.

SEC 28. Effect of want of consideration—Absence or failure of consideration is a matter of defense against any person not HDC; partial failure of consideration is a defense pro tanto
(proportionate) whether the failure is ascertained and liquidated amount or otherwise.

Defense pro tanto means that the person is not totally exonerated from liability. He is liable up to the amount he benefited.
Partial failure of consideration is a personal defense and can be raised against a holder not in due course.
General holder is liable for breach of warranty (i.e. his warranty that at the time of his indorsement, the instrument is valid and existing).
With regard to person negotiating by delivery and qualified indorser, his liability depends on whether he has knowledge of invalidity of the instrument.

Q: A issued a PN sans consideration to B. Can B collect from A?

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A: NO

Q: B indorsed the note to C, C to D, D to E. Could C be a HDC?

A: YES, as long as he has no knowledge of the fact that there was infirmity in the instrument.

Q: Does A have a defense? What kind of defense?

A: YES, a personal defense.

Q: Can A successfully raise it?

A: NO, one who made the infirmity possible shall bear the loss.

ABSENCE OF CONSIDERATION—total lack of any valid consideration
Examples
1. A issues to B P1000 check in payment of forged certificates of stock
(valueless, hence no consideration)
2. Note given for future illicit cohabitation
3. Note by husband to wife, upon promise of wife to withdraw all opposition to
proceedings for divorce instituted by him
4. Note given in consideration of an agreement to stifle or hinder a public
prosecution for a felony
5. Fraudulent consideration for commercial paper
FAILURE OF CONSIDERATION—neglect or failure to give, to do, to perform consideration
agreed upon
Examples
1. Where stocks are not forged and have some value but B fails to deliver
2. A thinks he owns a certain piece of property by there is judgment against him and
execution has not been taken and A conveys that property for B’s note. In the
meantime, property is taken on execution.
3. Consideration for bill or note for use of an invention but which patent is not
obtained
4. Where invention is non-patentable
But there is no failure of consideration where use of invention or its sales merely proves
unprofitable.

EFFECT OF WANT OF CONSIDERATION BETWEEN DRAWER AND ACCEPTOR AS TO PARTIAL FAILURE OF CONSIDERATION
HOLDER Suppose extent of want of consideration is only P600.
Drawee—liable to holder and cannot allege want of consideration between him and B payee, gave to A maker, VC to extent of P400.
drawer A can interpose want of consideration only pro tanto to the extent of P600.
If C were not HDC, he can collect only P400.
Holder—stranger in the transaction between the drawer and the drawee. But if C is HDC, he can collect P1000 because failure or absence of consideration is not a valid
If holder has given value to drawer andhas no knowledge of equity between drawer and defense against an HDC.
drawee = INDORSER GF

Hence, in an action brought by holder against acceptor, merchandise of inferior quality

as not worth the value of bill is not a valid defense.

INADEQUACY OF CONSIDERATION (ALSO UNDER SEC 52)

ART 1355 CCODE—except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence.
While inadequacy of consideration is not of itself a sufficient ground for either legal or equitable relief, it may be shown as evidence of constructive fraud.

In general, want of consideration can be raised only between immediate parties. But defense may also be raised against any holder who takes instrument with notice of want or failure of
consideration.

BETWEEN WHOM DEFENSE MAY BE RAISED IN BILL OF EXCHANGE

Want of failure of consideration may be interposed in an action brought by—
1. Payee against drawer
2. Indorsee against payee indorsing
3. Drawer against acceptor

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 BUT NOT ACTION BETWEEN PAYEE AND ACCEPTOR—defense is available only if there is no consideration received by defendant for his liability and plaintiff must have given no consideration for
his title.

Simple fraud, duress, SEC 55. When title is defective—title of person who negotiates is defective when he obtained the instrument, or any signature by fraud, duress or force and fear or other unlawful means, or
intimidation, force or for an illegal consideration or when he negotiates it in breach of faith or under circumstances amounting to fraud.
fear, illegality of
consideration, breach of SEC 56. What constitutes notice of defect—To constitute notice of an infirmity or defect in title, person to whom it is negotiated must have had actual knowledge of infirmity or defect or
faith knowledge of facts that his action in taking the instrument amounted to BF

SEC 57. Rights of HDC—HDC holds instrument free from any defect of title prior parties and free from defenses available to prior parties among themselves and may enforce payment of
instrument for full amount against all parties liable thereon

FRAUD IN INDUCEMENT—relates to
1. Quality
2. Quantity
3. Value or character of consideration
Signer is led by deception to execute what he knows is a negotiable instrument. There is misrepresentation of facts touching inducement or desirability of contract. Fraud does not prevent
contract.

There is fraud when other is induced to enter into a contract which, without them, he would not have agreed to. It is one of modes of acquiring a defective title from which HDC is free.
One knew that he was signing negotiable paper and therefore necessarily signed with knowledge that instrument would probably pass into hands of innocent purchaser but was deceived into
signing for a larger amount than he intended or on different terms. He is consciously launching a negotiable instrument. Deceit is not in character of instrument but in its amount of its terms.
Fraud is one of negligence.

ACQUISITION OF INSTRUMENT BY FORCE, DURESS OR FEAR

DURESS—depriving one of his will and understanding by threats or unlawful means so that PN obtained from him is not free and voluntary act.

MISTAKE—substance of thing or conditions which have principally moved one or both parties to enter into the contract. This will vitiate consent only when such identity or qualifications have
been the principal cause of contract. Simple mistake of account shall give rise to its correction.

INTOXICATION—when a man has voluntarily put himself in such a condition that a loss must fall on one of 2 innocent persons, it should fall on him who occasioned it.

Ultra vires acts of Where corporation has power to issue negotiable paper but issuance was not authorized is not a defense against HDC
corporation in certain
cases
Want of authority of an Where agent is without authority, want of authority of agent is REAL DEFENSE; principal will not be bound. Where agent has apparent authority, although actually unauthorized, actual want of
agent in certain cases authority is equitable.

Other possible defenses

1. Blank signature
2. Bankruptcy or insolvency
3. Counterclaims and set-offs
4. Discharge
5. Lack of revenue stamp

Blank signature No intention to issue a negotiable instrument; where there is an intention to issue a negotiable instrument but blank signature is filled up contrary to authority or is not filled up within

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 reasonable time, it is EQUITABLE.

Bankruptcy or 2 legal situations

insolvency 1. Party primarily liable on instrument—where it is party liable who is bankrupt or insolvent, it is no defense
A maker of note in hands of F holder
A declared insolvent
F may file claim with assignee or trustee in bankruptcy appointed by Court
2. One negotiating who is bankrupt or insolvent
Where negotiation is made within 30 days before filing of petition for insolvency, negotiation is VOID and no title is transferred. Bankruptcy is REAL DEFENSE.
Where party who is insolvent or bankrupt is one negotiating, it may or may not be a defense depending upon time of indorsement.

Q: A maker of note payable to order of B, B negotiates it to C, C to D. D becomes insolvent. Within 30 days before filing of petition declaring him insolvent, D negotiates note to E. Can E
collect from A?
A: NO. A can interpose defense that negotiate made by D is void and therefore, E has no right or title to note or its proceeds. A’s liability is not extinguished. While he is not liable to E, he is
liable to assignee in insolvency of D insolvent. Where however note is negotiate by D to E before 30 day period, negotiation is valid and title to note passes to E. A is liable to E and A cannot
interpose defense of bankruptcy or insolvency of D
Counterclaims and set- SEC 58, DEFENSE from which holder is NOT HDC is not free—means technical defenses as distinguished from set-offs.
offs SET-OFF—not generally as a defense; between original parties whom there is a privity, a set-off may be pleaded to a negotiable instrument the same as it may be to a non-negotiable
instrument.

A makes note for P1,000 payable to order of B

A owes B P1,000
B owes A P600
In case of action by B against A for P1000
A can set-off sum of P600 which B owes him
He would then be liable for P400 only

COUNTERCLAIMS AS AGAINST REMOTE PARTY; HDC

But as between remote parties NOT HDC, GR: although there is considerable conflict of authorities, in an action by an indorsee, independent demands against payee cannot be set-off, but only
such equities which arise out of instrument itself.

B negotiates note to C
In an action by C against A, A cannot set-off the P600 which B owes A, against claim of C, even if C is not HDC

Set-off or counterclaim is not available against HDC

Discharge Before NIL, discharge was treated as defense but it is deemed best to submit to new classification as adopted in law. If instrument is discharged, anyone who has been a party to it may set up
against holder a defense that it has been extinguished as an existing contract and that holder or payee holds it as a mere receipt or voucher.

DISCHARGE AS DEFENSE BETWEEN ORIGINAL PARTIES—good defense between original parties or between parties having only their rights = remote parties NOT HDC. Payment in due course at
or after date of maturity is a defense against any holder, as any holder who acquires the instrument after maturity is NOT HDC.

DISCHARGE AS DEFENSE AGAINST HDC—but against HDC, where party paying instrument does not observe precautions, it is not a defense.

A makes a note payable on demand to B or order

B negotiates note to C
C collects from A but A does not get back the note
C negotiates note to D, HDC
D can still collect from A who cannot interpose defense of discharge

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Lack of revenue stamps NIRC requires placing of documentary stamps on each bank check, draft or certificate of deposit not drawing interest, or order for payment of any sum of money drawn upon or issued by any
bank, trust company, or any person or persons, companies or corporations, at sight or on demand, in all BE, drafts, certifications of deposit drawing interest or orders for payment of any sum of
money otherwise than at sight or on demand, or on all negotiable PN except bank notes and on each renewal; upon acceptance of payment purporting to be drawn in a foreign country but
payable in the Philippines, and on all foreign BE and LOC including orders, by telegraph or otherwise, for payment issued by express or steamship companies or by any person or persons drawn
in but payable out of the Philippines in a set of 3 or more according to custom of merchants and bankers.

EFFECT OF FAILURE TO STAMP

SEC 233, National Internal Revenue Code—instrument required to be stamped and which has been signed, issued, accepted or transferred, without being duly stamped, shall not be recorded
nor shall be admitted or used in evidence in any court until requisite stamp shall have been affixed and cancelled.

No notary public or other officer shall add his jurat or acknowledgement to any document subject to documentary stamp tax unless proper documentary stamps are affixed and cancelled.
Effect is to make instrument unenforceable. But this defect may be cured by affixing stamp at time instrument is presented in evidence.

 Give the effects of each of the following: a) Incomplete but delivered instrument; b) Complete but undelivered instrument; and c) Incomplete undelivered instrument
Incomplete but delivered instrument Complete but undelivered instrument Incomplete undelivered instrument
Where the instrument is wanting in any material particular, the person in possession is prima facie presumed Delivery is essential to the validity of the negotiable
authorized to complete it. instrument. As between immediate parties and those who
are similarly situated, delivery must be coupled with
A signature on a blank paper delivered by the person making the signature in order that it may be converted intention of transferring title to the instrument.
into a negotiable instrument operates as prima facie authority to fill it up as such for any amount.
However, if the instrument is in the hands of a HDC, valid
In both cases, however, the instrument must be filled up strictly in accordance with authority given and delivery to him is conclusively presumed.
within reasonable time in order that it may be enforced against any person who became a party prior to its
completion. However, persons negotiating after its completion are liable because of their warranties.

HDC may enforce the instrument as if it had been filled up strictly in accordance with authority given and The defense of lack of delivery of a complete instrument is Non-delivery of an incomplete instrument is
within reasonable time. Hence, it is no defense in an action to enforce PN that it was signed in blank as SEC only a personal defense. a real defense.
14 concedes prima facie authority of person in possession to fill in the blanks.

