PROMISSORY NOTE:

unconditional promise in writing made by one person to another, signed by the maker,

engaging to pay on demand or at a fixed or determinable future time, a sum certain in money

to order or to bearer.

BILL OF EXCHANGE:

unconditional order

In writing

Addressed by one person to another

Signed by the drawer

Requiring the person to whom it is addressed to pay

On demand or at a fixed or determinable future time

A sum certain in money

To order or to bearer

CHECK:

A bill of exchange drawn on a bank

Payable on demand

A check whether or not post-dated or crossed is still a negotiable instrument and unless A is a general
indorser, he cannot be held liable for the dishonor of the instrument.

Effects of crossing a check:

⁃ for deposit only in the account of the payee

⁃ May be indorsed only once in favor of a person who has an account with a bank

⁃ It is issued for a specific purpose and the person who takes it not in accordance with
said purpose does not become a holder in due course and is not entitled to payment thereunder
Failure to inquire as to the purpose constitutes bad faith and prevents a person to be a holder in due
course.

Not being a holder in due course drawer is entitled to the personal defense of breach of trust against
the original payee.

Holder is entitled to collect only from the original payee as he is the immediate indorser of the check.

When a bank honored the check, it became an acceptor. As such, the bank became primarily and
directly liable to the payee/holder.

Legal consequences if a bank honors a forged check:

⁃ drawer's signature is forged : it cannot set up the defense of forgery because by

accepting the instrument, the drawer bank admits the genuineness of signature of the drawer. UNLESS,
forgery is attributable to the negligence of drawer, remedy of bank is against the party responsible for
the forgery.

⁃ Forged payee's signature : when bank pays, it is as if it is paying out of its funds and
cannot charge the depositor's account. The bank becomes liable because it has a primary duty to verify
the authenticity of the payee's signature.

⁃ Forged indorsement : drawer's account cannot be charged. If charged, he can recover

from the drawee bank. No course of action against collecting bank since its duty is only to payee. A
collecting bank is not guilty of negligence over a forged indorsement for it has no way of ascertaining
the authority of the endorsement and when it caused the checks to pass thru the clearing house before
allowing withdrawal of the proceeds thereof.

⁃ ON THE OTHER HAND, a collecting bank which indorses a check bearing a forged
indorsement and presents it to the drawee bank guarantees all prior indorsements including the forged
indorsement itself and should be held liable.

⁃ Drawee bank can recover from the collecting bank because even if the indorsement on
the check deposited by the bank's client is forged, collecting bank is bound by its warranties as an
indorser and cannot set up defense of forgery as against drawee bank.

Drawee Bank vs. Collecting Bank: when the signature of the drawer is forged, as between the Drawee
Bank and the Collecting Bank, the Drawee Bank sustains the loss, since the Collecting Bank does not
guarantee the signature of the drawer. The payment of the check by the Drawee Bank constitutes the
proximate negligence since it has the duty to know the signature of its clients.

Material alteration- any alterarion which changes:

a. Date

b. Sum payable, either for principal or interest

c. Time or place of payment

d. Number or the relations of the parties

e. Medium or currency in which payment is to be made; or which adds a place of payment where no
place is specified, or any other change or addition which alters the effect of the instrument in any
respect.

Drawee bank is not liable for the payee in case of material alteration because they have no privity.

Alteration is serial number of a check is not material alteration.

"Reasonable time" is not more than 6 months from the date of issue. Beyond said period, it is
"unreasonable time" and the check becomes stale.

Forgery is a real defense.

Forged check is wholly inoperative to the drawer. Drawer cannot be held liable by anyone, not even a
holder in due course.

Special indorser is liable to a holder of a forged instrument because it makes him secondarily liable being
a party after the forgery.

The forger rendered himself primarily liable.

Parties prior to the forgery remains juridically related. They cannot be held liable to the holder of the
instrument subsequent to the forgery. The holder may claim from the persons who become parties
subsequent to the forgery and who indorsed the same to the holder.
INCOMPLETE & DELIVERED

Holder can enforce payment of an instrument as if it had been filled up strictly in accordance with the
authority given and within a reasonable time.