Problems
1. Jose Reyes signed a blank check and in his haste to attend a party, left the check at the top of his executive desk in his office. Later, Nazareno forced open the door to Reyes’ office and stole the blank check.
Nazareno immediately filled in the amount of 50,000 and a fictitious name as payee on the said check. Nazareno then endorsed the check in the payee’s name and passed it to Roldan. Thereafter, Roldan
endorsed it to Dantes.
a. Can Dantes enforce the check against Jose Reyes?
b. If Dantes is a HDC, will your answer in (a) be the same?
A: Dantes cannot enforce the instrument against Jose Reyes. Jose Reyes can raise the defense that the incomplete instrument was not delivered since the check was only stolen and filled up by Nazareno.
My answer would still be the same even if Dantes is HDC. If an incomplete instrument has not been delivered, it will not, if complete and negotiated without authority, be a valid contract against any holder, even HDC.

2. A signed a blank check and kept it inside the drawer of his desk in his office. B, a janitor opened the drawer, got the check and filled in the amount 100,000 with B’s name as payee. Thereafter, B indorsed
the check to C and C indorsed the check to D. Should the drawee bank dishonor the check? Can D hold A liable? Would your answer be the same if D was HDC? How about B and C, are they liable to D?
A: NO, D cannot hold A liable because the instrument is incomplete and undelivered. An incomplete and undelivered instrument would not be a valid instrument in the hands of any holder as against an person whose
signature was placed before delivery.
YES, my answer will be the same even if D is a HDC because SEC 15 says “any holder”.
YES, BC are liable. B because he was the forger and besides an indorser, and he warrants that the instrument is genuine and in all respects what it purports to be. SO also with C.

 Give the different forms of fraud

Fraud in execution Fraud in inducement Fraud in factum

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When a person induced to sign an instrument not knowing the Person signs the instrument intends to sign it as a negotiable The person who signs the instrument lacks knowledge of the character or
character as a note or bill. The person who signed the instrument does instrument but was induced only by fraud. His consent to issue essential terms of the instrument. But the defense is not available if the
not know that he is signing a negotiable instrument. was vitiated by fraud. party involved has reasonable opportunity to obtain such knowledge.

EX: A blind person was made to sign a piece of paper he believed to be It is a personal defense It is a real defense
a credit application although it is really a PN.

Problem
 A induced B by fraud to make a PN payable on demand to the order of A in the sum of 5,000,000. Can A file an action successfully against maker B for the amount of the note? If A transfers the note to C
who pays 5,000,000 therefore and acquires the note under circumstances to make C HDC. Can C file an action successfully against B, maker of the note for the amount?
A: NO, B may raise the defense of fraud of inducement against A who is not HDC. This is true in a case where A was the one who fraudulently induced B to issue the note.
YES, C can file an action successfully against B. C is presumed to be HDC. Hence, in the absence of proof that he is not, he is HDC who is free from personal defenses including fraud in inducement.

 What is the difference between failure or absence of consideration and illicit consideration?
Failure or absence of consideration Illicit consideration
Personal defenses Personal defense
EXCEPTION: if the statute declares the instrument void for any purpose.

Problem
1. AB issued 2 postdated checks to CV, as security for pieces of jewelry to be sold. Each check has a face value of 50,000. Thereafter, CV negotiated the check to SIH Inc. without knowledge of AB. AB returned
the jewelries to CV and tried to retrieve the checks. Having failed to do so, AB withdrew her funds from the drawee bank and the checks were dishonored when presented for payment. SIH sued AB who
interposed the defense that the checks did not have any consideration. However, AB did not present proof that SIH is not HDC. Will defense of absence of consideration prosper?
A: AB cannot invoke the defense of absence of consideration against SIH. There is no showing that SIH is not HDC, hence presumption stands. As HDC, SIH is free from personal defenses of prior parties.

2. A bill of exchange was issued because of the love and affection of drawer for payee. Can the drawer be held secondarily liable (assuming non-acceptance by the drawee on the instrument): a) by the payee;
b) by a HDC?
A: NO, drawer cannot be held secondarily liable by payee because while the love and affection may be a good consideration, it is not a valuable consideration. Lack or absence of consideration is a vlaid defense between
drawer and payee.

3. Pedro issued a negotiable note to Juan, a government employee to facilitate the early release of the government approval of application that he filed. Juan negotiated the instrument to Pablo, a HDC. When
Pablo presented the instrument Pedro for payment, Pedro claims that he is not liable because the consideration was illicit. Is the refusal of Pedro justified?
A: Refusal is not justified. Illegality of consideration is only a personal defense. Since Pablo is HDC, illegality of consideration cannot be invoked.

CHAP 6: Enforcement of Liability

1. Parties primarily liable and parties secondarily liable
Primarily liable Secondarily liable
Maker Drawer
Acceptor General indorsers
Qualified indorsers

 How do you enforce liability to those primarily liable?

Maker Drawee
The moment he makes the instrument The moment he accepts the instrument under SEC 62 (acceptor)

 How do you enforce liability to those secondarily liable?

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PN BE Steps to charge the acceptor for honor and referee in
case of need
1. Presentment for payment must be made within the 1. Presentment for acceptance or negotiation within reasonable time after it was Protest for non-payment by drawee.
required period to the maker acquired should be made only in instances under SEC 143.
2. Notice of dishonor should be given, if PN is dishonored by 2. If dishonored by non-acceptance:
non-payment of the maker. a. Notice of dishonor to indorsers and drawer
b. If bill is a foreign bill, there must be a protest for dishonor by non-
acceptance
3. If bill was accepted
a. Presentment for payment to acceptor
i. If bill is dishonored upon presentment for payment
ii. Notice of dishonor must be given to person secondarily
liable.
b. If bill is a foreign bill, protest for dishonor by non-paymet must be
made.

84 Liability of Where instrument is dishonored by non-payment, immediate right of recourse to all parties secondarily liable accrues to holder
person
secondarily AFTER DISHONOR, INDORSERS ETC PRIMARILY LIABLE
liable, when As to holder, after an instrument is dishonored by non-payment, persons secondarily liable cease to be secondarily liable. They become principal debtor. PROVIDED, notice of dishonor is given
instrument to them
dishonored If no notice of dishonor, they are discharged.
After notice of dishonor given, holder can bring action against any one of them without necessity of first bringing an action against person primarily liable. But where persons secondarily liable
are charged by dishonor and notice, while it is true that they become principal debtors as to holder, yet as among themselves, persons secondarily liable are presumed liable in order they
become parties to instrument.

2. General steps in enforcing liability

a. Presentment
i. Presentment for acceptance
ii. Presentment for payment

b. Dishonor
c. Acceptance

3. Presentment for payment

a. Concept of presentment
70 Effect of want of Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if instrument is, by its terms, payable at a special place, and he is able and
demand on willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except otherwise provided, presentment for payment is necessary
principal debtor in order to charge the drawer and indorsers.

PRESENTMENT FOR PAYMENT: production of BE to the drawee for his acceptance or to drawee or acceptor for payment or production of PN to the party liable for payment of same.
Consists of:
1. Personal demand for payment at proper place
2. With bill or note in readiness to exhibit it if required and to receive payment and surrender it if debtor is willing to pay

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Informal talk without a presentment of it or intention as formal presentment and demand is not sufficient to put note in dishonor. Demand over phone is not sufficient unless maker, by word or conduct, waives right to ask
for exhibition of note.

PRESENTMENT TO ACCEPTOR—operative act that makes acceptor liable under his acceptance. Before acceptance, drawee is stranger to bill. Upon acceptance, he becomes bound as party primarily liable. He is bound
according to the tenor of his acceptance and cannot show, against payee, that there was subsequent agreement between him and drawer modifying terms of acceptance.

PAYABLE AT SPECIAL PLACE—not payable at specified city but at bank

Q: If bill is payable at PNB, is it necessary to make presentment to X in order to charge him?
A: NO. Only effect is that if X is able and willing to pay the bill at PNB at maturity = tender of payment of X and holder F loses right to recover interest due subsequent to maturity and costs of collection but he can still hold
X liable/

RULE APPLICABLE TO DEMAND NOTES—rule that presentment is not necessary to charge person primarily liable applies to instruments payable on demand

SEC 71 (read together with 70) which provides that “But, except otherwise provided, presentment for payment is necessary in order to charge the drawer and indorsers”= means that instrument must be presented for
payment on date and period mentioned to charge the persons secondarily liable such as drawers and indorsers.
Instrument must be:
1. Presented on date of maturity, it payable on a fixed date or within reasonable time after issue, if it is a PN
2. Or within a reasonable time after last negotiation if BE
Otherwise drawer and indorsers are discharged from liability

Rules on presentment for payment

When not necessary Requisites
It is not necessary to charge persons primarily liable but it is necessary to charge those secondarily liable,  Presentment must be by the holder or by some person authorized to receive payment on his
except: behalf
 Drawer—where he has no right to expect or require that the drawee or acceptor will pay the  It must be made at a reasonable hour on a business day on the proper date
instrument  Presentment must be at the proper place
 Indorser— where the instrument was made or accepted for accommodation and he has no reaon  Presentment must be to the person primarily liable on the instrument or if he is absent or
to expect that the instrument will be paid if presented. inaccessible, to any person found at the place where presentment is made
 When dispensed with under SEC 82:  Person entitled to present the instrument for payment must exhibit the instrument to the person
o Where, after exercise of reasonable diligence, presentment cannot be made from whom the payment is demanded and upon payment must be delivered to the person paying
o Where drawee is a fictitious person it. If the instrument is not surrendered and cancelled, there is a danger that it may fall in the
o By waiver of presentment express or implied hands of other persons who might claim rights over the instrument.
 When instrument has been dishonored by non-acceptance.

Problems
 Gemma drew a check on SEPT 13, 1990. The holder presented the check to the drawee bank only on FEB 5, 1994. The bank dishonored the check on the same date. After dishonored by the drawee bank, the
holder gave a formal notice to Gemma througha letter dated APRIL 27 1994. What is meant by “unreasonable time” as applied to presentment? Is Gemma liable to the holder?
A: The concept of what is reasonable time is relative. Reasonable time has been defined as time necessary for a reasonable, prudent and diligent man to do what the contract or duty requires should be done, having a
regard for the rights and possibility of loss, if any, to the other party. However, with respect to checks, SC took cognizance of current banking practice that check becomes stale after more than 6 months or 180 days.
NO, Gemma is no longer liable because she is already discharged from secondary liability under the check. Presentment and notice of dishonor was made after an unreasonable length of time of more than 3 years.
However, Gemma may still be liable to the holder if the latter is her contracting party. Failure to present the instrument on time does not totally wipe out all liability based on contract. Although she may not be liable on
the check, she may be liable on their contract.

 The check was presented to the drawee bank 120 days from the date thereof. Is the drawer discharged from the duty to maintain sufficient funds therefor?
A: NO, according to current banking practice, the reasonable period within which to present a check to the drawee bank is 6 months thereafter, the check becomes stale and the drawer is discharged from liability thereon
to the extent of loss caused by the delay. Thus, presentment of the check to the drawee bank 120 days (4 months) after its issue was still within the allowable period. The drawer was freed neither from the obligation to
keep sufficient funds in his account nor from liability resulting from the dishonor of the check.

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Rules for presentment for acceptance
When mandatory
1. Where the bill is payable within a fixed period after sight, or in any other case, where
presentment for acceptance is necessary to fix the maturity of the instrument.
2. Where bill expressly stipulates that it shall be presented for acceptance
3. Where bill drawn is payable elsewhere than at the residence or place of business of drawee.
NOTE: It is not necessary to present a check for acceptance because it is not one of those required under SEC
143.
When excused or dispensed with
1. Delay is excused when a bill drawn payable elsewhere than at the place of business or the
residence of drawee and the holder, with the exercise of reasonable diligence, failed to present
the bill for acceptance. What is excused is the delay in presenting it for payment caused by
presentment for acceptance.
2. Where drawee is dead, absconded or is a fictitious person or a person not having capacity to
contract by bill.
3. Where, after exercise of reasonable diligence, presentment cannot be made.
4. Where, although presentment has been irregular, acceptance has been refused on some other
ground.

b. Requisites for sufficiency

72 What Must be made:
constitutes a a. By holder or by some persons authorized to receive payment in his behalf
sufficient b. At a reasonable hour on a business day
presentment c. At a proper place as defined
d. To person primarily liable on instrument or if he is absent or inaccessible to any person found at place where presentment is made

i. Date of presentment
71 Presentment Where instrument is not payable on demand, presentment must be made on day it falls due.
where Where it is payable on demand, presentment must be made within reasonable time after its issue, that in the case of BE, presentment for payment will be sufficient if made within a
instrument is reasonable time after last negotiation.
not payable on
demand and
where payable
on demand

WHEN PAYABLE AT A FIXED OR DETERMINED TIME

When must presentment for payment be made?
If payable at a fixed or determinable future time—on date of maturity
If payable on demand—
a. If note—within reasonable time for issue
b. If bill—within reasonable time from last negotiation, not issue.
LAST NEGOTIATION: last transfer for value
Subsequent transfers between banks for purposes of collection are not negotiations within this secetion.
Requirement of reasonable time begins to run from last taking for value.

Rule in determining maturity date Rule in computing time

SEC 85. Time of maturity—every negotiable instrument is payable at time fixed without grace. When day
of maturity falls upon Sunday or holiday, instruments falling due or becoming payable on Saturday are to
be presented for payment on next succeeding business day EXCEPT that instruments payable on demand
may, at the option of holder, be presented for payment before 12NOON on Saturday when that entire day
is not a holiday.
SEC 86. Time; how computed—when instrument is payable at a fixed period after date, after sight or after
happening of a specified event, time is determined by excluding day from which time is to begin to run
and by including date of payment.
A draws bill dated March 1, 1950

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 “To X: 30 days from date, to pay B or order P1000 (Sgd) A”
Where instrument falls due on Saturday and becomes payable on Saturday, when must presentment be
made? Exclude March 1, then count 30 days from date and include 30th day.
Depends whether payable at a fixed or determinable future time or on demand March 31 will be date of payment.
At a fixed or determinable future time On demand
Presentment must be made on next succeeding On day Saturday before noon or Monday (at But if one date January 31 and payable 1 month after date will mature on February 28 or 29, if it is a leap
business day option of holder) year—it must be remembered that on date of payment, party liable is entitled to whole of that day within
which to make payment.

If due date was July 5, 1923, an action dated July 5, 1923—action was prematurely brought.

1. Rule if payable in a bank

75 Presentment Presentment for payment must be made during banking hours, unless the person to make payment has no funds there to meet it at any time during the day, in which case presentment at
where payable any hour before bank is closed on that day is sufficient.
at a bank
APPLICATION: applies to instrument payable at bank
Pay to B or order P1000 at PNB (Sgd) A
Banking hours are 9-230pm from Monday to Friday

Presentment for payment must be done between banking hours on ordinary banking days. Otherwise, presentment would not be sufficient and persons secondarily liable are discharged.
But person to make payment has until close of banking hours where instrument is made payable in which to pay it, and if before close of such hours, he deposits funds there enough to pay it, a
demand earlier in the day is premature.

WHEN PRESENTMENT MAY BE MADE AFTER BANKING HOURS

Where X has no funds sufficient to meet the bill on day of presentment, presentment may be made before 4pm and such presentment would be sufficient, as at any rate, bill cannot be paid
even if presented during banking hours.

87 Rule where It is equivalent to an order to bank to pay the same for account of principal debtor
instrument
payable at bank Applies only where instrument is payable at a particular named bank.
“I promise to pay B or order P1000 at PNB (Sgd) A”
= order to pay addressed to PNB by A maker
PNB may charge the amount of note from account of A without further authority from A

EFFECT OF FAILURE TO MAKE PRESENTMENT FOR PAYMENT

Suppose B or any subsequent holder fails to make a presentment for payment at PNB, is A maker discharged?
A is not discharged because he is primarily liable.

ii. Place of presentment

73 Place of At a proper place
presentment a. Where a place is specified
b. No place specified but address of person to make payment is given
c. No place and no address, presented at the usual place of business or residence of person to make payment
d. In any other case if presented, wherever he can be found or if presented at his last known place of business or residence

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ANY OTHER PLACE—when holder meets maker or acceptor while waiting at Escolta, presentment may properly be made there.

1. Rule if payable at a special place

70 Effect of want of Presentment for payment is not necessary in order to charge the person primarily liable on the instrument; but if instrument is, by its terms, payable at a special place, and he is able and
demand on willing to pay it there at maturity, such ability and willingness are equivalent to a tender of payment upon his part. But except otherwise provided, presentment for payment is necessary
principal debtor in order to charge the drawer and indorsers.

PRESENTMENT FOR PAYMENT—production of BE to the drawee for his acceptance or to drawee or acceptor for payment or production of PN to the party liable for payment of same.
Consists of:
1. Personal demand for payment at proper place
2. With bill or note in readiness to exhibit it if required and to receive payment and surrender it if debtor is willing to pay

Informal talk without a presentment of it or intention as formal presentment and demand is not sufficient to put note in dishonor
Demand over phone is not sufficient unless maker, by word or conduct, waives right to ask for exhibition of note

PAYABLE AT SPECIAL PLACE—not payable at specified city but at bank

If bill is payable at PNB, is it necessary to make presentment to X in order to charge him?
NO. Only effect is that if X is able and willing to pay the bill at PNB at maturity = tender of payment of X and holder F loses right to recover interest due subsequent to maturity and costs of collection but he can still hold X
liable

RULE APPLICABLE TO DEMAND NOTES—rule that presentment is not necessary to charge person primarily liable applies to instruments payable on demand

iii. Presentment to the party primarily liable

1. How presentment is made
2. Rule in case party primarily liable is already dead
3. Presentment to partners
4. Presentment to joint debtors

How presentment 74 Instrument must Instrument must be exhibited to the person from whom payment is demanded, and when it is paid, it must be delivered up to party paying it.
is made be exhibited
NECESSITY OF EXHIBITION OF INSTRUMENT—
a. Demand for payment
b. Exhibition of instrument

Purpose for exhibition is to enable debtor to:

1. Determine genuineness of instrument and right of holder to receive payment
2. To enable him to reclaim possession upon payment
No presentment and demand can be made by any person without having the note in his possession at the time unless special circumstances, such as loss of note or its
destruction as excuse of its absence.

DEMAND BY TELEPHONE NOT SUFFICIENT because exhibition not possible

WHEN ACTUAL EXHIBITION EXCUSED
1. Debtor does not demand to see instrument but refuses payment on some other grounds
2. When instrument is lost or destroyed

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Rule in case part 76 Presentment Where person primarily liable on instrument is dead and no place of payment is specified, presentment must be made to his personal representative if such there
primarily liable is where principal be, and if he can be found.
already dead debtor is dead
SEC 76-78 NOT APPLICABLE WHERE PLACE SPECIFIED
May be made to his executor/administrator
1. If there be one
2. If he can be found

Holder must use diligence to find personal representative.

Indorser himself be the personal representative, presentment has been held necessary.

Presentment to 77 Presentment to Where persons primarily liable are liable as partners and no place of payment is specified, presentment may be made to any one of them even though there has
partners persons liable as been a dissolution of firm.
partners
SEC 76-78 NOT APPLICABLE WHERE PLACE SPECIFIED
May be one of partners even if partnership has been dissolved.
Each partner is an agent of the partnership.
In case of death of one, presentment shall not be made to his personal representative but to the surviving partner.

Presentment to 78 Presentment to Where there are several persons, not partners, primarily liable on instrument and no place of payment is specified, presentment must be made to them all.
joint debtors joint debtors
SEC 76-78 NOT APPLICABLE WHERE PLACE SPECIFIED
Must be made to all of them
Informal demand on one of joint makers is not a basis for charging indorsers
If one of them is duly authorized for the purpose, presentment to him would be sufficient.

c. Instances where presentment is excused

i. When presentment not required to charge the drawer
ii. When presentment not required to charge indorser
iii. When presentment for payment is excused

79 When presentment not required to Where he has no right to expect or require that drawee or acceptor will pay the instrument
charge the drawer
80 When presentment not required to Where instrument was made or accepted for his accommodation and he has no reason to expect that instrument will be paid if presented.
charge the indorser
82 When presentment for payment is a. Where, after exercise of reasonable diligence, presentment cannot be made
excused b. Where drawee is a fictitious person
c. By waiver of presentment, express or implied

NOTES for SEC 79 and 80:

GR: If no presentment for payment is made, persons secondarily liable are discharged.
EXCEPTIONS:
1. Where drawer has no right to expect or require that the drawee/acceptor will pay the instrument
2. Where indorser has made or accepted instrument for his accommodation and he has no reason to expect that instrument will be paid if presented
Exceptions are relative.

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Only drawer or indorser is not discharged, but all other parties secondarily liable are relieved from liability.

WHERE DRAWER NEED NOT BE GIVEN NOTICE

Where drawer, withdraws his funds from X drawee, so that they are not sufficient to pay bill, he has no right to expect or require X to pay instrument
Where F holder does not make a presentment to X, A drawer would not be discharged by such failure. But other parties secondarily liable are discharged.
Where drawer made arrangement with drawee for payment of bill, presentment is still necessary to charge him

Illustrative cases: presentment is not required to charge drawer—

1. In case of check upon which payment has been stopped
2. Where drawer’s balance is less than amount of check.
However, mere fact that drawer has no funds in drawee’s hands at time he draws, does not render presentment unnecessary if he still has reasonable grounds to believe that instrument will be paid, particularly
when provision has been made for payment of any bill drawn by drawer on drawee.
3. Where drawer of a bill containing words “pay from balance” had no money deposit with drawee but expected to arrange with broker to cover drafts.

WHEN INDORSER NEED NOT BE GIVEN NOTICE

A makes note for accommodation of B payee
B indorses to C, C to D, D to E, E to F
F need not make presentment for payment to A, in order to charge B indorser

REASON: B did not give value to A

B has no reason to expect that note will be paid upon presentment
But CDE are discharged as no presentment has been made

In effect, accommodated party is the person primarily lable

Accommodated payee-indorser is not discharged even if no presentment for payment is made (being in effect the person primarily liable)

d. When delay is excused

81 When delay in making Delay is excused when caused by circumstances beyond control of holder and not imputable to his default, misconduct or negligence. When cause ceases to operate, presentment
presentment is excused must be made with reasonable diligence.

Delay Failure to make presentment

SEC 81. When delay in making presentment is
excused—delay is excused when caused by
circumstances beyond control of holder and not
imputable to his default, misconduct or negligence.
When cause ceases to operate, presentment must
be made with reasonable diligence.
SEC 82. When presentment for payment is excused—
a. Where, after exercise of reasonable diligence, presentment cannot be made
b. Where drawee is a fictitious person
c. By waiver of presentment, express or implied

APPLICATION—what is excused is delay APPLICATION—what is excused is the failure to make presentment

EXCUSABLE CIRCUMSTANCES: those events which
could not be foreseen or which though foreseen, are
inevitable
Reasonable diligence implies active search
Insolvency of maker even if known to indorser, will not excuse presentment
IMPLIED WAIVER—may be manifested by any language or conduct or any agreement to lead holder to believe that presentment is waived or to mislead or prevent
him from treating the bill as he otherwise would

Illustrative cases of implied waiver

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 1. Mislead holder and induce him from taking steps to make presentment
2. A drawer tells F holder that he will take care of collecting bill. This is a waiver on A’s part and if F fails to make presentment, A is not discharged
3. Holder fails to make presentment to drawee. Drawer paid part of bill and promised orally to pay rest.
4. Maker, before maturity of note, was adjudged a bankrupt partly upon his written admission of inability to pay with willingness that he be adjudged a
bankrupt
5. Where indorsers had assured holder that it could not be paid at maturity and knew that maker, a corporation had no money to pay for it
6. Indorser assured holder that a note for same amount with his indorsement will be given in renewal, such assurance if relied by holder
7. Maker on day of maturity telephone the holder that he could not then pay the note and holder then telephoned the maker consenting in giving further
time to maker

4. ACCEPTANCE
 What does acceptance of a bill mean? How is it made?
A: SEC 132 states, “acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. Acceptance must be in writing and signed by the drawee. It must not express that the drawee will perform
his promise by any other means than the payment of money.