Real defense cannot be applied to a holder in due course. Only personal defenses are available to the
maker. Eg. Not in accordance with the authority given

INCOMPLETE NOT DELIVERED

Where an incomplete instrument has not been delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands of ANY HOLDER, as against any person whose
signature was placed thereon before delivery.

IRREGULAR VS. GENERAL INDORSER

Irregular

⁃ not a party but he places his signature in blank before delivery

⁃ Not a party but becomes one becuase of hid signature

⁃ He is considered an indorser

⁃ Liable to the parties in the instrument

General

⁃ warrants th instrument is genuine

⁃ He has good title to it

⁃ All prior parties had capacity to contract

⁃ Instrument at the time of the indorsement is valid and subsisting

⁃ On due presentment, it will be accepted or paid or both according to its tenor

⁃ If dishonored, he will pay IF NECESSARY PROCEEDINGS for dishonor are made.

Negotiable - interest is to be computed at a particular time and is determinable. It does not make the
sum uncertain or the promise unconditional.
Non negotiable - giving the MAKER the option to make payment either in money or in quantity of goods
or equivalent value makes the promise conditional.

Negotiable - giving the option either to require payment in money or require the maker to render
service to the HOLDER does not make promise conditional.

Every negotiable instrument must have the words of negotiability. Eg. "To order" or "to bearer"

The fact that no consideration was mentioned is not material and does not affect negotiability because
consideration is presumed.

NON NEGOTIABLE INSTRUMENTS

⁃ postal money order

⁃ Certificate of time deposit

⁃ Letters of credit

⁃ Warehouse receipts

⁃ Treasury warrants payable from a specific fund

An instrument payable to "cash" is negotiable. The name of payee does not purport to be the name of
any person.

A bill may not be addressed to two or more drawees in the alternative or in succession. To do so makes
the order conditional. They can, on the other hand, be jointly.

Despite a special indorsement, a bearer instrument remains a bearer instrument and can be negotiated
by mere delivery.

Even if there is forgery, it is unnecessary to presume the juridical relation beteeen or among the parties
prior to the forgery and the parties after the forgery. The only party who can raise the defense of
forgery against a holder in due course is the person whose signature is forged.
DOCTRINE OF COMPARATIVE NEGLIGENCE

as between both innocent parties, it was the negligence of the maker in safekeeping the instrument
which is the proximate cause of the loss, hence should bear the risk/loss.

Notice of dishonor is not required to be given to the drawer when:

⁃ drawer and drawee are the same person

⁃ Drawee is a fictitious person or a person not having the capacity to contract

⁃ Drawer is the person to whom the instrument is presented for payment

⁃ Drawer has no right to expect or require that the drawee or acceptor will honor the
instrument

⁃ Drawer has countermanded payment

Accomodation party is liable to a holder for value notwithstanding the holder at the time of taking said
instrument knew him to be only an accomodation party.

Absence of consideration cannot be set up by an accomodation party against a holder for value becuase
it is the essence of accomodation--no consideration was received by the accommodation party.

If accomodation party pays the holder, he can have recourse to the accomodated party.

A holder who has taken the instrument from a holder in due course, for value but has knowledge of
infirmity, has all the rights of a holder in due course. She did not participate in the breach/infirmity.

HOLDER IN DUE COURSE:

⁃ COMPLETE and REGULAR upon its face

⁃ Became a holder of it before it was OVERDUE and without notice that it had been
previously dishonored, if such was the fact

⁃ Took it in GOOD FAITH and FOR VALUE

⁃ at the time it was negotiated to him, he had NO NOTICE of INFIRMITY in the instrument
or defect in the title of the person negotiating it.
DISCHARGE

⁃ payment in due course by or on behalf of the principal debtor

⁃ Payment in due course by the party accomodated

⁃ Intentional cancellation thereof by the holder

⁃ Any other act which will discharge a simple contract for the payment of money

⁃ When principal debtor becomes the holder at or after maturity in his own right

To make the presentment for payment, it is necessary to exhibit the instrument.

If holder did not show up at the place of payment, he still can collect as far as the face value of the note
is concerned, but not with respect to the interest due subsequent to the maturity and costs of
collection. He lost his right to recover the interest due and costs of collection by his failure to show up at
the place of maturity