 When is acceptance of a bill qualified?

A: SEC 141 states, “Qualified acceptance—“
1. Conditional—which makes the payment by the acceptor dependent on the fulfillment of a condition therein stated.
2. Partial—an acceptance to pay part only of the amount for which the bill is drawn
3. Local—an acceptance to pay only at a particular place
4. Qualified as to time
5. Acceptance of some, one or more of drawees but not of all.

REQUISITES:
1. Acceptance must be in writing
2. Written acceptance must be signed by the drawee
3. Drawee must assent to the promise to pay a sum certain in money and not by any other means

Proof of acceptance—it may be the instrument itself or in a separate instrument.

However, under SEC 133, “holder of a bill presenting the same for acceptance may require that the acceptance be written on the bill and if such request is refused, may treat the bill as dishonored.
EFFECTS: when an acceptance is written on a paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith thereof, receives the bill for value.

 When is it deemed accepted?

A: The drawee is deemed to have accepted the instrument under the said section in the following instances:
1. Bill was delivered to the drawee and the latter destroy the same.
2. Bill was delivered to the drawee but the drawee refuses within 24 hours or within such other period as the holder may allow to return the bill accepted or non-accepted.

NOTE: SEC 136 provides that the drawee is allowed 24-hours after the presentment in which to decide whether or not he will accept the bill, the acceptance if given, dates as of the day of presentation”. On the other hand,
SEC 137 provides that, where a drawee to whom a bill is delivered for accepted destroys the same or refuses within 24-hours after such deliver or within such other period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have accepted the same.

FUTURE BILL: an unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value.

 What are the kinds of acceptance?

A: The following are the kinds of acceptance:
1. Conditional—which makes payment by the acceptor dependent on the fulfillment of a condition stated
2. Partial—an acceptance to pay part only of the amount for which the bill is drawn

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 3. Local—an acceptance pay only at a particular place
4. Qualified—as to time
5. Acceptance of some, one or more of the drawees but not of all

 What is the right to unqualified acceptance?

A: Holder may refuse to take an qualified acceptance and if does not obtain an unqualified acceptance, he may treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, 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 to. However, acceptance presumed to be unqualified or absolute.

5. Dishonor
PN BE
1. Presentment for payment must be made within required period to the maker. 1. Presentment for acceptance or negotiation within reasonable time after it was acquired
2. Notice of dishonor 2. If dishonored by non-acceptance:
a. Notice of dishonor should be given to indorsers and drawer
EX: M -> A -> B -> C -> D -> E b. If bill is a foreign bill, there must be a protest for dishonor by non-acceptance
Q: In case where the cause of action is for payment, is presentment and dishonor essential? 3. If bill is accepted
A: YES a. Present for payment to acceptor should be made
b. If bill is dishonored upon presentment for payment:
Q: If holder is running after indorsement for breach of warranty, is presentment and dishonor essential? i. Notice of dishonor upon presentment for payment
A: NO ii. If the bill is a foreign bill, protest for dishonor by non-acceptance must be
made
SEC 70. Effect of want of demand on principal debtor—presentment for payment is not necessary in order SEC 143. When presentment for acceptance must be made—
to charge the person primarily liable on the instrument; but if instrument is, by its terms, payable at a a. Where bill payable after sight or in any other case, where presentment is necessary in order to
special place, and he is able and willing to pay it there at maturity, such ability and willingness are fix maturity of instrument
equivalent to a tender of payment upon his part. But except otherwise provided, presentment for b. Where bill expressly stipulates
payment is necessary in order to charge the drawer and indorsers. c. Where bill is drawn payable elsewhere than at residence or place of business of drawee
In no other case is presentment necessary in order to rendered any party to bill liable.
SEC 89. To whom notice of dishonor must be given—when a negotiable instrument has been dishonored
by PRESENTMENT FOR ACCEPTANCE—production of BE to drawee for his acceptance
a. Non-acceptance GR: Presentment not necessary to render any party to bill liable
b. Non-payment EXCEPTION 3 CASES IN SEC 143: in those cases, to charge persons secondarily liable, it is necessary to
Notice of dishonor must be given to drawer and to each indorser a. Make presentment for acceptance
Any drawer or indorser to whom such notice is not given is discharged b. Negotiate bill within reasonable time
So, even when no presentment for acceptance is made, if bill is negotiated within reasonable time, persons
secondarily liable are not discharged.

If bill is dishonored by non-acceptance, holder may treat bill as if it had required acceptance.

Illustration
Where bill is payable 30 days after sight
Law requires this bill to be presented for acceptance
Date of maturity will not be fixed if bill is not presented

Where there is express stipulation

Bill contains stipulation that it must be presented for acceptance

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 Where bill is drawn elsewhere than at residence of drawee
In order to inform X drawee of existence of bill so that he can make arrangements for its payment at PNB
Manila

 When dishonor of instrument occurs?

Dishonor by non-payment Dishonor by non-acceptance
SEC 83. When instrument dishonored by non-payment— SEC 149. When dishonored by non-acceptance
a. Payment is refused or cannot be obtained a. When it is duly presented for acceptance and acceptance is refused or cannot be obtained
b. Presentment is excused and instrument is overdue and unpaid b. When presentment is excused and bill is not accepted

Q: What are the implications of the notices sent to drawer/general indorsers?

A: Secondary liability

Example:
A -> B -> C -> D -> E
E sent notice of dishonor to D alone.
Q: What is the effect of notice given to D?
A: Others are discharged.
PRINCPLE: Parties not given a notice are discharged.

WHEN PAYMENT IS REFUSED WHEN PRESENTMENT EXCUSED Illustration (A)

a. Instrument must be duly presented a. Presentment for payment be excused Drawee refuses to accept on bill itself or refuses to give general acceptance
for payment b. Instrument be overdue
b. Payment is either refused or c. It be unpaid
cannot be obtained But if presentment is not excused, bill is not
dishonored by mere fact that bill is overdue and
unpaid.

 Is the drawer an indispensable party to a suit against indorsers in case of dishonor of the instrument by nonpayment?
A: NO, after an instrument is dishonored by nonpayment, indorsers cease to be merely secondarily liable—they become principal debtors whose liability becomes identical to that of the original obligor. The holder of a
negotiable instrument does not even proceed against the maker before suing the indorser. Hence, the drawer is not an indispensable party in an action against the indorser of the checks (TUAZON vs. Heirs of Ramos).

 Will discharge of the drawer from liability due to the lack of protest operate to discharge him from his own letter of undertaking which he signed as additional security for the draft (BE)?
A: NO, he can still be liable under the letter of undertaking even if he is discharged due to failure to protest the non-acceptance of drafts. The letter of undertaking is a separate contract from the sight draft. The liability of
the drawer under the letter of undertaking is direct and primary. It is independent from his liability under the sight draft. Liability subsists on it even if the sight draft was dishonored for non-acceptance or non-payment.

 What is the effect of a failure to protest a sight draft?

A: Drawer will be discharged from liability under the sight draft when there is failure to protest the draft for non-acceptance. A sight draft made payable outside the Philippines is a foreign bill of exchange. When a foreign
BE is dishonored by non-acceptance or non-payment, protest is necessary to hold the drawer and indorsers liable. Verily, the failure to protest the non-acceptance of sight draft resulted in discharge of drawer from liability
under the instrument.

a. Notice of dishonor
 Who should give it?
A: It should be given by the:

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 1. Holder
2. Agent or representative of holder
3. Any party who may be compelled to pay like indorsers
4. Agent of any party who may be compelled

 Who will benefit?

A: The following are those who will benefit from the notice:
1. Given by or on behalf of the holder—it inures to the benefit of all subsequent holders and all prior aprties who have a right of recourse against the party to whom it is given.
2. If notice is given by the indorser who may be compelled to pay, such notice inures to the benefit of the holder and all parties subsequent to the party to whom notice is given

EX: M maker issued a negotiable note to P payee, payable to P or his order. P indorsed the instrument to A, then A to B, B to C and C to D present holder. If M dishonors the instrument, D may notify C since C may be
compelled to pay D. C may notify any person who may be secondarily liable to him, that is BAP. B may notify A and P and A may notify P.

If D gave notice of dishonor to P, AB and C, C need not notify PAB again because notice by holder inures to the benefit of all prior partie who have the right to recourse against the party to whom it is given. On the other
hand, if D notified only C but C, in turn, notified PAB, D can already hold PAB liable because notice by an indorser (C in this case) inures to the benefit of the holder. P need not be notified by AB anew because the notice
given by C inures to the benefit of all parties subsequent to the party to whom notice is given (P having been given notice by C).

 What is the effect of notice of dishonor?

A: Immediate right of recourse against indorser arises. It is as if the indorser becomes primarily liable in the sense that the holder need not claim payment from the person primarily liable.

 When is notice not required, excused or dispensed with?

A: After due exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged.

Not necessary for Drawer Not necessary for Indorser

1. Where drawer and drawee are the same person
2. When drawee is a fictitious person or a person not having capacity to contract
3. When drawer is the person to whom the instrument is presented for payment
4. Where drawer has no right to expect or require that the drawee or accetpr will honor the
instrument
5. Where drawer has countermanded the payment
 When drawee is a fictitious person or without capacity to contract and indorser is aware of that
fact at the time of indorsement
 Where indorser is person to whom the instrument is presented for payment
 Where instrument was made or accepted for his accommodation

 Who should give notice?

Holder SEC 90. By whom given—notice may be given:
a. By holder
b. On behalf of holder
c. By any party to the instrument
d. On behalf of any party to the instrument
Who might be compelled to pay it to holder, and who, upon taking it up, would have right to reimbursement from party to whom notice is given.

A makes note payable to order of B negotiates it to C, C to D, D to E, E to F

1. F holder can give notice
2. X stranger can give notice on F’s bahlf. If X is notary public, he may give notice as agent
3. CDE can give notice because any of them may be compelled by F to pay (provided notice has been given by F to them). C can give notice only to B because it is only B whom he can
hold liable, but not to D and E. D can give notice to C and B. E can give to DCB
4. Y stranger can give notice in behalf of BCD to persons to whom each can give notice

Q: Suppose F notifies only D. Can D notify E?

A: NO because D, upon taking the note, would not have the right of reimbursement from E.

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 Effect is to discharge E.

Q: Whom can D notify?

A: C and B because he would have right of recourse against any of them if he is compelled to pay the note by F holder

Q: Can E give notice in his own behalf?

A: NO because upon discharge, he becomes a stranger and a total stranger cannot give notice in his own behalf.

Q: Can A maker give notice in his own behalf?

A: NO but E or A can give notice as agents in behalf of those who are entitled to give notice, such as F holder or D indorser who was notified by F.

Agent SEC 91. Notice given by agent—Notice may be given by any agent, either in his own name or in name of any party entitled to give notice, whether that party be his principal or not.

NOTICE OF AGENT—it is not necessary that agent be authorized by principal

Notice may be given by him:
1. In the name of any party entitled to give notice
2. In his (agent’s) own name

A collecting bank may give notice and where it has done so, no notice from owner is necessary
Where cashier of drawee bank which had refused to pay a check gave the check to a notary to protest, it was held that possession of check by cashier was evidence of his agency of the holder to
present it for protest.

Party who may be SEC 90. By whom given—notice may be given:

compelled to pay a. By holder
b. On behalf of holder
c. By any party to the instrument
d. On behalf of any party to the instrument
Who might be compelled to pay it to holder, and who, upon taking it up, would have right to reimbursement from party to whom notice is given.

 Form of notice?
96 Form of notice Notice may be in writing or merely oral and may be given in any terms which sufficiently identify the instrument, and indicate that it has been dishonored by non-acceptance or
non-payment. It may in all cases be given by delivering it personally or through mails.

EFFECT OF DEFECTS
1. NOT SIGNED—it would not invalidate it
2. IF WRITTEN, DOES NOT CONTAIN STATEMENT THAT IT WAS PRESENTED AND DISHONORED; PARTY INTENDS TO LOOK FOR PARTY ADDRESSED—insufficiency can be supplemented by oral communication. Failure
to state the date of making and maturity and name of payee does not invalidate notice. Notice which contains a copy of note and declares that payment has been demanded and refused is sufficient.
But mere statement that note was payable and due is insufficient notice.
3. MISDESCRIPTION OF INSTRUMENT AS TO DATE/AMOUNT/NAMES/DATE OF MATURITY—if person is not mislend, it does not vitiate notice. Thus, though notice on its face was to maker if it was in an envelop
addressed to indorser and was opposed by latter, indorser has sufficient notice. But if he is misled, notice is vitiated as where both notice and envelop containing it were addressed to another party.
Notice by phone is allowed because notice can be given orally. However, it must be clearly shown that party to be notified was really communicated with, fully identified as party at the receiving end of the line.

MANNER OF GIVING NOTICE

a. By personal delivery—actual or diligent effort upon indorser at his place of business/residence (if no place of business); but if absent, no need to call second time and notice may be left with anyone left in
charge or if no one is there, then giving of notice is deemed to be waived.

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 But leaving notice at window of cashier was held to be insufficient where no one was shown to be present.
b. By mail

 To whom notice is given?

Party secondarily 97 To whom notice a. To party himself
liable or agent may be given b. To his agent in that behalf

Accommodation indorser is entitled to notice

Irregular indorser must also be given notice if he is to be charged
Agent must be authorized

NOTICE TO AGENT NOTICE ATTEMPTED TO BE GIVEN TO PARTY HIMSELF

Notice may be left with anyone found in charge
Notice left with clerk or person in charge at party’s place of business, in his absence or his place of business, without proof as
to the person with whom it was left, is sufficient.

Proof that such person was not party’s agent is irrelevant, notice being left at the right place. Hence, leaving notice with
private secretary at his public office is sufficient

If service sought at party’s dwelling, sufficient to leave notice with wife of any other person in his premises

Notice where party 98 Notice where When any party is dead and his death is known to the party giving notice, notice must be given to personal representative, if there be one and if can be found.
is dead party is dead If no personal representative, last resident or last place of business of deceased
REQUISITES
1. His death his known to party giving notice
2. There is personal representative
3. He can be found with reasonable diligence

Notice mailed in due course to indorser in care of executor in his address with postage prepaid, after partyor agent received information that indorser was dead, was
held to be proper notice although it was not the correct address of executor named in will.

WHEN NOTICE MAY BE SENT TO LAST RESIDENT OR PLACE OF BUSINESS

1. If death is not known to party giving notice
2. Although death is known but no personal representative
3. There is one but he cannot be found with reasonable diligence

Notice to partners 99 Notice to Notice to any one partner is notice to the firm, even though there has been dissolution
partners Each partner is an agent of the partnership

SEC 99 DOES NOT APPLY TO JOINT PAYEES OR JOINT INDORSEES who indorse under SEC 68, such joint indorsers to whom notice has been given are not discharged by
failure to give notice to other joint indorsers.

SEC 99 APPLIES TO JOINT PARTIES OTHER THAN JOINT PAYEES AND JOINT INDORSEES who indorse such as to drawers who sign a bill jointly or to joint accommodation
indorsers who are not jointly and severally liable under SEC 68 as they are neither payees nor indorses.

Notice to persons 100 Notice to Who are not partners must be given to EACH of them unless one of them has authority to receive notice for others
jointly liable persons jointly

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 liable APPLICATION OF SEC 68—Rule applies only with respect to an indorser against another indorser BUT NOT AGAINST HDC
Every indorser is liable to all indorsers subsequent to him but not those prior to him whom he in turn makes liable.
This section contemplates successive negotiations and successive indorsements.
It does not determine order of liability of joint indorsers among themselves.

JOINT AND SEVERAL LIABILITY OF JOINT PAYEES—deemed to indorse jointly and severally; Holder can make any one of them pay the whole amount

EFFECT OF LACK OF NOTICE OF DISHONOR—One of joint indorsers cannot escape liability because proper notice of dishonor was not given to his joint indorser. When
holder expressly releases first indorser, second indorser will be discharged. However, if one of joint indorsers pays the instrument, second joint indorser is prima facie
liable to contribute and burden of proof to show release from such liability is upon second indorser.

Notice to bankrupt 101 Notice to Where party has been adjudged a bankrupt or an insolvent or has made an assignment for benefit of creditors, notice may be either to
bankrupt a. Party himself
b. His trustee or assignee

CONTEMPLATED SITUATIONS:
1. Where party secondarily liable has been declared a bankrupt or an insolvent
2. Where he has made an assignment of his properties for benefit of creditors

Notice may be given either

1. Party himself
2. His trustee or assignee

 When is notice excused?

Before giving of notice SEC 109. Waiver of notice—either before the time of giving notice has arrived or after omission to give notice and waiver may be expressed or implied.
or after omission to
give due notice
Waiver is in the SEC 110. Whom affected by waiver—where waiver is embodied in instrument, it is binding upon ALL parties but where it is written above the signature of indorser, it binds him only.
instrument
Waiver of protest in SEC 111. Waiver of protest—whether in the case of foreign of exchange or other negotiable instrument, is deemed to be a waiver not only of formal protest but also of presentment and
foreign instruments notice of dishonor.

 What is the difference between an inland and a foreign bill of exchange?

Inland bill of exchange Foreign bill of exchange
Bill of which is or on its face purports to be, both drawn and payable within the Philippines It may be drawn outside the Philippines payable outside the Philippines, or both drawn and
payable outside of the Philippines.
It need not be protested. It must be protested in case of dishonor to charge the drawer and the indorsers.

Parties could not be SEC 112. When notice is dispensed with—when, after the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged.
reached
Notice not required SEC 114. When notice need not be given to drawer—notice is not required to the drawer in either of the following cases:
a. Drawer and drawee are same person
b. Drawee is a fictitious person or person not having capacity to contract
c. Drawer is person to whom instrument is presented for payment
d. Drawer has no right to expect or require that drawee or acceptor will honor the instrument
e. Where the drawer has countermanded payment

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Notice relatively SEC 115. When notice need not be given to indorser—
excused a. Drawee is a fictitious person or person not having capacity to contract and indorser was aware of that fact at the time he indorsed the instrument
b. Indorser is the person to whome the instrument is presented for payment
c. Instrument was made or accepted for his accommodation

 In what cases is the drawer not excused for payment despite lack of notice of dishonor?
A: SEC 114. When notice need not be given to drawer—notice is not required to the drawer in either of the following cases:
1. Drawer and drawee are same person
f. Drawee is a fictitious person or person not having capacity to contract
g. Drawer is person to whom instrument is presented for payment
h. Drawer has no right to expect or require that drawee or acceptor will honor the instrument
i. Where the drawer has countermanded payment

Thus, where drawer’s bank account was already closed even before issuance of the check, he had no right to expect or require the drawee bank to honor such check. By virtue of SEC 114, petitioner is not entitled to be
given a notice of dishonor.

 What instances is a general indorser liable despite lack of notice of dishonor?

A: SEC 115. When notice need not be given to indorser—
a. Drawee is a fictitious person or person not having capacity to contract and indorser was aware of that fact at the time he indorsed the instrument
b. Indorser is the person to whome the instrument is presented for payment
c. Instrument was made or accepted for his accommodation

 When there is delay in giving notice?

113 Delay in giving notice; Delay in giving notice is excused when delay is caused by circumstances beyond control of holder and not imputable to his default, misconduct or negligence. When cause of delay
how excused ceases to operate, notice must be given with reasonable diligence.

SUMMARY AS TO NOTICE OF DISHONOR

1. Like presentment for payment, notice of dishonor need not be given to persons primarily liable in order to charge them
2. But aside from presentment for payment to persons primarily liable, notice of dishonor to persons secondarily liable is necessary to charge latter EXCEPT:
a. When notice is waived (109)
b. When dispensed with (112)
c. As to drawer (114)
d. As to indorser (115)
e. Where due notice of dishonor by non-acceptance has been given (116)
f. As to HDC without notice (117)

EXCEPTION TO REQUIREMENT OF NOTICE

WAIVER NOTICE IS DISPENSED NOTICE NOT REQUIRED/RELATIVELY EXCUSED ACCEPTANCE OF NOTICE IS
WITH/EXCUSED REFUSED

Intentional abandonment of right; implied or When political disturbances As to a particular person secondarily liable, such as drawer or indorser, notice is not OMISSION DOES NOT AFFECT
express interrupt and obstruct the necessary: HDC
ordinary negotiations of trade, 2. Where he has knowledge of dishonor by other means than formal notice (as

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SEC 109. Waiver of notice—either before the time
of giving notice has arrived or after omission to
give notice and waiver may be expressed or
implied.
WHEN MAY BE MADE
1. Before time of giving notice (express
waiver in body of instrument or added in
signature of party)
2. After omission to give due notice.
Y draws a bill as follows:
“To X, pay to X or order P1000. Notice od dishonor
waived (Sgd) Y”
F is holder of note. He fails to give notice to D
indorser.
If D declares afterwards that he would pay note,
there is implied waiver.
Waiver may be implied from acts, declarations or
silence. There is also implied waiver if A admits his
liability afterwards and authorizes plans for
settlement of note or extension of time for
payment. But if D merely advises F how to collect,
act does not constitute waiver of notice.
they constitute a sufficient excuse
for want of presentment or notice
upon same principle that controls
in cases of military operations or
interdictions of commerce.
SEC 112. When notice is
dispensed with—when, after the
exercise of reasonable diligence,
it cannot be given to or does not
reach the parties sought to be
charged.
WHEN NOTICE EXCUSED—when
political disturbances interrupt
and obstruct the ordinary
negotiations of trade, they
constitute a sufficient excuse for
want of presentment or notice
upon same principle that controls
in cases of military operations or
interdictions of commerce.
when he is both drawee and drawer or when presentment is made to him)
3. Where he has no reason to expect that instrument will be honored, as when
he has countermanded or where drawee is fictitious or without capacity to
contract.
SEC 114. When notice need not be given to drawer—notice is not required to the SEC 116. Notice of non-
drawer in either of the following cases: payment where acceptance
a. Drawer and drawee are same person refused—where due notice by
b. Drawee is a fictitious person or person not having capacity to contract non-acceptance has been
c. Drawer is person to whom instrument is presented for payment given, notice of a subsequent
d. Drawer has no right to expect or require that drawee or acceptor will dishonor by non-payment is
honor the instrument not necessary unless in the
meantime the instrument has
ILLUSTRATION OF DRAWER AND DRAWEE THE SAME been accepted.
A is both drawer and drawee of bill.
Since A drawee dishonored instrument, he has knowledge of such dishonor. ILLUSTRATION
A drawer does not have to be notified to charge him. Bill is payable on December 31,
SEC 130—holder may treat the instrument as a PN, in which case drawer becomes 1950
maker and therefore, person primarily liable thereon, to whom notice of dishonor is not F holder presents it for
necessary. acceptance of X drawee on
December 1, 1950
ILLUSTRATION OF FICTITIOUS DRAWEE X refuses to accept bill
X appears to be drawee on bill drawn by A drawer. F gives notice of dishonor to A
F is holder drawer and to indorsers BCDE
If X is fictitious or a minor, F can treat bill as a note, in which case A becomes maker to
whom notice is not necessary. SEC 151—there is no necessity
for presentment for payment
ILLUSTRATION OF DRAWER TO WHOM PRESENTMENT MADE SEC 116—F need not give
A is drawer of bill payable to B payee. notice of dishonor by non-
X is drawee payment.
Bill is payable at A’s office
B indorsers to C, C to D, D to E, E to F Suppose X drawee accepts bill
F makes presentment at A’s office of December 15?
X drawee is not there but A is there F must present bill for payment
to X drawee on December 31.
SEC 72 (d)—F can make presentment on A who is person found at the place of If X refuses to pay, F must give
presentment. notice to ABDCE indorsers in
order to charge them, as in the
F need not give notice to A drawer as A knows already of dishonor. meantime the instrument has
been accepted.
NO RIGHT TO REQUIRE OR EXPECT PAYMENT AS TO DRAWER—drawer has no right to
expect or require payment in following cases:
1. Where drawer of check has no account with drawee bank
2. When drawer of check payable has no funds to meet it with drawee bank
3. When knowledge that previous drafts in same consignee had been
dishonored.
In the foregoing cases, drawer has no right to notice of dishonor.
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SEC 110. Whom affected by waiver—where waiver
is embodied in instrument, it is binding upon ALL
parties but where it is written above the signature
of indorser, it binds him only.
WHERE WAIVER IN INSTRUMENT ITSELF
“Pay to X or order P1000. Notice of dishonor waived.
To C (Sgd) Y.”
If X payee indorses bill to C, C to D, D to E and E to F,
all parties are bound.
It is not necessary that F gives them notice to charge
them.
EFFECT—to make subsequent indorsers
unconditionally liable and in this sense,
unconditional debtors.
But such waiver does not make indorsers liable as
co-makers since their obligation to pay is still a
contingent liability.
WAIVER ON BACK OF INSTRUMENT
Printed waiver on back of instrument, above the
indorsements is a waiver in instrument itself.
All indorsers appearing below it are bound and
holder need not give them notice to hold them
liable.,
WHERE WAIVER WRITTEN ABOVE SIGNATURE OF
INDORSER—only that indorser is bound by waiver.
SEC 111. Waiver of protest—whether in the case of
foreign of exchange or other negotiable
instrument, is deemed to be a waiver not only of
formal protest but also of presentment and notice
of dishonor.
APPLICABLE TO FOREIGN BE
ONLY INSTRUMENT IS WAIVED
APPLICATION—Where protest is waived, following
are included and are deemed waived also:
1. Presentment
2. Notice of dishonor
Where presentment is waived, notice of dishonor is
also waived.
Where notice of dishonor is waived, presentment is
SEC 113. Delay in giving notice;
how excused—delay in giving
notice is excused when delay is
caused by circumstances beyond
control of holder and not
imputable to his default,
misconduct or negligence. When
cause of delay ceases to operate,
notice must be given with
reasonable diligence.
WHEN DELAY IS EXCUSED—delay
caused by making inquiries as to
the address of party to receive
notice is excusable where holder
does not know the address.
But where holders’ agent called at
place of business to give notice
but defendant is absence from the
city, delay will not excuse agent
since notice by mail is practicable.
SEC 115. When notice need not be given to indorser— SEC 117. Effect of omission to
d. Drawee is a fictitious person or person not having capacity to contract and give notice of non-
indorser was aware of that fact at the time he indorsed the instrument acceptance—omission does
e. Indorser is the person to whom the instrument is presented for payment not prejudice the rights of HDC
f. Instrument was made or accepted for his accommodation subsequent to the omission
WHEN NOTICE RELATIVELY EXCUSED ILLUSTRATION
As to a particular person secondarily liable, such as drawer or indorser, notice is not A is drawer of bill addressed to
necessary: X drawee, B payee
4. Where he has knowledge of dishonor by other means than formal notice (as Bill is payable on December 31,
when he is both drawee and drawer or when presentment is made to him) 1950
5. Where he has no reason to expect that instrument will be honored, as when It is successively indorsed to
he has countermanded or where drawee is fictitious or without capacity to CDE, F holder
contract. F negotiates note to G HDC
114 and 115 APPLY ONLY TO DRAWER AND INDORSER CONCERNED. Failure to give due As to G, are BCDE discharged
notice to other parties secondarily liable will discharge them. also?
NO.
SEC 117—omission to give
DRAWER HAS COUNTERMANDED PAYMENT notice, by non-acceptance,
A drawer tells X drawee not to pay the bill does not prejudice the rights of
F holder need not give notice to A HDC subsequent to omission.
Allegation that payment of check has been countermanded is sufficient to set out
where check was set forth with indorsement across face “Pyt stopped”.
DRAWEE FICTITIOUS ETC AS TO INDORSERS
Indorser must be aware that drawee is fictitious or does not have capacity to contract.
Otherwise, notice must be given to such indorser to charge him.
But the fact that instrument was dishonored does not dispense with necessity of notice.
ILLUSRATION OF INDORSER TO WHOM PRESENTMENT MADE
A note is made payable at office of B payee
Note is indorsed successively BCDE, F holder
F makes presentment at B’s office but A maker is not there, B is there.
F makes presentment to B under SEC 72.
Thus, also when note of a corporation was indorsed by its CEO, they were not entitled
to notice of dishonor.
Where notes made by corporation were indorsed for its accommodation by its
President who had the sole power to draw checks for company, notice to him is not
required since he was person to whom it was to be presented for payment.
WHERE SECTION NOT APPLICABLE—SEC 115 DOES NOT APPLY:
1. Maker of instrument is a partnership and indorser sought to be charged is a
member of it
2. No presentment actually made
3. Indorser was treasure of maker corporation, not active in its management
and signed note in behalf of corporation
In the foregoing cases, indorser is entitled to notice of dishonor and is discharged if not
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not waived. notifed.

It is the notary public who will prepare the protest. INDORSER IS ACCOMMODATED PARTY—See SEC 80.
Where notes were made for accommodation of payee but he died before maturity,
presentment to his administrator is not necessary.

CHAP 7: Discharge of instruments

1. Concept of discharge
DISCHARGE: release of all parties, whether primary or secondary, from obligations arising thereunder. It renders the instrument without force and effect and consequently, it can no longer be negotiated.
It applies to the instrument or to the source of liability.

2. How instrument is discharged

119 Instrument, how a. Payment in DC by OR on behalf of principal debtor
discharged b. PDC by party accommodated
c. Intentional cancellation by holder
d. Any other act which will discharge simple contract for payment of money
e. Principal debtor becomes holder at OR after maturity in his own right

DISCHARGE
 What discharges the instrument?
A: SEC 119. Instrument, how discharged—
1. Payment in due course by or on behalf of principal debtor.
2. Payment in due course by party accommodated, where instrument is made or accepted for his accommodation.
3. Intentional cancellation by holder
4. Any other act which will discharge a simple contract for payment of money
5. Principal debtor becomes the holder of the instrument at or after maturity in his own right

 When would novation discharge an instrument?

A: While SEC 119 in relation of ART 1231 provides that one of the modes of discharging a negotiable instrument is by any other act which will discharge a simple contract for payment of money, such as novation, the
acceptance by the holder of another check which replaced the dishonored bank did not result to novation. There are only 2 ways which indicate presence of novation and produces the effect of extinguishing an obligation
by another which substitutes the same:
1. Novation must be explicitly stated and declared in unequivocal terms as novation is never presumed.
2. Old and new obligations must be incompatible on every point.

Holder’s acceptance of the replacement check will not discharge the drawer and endorser from liability. Neither is there incompatibility because both checks were given precisely to terminate a single obligation arising
from the same transaction.

a. Payment in due course

88 What a. When it is made at or after maturity of payment to holder
constitutes b. Holder in GF and without notice that this title is defective
payment in due
course

REQUISITES

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 1. Payment must be made at or after date of maturity
2. Payment made by holder
3. Payment must be made by debtor in GF and without notice that holder’s title is defective
Thus—
1. If payment before maturity = negotiation back to person primarily liable and he can re-negotiate it. Payment does not discharge instrument
2. Payment to indorsee who is not in possession is not payment in due course as he is not holder nor authorized to receive payment
Payment to original payee after note has been transferred by him to HDC does not discharge note
3. Payment to person by debtor who knows that such person stole it, is not payment in due course, as such payment is not GF
Maker of note or acceptor of bill must satisfy himself that the holder traces his title through genuine indorsements and if there is a forged instrument, it is a nullity and no right passes by it.

PAYMENT MUST BE MADE TO POSSESSOR OF INSTRUMENT

Receipt is no protection.
Party must insist on presentment of paper by party demanding payment in order to make sure that it is at the time in his possession and not outstanding another.
If at the time he makes payment, instrument is outstanding and held by HDC, he will be liable to pay it again. But payee’s possession raises presumption that they are not paid.

MEDIUM OF PAYMENT—
a. Currency stipulated
b. If not possible to deliver currency, in the currency which is legal tender in Philippines
c. In case of extraordinary inflation or deflation of currency stipulated, value of currency at time of establishment of obligation shall be basis unless contrary
Delivery of PN payable to order or BE or other mercantile documents shall produce effect of payment only when they have been cashed, or when, through fault of creditor, they have been impaired.
In the meantime, action derived from original obligation shall be held in abeyance.

PAYMENT IN OTHER THAN LEGAL TENDER—when payment of bill or note is made by giving another note or bill other than notes treated as legal tender
GR: payment will not be considered absolute until paper given in payment has been itself paid
EXCEPT: parties expressly or impliedly agree that claim shall be discharged by such payment

New bill or note given in renewal of old retained by payee = suspension of old one until new is paid
Taking a renewal note is not a payment of original

PAYMENTS THROUGH BANKS—agent of owner

Immaterial that maker has requested the holder to send note to this bank for collection

CREDITING OF ACCOUNT CONSTITUTES PAYMENT

Where check is presented by payee/holder to bank on which it is drawn and received as deposit and credited to his account = payment of check as if currency had been paid over counter and immediately redeposited
(absence of fraud)

By principal holder 119 Instrument how Payment in DC by OR on behalf of principal debtor

discharged
PRINCIPAL DEBTOR—person ultimately liable to pay the debt, whether he is a party to the instrument or not or whether he appears primarily or secondarily liable.

PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER shall produce effect only:

1. When they have actually be cashed
2. Through fault of creditor, they have been impaired
Creditor is not bound to accept a check because it does not meet the requirements of a legal tender.

WAIVER OF OBJECTION TO TENDER OF PAYMENT OF CHECK

GR: Objection to tender must be in good time and grounds must be specified; objection to tender on one ground is a waiver of all other objections which could have
been made at that time.

It is ordinarily required of one to whom payment is offered in check that he makes his objection at time to the offer of a check instead of an offer of payment in money.
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 Since payment by check has became so generally recognized, omission to make objection to check as tender of payment is regarded as a waiver of right to demand
payment in money.
Thus, plaintiff who refused tender of payment by check on belief that it could not be forced to accept payment prior to date specified but did not refuse payment by
check as tendered for insufficiency of funds, it is deemed to have waived such grounds.

REASON FOR RULE: afford debtor opportunity to secure specific money accepted in payment of debts.
Non-observance of this duty would mislead debtor and might inflict a loss which could be avoided if creditor had objected to form and character of tender.

By accommodated 119 Instrument how PDC by party accommodated

party discharged
PAYMENT BY ACCOMMODATED PARTY—between accommodation party and accommodated party, accommodated party is liable on the instrument. Hence, his PDC
discharges the instrument as if payment was made by principal debtor under (A).

Illustration: A and another signed note as co-makers for S’s accommodation, payable to order of bank. At maturity, S paid amount with check drawn by his wife on funds
placed to her credit by S. Note was transferred to wife
= Note was discharged and wife could not recover from A.

Where accommodation note, after being once negotiated, is paid at maturity by accommodated party
= Note was discharged and ceased to have legal existence

“Straw man” acting for K took title to land and signed purchase note and mortgage. Straw Man is accommodated maker. K is accommodated party, although his name
did not appear on instrument. K paid
= Note was discharged under SEC 119.

PAYMENT BY PRINCIPAL DEBTOR PAYMENT BY 3RD PERSON

In order to discharge: Instrument is not discharged because payment is not made by person principally liable.
a. PDC
b. By principal debtor GR: not any one who desire may pay the instrument and recover from maker. He must be a
If before date of maturity, instrument not discharged as NOT PDC but merely constitute as negotiate back to principal person who has made himself liable for payment.
debtor who can renegotiate instrument.
EXCEPTION: where instrument has been protested and some one voluntarily makes payment
Where payment not by primary obligor or accommodation party, payment only conceals his own liability and those after supra protest or for honor. If intention was to give money in payment, instrument is discharged.
him. All prior parties primarily or secondarily liable are liable to such payer and payer may cancel indorsements
subsequent to his own and re-issue paper. SUPRA PROTEST—made by stranger

SUMMARY OF DISCHARGED BY PAYMENT UNDER SEC 119/121

1. Payment by person ultimately liable, whatever his position, is a discharge
2. Payment by accommodation party is not a discharge, whatever his position— whether as sole or joint maker/acceptor (parties primarily liable) and whether indorsement be regular or anomalous.
3. Payment by non-accommodation drawer OR indorser (parties secondarily liable) not a discharge

b. Intentional cancellation
123 Cancellation; Cancellation; unintentional; burden of proof—inoperative but where an instrument or any signature appears to have been cancelled, burden of proof lies on party who alleges cancellation
unintentional; was made unintentionally or under mistake or without authority.
burden of proof

REQUISITES

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 1. Intentional
2. Made by holder
3. By tearing, burning or writing “cancelled”
Note intentionally burned by agent = discharged
Payee with intention of destroying = discharged
INTENTION essential element

CANCELLATION—not only drawing of criss-cross lines but also tearing, obliterations, erasures or burning. There must be intention to cancel.

WHEN CANCELLATION INOPERATIVE

1. Unintentional
2. Under mistake
3. Without authority

Unintentional— where notes where physically mutilated by payee who acted in outburst of temper without intent to cancel
Mistake—where note was cancelled under supposition that it was fully paid when in fact it is not
Without authority—accepted by acceptor of bill less than amount claimed by holder and allowed the acceptor to cancel his signature

c. Any act that discharge simple contracts

ART Obligations are 1. By payment or performance
1231 extinguished 2. By loss of thing due
3. By condonation or remission of debt
4. By confusion or merger of rights of creditors and debtor
5. By compensation
6. By novation

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition and prescription, are governed elsewhere int his code.

Although these ways discharge the instrument as between immediate parties, they will not do so in the hands of an HDC.
Novation would discharge instrument
SEC 196, other acts that will discharge simple contract are to be determined by existing legislation.

Q: Will an extension of time granted by holder to debtor discharge instrument?

A: NO. Extension of time as a ground is omitted in SEC 119.

Q: Suppose one of persons principally liable secures note by mortgage without knowledge of other. Is instrument discharged?
A: NO.

d. Principal debtor becomes a holder

REQUISITES:
a. Reacquisition must be by principal debtor
b. In his own right—not in representative capacity
c. At or after date of maturity

IN HIS OWN RIGHT—not in representative capacity

A maker buys from F indorsee, his own note, as an agent of a 3rd person
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= X not discharged

Maker or acceptor becomes executor of holder, though executor had to account for amount as assets of estate
Note was transferred to maker as collateral for separate debt due the maker
Maker reacquires old note in exchange of new note in payment
= Not discharged

WHEN INSTRUMENT REACQUIRED BEFORE MATURITY

Reacquisition in his own right but before maturity
= Not discharged
= Merely constitute a negotiation back to principal debtor who (SEC 50) may renegotiate instrument

DISCHARGE BY OPERATION OF LAW

If judgment is obtained on bill or note, bill or note is extinguished and merged in judgment
But judgment alone is not extinguishment between plaintiff and other parties not jointly liable with original defendant whether parties be prior or subsequent to defendant.

Discharge in bankruptcy releases a bankrupt from all his provable debts

= Discharge the bankrupt on all bills accepted but will not discharge other parties.

3. Discharge of persons secondarily liable

120 When persons a. Any act which discharges instrument (SEC 119)
SECONDARILY b. Intentional cancellation of his signature by holder
LIABLE are c. Discharge of prior party
discharged d. Valid tender of payment by prior party
e. Release of principal debtor unless holder’s right of recourse against party secondarily liable is expressly reserved
f. By any agreement binding upon holder to extend time of payment or to postpone holder’s right to enforce instrument unless made with assent of party secondarily liable or
unless right of recourse against party is expressly reserved.

121 Right of party SEC 121. Right of party who discharges instrument—where instrument is paid by secondarily liable, not discharged; but party paying is:
who discharges a. Remitted to his former rights as regard to all prior parties
instrument b. May strike out his own and all subsequent indorsements
c. Negotiate instrument
EXCEPT
a. Where it is payable to order of 3rd person + has been paid by drawer
b. Where it was made/accepted for accommodation + has been paid by party accommodated

 When persons SECONDARILY LIABLE are discharged

Acts discharging the SEC 119
instrument
Intentional cancellation A maker; D payee; CDE to F holder
F intentional cancels signature of D = D is discharged

Discharge of prior party Discharge of D’s signature also discharges E as D is party prior to E
REASON: if E not discharged by D’s discharge, he is made to pay by F holder, he would not be able to enforce his right of recourse against D.

DISCHARGE BY OPERATION OF LAW NOT INCLUDED- discharge must be done by acts of holder

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 NOT APPLICABLE:
a. Discharge by bankruptcy
b. Party not given due notice of dishonor
c. By Statute of Limitations

Valid tender of payment If D indorser validly tenders payment

F refuses without justification
= D discharged

TENDER OF PAYMENT—act by which one produces and offers to a person holding a claim or demand against him the amount of money which he considers and admits to be due in satisfaction
of such claim or demand without any stipulation or condition. But where instrument is payable tat a bank and indorser waived protest, fact that maker haad money on deposit in bank at
maturity was not sufficient tender under SEC 70 and 87 to discharge indorser.
Notice must be brought to holder.

RELEASE OF PRINCIPAL DEBTOR

If F holder releases A maker
= BCDE (secondarily liable) are also discharged
a. Discharges the instrument
b. Deprives them of right of recourse against A maker

If on releasing A maker, F holder reserves his right of recourse against parties secondarily liable
= Not discharged

REASON: effect of reservation is implied reservation of their right of recourse against A maker
While holder cannot hold A liable, he can hold BCDE liable but they in turn can hold A liable should any of them be made to pay F.
Reservation of right must be expressed.

Release must be voluntary act of holder, not operation of law.

If release is NOT for value = Not discharge

EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR

GR: He is not discharged by holder’s release of principal debtor even if release be made with knowledge of true relation of aprties
Release of AMaker/acceptor does not discharge principal debtor though latter occupies position of party secondarily liable

Extension of time GR: F holder agrees to extend time of payment, BCDE are discharged
EXCEPTIONS
1. Where extension of time is consented to by party secondarily liable
2. Where holder reserves right of recourse

REQUISITES OF AGREEMENT OF EXTENSION OF TIME

1. Must be binding contract
2. Supported by valuable consideration
3. For definite period
4. Made with principal debtor, not 3rd party

 Right of party who discharges instrument

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A drawer addressed to X drawee, payable to order of B
Bill successively indorsed by BCDE, F holder
D indorser pays bill

Q: What are the effects?

1 Instrument is not discharged but discharges D, party paying
2 D is remitted to his former rights against parties prior to him, such as CBA.
If D was formerly HDC, even if at time of payment he already had notice of defects of title, he can enforce his rights against any of them free from defenses, as he is remitted to his former rights.

But if original payee of note unenforceable for lack of consideration repurchases instrument after transferring it to HDC, paper becomes subject in payee’s hands to same defenses to which it would have been
subject if paper had never passed through hands of HDC.

True where instrument is retransferred to agent of payee.

3 D can strike out his indorsement and subsequent indorsements of E and F
4 D can renegotiate instrument

EXCEPTIONS (not applicable to rule that instrument is not discharged):

Where drawer of certified check was required to take up check because of failure of drawee bank, instrument is not discharged and he is subrogated to rights of payee. Party secondarily liable who pays cannot
negotiate instrument:
1. If instead of D, A drawer pays and bill is payable to order of 3rd person, A can no longer negotiate instrument
2. If B payee is an accommodated party and B pays, he cannot negotiate bill as B is ultimate party and he does not have right of recourse against X drawee or A drawer

CHAP 8: Checks
1. Checks
85 Checks A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply
to a check.

Checks need not be presented for acceptance. These are always payable on demand and always drawn against a bank. In case of refusal by a drawee bank, payee or holder cannot compel drawee bank to pay because
there is no privity of contract.
RECOURSE: Serve notice of dishonor to drawer or run after the drawer.

2. Distinguished from draft

Other BE Check
Not drawn on a deposit. It is not necessary that a drawer of a BE should have funds in the hands of the It is necessary that a check is drawn on a previous deposit. Otherwise, there would be fraud.
drawee. The bank is always a drawee and need not be presented for acceptance.
It exists for circulation. It exists for immediate payment.

Death of a drawer with knowledge of a bank, does not revoke the authority of the bank to pay. Death of a drawer of a check, with knowledge by the bank, revokes the authority of the banker to pay.

It may be presented for payment within a reasonable time after its last negotiation. It may be presented within a reasonable time after its issue. Checks become stale after 6 months from issue.

 When does a check operate as an assignment?

A: A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank and the bank is not liable to the holder unless and until it accepts or certifies the check.

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 3. Relationship between drawer, drawee and payee
Drawer Secondarily liable
He admits the existence of a payee and his capacity to indorse and engages that the instrument will be accepted or paid by the party primarily liable.
He only engages if the instrument is dishonored and proper proceedings are brought.

Drawee Primarily liable

He engages to pay according to the tenor of his acceptance.
He admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument and admits the existence of the payee and his capacity to
indorse.

Payee Person who is named to receive the payment.

One who can indorse for further negotiation

4. Kinds of check
Cashier’s and manager’s BE drawn by a bank upon itself and is accepted by its issuance.
check It is treated as good as cash.
Drawee and drawer are one and the same.

BSP Circular 259 series of 2000: Pursuant to MB Resolution 11494 dated SEPT 1 2000, additional anti- money laundering rules and regulations for banks are issued as follows:
SEC 1. Issuance of cashier’s, manager’s or certified checks—Banks shall not issue cashier’s. manager’s or certified checks or other similar instruments payable to cash, bearer, fictitious
payee or numbered account. When the person purchasing the above-mentioned instruments is not a regular bank client, the issuing bank shall require the purchaser to present his/her
proof of residence together with his/her driver’s license, passport, employment ID or other photo ID. A register for cashier’s. manager’s or certified checks issued shall be maintained by
the bank.

SEC 2. Sanction—any violation shall be subject to a fine of 30,000/transaction.

BSP Circular 291 series 2001: MB Resolution 707 MAY 10 2001 decided to authorize the issuance of cashier’s, manager’s or certified checks or other similar instruments in blank or payable
to cash, bearer or numbered account as an exception from CIR 259, subject to following grounds:
1. Amount of each check shall not exceed 10,000
2. Buyer of the check is properly identified as required by CIR 259
3. Register of said checks shall be maintained with following minimum information:
a. Date issued
b. Amount
c. Name of buyer
d. Date paid
e. If aggregate instruments purchased by same person within any 30-day period amounts to at least 50,000, the purpose of buyer should be stated
4. Banks which issue as well as those which accept as deposits, said checks in blank or payable to cash, bearer or numbered account shall take measures as may be necessary to
ensure that said instruments are not being used/resorted to by the buyer or depositor in furtherance of a money-laundering activity
5. Deposit of said instruments shall be subject to the same requirements/scrutiny applicable to cash deposits
6. Transactions involving said instruments should be accordingly reported to BSP if there is reasonable ground to suspect that said transasctions are being used to launder funds of
illegitimate origin.

 What is a manager’s check? What is a cashier’s check?

Manager’s check Cashier’s check
One drawn by the bank’s manager upon the bank itself. It is similar to a cashier’s check both Check the bank’s cashier on his own or another check.
as to effect and use. In effect, it is a BE drawn by the cashier of a bank upon the bank itself, and accepted in
advance by the act of its issuance. It is really the bank’s own check and may be treated as a

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 PN with the bank as a maker.

The check becomes the primary obligation of the bank which issues it and constitutes its written promise to pay upon demand. The mere issuance of it is considered an acceptance thereof.

 Why is a manager’s check considered as good as cash?

A: It holds the same footing as a certified check, which is deemed to have been accepted by the bank that certified it, committing in effect its total resources, integrity and honor behind its
issuance. By its peculiar character and general use in commerce, a manager’s check is regarded substantially to be as good as the money it represents (PNB vs. Tria)

 To satisfy their obligation to Wasabi Company, a manager’s check was obtained by Sposues Yaki and Soba. The check was obtained from Porki Bank. However, the check
remained in the possession of the spouses but Wasabi Company was advised that it is available for withdrawal. Since more than 10 years passed without the amount of the
check being withdrawn. Porki Bank reported it to the Bureau of Treasury as among its “unclaimed balances”. Should the amount corresponding to the check be considered part
of the Porki Bank’s “unclaimed balances” and therefore, could be the subject of an escheat proceedings?
A: NO, mere issuance of manager’s check does not ipso facto work as an automatic transfer of funds to the account of the payee. In case the procurer of the manager’s or cashier’s check
retains custody of the instrument, does not tender it to the intended payee or fails to make an effective delivery, it cannot be said that delivery of the check has taken place.
Since there was no delivery, presentment of the check to the bank for payment did not occur. An order to debt the account of the spouses was never made. As a result, the assigned fund is
deemed to remain part of the account of the spouses who procured the manager’s check. The doctrine that the deposit represented by the manager’s check automatically passes to the payee
is inapplicable, because the instrument, although accepted in advance, remained undelivered. The spouses should have been informed that the deposit had been left inactive for more than 10
years, and that it may be subjected to escheat proceedings if left unclaimed (Rizal Commercial Banking Corp. vs. Hi-Tri Development Corp.)

Certified check One drawn by a depositor upon funds to his credit in a bank which a proper officer certifies will be paid when duly presented for payment.
There is guarantee that upon presentment, it will be accepted.
It is accepted in advance
Certification is equivalent to acceptance.
It is forbidden to issue a stop order payment.

NOTES:
1. Certification is equivalent to acceptance
2. Where holder of the check procures it to be accepted or certified, drawer and all indorsres are discharged from liability thereon
3. A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank and the bank is not liable to the holder unless and until it
accepts or certifies the check.

 What are the effects of certifying a check?

A: The effects are:
1. It is equivalent to acceptance and is the operative act that makes the bank liable.
2. It amounts to assignment of funds of the drawer in the hands of the drawee.
3. If obtained by the holder, persons secondarily liable are discharged.

Cross check Done by writing 2 parallel lines diagonally on left top portion of checks
The crossing is special where the name of the bank or the business institution is written between the 2 parallel lines, which means that the drawee should pay only with intervention of that
company. The crossing is general where the words written between 2 parallel lines are “and Co.” or “for payee’s account only”.

ART 541 Code of Commerce—Maker of any legal holder of a check shall be entitled to indicate that it be paid to a certain banker or institution, or only the words “and company”.

Effects of crossing a check

1. Check may not be encashed but only deposited in the bank
2. Check may be negotiated only once to one who has an account with the bank
3. Act of crossing serves as a warning to holder that check has been issued for a definite purpose, so that he may inquire if he has received the check pursuant to that purpose

Memorandum check In the form of an ordinary check, with the word “memorandum”, “memo” or “mem” written across its face, signifying that the maker or drawer engages to pay bona fide holder absolutely,

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 without any condition concerning its presentment. Such check is an evidence of debt against the drawer, and although it may not be intended to be presented, has the same effect as an
ordinary check, and if passed to a 3rd person, will be valid in his hands like any other check.

Traveller’s check Instruments purchased from bans, express companies or the like, in various denominations, which can be used like cash upon second signature of the purchase. It has the characteristics of a
cashier’s check of the issue.
It requires the signature of the purchaser at the time he buys it and also at the time he uses it—that is when he obtains the check from the bank and also at the time he delivers the same to
the establishment that will be paid thereby.

5. When required to be presented for payment

186 When required A check must be presented within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay.
to be presented
for payment

 The check was presented to the drawee bank 120 days from the date thereof. Is the drawer discharged from the duty to maintain sufficient funds therefor?
A: NO, according to current banking practice, the reasonable period within which to present a check to the drawee bank is 6 months thereafter, the check becomes stale and the drawer is discharged from liability thereon
to the extent of loss caused by the delay. Thus, presentment of the check to the drawee bank 120 days (4 months) after its issue was still within the allowable period. The drawer was freed neither from the obligation to
keep sufficient funds in his account nor from liability resulting from the dishonor of the check.

 Can the holder sue the drawee bank if the latter refuses payment of a check notwithstanding sufficiency of funds?
A: NO, a check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank. The bank is lot liable to the holder, unless and until it accepts or certifies the check. Thus, if a
bank refuses to pay a check notwithstanding sufficiency of funds, the payee-holder cannot sue the bank. The payee-holder should instead sue the drawer who might in turn sue the bank. SEC 189 is a sound law bsed on
logic and legal principles. There is no privity of contract between the drawee-bank and the payee.

 What is check kiting?

A: KITING: wrongful practice of taking advantage of the float, the tie that elapses between the deposit of the check in one bank and its collection at another. In anticipation of the dishonor of the check that was deposited,
the original check will be replaced with another worthless check.

 Checks with the notation “account payee only” payable to the order of Machang Company were allowed by Pigue Bank to be deposited in the account of one of the officers of Machang Company. What are
the legal implications of the notation “account payee only”?
A: The notation of “account payee only” creates a reasonable expectation that the payee alone would receive the proceeds of the check and that diversion of the checks would be averted. This exception arises from the
accepted banking practice that crossed checks are intended for deposit in the named payee’s account only and no other.

The nature of crossed checks should place a bank on notice that it should exercise more caution or expend more than a cursory inquiry, to ascertain whether the payee on the check has authorized the holder to deposit the
same in a different account. The fact that the person other than the named payee of the crossed check was representing it for deposit should have put the bank on guard. It should have verified if the payee authorized the
holder (officer) to present the same in its behalf, or indorsed it to him. Such misplaced reliance on empty words is tantamount to gross negligence, which is the “absence of or failure to exercise even slight care or
diligence, or the entire absence of care, evincing a thoughtless disregard of consequences without exerting any effort to avoid them”. (Equitable Banking Corporation vs. Special Steel Products).

 What are the nature and effects of crossing check?

A: NIL is silent with respect to crossed checks, although the Code of Commerce makes reference to such. Practice that a check with 2 parallel lines in the upper left hand corner means that it could only de deposited and
could not be covered to cash. Thus, effect of crossing a check relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person (payee named therein). The change in
the mode of paying the obligation was not a change in any of the objects or principal condition of contract for novation to take place.

The following are the effects of crossing a check:

1. Check may not be encashed but only deposited.
2. Check may be negotiated only once—to the one who has an account with a bank.
3. Act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that such holder must inquire if the check has been received pursuant to that purpose.

 What is the duty of the bank in case a person other than the named payee presents the crossed check for deposit?

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A: It should put the bank on guard. It should have verified if the payee authorized the holder to present the same in behalf or indorsed it to him. The bank’s reliance on the holder’s assurance that he had good title to the 3
checks constitutes gross negligence even though the holder was related to the majority stockholder of the payee. While the check was not delivered to the payee, the suit may still prosper because the payee did not assert
a right based on the undelivered check but on quasi-delict.

6. Effect of death of drawer

In case of death of drawer, the bank may refuse payment provided that there was proper notice of the death of drawer given to the bank.

7. Pertinent Philippine Clearing House Corporation Rules

 Does the 24-clearing house rule, which requires the drawee bank to return a defective check to the collecting bank within 24 hours to allow the former to recover from the latter apply to altered checks?
A: NO, SEC 21 provides: “Special Return Items Beyond the Reglementary Clearing Period—items which have been subject of material alteration or items bearing forged endorsement when such endorsement is necessary
for negotiation shall be returned by direct presentation or demand to the Presenting Bank and not through the regular clearing house facilities within the period prescribed by law for the filing of a legal action by the
returning bank/branch, institution or entity sending the same”.

24-hour clearing rule does not apply to altered checks. (AREZA vs. Express Savings Bank).

Antonio Viray, in his book Handbook on Bank Deposits, elucidated: “the 24-hour rule has been modified. In the case of Hongkong & Shanghai vs. People’s Bank reiterated in Metrobank vs. FNCB, the SC strictly enforced the
24-hour rule under which the drawee bank forever loses the right to claim against the presenting/collecting bank if the check is not returned at the next clearing day or within 24 hours. Apparently, the commercial banks
felt that strict enforcement of the 24-hour rule was too harsh and made representations and obtained modification of the rule, which is not incorporated in the Manual of Regulations. Since the same commercial banks
controlled the PCHC, incorporating the amended rule in PCHC Rules naturally followed.

As the rule now stands, the 24-hour rule is still in force, that is, any check which should be refused by the drawee bank in accordance with the banking practices shall be returned through PCHC/ local clearing office , as the
case may be, not later than the next regular clearing (24-hour). The modification is that items which have been subject to material alteration or bearing forged endorsement may be returned even beyond 24-hours so long
that the same is returned within the prescriptive period fixed by law. Prescriptive period is 10 years because a check or endorsement is a written contract. The item need not be returned through the clearing house but by
direct presentation to the presenting bank.

 What is “stop payment”?

A: The drawer has the right to order the drawee to stop payment of a check and this right flows from the rule that the issuance of check by itself is not an assignment of funds by the drawee. If a bank paaus a check after it
has been notified to stop payment, it pays on its own responsibility and will not be permitted to charge the account. The drawer may countermand payment if he has a valid defense against the holder of the check, Thus,
countermanding of a check is proper where the payee failed to deliver the goods that he was supposed to deliver.

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